Leveraging investment climate & venture capital investment

A country's investment climate (IC) refers to the socio-economic and political landscape affecting the investment outcome. Another related factor affecting technology investment is the health status of the innovation ecosystem. The objective of the discourse about investment climate and innovation ecosystem within the context of Venture Capital and Private Equity investors appears to be leveraging the 'smart Bangladesh' agenda through increasing investment prospects in the technology sector and improving the valuation of portfolio firms.

In investment climate ranking, Global Innovation Index (GII) or any other related rankings, invariably, Bangladesh does not occupy the top spot. Hence, we find a reason to create urgency in improving the situation on the ground. In response, the government reforms policies, simplifies regulatory processes, improves infrastructures, and so on.  Notably, within the context of leveraging technologies like the internet, artificial intelligence, robotics, semiconductors, internet of things, digitisation, and many more, visible progress has been made in high-tech and software technology parks, incubators, academic and training programmes, R&D and innovation grants, publications, nationwide fibre optics network, cloud platforms, and so on. Such improvements encourage us to know their implications.

On the other hand, if Bangladesh keeps improving its investment climate and enhancing its position in GII and other rankings, will there be proportionate advancement in increasing investment prospects and improving the valuation of firms? Besides, as there is a race among countries, is it feasible for Bangladesh to outperform all other countries in critical indicators like infrastructure, education, R&D, risk capital, and incentives? If not, does Bangladesh's investment run the risk of suffering from less-than-expected results? Hence, it may be fair to say what else Bangladesh should pay attention to in order to increase the return on investment in improving the investment climate and innovation ecosystem. To get insights, let's draw lessons.

In the 1950s, Japan was far poorer in most indicators of investment climate and innovation ecosystem than the USA and Europe. Despite this, why did firms like Sony, Canon, Toshiba, Honda, and many others started rapidly growing, increasing their valuation and dividend? Surprisingly, they grew by outperforming their American and European counterparts. More importantly, that growth resulted in the migration of innovation epicentres of essential consumer products from the USA and Europe. Consequentially, American and European iconic firms suffered from disruptive effects. This trend has continued to date.

Let me bring forward another example. In the 1970s, Taiwan was far poorer in the investment climate and innovation ecosystem than the USA. Taiwan's economy was primarily based on export-oriented contract manufacturing and import substitution. Despite this, Taiwan has succeeded in migrating the silicon edge from America's famous Silicon Valley. Despite the robust innovation ecosystem and successful track record, why have American firms lost the semiconductor processing supremacy to latecomer Taiwan's TSMC? Is it the outcome of the advancement of Taiwan's investment climate and innovation ecosystem?  

Let's now draw lessons from firm-level examples. We all know the spectacular performance and skyrocketing valuation of Apple, Amazon, and Netflix-among many others. Despite the remarkable success of Macintosh, Apple suffered losses in both Apple I and Apple II. Instead of improving initial offerings, if Apple had focused on enhancing the valuation by increasing the sales of Apple I and II through massive subsidies, what would have been the result? Besides, surprisingly, Apple suffered a loss from the release of the iPhone I, as its sales came down to almost zero before enjoying its first birthday. If Apple had kept giving subsidies and complaining about IC to keep the iPhone afloat, what would have been the implications for its revenue, profit, dividends, and share price?

Similarly, Jeff Bezos's idea of retailing books over the internet started at a loss. His father's seed capital evaporated within a couple of months in giving subsidies to postal services. What could have been a reality if he had kept focusing on giving subsidies and asking to improve the investment climate and innovation ecosystem? On the other hand, in the 1990s, many startups pursuing video-on-demand ideas got burst. However, upon pursuing the same idea, Netflix has appreciated investors' funds substantially. Is this success rooted in Netflix's subsidies, advancement of investment climate, or innovation ecosystem?

Of course, investment climate and innovation ecosystem matter for increasing investment prospects and growing the valuation of firms. However, are they sufficient? To dig down this vital question and the substance of many other development advice embedded in loan packages, the World Bank patronised the Growth Commission, headed by a Nobel Laureate. The primary objective was to figure out underlying reoccurring patterns propelling natural resource-poor, less developed countries to high-income status. Upon organising many workshops and producing several reports at the cost of a few million dollars, the commission came up with a disappointing finding; they could not detect any pattern that could be used to advise less developed countries to craft a sustained path to reach high-income status through borrowing.

Hence, perhaps, it's not surprising to encounter growth traps-infamously known as the middle-income trap-upon borrowing and listening. International consultancies have shown up to overcome the advising limitations of global lenders. However, their prescriptions of following leaders have no evidence of repeating the success for the following less-developed countries in the global technology market. For example, upon listening to such prescriptions, Malaysia invested billions in multimedia super corridor projects. Of course, this improved the country's investment climate and innovation ecosystem, propelling Malaysia into the GII ranking. However, its implications on investment prospects and the valuation of firms deserve investigation.     

Such unfolding reality encourages conscious minds to investigate and figure out missing links. Through borrowing to improve the investment climate and ecosystem, is there a risk of impeding the formation and growth of firms, investment prospects, and valuation increase through performance improvement? It's well understood that if technology firms cannot take off upon visible improvement of power, internet, and physical infrastructure, how can the government justify giving tax waivers and other fiscal incentives? However, if those improvements are not sufficient, do they run the risk of pushing technology companies into a degenerative cycle? It also raises the question of where the end is. For sure, the government cannot keep addressing investment climate and ecosystem issues through borrowing and without reaching a state of collecting taxes after 20 to 30 years of nurturing. Therefore, it's time to find the missing links. 

It's worth noting that technology possibilities have been creating discontinuities in the growth dynamics of innovations and industries. Often, long-term investment success depends on detecting these discontinuities early and strategising investments to produce significant returns from the humble beginning.  For making investment prospects and increasing valuation, in addition to improving the investment climate and innovation ecosystem, the focus should be on figuring out how to create a snowball effect in leveraging technology possibilities. Instead of marshaling enormous resources to outperform competitors through investment climate advancement, it is often wiser to be at the right place at the right time with the suitable capacity to profit from unfolding technology possibilities.   

M. Rokonuzzaman, Ph.D is academic, and researcher on technology, innovation and policy.

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