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IP/00/1180
Brussels, 18 October 2000
The Commission reviews strategy and calls for
actions to stimulate development of risk capital in
Europe
Although 1999 was a good year for the EU risk capital market, the gap with
the US, particularly in the early stages, remains as large as ever. In a
Communication to the Council the Commission argues that more needs to be
done to create an environment favourable to creating and sustaining new
and innovative businesses in Europe. According to Pedro Solbes, EU
Commissioner for Economic and Monetary Affairs, “there is a need for
further progress in implementing relevant structural reforms, in financialmarket integration and in promoting a culture of entrepreneurship.” Frits
Bolkestein, EU Commissioner for Internal Market, stresses that “timely
implementation of the Financial Services Action Plan by 2005 will do much to
foster a more integrated EU risk capital market.” Member States are asked to
act in three priority areas: (i) the easing of quantitative constraints on
institutional investment in equity capital; (ii) the softening of bankruptcy laws
to allow failed entrepreneurs a second chance (while affording adequate
protection of creditors’ rights); and (iii) the development of a fiscal
framework more conducive to investment and entrepreneurship.
Update on EU risk capital strategy
Although small in relation to other financial markets, the risk capital market is of
unique importance in providing a source of equity financing for young and innovative
businesses. Several studies suggest a high employment content in the activities of
innovative SMEs, while highlighting the role that venture capital funding and IPOs
can play in their development. In this way, a developed and efficient risk capital
market has a significant role to play in stimulating sustainable economic growth and
employment creation. It is for this reason that development of the EU risk capital
market figured so prominently in the conclusions of the special Lisbon European
Council (March 2000). Accordingly, the Council called for implementation of the Risk
Capital Action Plan (RCAP)1 by 2003.
The RCAP proposes initiatives to be taken at Community and/or at Member State
level in the areas of market fragmentation, institutional and regulatory barriers,
taxation, paucity of high-tech SMEs, human resources and cultural barriers.
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annexed to the April 1998 Risk Capital Communication SEC(1998)552
After a first implementation report (October 1999), the Commission adopted today a
Communication reviewing the strategy for developing the EU risk capital market so
as to take account of the Lisbon conclusions and proposing priority areas for action
to ensure implementation of the RCAP by the 2003 deadline.
Market developments in 1999
The EU risk capital market performed strongly in 1999. An increased number of
business angels invested in young small and medium-sized businesses; venture
capital investments reached the highest level ever in Europe, increasing by 70%
relative to 1998, to about €12 billion; and so called new stock markets experienced
significant growth, listing an ever-widening number of high-growth companies. The
progress achieved must be viewed in the context of profound changes in the
functioning of the EU financial system as a whole, globalisation and the introduction
of the euro in particular. But, despite the progress made, the EU risk capital market
remains small and fragmented, particularly in respect of early-stage investment and
investment in technology sectors. It compares unfavourably with the US market
where venture capital investments rose by 150%. The gap relative to the US risk
capital market remains as large as ever. While there is no evidence of a generalised
market failure in the EU, the divergence in performance between Member States
points to market fragmentation and to the existence of country-specific constraints on
more efficient market functioning. To close this gap, the Commission proposes
action in several areas.
Actions to accelerate market integration at EU level.
As stressed by the Commission’s communication, timely implementation of the
Financial Services Action Plan (FSAP) is the key. The FSAP includes many
measures of particular relevance to risk capital. In this context, the Commission
adopted last week a proposal for a Directive on the prudential supervision of
supplementary pension funds. By setting as a principle that investment rules will be
based on the “prudent-man” principle, this Directive will ensure that pension funds
can invest in risk capital markets. The Commission also intends to table important
proposals before end-2000 to facilitate cross-border financial activity, such as
improved procedures for issuing prospectuses to raise capital, the agreement at EUlevel on which investors should qualify as professional, and the introduction of
common accounting standards.
Similarly, the Commission’s adoption in July of a Regulation on a Community patent
will do much to lower the costs and increase legal certainty for innovative enterprises
wishing to operate outside their own Member States. The Commission stresses how
important it is that this momentum toward creating an integrated risk capital market is
maintained.
Actions to speed up the necessary structural reforms to address country-specific
constraints.
The second line of action highlighted by the Commission is to ease the regulatory
and fiscal constraints hindering the development of efficient risk capital markets and
slowing down business creation. Progress has been made in several Member States
to relax regulatory constraints on institutional investment in equity markets. The
administrative procedures for establishing a business have also been eased. But
little has been done to address the disincentive effects of bankruptcy and insolvency
procedures in most Member States.
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The Commission calls upon Member States to act swiftly in this area. It also
highlights that, despite progress already being done, tax reforms will need to be
accelerated and extended to reduce disincentive effects on risk capital investment
and entrepreneurship.
Actions to promote a culture of entrepreneurship
The third necessary line of action highlighted by the Commission is to promote
innovation and entrepreneurial culture in the EU. Several Community, as well as
national, but also regional actions have been taken in these regards. The
communication gives some examples, such as the exchange of experience and
good practice between the use of the European Social Fund to finance a series of
educational and training programs to promote entrepreneurship, the introduction of
entrepreneurship in the school curriculum, or the creation of award schemes for
entrepreneurs.
Priorities for action
With this Communication, the Commission highlights the importance to create an
environment favourable to creating and sustaining new and innovative businesses.
Consistent with this approach, it recognises a limited role for public funding as a
means to address identifiable market failures, provided it respects competition rules.
Among the various actions to be swiftly undertaken, it identifies three priorities, all of
these falling under Member States responsibility:
(i) the easing of quantitative constraints on institutional investment in equity capital;
(ii) the softening of bankruptcy laws to allow failed entrepreneurs a second chance,
while affording adequate protection of creditors’ rights; and
(iii) the development of a fiscal framework more conducive to investment and
entrepreneurship.
Substantial progress in these priority areas, combined with accelerated progress of
financial integration will do much to ensure the environment necessary for a thriving
EU risk capital market.
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