Generally speaking, funds willing to finance long-term investments and to assume the cumulative risks associated with long-term investments should be considered a scarce resource. Two types of biases, whose net effect on aggregate long-term investment may vary from one region of the world to another, are indeed likely to affect long-term investment decisions:
First, behavioral biases:
Nobel Prize winners Daniel Kahneman and Amos Tversky have shown that individuals, faced with the difficulty of knowing objective probabilities, develop subjective probabilities that affect their perception of risk; these biases encourage economic agents not only to underestimate the reality of long-term risks but also to show relative aversion to these risks because of the ambiguity of their distribution law -institutional biases: these are linked to taxation, which may encourage or discourage long-term investment and influence the nature of financial products offered to the nature of the retirement cover – in distribution or capitalization – that determines the existence of pension funds.
These biases are all the more important since the allocation of capital should be marked by two major facts over the next few years :
-An increasingly intense competition, on a global scale, for the attraction of savings likely to be invested in the long term ;
The domestic bias, although tending to diminish over time, is still significant today.
Global resources to finance a long-term investment
While current account imbalances between major economic areas are widening, most industrialized countries are experiencing accelerated aging. In the face of global population growth, these divergences could weaken the financing of productive investment. This article successively explores the role of contemporary current accounts, international direct and portfolio investment flows, and, finally, the demographic factor. While some industrialized countries maintain an efficient domestic productive system, the majority of them show a relative decline in the benefit of emerging countries, including in their capacity to mobilize foreign savings. The United States is distinguished by the volume and structure of its international capital flows. Overall, the more pronounced the aging of the industrialized countries, the less pronounced their savings deficits appear to be, but probably to the detriment of their economic growth. At the macroeconomic level, the life-cycle theory would therefore only be verified on a transitory basis.
Resources released from contemporary current accounts
While the global trend is one of increasing investment and savings (an increase of more than 1 percent of world GDP from 2000 to 2011), the situations are very contrasted (see annex 1). Thus, the decline in the share of industrialized countries (dollar zone + United Kingdom2- UK, North America, Japan, other advanced economies) in global investment and savings is sharp (from 17.3 percent to 12 percent), although the fall is less marked as a percentage of their cumulative GDP (a decline of about 3 percent in both cases).
Still considered as a whole, since 2009 they have reached near current account balance (overall deficit of about 0.3 percent of aggregate GDP and 0.2 percent of world GDP in 2011, compared with about 1 percent and 0.7 percent, respectively, from 2000 to 2008), but their respective situations reveal a plurality of cases.
Now expressed as a percentage of the country’s/area GDP, Japan is experiencing a trend decline in savings and investment (-4 percent in 11 years), but still maintains large current account surpluses (around 3 percent). The dollar + the UK show similar dynamics to Japan in terms of savings and investment (the decline is limited to around 1.5%), but at levels below 3% to 6% in both cases, and a slow reduction in the current account deficit to around 0.2% of GDP at the end of the period.
While North America (the United States and Canada), like Japan, is experiencing a trend decline in savings and investment (from 4 percent to 5 percent in 11 years), the region is falling too much lower levels (about 5 percent of GDP lower) and, above all, has a structural savings deficit leading to a negative current account balance of between -3 percent and -5 percent of GDP. Finally, the other advanced economies3 have a remarkably stable profile, with intermediate levels between those of Japan and the dollar + the UK for investment and savings (between 22 percent and 29 percent) and, above all, an average current account surplus of 4.2 percent.
At the same time, the emerging countries-China, Russia, Latin America, and the Caribbean-are seeing their contribution to global savings and investment increase from 3 percent to 7.5 percent, and their current accounts are running a surplus of about 0.5 percent of global GDP. Within the latter and now expressed as a percentage of the GDP of the country/area under consideration, China is experiencing a spectacular evolution: investment and savings are growing steadily (with the exception of stable investment from 2004 to 2007) to reach average levels of 50%, with a current account surplus of at least 5%.
Russia is characterized by an investment and current account balance that fluctuate widely around 20 percent and 8 percent of GDP, respectively, and a very uneven savings profile, strangely enough, disconnected from hydrocarbon prices until 2008 (the impact of the latter is most clearly seen in the fiscal balance and the investment rate). The Latin America and Caribbean5 bloc is still in the making: savings and investment are of the same order as in the dollar + UK, with current account balances fluctuating between -2.5 percent and +1.5 percent of GDP. Finally, like China, the countries of the Arabian Peninsula present a highly atypical profile with an average savings rate of 37%, an investment of the same order of magnitude as Russia, but much more stable, and above all a striking per capita current account surplus.
The 2008-2009 crisis
It has therefore changed the dynamics of each country/area in a differentiated way: it has resulted in a fall in savings and investment in all industrialized countries and Russia, a modest (around 0.5 percent) and very one-off decline in the other advanced economies and in Latin America and the Caribbean, a fall in savings but, conversely, an increase in investment in the Arabian Peninsula, and a simple stabilization in China.
Generally, higher savings translate into higher current account balances (although this relationship has been weakening since 2009 in China, the dollar + UK, and Latin America, and the Caribbean). The Arabian Peninsula and Russia are caricatural cases, with investment even appearing (until 2007 for Russia) to be negatively correlated with savings. Of course, the more than fourfold increase in oil prices from 2001 to 2008 is an important explanatory factor. Conversely, in the case of North America, which has a structural deficit in savings, an increase in investment leads to a deterioration of this balance in the absence of a savings adjustment.
Moreover, this zone is the only one to show a negative correlation between savings and the current account balance.
The saver on the verge of the crisis
Today’s savers are sailing on a stormy sea: financial and economic crisis making the environment more uncertain, macroeconomic risk linked to the future of the social protection system (retirement, health, etc.) partly explained by the aging of the population, successive reforms of capital and inheritance taxation, “activation of the individual” policies seeking to make the individual more responsible for his or her future… Nothing is spared. And it is precisely at this point that he also comes under a lot of criticism.
Indeed, some economists put the saver in the dock, blaming him for his financial “ignorance” and even invoking this “bad education” to explain the financial crisis of September 20081. Others, in the light of economic science, consider them too cautious with regard to productive investments and criticize them for not coming to the rescue of growth2.
The economic and financial crisis and its consequences for investments have only accentuated this climate of suspicion. The saver’s appetite for risk3 is said to be diminishing, which explains why, as a result, he is more than ever favoring safe, short-term assets (increase in passbook deposits, drop in net life insurance inflows, etc.) to the detriment of risky, long-term investments.
Against the tide, others, more nuanced, have rather found it stoic and reasonable in the turmoil, adapting its behavior to the new environment without giving in to panic and emotions of the moment. His reactions turned towards prudence would then be no more than a rational adaptation to the new economic and financial environment marked by an increase in risks, particularly macroeconomic risks, and uncertainty4.
This debate is still alive today
Since the increase in the ceilings on savings accounts, which could accentuate these tendencies towards prudence, is worrying some actors who would have preferred to focus instead on the question of how to encourage savers to favor long-term and riskier savings.
It appears that the conclusion drawn from the macroeconomic data must be qualified. Indeed, in view of the data (especially individual data) mobilized, it seems that the observation of a timid French saver favoring short-term and secure products does not concern the entire population. By crossing the various asset components with the level of wealth and age, we can see that the wealthy and rather elderly segments of the population hold risky and long-term products rather frequently and to a large extent. Moreover, the increased caution of investors during the crisis can be explained by lower expectations regarding income and stock market asset prices, a more pessimistic perception of the future on the labor market, and not by an increase in risk aversion during the crisis.
Venture capital: effective long-term financing of innovation
Venture capital is a long-term investment that promotes the emergence of breakthrough innovations and multiplies the innovative capacity of companies. It is clear that the United States, the most innovative country, is also leading the way in this effort, far ahead of Europe and France. The reasons for this French under-investment are mainly linked to the difficult meeting between supply and demand, the lack of expertise of venture capitalists, and the weakness of seed capital. Public measures are proposed to encourage the development of venture capital as an effective source of innovation.
The economist Joseph Schumpeter, in Theory of Economic Evolution, a book published in 1911, highlighted innovation as an important process of economic transformation. The debate on the definition of innovation-led in 2005, within the OECD (Organisation for Economic Co-operation and Development), to a now widely shared understanding: innovation is the implementation of a new or substantially improved product (good or service) or process, a new method of marketing or a new organizational method in firm practices, workplace organization or external relations (OECD, 2005).
It is now recognized that innovation is both a major process that drives economic change and an engine of economic growth (Lorenzi and Villemeur, 2009). Venture capital, a recent institution born after the Second World War, plays a particular and growing role in the innovation process as a long-term investment.
The first part of this article aims to resituate the role of venture capital in the innovation process by drawing on economic research on the subject and on the comparison between the United States and Europe, which proves to be rich in lessons learned. In the second part, the reasons for French under-investment are characterized and, finally, the levers of a public policy in favor of venture capital are highlighted.
The logic of innovation through venture capital
Associating a creator of new techniques with a financier taking the risk of bringing in the capital is a very old idea. A famous venture capital adventure was the financing of Christopher Columbus’ voyage in 1492 by the Queen of Spain. Although these financial techniques have occasionally been used for a long time, the activity was only really organized from the 1930s onwards in the United States, where business angels appeared. At that time, they involved very wealthy individuals who invested part of their fortune in promising young companies; the main purpose was to pursue an entrepreneurial spirit by taking risks to get rich.
The first modern venture capital company, American Research, and Development (ARD) were mainly created in 1946 by Karl Compton, President of MIT (Massachusetts Institute of Technology), and Georges Doriot, a French Harvard professor. These investors decided to invest in companies developing technologies that emerged from the Second World War. In 1958, the first venture capital company, Draper, Gaither, and Anderson, was founded, organized in the legal form of a limited partnership (LP), which gradually became the dominant legal form for raising funds for investment in venture capital.
The growth of venture capital
However, the origins of the strong growth of venture capital lie in the modification of the prudent man rule that prohibited pension funds from investing in risky assets including venture capital. This 1978 amendment removed regulatory barriers to pension fund investment in venture capital. As a result, from the 1980s onwards, there was a sharp increase in the amount of money devoted to venture capital. In the mid-1990s, a strong increase in venture capital occurred in the context of the accelerated development of information technology. In 2000, venture capital in the United States experienced speculative growth and the bursting of the stock market bubble in 2001 caused a sharp decline in the number of such investments.
Over the last few decades, the number of business angels in the United States has grown very rapidly, expanding to include individual investors, who are more likely to be as wealthy as the pioneers. Nowadays, a business angel is an individual who invests his or her own money in an innovative company with high growth potential and who makes available to the entrepreneur, free of charge, his or her skills, relational networks, and experience in organization and day-to-day management.
During the 2000s, governments in developed countries have been trying to encourage the development of venture capital and, more generally, private equity (see box 1), thereby recognizing the very positive role played by these activities in the genesis of innovations. Generally speaking, private equity has been hard-hit by the latest economic and financial crisis, especially in the United States (Mahieux, 2012).
Government support for seed capital
The reasons for the low development of seed capital in France can be classified into three categories:
the insufficient development of technology transfers between universities and private research, which leads to a low level of creation of innovative start-ups from the academic world; the insufficient presence of business angels; the lack of specialization of venture capital teams in high-tech financing.
State intervention is indispensable at all stages in order to support upstream the levers of innovation, such as the development of partnerships between universities and the private sector, the encouragement of collaboration between the various public and private research organizations, and the encouragement of the creation of innovative companies.
The example of the SBIC and SBIR programs, which has a particularly important impact on the dynamics of innovation by focusing on technology seed.
All economic research shows that venture capital is a particularly effective long-term investment for generating breakthrough innovations. Therefore, it has become essential to develop it in order to boost innovation; this is all the more justified as innovation appears to be one of the remedies to the economic crisis in developed countries.
Among developed countries, the United States devotes the most significant effort to venture capital and seed capital, while at the same time possessing original institutions at the initiative of public authorities.