SMEs and the financial institutions to focus on investments that contribute to increased productivity. It would also encourage the development of new products and the adoption of innovative processes and technologies.

# **THE ELUSIVE VENTURE CAPITAL MARKET**

As a share of the economically active population, the number of Chilean entrepreneurs compares favorably to the number in Japan, France or Spain; this should make the country fertile ground for a venture capital market _._ However, the results have been disappointing _._ According to one study, 25 percent of Chilean universities have programs or courses dedicated to entrepreneurship—but the venture capital market remains moribound. The lack of dynamism in venture capital may be explained by business projects not adequately presented to investors or that their profitability is below what venture capitalists would expect, given the combination of country, sector and other risks. It may also be a result of a lack of venues for investors and businesses to meet, or a lack of bankable technologyintensive projects offering high rates of return.<sup>40</sup> The legal framework that created the investment market ( _Fondos de Inversion_ , 18,815), begun in the late 1980s, proved to be inadequate to jumpstart this new financial sector industry _._ In 1997, the Government launched a credit line to stimulate the creation of Business Development Investment Funds ( _Fondos de Inversión en Desarrollo de Empresas,_ FIDES) to focus investment on emerging technology firms. This program offered a 1-to-1 match to the capital raised by a fund administrator. In addition, following the example of the Yozma Fund in Israel, the program attempted to attract foreign investors to establish funds in partnership with domestic investors. However, the regulatory framework’s excessive restrictions limited the success of this initiative. The chief problem was the difficulty assessing the value to a firm’s intangible assets. This limited investments in firms whose underlying value was primarily linked to innovative ideas.

In late 2000, adjustments to the legal framework sought to encourage private sector participation in venture capital markets. The changes provided much greater freedom to private investment funds. These funds can now rely on their own bylaws to set the rules of the game.<sup>41</sup> At the same time, the Emerging Industries Stock Exchange ( _Bolsa Emergente_ ) was formed. Registration in this stock exchange is streamlined and provides more protection to minority investors (Ley de OPAS, 2000). The Second Capital Market Reform ( _Reforma de Capitales 2_ ) now permits all bond and other instruments issued by qualified risk capital funds for up to twice their original equity. These funds can also issue stock options under the new framework. In addition, it exempts stock transactions carried out by these firms from capital gains tax (up to 10,000 UF, about US$270,000, in cases when more than one third of equity is involved) for up to three years. This benefit is transmitted to the holders of “cuotas” (similar to shares) from the Funds. It also allows pension fund managers to invest in these funds. However, this proposed reform fails to include “angel capitalists” as potential beneficiaries.

Given the shortage of private venture capital, the Government launched the Seed Capital program to support business start-ups and those in early stages of development. It is a non-reimbursable subsidy whose objective is to offset the lack of private venture capital. It provides financing for activities such as market research, publicity, legal registration, business plan preparation, management technical assistance and even prototype design and testing. Proposed projects are presented by sponsoring agents who act as a “filter” and receive a payment for assisting the applicant business.

In addition to the Seed Capital program, the Government sponsors national networks of business incubators. These incubators are designed to address the lack of specialized business managers who

> 40 See the worldwide study conducted by Babson College and the London Business School and reported in a public presentation at the Universidad de Los Andes in Santiago, Chile.

> 41 See Título VII, Ley 18.815 currently in force. These Funds are annually audited by external auditors accredited with the Superintendencia de Valores y Seguros (Securities and Insurance Superintendency).

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