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Sources of finance for technology-based small firms. evidence from Belgium

Sources of finance for technology-based small firms. evidence from Belgium

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. The analysis of the relationship between financial markets and innovation provides important clues about the variety of the mechanisms of knowledge governance and their relations with the characteristics of knowledge. Using an original survey data, this paper examines the internal and external sources of finance for 104 young and active technology-based small Belgian firms. The aim is to detail the financial structure and the pattern of financing for these firms during their stages of development. The empirical work finds that 82 percent of entrepreneurs finance their firms with their own personal savings at seed stage. The debt-financing funds mostly in the form of government subsidies of all kind and commercial bank loans are the secondary source of finance and together constitute a bigger portion of total external finance. 26 percent of these firms had at start-up stage been recipient of venture capital funds and 20 percent of “angel” funds. Venture capitalists provide the highest average amount of funds, Є765 thousand, to these firms. There is also evidence that as firms get older the proportion of internal finance decreases while external finance first increases at start-up, peaks at early growth, and gradually decreases at later stages of development. The role of innovative enterprise as an engine of economic growth has gathered the attention of a vast number of policy makers, politicians and scholars. Much of this attention stems from the belief that innovation is vitally dependant on entrepreneurial activity. This paper attempts to detail the financial structure and the evolution of sources of finance for technology-based small firms (TBSF) during their stages of development. We conducted mail-based surveys and semi-structured interviews in Belgium in the first quarter of 2003. We have 104 observations including 22 interviews with the entrepreneurs. These firms are active and represent “aerospace”, “medical and life sciences”, “information and communication technologies” (ICT), and “other medium-high technology industries”. They are independently owned and employ less than 50 employees with annual sales of Є7 million maximum or total assets capitalization of Є5 million12. They were established between 1985 and 2002. None of the firms in our sample had initial public offerings and were traded in public markets in any ways. We collected information on the sources of finance at four different stages of development: “seed”, “start-up”, “early growth”, and “development/expansion”. The sources of finance included: personal funds of the founders; family and friends funds; retained earnings; commercial bank loans; government subsidies of all kind; non-financial institutions funds; other sources of debt-finance; business angel funds; venture capital funds; and other sources of equity-finance. We then grouped the sources of finance into two categories: i). internal finance, and ii). external finance. Consistent with the theoretical arguments on the key role of knowledge governance, we find that internal finance is critical for entrepreneurs to start-up new technology-based firms. The personal funds of the founders are the primary source of seed finance in 82 percent of cases. The debt-finance funds mostly in the form of government subsidies of all kind and commercial bank loans are the secondary sources of finance and together constitute a bigger portion of total external finance. 26 percent of these firms had at start-up stage been recipient of venture capital funds and 20 percent of business angel funds. Venture capitalists provide the highest average amount of funds, Є765 thousand, to TBSFs. Business angels and commercial banks almost equally follow this with an average of Є280 thousand. The Belgian entrepreneurs borrow an average of Є61 thousand from their family members and friends. They invest an average of Є138 thousand from their own personal savings. As firms get older, the proportion of internal finance decreases while external finance first increases at start-up, peaks at early growth, and gradually decreases at later stages of development. We do not expect to witness major structural changes in the national/regional debt and equity markets or in the products these markets offer in the near future. We further expect that the internal capital will be the core of early stage start-up source of finance. In this context, it is worthwhile to focus on the tax situations of the entrepreneurs themselves along with the tax policies considered to increase private equity investments.

Leather filiere case study

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. As with other TELL Project case studies the Leather Filiere Case Study is concerned with knowledge and learning. More specifically, this study discusses the knowledge characteristics (localised, specialised, and dispersed) and intends to answer a crucial question: How should the production and use of knowledge be coordinated? The Leather Filiere Case Study is concerned with the role of fashion in the footwear industry and is based on a case study on the North region of Portugal (Ave, Tamega, Entre Douro e Vouga NUTS III level). We carried semi-structured interviews to around 20 firms and institutions of the footwear-fashion. The general analytical framework follows the TELL matrix of knowledge dimensions and governance structures and draws from contributions from sectoral systems of innovation and national and regional innovation systems literature. Technological maturity in the manufacture of leather products has permitted the entry of new competitors into international markets. these competitors have a more favourable cost structure owing to their low salaries particularly china and, to a lesser extent, some new eu comers (poland, czech republic, hungary and slovakia) and one applicant country (turkey). International competition has led european manufacturers to invest in high quality products which are more diversified and offer higher added value, implying the use of new technologies in the production process and the incorporation of design in the product. an analysis of company competitive strategies in the footwear industry reveals a change in the factors of competitiveness. eu companies have confronted international competition and changes in demand by using technological innovation to increase productivity and give value to aesthetic attributes. the product differentiation strategy is beginning to abandon the quality/price logic and is increasingly including aesthetic elements associated with other attributes such as design in terms of practicability. The emergence of a flexible accumulation regime brings about significant qualitative changes in the organisation and functioning of consumption processes from which arises an ever-wider diversity of consumption patterns, thus breaking the iron rule of mass consumption of standardised products. There has been, we might claim, an increasing role of fashion within the industrial production systems of different consumer oriented industrial sectors. The pressure for speeding up innovation and creativity cycles has been higher than ever which brings with it major changes in industrial organisation and corporate competitive strategies. These changes are better understood within the context of approaches dealing with the increasing complexity of the relationship between culture and economy. We have seen over the last decades a serious development of industrial activities that in one way or another are related to the production of goods and services which marketable qualities are based on aesthetics or semiotics attributes. Some authors conceive the new culture emphasis of production as the ‘cultural materialization of the economic’. The increasing inclusion of fashion content in products from the leather industry, especially footwear, for diverse market segments, confirms the relevance of the creation activity in this sector. The elevation of fashion as a critical factor of innovation has lead to significant changes in industrial organisation, adding greater complexity to the actual process of industrial innovation in fashion sectors. In productive sectors where the fashion element is felt more intensely – namely in clothing and footwear – profound changes have been observed in the global organisation of activities integrated in the respective production chain, thus leading to a reorganisation of power relations amongst the productive units involved. The change, at the centre of industrial production processes, in the relation between economy and culture, has resulted in important transformations in the actual organisation of production. Therefore, the fashion factor may be approached as a critical factor for product innovation and an inductive factor in technological change, namely of industrial sectors where fashion arises as a central element of firms’ commercial strategies. The process of industrial innovation takes place both through information-processing capacities, and also, fundamentally, through symbol-processing capacities. In regard to fashion industries, the development of these capacities requires the firms’ dominance of new innovation sources and availability of new product development structures, holding different characteristics from those firms in sectors whose scientific and technological knowledge base is determinant. What we are highlighting here is the existing interdependence between processes of industrial innovation and processes of innovation of aesthetic and symbolic nature, resulting in two sub-systems of innovation, functionally autonomous but organically articulated in the production process of fashion industries. Both the interpretation of symbolic manifestations, and the translation into industrial products, depends on the presence of (or access to) particular social contexts from whose richness, in terms of creation and circulation of aesthetic elements, the actual processes of fashion creation depends. As with technological externalities, we are faced here with symbol-processing externalities that grow out of these particular cultural, industrial or territorial contexts, accentuating the collective nature of fashion creation processes. The production of fashion goods can be considered as an activity where technological knowledge plays a key role, in the sense that fashion creation is a collective good that is produced using several bits of previous information and knowledge. The firm has to manage a distinctive and dedicated flow of interactions regarding its internal structure and its productive environment, requiring a specific ability to organize, control and combine different resources. The opportunity conditions in the footwear industry are based in external sources of knowledge to the industry and do not match the opportunity level of emergent industries. Appropriation is less on the basis of a technological advantage, than of aesthetic design, brands, and advertising. The increasing role of fashion in the leather industry opened up opportunities for innovation in established producers. Literally, fashion is used in almost all the footwear segments and therefore new agents arrived to the industry with new knowledge. Footwear producers in the fashion-leather innovation system usually develop strategies to respond to these changes in the knowledge base, namely the control of complementary assets and increasing competences. In the traditional footwear industry low opportunity and low appropriability are combined with low cumulativeness in the firms with no innovative activity. However, when fashion is incorporated in the footwear industry it seems that cumulativeness is present at industry level rather than firm level. The high degree of complexity is much more related with the different competences necessary to the production process, and frequently external to the manufacturing firms' boundaries, ranging from fashion trends definition to components production, to consumer tastes analysis and to distribution. The fashion-footwear innovation system is made up of three subsystems: the fashion subsystem (colours and shape committees, schools of fashion and design, fashion trends offices, designers and stylists, fashion media and events), the footwear manufacturing subsystem (incorporating tanning industry, manufacturing firms, components suppliers and capital goods industries, R&D institutions, new material producers), and the consumption subsystem (mediated by gatekeepers). The interactions in an innovation system are critical for its performance. The communication channels are fundamental to the knowledge generation, accumulation and diffusion in the fashion innovation system. In the North region case study, knowledge governance by the footwear firms follows three stilized patterns: Pattern I - Entire footwear fashion production control; Strong competences in strategic nodes of footwear production; Intra-firm capacities to coordinate the use of dispersal knowledge; Vertical integration or strong strategic alliances; Strong/medium expenditures on R&D; Strong competences in interpretation of sources of fashion trends and in the translation to footwear production; Strong strategies of marketing and branding. Pattern II – Limitative and dependent; Limited capacity to create fashion; Flexibility of production organisation; Batch production; Relevance of intra-firm tacit knowledge; Highly dependent from retail chains and fashion producers. Pattern III – Niche market; Creative capacities based on individual skills; Fashion oriented to niche/radical markets; Flexibility of production organisation; Batch production; Strong control of marketing channels (own retailing networks or highly selective shops selection). This collective expression of knowledge and creative capacity is strongly interlinked with the geographically located configuration of these same cultural-economic systems considered here as image-processing complexes. Places that in this way stand out in the projection of their cultural economies hold, in what refers to cultural industries, an economically advantageous monopoly power of place. In terms of industrial organisation, the essential aspect of this process is the symbiosis effect that exists, in very particular places, between the social characteristics of territory, the cultural capital of that same territory and the local economy. This aspect will have fundamental implications in terms of the reorganisation of the production system, namely, in what concerns the readjustment of power relations in industrial organisation and in the spatial organisation of industrial systems of industries with a strong design component, as in the case of the fashion and footwear sector. With the expansion of footwear industry in a world scale, firms located in industrial districts changed competitive strategy to respond to low quality and low cost products manufactured by emergent countries firms. The systematic incorporation of fashion in the shoe and other leather consumer products has been a major strategy to leading firms, along with the product quality improvement and the control of complementary assets. However, these changes in the knowledge base of the industry have been dramatic to some firms and also to more traditional local productive systems. The geography of fashion production centres is very selective and only a few agglomerations are truly symbol processing spaces at a world scale. The extreme spatial concentration of fashion production is creating a new hierarchy in the industry. Firms located in other European regions needed to create new knowledge governance mechanisms to access fashion creation and to introduce this new localised knowledge at firm level. In other words, firms established pipelines with international fashion production centres to access critical information to develop new products. Not only new competences related with fashion have to be created at local level as new forms of access information produced outside the local agglomeration have to be established. If changing knowledge base in the industry is given firms new opportunities, at the same time is speeding up the fall or at render more fragile the traditional footwear production centres since new competitive factors are not fully controlled by local agents.

2014-07-19 18:44
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