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Lord Sainsbury of TurvilleThe Venture Capital Forum Of The Shenzhen Hi-Tech Fair |
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Distinguished guests, ladies and gentlemen. Thank you for your kind introduction. I am very pleased to be invited to speak about venture capital at such a important event and at a time when we all look forward to welcoming China into the WTO in the very near future. I have spent the past week in China visiting research institutes and universities and discussing with my Chinese counterparts how to foster closer collaboration between the UK and China. I am convinced that there is tremendous potential in the Chinese research community to contribute to global knowledge in a wide range of areas, and to commercialise that knowledge to the benefit of China and the world at large. The objective of my talk today is to share some of the experience we have gained over the years in restructuring the British economy towards high value added business and to highlight the role of venture capital in this process. WTO entry The first point I wish to make is to emphasise the strong link between entry into the WTO and China's ability to maintain high levels of growth. It has become something of a popular past-time for commentators to criticise the WTO. What those critics ignore are the enormous advantages and benefits that participation in the international framework of trade and investment, which the WTO provides, bestows on both newcomers and its established members. As a result of entry, China will enjoy more secure access to some 142 overseas markets and see an end to repeated bilateral negotiations with her trade partners. It also spells the end of barriers being imposed on specific Chinese goods. Indeed, China will have a say in the rule making process and should have much to contribute to the new Round of WTO multilateral trade negotiations, which I hope will commence as soon as possible. In return, and over a period of time, China will need to open up its economy to foreign goods and capital, but the longer term benefits are considerable. We have already witnessed a steady increase in foreign direct investment in China over a number of years, with its positive impact on jobs, not least here in Shenzhen. In the year 2000, foreign direct investment in China amounted to $38 billion and it is projected to increase to $43 billion this year, notwithstanding the downturn in global hi-tech markets. This is in marked contrast to developments elsewhere in the region and it is a clear and tangible sign of the benefits to be gained by entry into the WTO. The opening up of China's product and capital markets will provide Chinese consumers with a much wider variety of goods and services and will make investment in China even more attractive. In short, entry into the WTO will provide China with the platform to capitalise on the capabilities of its people. Importance for Venture Capital The opening up of markets and the ability to trade freely - without fear or favour - with the world's leading economies is absolutely critical for the success of venture capital in this or any other country. This is because the fundamental feature of venture capital is that it thrives on opportunity. Open access at home and to world markets will provide Chinese entrepreneurs with the opportunity to capitalise on their ideas. It will also provide a stable framework within which they can work. To show you how much venture capital can contribute to an economy let me describe the situation in the UK. Since 1983 it has invested £35 billion in around 20,500 companies. £6.3 billion was invested last year and, of this, £1.5 billion was invested in UK hi-tech firms. To give just one example of its impact on a particular sector, the latest figures from the British Venture Capital Association indicate that more than two thirds of the biotechnology firms now listed on the London Stock Exchange have been backed by venture capital. The UK biotechnology industry is the largest and most successful in Europe. But it is not only in the hi-tech sectors where venture capital has had an impact. Many of the UK's young dynamic leisure, retail and consumer firms have also enjoyed support in their infancy from venture capital. This has enabled them to expand rapidly and achieve national coverage. If you come to the UK you will see firms like Dolland & Aitchison, Books Etc, Waterstones, Whittards of Chelsea, New Covent Garden Soup Company in almost every High Street, all of them companies which got started with the help of venture capital. It is estimated that over 8% of UK jobs are in companies which have been backed by British venture capital. By any comparison, this has been a formidable contribution to the development of a modern dynamic business sector in Britain today. But the growth of venture capital in the UK over the past 20 years, to its current pre-eminent position in Europe, indicates that a number of other elements are required in order for it to prosper. I would like to turn to these. People While much of the investment made by venture capital funds is in science based businesses, venture capital is basically the art of investing in people, and people rather than raw materials, or machines and equipment, are the key to developing a knowledge based economy. China has abundant sources of low cost energy and a large pool of low cost labour which are important assets, but I believe it is the abundance of high quality engineers which is perhaps China's greatest asset at the present time. And I am not simply referring to the number of engineering graduates: there has been a steady increase in the number of doctoral science and engineering degrees earned by Chinese students in both Chinese and American universities over the last ten years. The latest figures I have indicate that the total number increased from 500 doctorates in science and engineering in 1987 to 7,500 in 1997 - a 10 fold increase over the decade. It is the whole range of skilled people from technicians to the very highest levels of research which makes China a very attractive location for foreign business and potentially for venture capital investors. I say "potentially" because, although access to a highly skilled labour force is an important element in developing knowledge businesses, venture capital needs something more than highly qualified people if it is to prosper. That key element is enterprise. It is a term which is difficult to define because it is both innate - namely a willingness to take risks and also the drive and determination to develop an idea into a commercial proposition. But it also has an element which can be learnt, not least through experience. Venture capitalists want to invest in people with high level skills, with the ability to see commercial opportunities in a rapidly changing environment, and with experience of developing an innovative small business. It is that combination of knowledge, enterprise and relevant experience of running a small business which sets aside the successful entrepreneur from the rest. There can be no doubt that Chinese people are very entrepreneurial. There is evidence all around the world. Of particular interest, is the growing number of highly skilled people returning from North America and Europe who have experience of product and financial markets, and who are already playing a leading role in business and research institutes alike. They are clearly going to have an important part to play in China's economic development, not least in establishing China's position in global markets. The role of Government The Government also has a role in promoting a culture of enterprise, in particular in removing barriers to its success. I would like to mention three areas. Firstly, there is the issue of Intellectual Property Rights. For high-tech firms, their people and their IPR are their only assets. It is, therefore, extremely important to them and the people who invest in them that they know that Intellectual Property Rights will be respected and policed and that there are proper procedures for handling disputes. Secondly, venture capitalists make their money by investing in the early stages of a company's life, and they are usually keen to take out most of their investment once a company has became established. It is, therefore, essential that specialist markets exist where companies which do not have long financial records can make IPOs (Initial Public Offerings). In recent years in the UK we have built up such financial markets. And, thirdly, it is important that the penalties for honest failure and bankruptcy are not too high. Every venture capitalist knows that some of his investments will fail. That is what risk-taking involves. Success in venture capital comes because the great successes pay for the failures and gives a high return on the money invested. I think in China you also have the fairy story of the princess who kisses the frog who turns into a prince. Venture capitalists say that it takes a number of frogs to create a prince but one prince pays for many frogs. And it is, therefore, essential that, as in the USA, the penalties for honest failure are not too high. In the UK we are introducing legislation so that we become more like the USA. Collaboration with UK What I have just said applies to all firms but, as a Science Minister, I have a particular interest in small hi-tech firms and in exploring the possibilities for collaboration between UK hi-tech companies and Chinese counterparts. Anyone who has visited the excellent British stand at the Fair will soon realise that the UK has world class technology in areas of strategic importance to China. Whether you are in the field of the integration of information and communications technologies, advanced materials, precision engineering required for aerospace, renewable energies, clean coal technology, biotechnology, healthcare, or computer games software, you will find that that the UK has a leading position - not just in Europe but globally. Just go to the stand and see for yourselves. I would urge you to consider whether some of the dynamic hi-tech firms in your portfolios might benefit from partnership with UK counterparts. We, for our part, are keen to foster collaboration with China. To facilitate that process we are expanding our network of Technology Promoters - that is businessmen, with experience of technology collaboration in the Far East - to help British firms to link up with dynamic Chinese organisations. Working with the commercial and scientific staff in the British Embassy and Consular Offices, they will bring much needed experience and support to the business of developing links. I also hope that next year, and in years to come, we shall be able to increase collaboration in the hi-tech sectors through Workshops and High Technology Fora, where British and Chinese participants can discuss in detail the developments taking place in their own area of technology specialism. Venture Capital Let me conclude, where I began - namely the importance of venture capital in developing a dynamic economy. For me, the growth of venture capital investment is a key indicator of the competitiveness and dynamism of an economy. It is therefore interesting to study the recent report prepared by 3i and Price Waterhouse Coopers on Global Private Equity - it is on the 3i web site. According to this report, investment in venture capital and private equity as a proportion of GDP in North America is around 1.2%; almost 0.4% in Europe and 0.1% in Asia Pacific. Clearly, in the Asia Pacific region venture capital is growing rapidly but it is a relatively recent phenomenon, as it is in many parts of Europe. But given the right conditions, which I have outlined in this talk, venture capital is like a tropical rainforest in its speed of growth. At the very outset, I mentioned the opportunities afforded to business by China's entry into the WTO. This same opportunity exists for the venture capital community, indeed it is even greater. China's commitment to high technology as the way forward, a stable rapidly growing economy, the excellent research teams already in place and the increasing number of young business leaders with Western experience all point to the huge potential for growth. I hope that you will seize this opportunity because an open and dynamic Chinese economy is not only good for the Chinese people but also good for all firms with the capability of transacting business here. I want to make certain that more British organisations are aware of the opportunities here, that international co-operation is encouraged and that both countries gain competitive advantage from the exciting advances taking place today in science and technology. |
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Other speeches by Lord Sainsbury of Turville
(the following are available from the archive) |
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