Innovation Capacity

The bulk of startup companies were founded by scientists and engineers who left their previous jobs to start their own companies.(Jeng and Wells, 2000). The R&D

expenditure potentially captures demand effects of high-technology firms. If R&D is higher, it may mean that the number of potential entrepreneurs with promising ideas may be greater.

Source: Indicators of Science and Technology, ROC (2004 edition), NSC and OECD Report

The results show that the R&D expenditure in Turkey is very small, and the difference is huge comparing to Taiwan. The following table illustrates the results;

Table 11: Total Number of Patents, Turkey and Taiwan 

Total number of Patents

1998 2003 Per million inhabitants

The patenting ratios show how Turkish innovation system suffers. The lack of innovation will definitely affect the demand side of venture capital. In Turkey, there would be less brilliant ideas to set new companies with a high potential growth.

6. 5 Government Policy and Support

According to TVCA (2006) for the past 22 years, the main driving force behind the steady flow of venture capital into early stage technology companies has been sound government policy. In 1983 legislation was passed giving attractive tax incentives to individuals willing to invest in professional venture capital firms. The most important feature was an up to 20 percent tax deduction for Taiwanese individuals provided they maintained their venture capital investment for at least two years. To qualify, the investment had to be made by a venture capital fund approved by the Ministry of Finance and in a Taiwanese firm or a foreign firm that would transfer technology to Taiwan. Notice investing abroad was acceptable as long as a benefit to Taiwan could be shown. This was very important because it allowed Taiwanese venture capitalists to forge strong ties with Silicon Valley. Each investment in a firm would be examined by an auditor who decided what proportion met the government criteria of "high technology" and then a percentage rebate of up to 20 percent was approved. An investor receiving the full deduction only risked $.80 for every $1.00 of investment.

Whereas, the initial law stated that only individuals could receive the rebate, the Statute was revised in 1991 to allow corporate investors the same 20 percent tax deduction. This revision dramatically increased the amount of venture capital. The ultimate indicator of the program’s success came in 1999 when the government declared that the venture capital industry was mature and discontinued the 20 percent tax deduction program.

The tax deduction was by far the largest benefit, but there were other benefits. For example, 80 percent of the investment income was exempt in the current fiscal year, providing a grace period of one year. Also, those who chose to reinvest the earnings

garnered from a venture capital investment were allowed to deduct the venture capital income from their tax return in that year. This encouraged the investors to allow the various venture capital firms to reinvest its earnings. The Taiwanese government also undertook other measures to ensure the growth of venture capital. One measure was a willingness to invest government funds in venture capital firms provided that they were matched by those from the private investors. In return for these incentives, there were restrictions as to which industries were eligible for investment, and the government excluded investments in publicly traded securities, real estate, and retail operations. Thus there was a quid pro quo, in return for the various benefits the government could restrict and channel the activities of its venture capitalists.

Today, Taiwan has the most dynamic technology-driven venture capital industry in Asia. Outside of the U.S., the only consistently more successful venture capital industry is Israel. From this perspective, there is no doubt that the decision in the 1980s to subsidize the creation of a venture capital industry was a major policy triumph. Experienced professionals with good track records have created a vibrant industry. (Kenny et al., 2002)

Thanks to the government support Taiwan created a strong VC industry. However, we don’t see and government support to VC industry in Turkey. Turkish government has not lunch any program for venture capital yet.

6.6 Industry Structure

Beforehand the previous studies were mentioned to explain the importance of industry

field diminished the advantage of larger firms. Moreover, vertical integration of the technology firms made it easier for small companies to enter the market. If we see the venture capital investment in Taiwan, the investment by industry show that most of the investment made is to the IT oriented companies.

On the other hand Turkey is still legging behind on transforming its economy to the technology based economy. As the following table indicates, the Turkish industry depends on classical manufacturing such as textile and petrochemical industries.

There is no significant IT industry to create an environment for the entrepreneurs to set up their business in this field.

Table 12: Weight of Industry Sectors, Turkey 

Refin. Petr. 14.48% Motor veh. 6.27% Publishing 1.73% Other tran. 1.07%

Textile 10.88% Machi. nec 5.76% Paper prod. 1.59% D. Leather 1%

Food. bev. 10.64% Wearing a. 5.42% Radio. tv 1.49% Wood prod.

0.59%

Chemic p. 10.34% Plastics p. 3.41% Publishing 1.73%

Basic metal 8.9% Metal prod. 3.39 Tobacco p. 1.35%

Non Metalic

6.85% Elec. Mach. 3.22 Furniture I. 1.3%

Source: Turkish Statistical Institute, Industrial Production Index, April / 2007

Table 13: Weight of Industry Sectors, Taiwan 

Chemical Materials 6.28% Plastic 2.39% Precision, Opt., Med.

1.15% Furniture 0.29%

Machinery & Eqip. 5.99% Electrical Machinery, Supplies

2.37% Pulp Paper 1.11% Tobacco 0.14%

Basic Metal 5.97% Non-metallic Mineral

Source: Taiwan MOEA Yearbook of Industrial Production Statistics(2006)

Clustering effect is another advantage that is brought by industry structure to Taiwan.

Since there are many companies in a small place, the clustering effect makes it easier for entrepreneurs to reach resources. On the other hand, for an entrepreneur that wants to start her/his business in Turkey, the recourses she/he might get are limited due to

Counting on statistics, it is concluded that the industry structure plays an important role in development of Taiwan Venture Capital Industry comparing to Turkish one.