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When Raising Investment Capital, Can You Pay Someone to Do it For You?

I was recently a speaker at a conference for entrepreneurs. My topic was about the different ways to raise investment capital. At the end of the program, a young entrepreneur spoke with me about how he was raising capital to produce a film.

A couple of weeks later, I received a letter from an accounting firm who was soliciting investments for the young filmmaker.

On its face, the letter seemed like a excellent idea: the polished letterhead from the accounting firm (and their endorsement) made the young filmmaker seem more credible; this was a great reason for the accounting firm to contact new people; and, if the filmmaker raised the money he needed, the accounting firm would surely have a great new client.

Problem is, both the filmmaker and the accounting firm violated a number of state and federal securities laws by mailing that letter.

Let’s face it, raising investment capital for a business isn’t easy-and most entrepreneurs would take all the help they can get.

Entrepreneurs are a clever bunch of people who are often required to make things happen with limited resources. Problem is, many of the techniques that you would rely on to fill a pipeline of prospective clients often times violate state and federal securities laws when used to find investors.

For example, if you’re selling shares in your company to raise cash, it seems logical that you should get your company’s sales staff, or outsourced services, to help you out. Perhaps you can even pay them a high commission on stock sales and they’ll be extra motivated.

After all, few things motivate someone to sell like a big commission check.

Better yet, what about hiring one of these guys who call themselves “consultants” or “finders” and claim to help companies raise money? Just about anyone who’s done some networking in the venture capital seminar scene has likely run across someone like this. They work on great terms: you don’t pay unless they raise cash. And even if the fee they charge for their services may be high, who wouldn’t give up a big chunk of cash (or a kidney) for the ease of having someone find investors for you?

On a fairly regular basis, my entrepreneur and investor clients ask me if they can pay their employees, or a finder-consultant a piece of the deal if they help the company raise investment dollars.

In almost every case, the answer is a definitive no. The payment of a finder’s fee or commission in connection with the sale of securities to a person who is not a broker registered with FINRA (formerly the NASD) is generally illegal.

Another common misconception among entrepreneurs is that the payment of finder’s fees falls within a “gray area” of the law. This is just wrong. It’s a myth that seems to be perpetuated by entrepreneurs and finders who have engaged in this activity and haven’t been caught.

I can’t tell you how many times I have heard from clients “well, I know ABC Company who paid a finder a commission and didn’t have any problems.” My reply is always the same: “ever drive a car on the West Side Highway at 75 miles per hour and get passed by someone going faster than you and neither of you got a ticket?” Just because you didn’t get nabbed by New York’s Finest doesn’t mean you weren’t breaking the speed limit by a fairly wide margin.

In my practice, I’ve represented clients who have had problems with regulators by unknowingly violating these rules. In nearly every case, the company went out of business or sought protection from creditors under the bankruptcy laws as a result of the mistake.

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The business of getting paid commissions for introducing investors to companies is something that our government has taken a keen interest in regulating.

If you are serious about growing your business, you will need to become adept at raising capital when your company requires it. Educating yourself about what your employees and consultants can and cannot do to help you raise capital is critical to your company’s health.

Here are the basics about using employees and finder-consultants to help you with your capital raising efforts:

What is a “finder?”

A finder is an individual, company or service that receives compensation in connection with the solicitation of potential investors. The most common examples of legal finders are broker-dealers or investment bankers working for broker-dealers.

What is a broker?

A “broker” is defined under the securities laws as “any person engaged in the business of effecting transactions in securities for the account of others.” Helping a company sell shares to raise capital, engaging in other activities like participating in presentations and negotiations, making recommendations to investors concerning securities, receiving transaction-based compensation (i.e. commissions or finder’s fees), and continuing or regular involvement in sales of securities are evidence of activities rendering a person a broker.

If your employees or finder-consultants perform these tasks, typically the person is obligated to be registered as a broker with (and thus regulated by) FINRA.

How can an employee help a company raise capital lawfully?

Under certain conditions, a company can permit its employees to help it raise investment capital without triggering the broker registration requirements. For example, the SEC’s Rules allow an employee, officer or director of a company to participate as a finder in a private offering provided that the employee:

** is not considered by the SEC to be a securities industry “bad boy”;

** does not get paid commissions in connection with the offering;

** is not an associated person of a broker or dealer at the time of his participation; performs a job for the company other than in connection with the company’s offering (i.e., marketing or customer relations);

** was not within the last year a registered broker; and

** does not participate in the company’s securities offerings more than once every 12 months (with certain restrictions).

Keep in mind, that each state has its own set of regulations that may differ from federal regulations. For example, in some states only officers and directors of a company are permitted to engage in the sale of securities.

Does a finder-consultant always have to be a registered as a broker with FINRA?

There are some circumstances where a finder-consultant is not required to register as a broker. However, if you’re acting as a finder (or you’re a company hiring a finder), you must take extreme care to ensure that the finder’s activities are limited so that he or she is not functioning as an unlicensed broker.

Finders can avoid registering as a broker by limiting to:

** merely introducing prospective investors to a company without engaging in negotiations;

** not recommending the company’s securities to prospective investors;

** and basing their compensation on a flat fee that is not contingent on the closing of a securities sale (for example, the finder gets a fee of ,000 for making the introduction to an investor, regardless of whether the investor purchases shares or not).

What kind of compensation cannot be paid to finder-consultants?

Transaction-based compensation, or success-based compensation, like a finder’s fee or commission, is compensation that is contingent on the transaction closing. Often the fee is a percentage of the amount of securities sold. Unregistered persons are not permitted to receive this type of fee from a company.

Permissible forms of compensation may include professional fees based on hourly billing rates or fixed fees; non-transaction based consulting fees; non-transaction based due diligence fees; or expense reimbursements.

You’ll notice that common theme among permissible forms of compensation is that the fee is paid regardless of whether funds are raised. My experience is that most companies are unwilling, or at least reluctant to pay a finder a fee for services that may or may not turn into an investment.

Many companies have attempted to disguise a commission as a permissible fee. For example, entrepreneurs often hire “finders” as “consultants” and call the finder’s fee a “consulting fee.” However, if the compensation the consultant receives is ultimately tied to their activity of selling shares in the company, and they would not have received the fee absent the company raising capital, then the payment of the fee to an unregistered person is not permissible.

Regulators will easily sniff out a thinly disguised form of success-based compensation, and the fee will not be considered valid.

What can happen if a regulatory agency determines that a finder-consultant or employee is acting as an unregistered broker?

If a regulatory agency, like the securities division of a state or the SEC, determines that a finder-consultant or employee has acted as an unregistered broker, the SEC or state could impose fines on the finder, which may include disgorging to the issuer commissions paid. Further, regulators could bar the finder in some cases from ever registering as a broker in with their agency in the future.

What can happen to a company if the SEC determines it unlawfully used an unregistered finder?

If a regulator determines that a company used an unregistered finder to locate investors, they could force the company to offer investors the right to rescind their purchase and obtain a return of their entire investment. This may be a problem if you’ve spent the investment money and there’s nothing in the company’s coffers to purchase shares back from investors.

Also, under certain circumstances, the regulators could impose fines on the company for participating in a transaction that violated the securities laws or prohibit the company from engaging in securities transactions in the regulators’ jurisdiction in the future.

Finally, any irregularity in early financing activities can make subsequent rounds of financing more difficult to complete. When disclosed to subsequent investors, errors made in early-stage funding efforts may cut the company off from funding options in the future.

Startup competition. Venture capital and seed investment: nanotech

Participants in to the startup competition Nanochallenge and Polymerchallenge 2010 have the chance to receive financial and management support for the establishment and growth of their business ideas.

Veneto Nanotech, the Italian Cluster of Nanotechnology, and IMAST, Italian Cluster for polymeric and composite materials and structures, will award for the 6th following year 600.00 euro to support researchers and scientists in the establishment of high tech start-ups.

The international business plan competition develops in four steps:

registration and executive summary submission by September 20, 2010, for the selection of finalist teams;
mentoring, support to translate the technology and entrepreneurial idea into a feasible business plan;
final contest, end of November 2010, selection of the winning projects by an international jury;
start-up phase, winning teams become real ventures and are incubated inside Veneto Nanotech and IMAST high tech clusters.

So far 56 teams coming from 18 different Countries have participated in the Final Contest; 2,4 million euros have been invested in the winning start-ups by Veneto Nanotech and IMAT; 7 start-ups have been founded; 15 milion euros have been raised in further rounds of investments from venture capitalist and industrial partners.

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The Final Contest is a unique moment of networking between teas and investors, sponsors and scientific environment.

Each year Nanochallenge and Polymerchallenge attracts researchers and scientists with innovative ideas from all over the world. Not only the winners receive a seed investments for the start-up phase, but they also receive the opportunity to use the resources and assets of the clusters: laboratories, instruments, machines, office spaces, competences from other researchers, management support.

Besides winners are supported in raising further investments from venture capitalists and private equity funds.

Information to participate and win one of the seed money for start up business are available on the website www.nanochallenge.com.

Lesson 1 helps business English students learn about entrepreneur, venture capital, business funding and venture. You will be able to speak, read and write with my free Business English ESL lesson series.
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Business Ethics of Capital Distribution and Creation of Investment

  Business ethics of Capital Distribution   

By PROF VISWANATHAN 

Director,

International Socio-Economic Research Bureau,   

Chennai,India (E Mail: economist@dataone.in)                             

 

 “Man  is  born  free,  and  everywhere  he  is  in  chains.  Many  a  one  believes  himself  the  master  of  others,  and  yet  he  is  a  greater  slave  than  they. How  has  this change come  about? I  do  not  know…”   

*–  Rousseau, Jean Jacques – ‘The  Social  Contract’ (p: 100)

 

  Economic  Slavery  and  Ownership  of  Capital:                                              

Rousseau  reserves  no  hesitation  to  admit  his  inability  because  of  the  reality  that  he  witnessed  the  complications  that  deeply  rooted  in  the  premature  socio-economic  order existing  during  his  time.  But  in  the  midst  of  knowledge  explosion  at  present  I  can  deduce  the  reason  for  the  socio-economic  slavery  of  the  people.   I  know  the  answer  for  the  slavery.  It  is  both  very  simple  and  highly  complicated  to  explain  in  the  present  context  of  permutations  and  combinations  of  socio-economic  orders.  The  answer  is  very  simple  on  the  fact  that  as  soon  as  the  man  surrenders  his  capital  to  a  few  capitalists  in  the  name  of  capitalism  or  to  the  ‘State’  in  the  name  of  ‘Socialism’  especially  after  industrial  revolution  man  has  become  slave  to  the  capitalists  or  the  ‘State’.  On  the  other  hand  the  answer  is  very  complicated   that  requires  deep  acumen  to  find  out  exact  faults  and  defects  that  have  deeply  anchored  in  each  and  every  segments  of  socio-economic  order  like  religion,  customs  and  conventions,  education,  law,  politics,  and  psychological  behavior  of  man;  these  socio-economic  segments  have  still  been  propelling  the  views  and  visions  of  man  to  surrender  his  capital  to  the  capitalists  or  to  the  ‘State’  instead  of  retaining  it  with  himself  to  regain  ‘the  economic  power  of  capital’  to  get  rid  of  any  kind  of  slavery.  The  surrender  of  capital  is  the  utter  ignorance  of  man  that  has  ever  been  witnessed  in  the  long  stretch  of  the  history  of  mankind.

                                                                                                                    

A  new  kind  of  slavery  extensively  known  as  ‘Economic  Slavery’ came  to  surface  over  the  social  fabrication  during  the  Industrial  Revolution.  During  this  period  of  Industrial  Revolution  huge  machines  came  to  play  a  vital  role  in  the  production  of  goods  and  services.  The  owners  of  such  huge  machines  i.e. capital  emerged  as  the  masters  of  the  society  and  the  rest  of  members  of  society,  a  vast  majority  of  workers,  turned  into  ‘economic  slaves’  in  all  the  capitalist  societies.

 

After  the  Industrial  Revolution  when  these  huge  machines  were  directly  owned  by  the  ‘State’  the  same  workers  in  the  name  of  ‘Socialism’    in  all  socialist  states.

 

This  is  the  process  of  slavery  what  Rousseau  says  that  man  is  born free  and  everywhere  he  is  in  chains.  How  do  we  have  to  shiver  into  pieces  these  ‘chains  of  slavery’  which  are  still  binding  the  workers  physically  and  mentally   even  in  all  democratic  societies.  The  answer  perches  on  the   elucidation  of  the  people  to  understand  ‘What  is  Capital  Justice? or Business Ethic?’  and  on  the  finding  out  an  ‘economic  technique’  of  ‘how  to  entrust  the  capital  directly  to  the  people  which  is  solely  created  by  them?’

 

                     ‘What  is  Capital  Justice?’

 

I  venture  to  state  the  only  reasonable  approach  to  solve  any  problem  is  first  and  foremost  to  understand  the  problem;  and  to  understand  such  a  problem  we  have  to  stand  under  the  problem   with  perfect  view  and  vision  of  justice  and  without  being  a  traitor  to  our  own  conscience.  So  it  commands  me  to  keep  my  thought  perpetually  in  a  balanced    attitude  without  taking  even  a  least  privilege  neither  towards  capitalism  nor  towards  socialism.  I  believe  myself  I  can  settle  with  this  pre-requisite  condition  before  writing  my  concepts  in  the  interest  of  justice  and  welfare  of  mankind.  And  now  let  me  define  the  idea  of  ‘Capital  Justice and Business Ethic”

 

 “‘The  Constitution  of  Natural  laws’  codifies  the  ‘Economic  Justice’  being  the  basic  structure  of  economic  system  on  which  the  beautiful  elements  of  the  super-structure  of  a  well – ordered  society  are  constructed”

 

Having  the  liberty  of  reason  I  wish  to  state  that  according  to  Economic  Justice of business ethic,  the  capital  of  a  country  is  created  by  the  people  and  for  the  people  and  hence  it  should  be  directly  owned  by  the  people’.  Once  the  capital, which is now  owned  by  a  few  or  by  the  State  or  by  the  both,  comes  under  ‘People’s  Direct  Ownership’,  consequently  each  worker  is  assured  a  direct  share  of  national  stock  of  capital.  It  leads  to  ‘Each  Industry  for  All  and  All  Industries  for  Each’.  This  is  the  crux  of  ‘Economic  Justice’.

 

“On  the  direct  ownership  of  capital  by  the  people  in  conformity  with  ‘Economic  Justice’ ,  a  new  economic  system  known  as  ‘DEMOCRISM’  will  emerge  on  the  basis  of  ‘Economic  Democracy’  demolishing  all  the  socio-economic  evils  that  are  futilely  pervading  in  every  economy  due  to  its  faulty  formulation.  For  the  sake  of  simplicity,  I  am  assuming  the  Capitalism  and  Communism  as  First  and  Second  theories  and  introducing   my  ‘Democrism’  as  ‘Third  Theory’  to  differentiate  it  with  present  theories”.   

                    Right  To  Own  One’s  Due  Capital according to Business Ethic:

The  “Declaration  of  Independence”  of  United  States  of  America  proclaimed  on  4th  July, 1776  states  as  follows:

 

“We  hold  these  truths  to  be  self-evident  that  all  men  are  created  equal,  that  they  are  endowed  by  their  creator  with  certain  unalienable  Rights,  that  among  these  are  Life,  Liberty  and  the  pursuit  of  Happiness”.

 

With all  its  mighty  force  the  ‘Declaration’  emphasizes  that  among  all  human  rights,  one’s  ‘Right  to  Live’  is  supreme,  beyond  the  zenith,  that  cannot  be  forfeited  by  any  one  or  by  any  force  without  the  consent  and  confirmation of  Justice.  In  the  name  of  war  or  in  the  name  of  patriotism  or  in  the  name  of  religion  or  in  the  name  of  law  or  in  the  name  of  caste,  creed  and  conventions  no  one  has  any  divine  or  earthly  authority  to  forfeit  one’s  ‘Right  to  Live’  on  the  earth.  Even  if  a  man  dies  due  to  appalling  poverty  it  implies  that  the  man’s  ‘Right  to  Live’  has  been  forfeited  and  the  whole  society  in  which  he  is  a  member  should  take  collective  responsibility.

In  the  modern  economic  systems  no  one  can  produce  whatever  he  wants  without  the  help  of  others.  On  the  introduction  of  division  of  labor  in  the  factory  system  of  production,  one  can  produce  only  a  particular  part  of  a  commodity  and  he  has  trained  and  educated  only  to  do  the  particular  job.  Under  these   economic  conditions  one’s  ‘Right  to  Live’  exclusively  depends  on  one’s  ‘permanent  job  opportunity’ or  one’s  “Right  to  work”.  In  turn  one’s  job  opportunity  always  remains  as  a  dependent  factor  of  volume  of  capital  or  investment  flow.  If  the  volume  of  capital  becomes  insufficient,  one’s  job  opportunity  will  be  worst  affected  and  consequently  his  ‘Right  to  Live’  will  be  confiscated.  Since  the  supreme  duty  of  every  civilized  society  is  to  provide  ‘Right  to  Live’  to each  and  every  member  of  it  and  moreover  the  ‘Right  to  Live’  is  exclusively  depending  on  the  volume  of  capital,  the  society  should  honestly  and  justifiably  provide  and  allocate  a  due  volume  of  capital  to  uphold  all  its  members  the  unalienable  ‘Right  To  Own  Due  Capital’  as  a  Fundamental  Right  to  ensure  one’s  ‘Right  to Live’.  This  is  basic  concept  of  “Capital  Justice”. (Upholding  equally  ‘people’s  Direct  Ownership  of  Capital’  to  ensure  one’s  ‘Right  to  Live’  with  dignity  and  security  is  the  basis  of  Capital  Justice’)

 

Generally  in  economics  we  classify  the  goods  produced  as  ‘Consumption  goods  and  Capital  goods’  depending  of  their  usage  by  the  final  consumers.  If  the  goods  like  ‘cars’  are  used    for  personal  usage  by  the  consumers  they  car  called  consumption  goods  whereas  if  the  came  cars  are  used  for ‘hiring  purposes,  as  taxis,  to  earn  income  they  are  called  capital  goods.  I  am  not  erroneous  to  say  that  both  the  consumption  and  capital  goods  are  produced  by  the  workers  as  a  whole.  No  one  dare  enough  to  advocate  that  the  consumption  goods  are  produced  by  the  ‘consumer-workers’  and  the  capital  goods  are  produced  by  the  ‘capitalists’  or  by  the  ‘State’,  in  capitalism  and  socialism  respectively.  Both  kind  of  goods  are  produced  by  the  workers  and  only  by  their  workers  according  to  their  ability  as  per  ‘Work  Justice’ (i.e. work  according  to  ability).

 

The  Wage  Justice  declares  ‘Wage  according  to  Work’.  The  work  includes  the  production  of  both  consumption  and  capital  goods  as  a  whole.  But  the  workers  are  not  paid  wages   to  equivalent  value  of   the  volume  of  capital  and  consumption  goods  that  they  produced. Both  the  capitalists  and  communists  pay  wages  to  workers  equivalent  to  the  value  of  consumption  goods  only.  They  have  been  nakedly  exploiting  a  huge  volume  of  workers  wages  in  name  of  profit  by  which  they  purchase  capital  goods  which  are  solely  produced  by  the  workers.  No  one  has  derived  neither  ‘divine  authority’  nor  ‘temporal  authority’  to  forfeit  a  part  of  workers’  wages  in  the name  of  ‘capital’  without  the  ‘General  Will’  of  workers  or  legal  approval  of  working  class.

 

The  capital  not  only  possesses  huge  productive  capacity  to  produce  goods  and  services  but  also  possesses  enormous  ‘economic  power’  like  nuclear  of  an  atom.  With  the  economic  power  both  the  capitalists  and  the  State  can  control  all  the  socio-economic-political  activities  of  the  working  class  and  subjugate  them  as  ‘economic  slaves’  and  always  threaten  their  ‘right  to  live’.

I  find  no  words  to  register  my  mental  agony  that a  great  ‘distributive  injustice’  has  been  enforced  on  working  class  by  negating  distribution   of  capital  against  legal  and  moral  grounds.  This  ‘distributive  injustice’  exhibits  the  inherent  defects  that  have  been  deeply  rooted  in  our  economic  systems.  Invariably  all  the  economic  and  social  thinkers  have  fiercely  demonstrated   such  defects  and  distributive  injustice.  For  instance  John  Maynard   Keynes,  who  is  still  considered  to  be  the  most  intelligent  among  the  economic  thinkers, writes  in  his  revolutionary  book,  “The  General  Theory”  as  follows:

 

 “The  outstanding  faults  of  economic  society  in  which  we  live  are  its  failure  to  provide  for  full  employment  and  its  arbitrary  and  inequitable  distribution   of   wealth  and  income”

 

Keynes  has  established  thought  in  his  words  and  justifiable  views  in  his  vision  that  the  capital  too  should  be  equally  distributed  among  the  people  to  rectify  the  grave  faults  of  our  economic  systems.  I  dare  to  say  if  both  the  consumption  and  capital  goods  are  distributed  among  the  people  in  satisfaction  of  justifiable  views  and  visions  of  Keynes,  it  would  beyond  all  doubts,  lead  the  society  for  the  establishment  of  ‘Democratic  Economy’  or  ‘DEMOCRISM’,  a  new  economic  system  which  I  advocate  for  the  establishment  of  an  ‘Ideal  Society’.

 

It  will  be  the  ultimate  fact  that  when  the  capital  is  distributed  among  the  people  in  coordination  with  ‘Distributive  Justice’  “All  Industries  will  be  owned  by  Each  Worker  and  Each  Industry  will  be  owned  by All  Workers”.  In  the  establishment  of  such  industries  neither  the  capitalists  nor  the  state  would  be  allowed  to  claim  any  capital  ownership.  The  creation  of  all  the  industries  would  be   “by  the  people,  for  the  people  and  of  the  people”  This  would  be  called  as  ‘Democratic  Economy’  or  “DEMOCRISM”  -  The  Third  Theory -  assuming  Capitalism  and  communism  are  first  and  second  theories.                                                                

 Understanding  of  Capital  Justice  or  Democrism i.e Business Ethic:                 

The  crux  of  the  problem  of  understanding  “DEMOCRISM” i.e business ethic, rests  on  the  two  theoretical  pillars :   Firstly  the  process  of  distribution  of  national  Capital  (i.e. Capital  Stock  of  a  nation)  to  the  people  and  secondly  the  creation  of  ‘new  investment’  of  the  people,  by  the  people  and  for  the  people. 

 

The  distribution  of  national  capital  will  ensure  the  people  the  ‘Economic  Justice’  of  ‘Each  industry  for  all  and  all  industries  for  each’  and  the  ‘creation  of  new  industry’  will  enable  the  working  class  to  contribute  a  share  of  their  wage  in  the  form  of  ‘share’  for the  establishment  of  new  industries  in  which  a  worker  will  have  a  share  in  all  industries  and  all  the  workers  will  have  a  share  in  every  industry  to  uphold  ‘Investment  Justice’.  I  will  explain  the  ‘Investment  Justice’  in  forth  coming  chapters.

 

First  let  me  explain  the  distribution  of  national  capital  to  the  people  for  the  establishment  of  “Democracy  in  Economy”  i.e.  the  “Economic  System  of  Democrism” (The  Third  Theory)  with  an  hypothetical  example.

Capital – Output  Ratio:  Suppose  the  national  capital  of  country  amounts  to  $ 3,000  billion  with  the  help  of  this  capital  stock  the  country  produces  $ 1,000  billion  worth  goods  and  services.  It  indicates  the  Capital : Output Ratio  of  the  country  is  3 : 1. In  other  words  in  order  to  produce  $ 1 dollar  of  goods  the  country  requires  $ 3  dollar  worth  of  capital.                                         

Again  let  me  assume  the  annual  income  of  a  ‘hypothetical  worker’  is  0,000  and  he  spends  all  his  income  for  the  purchase  of  consumption  goods.  Since  the  capital : output  ratio  is    3 : 1   for  the  production  of  $ 100,000  worth  of  consumption  goods,  $ 300,000  worth  of  capital  goods  would  have  been  used.  Similarly  according  to  the   total  income  of  all  the  workers  a  capital  stock    should  have  been  used  three  time  of  income.  Generally  speaking  for  the  production  of  a  particular  amount  National  Income,  a  particular  volume  of  Capital  stock  would  have  been  used  and  it  determines  Capital  :  Output  Ratio.  This  Capital  Stock  is  legally  entitled  to  the  workers  only  but  it  has  been  fallaciously  handed  over  to  a  few  capitalists  or  the  State.  This  is  fallible  of  infallible  justice.  In  order  to  uphold  ‘Economic  Justice’  the  capital  stock  also  should  be  distributed  to  all  the  workers  according  to  capital  :  output  ratio.  This  mode  of  proportional  distribution  of  national  capital  to  all  the  workers  will  guarantee  and  ensure  an  active  powerful   ‘Economic  Democracy’  among  the  people  than  the  passive  and  week  ‘political  democracy’  to  protect  one’s  liberty. 

 

In  the  modern  production  system  since   ‘the  capital’  has  occupied  the   position  of  hub  in  the  production  process  of  consumption  goods  and  services  and  moreover  it  determines  one’s  ‘right  to  work’  and  ‘right  to  live’  no  worker  is  entitled  to  merchandise  his   capital  to  other  workers.  No  worker  is  permitted  to  hold  a  share  of  capital  more  than  his  country’s  ‘capital : output  ratio’.  Marketing  of  capital  share  in  democratic  economy  is  forfeited  because  of  the  fact  it  will  lead  to  sell  one’s  ‘right  to  live’  ‘right  to  work’   ‘economic  security’  and  ‘economic  equality’.  Justice  warns  man  not  to  sell  economic  liberty  even  if  he  sells  political  liberty.

 

Distribution  of  Capital and Business Ethic:  Capital  is  inseparable  block.  It  cannot  be  divided  into  convenient  parts  to  distribute  to  the  workers  according  to  their  wage-income.  It  forms  huge  industries.  The  workers  can  only  claim  a  ‘capital  right’  in  the  national  capital   stock  and   a   ‘dividend-income’  according  to  their  share  of  capital.  The  capital  goods  cannot  be  distributed  to  the  workers  as  consumption  goods.  But  every  worker  can  claim  a  certain  value  in  the  national  capital  to  ensure  their  capital  right.  The  value  of  capital  would  be  distributed  to  the  workers  equally  or  according  to  their  income.  The  distribution  of  capital  is  just  a  ‘book-keeping  entry’  to  assure  every  worker  that  they  have  a  capital  right  in  the  national  capital.

 

Every  worker  will  have  a  ‘Capital  Account’  in  his  bank  and  a  ‘capital – share-value’  according  to  his  annual  income  will  be  credited.  The  workers  will  be  strictly  restricted   to  bargain  his  ‘share  of  capital’  to  other  workers  as  it  is  now  practiced  in  the  ‘share-market’. The  ‘share-gambling’  involved  in  the  share  market  would  be  completely  abolished.  On  the  other  hand  there  will  be  only  ‘commodity  market’.  Since  one’s  share  of  capital  represents  one’s  ‘right  to  live’, ‘right  to  work’  and  economic  liberty  and  security  the  sale  of  capital  will  not  be  permitted  at  any  cost  in  the  ‘People’s  Direct  Ownership  of  Capital’  i.e. ‘Economic  Democracy’.            

In  the  distribution  of  national  capital  to  the  people  the  ‘capital : output  ratio’  would  be  taken  as  guideline  to  ensure  ‘capital  to  each  worker  according   to  his  wage’.  Right  from  ordinary  village  workers  to  the  top-most  managing  director  of  a  huge  company  the  ratio  would   be  strictly  followed  in  the  capital  distribution  as  it  preserves  ‘distributive  justice’.  No  one  would  be  afford  undue  advantage  to  claim  more  capital – share  than  the  one’s  income  ratio.  The  aggregate  national  capital  would  be  distributed  to  all  the  people  without  any  discrimination  of  one’s  labor.  This  is  the  idea  of  ‘Democrism’  i.e.  ‘Economic  Democracy’.  I  wish  to  take  liberty  to  express  such  kind  of  distribution  would  uphold  the  noble  concept  of  ‘Capital  Justice’.

 

Mahatma  Gandhi  emphasizes  this  capital  justice  in  his  own  fashion  of  spiritual  style  as  follows:

 

“We  should  aim  at  getting  only  what  the  rest  of  the  world  gets.  Thus,  if  the  whole  world  gets  milk,  we  may  also  have  it.  We  may  pray  to  God  and  say : “O  God, if  you wish  me  to  have  milk, give  it  first  to  the  rest of  the world”*

-*Gandhi. M _ “Speeches  and  Writings  of  M. Gandhi” (p:384)

 

If  any  one  wishes  to  portray  his  argument  that  the  above  example  presented  by  Gandhiji  in  the  distribution  of  milk  can  only  be  coordinated  to  the  ‘distribution  of  income’  but  not  the  ‘distribution  of  capital – wealth’,  Gandhiji   replies  them  as  follows:

 

“Earn  your  crores  by  all  means.  But  understand  that  your  wealth  is  not  yours;  it  belongs  to  the  poor.  Take  what  you  require  for  your  legitimate  needs,  and  use  the  remainder  for  society ……But  I  have  visions  that  the  end  of  this  war  will  mean  also  the  end  of  the  rule  of  capital.  I  see  coming  the  day  of  the  rule  of  the  poor,  whether  that  the  rule  be  through  force  of  arms  or  of  non-violence”. **

         **- Gandhi. M : “Harijan”, Feb. 1, 1942

 

The  views  and  visions  of  Gandhiji  are  placidly  warning  the  capitalistic  society  that  the  capital – wealth  should  be  honestly  handed  over  to  the  people  within  the  frame  of  supreme  justice;  otherwise,  he  cautions,  that  the  poor  would  take  even  the  deadly  arms  to  uphold  their  legitimate  right  to  own  their  capital  through  non-violence  as  the  ‘rule  of  poor  through  bullet’  instead  of  ‘rule  of  poor  through  ballot’  that  could  be  the  only  solution  for  all  evils  suppressing  the  poor.

 

Now  I  explain  the  basic  concept  of  Democrism  in  ordinary  terms.  In  Democrism  In  Democrism  in  order  to  ensure  a  sense  of  security  regarding  the  ‘capital  ownership’  in  the  minds  of  every  worker,  ‘a  capital  account’  would  be  opened  in  his  name  and  his  legitimate  due  capital  would  be  credited  in  his  capital  account. 

 

The  capital  in  the  view  of  a  common  man  may  look  like  a  commodity  as  machines  and  factory  buildings.  But  it  is  not  so  in  real  sense.  The  capital  contains  in  its  core  an  enormous  ‘Economic  Power’  only  by  which  one  can  save  and  ensure  one’s  ‘right  to  live’  in  the  world,  which  is  valued  as  supreme  right  of  all  the  socio-economic-political  rights.  No  worker,  therefore,  would  be  permitted  to  sell  or  buy  one’s  share  of  due  capital.  Capital  is  not  a  marketable  commodity  because  if  the  sale  of  capital  ‘in  the  form  of  share’  is  allowed  among  the  workers,  it  is  nothing  but  allowing  the  workers  to  sell  their  ‘right  to  live’,  ‘economic  liberty’,   ‘economic  equality’,  ‘economic  security’  and  so  on.  The  sale  of  capital  would  lead  the  workers  towards  their  economic  slavery;  no  political  revolution  can  uplift  them.  That  is  why  Rousseau  says  in  his  Social  Contract ;  “Man  is  born  free  and  everywhere  he  is  in  chains”

 

It  is  Universal  law  that  the  natural  force  of  all  evolutions  is  to  lead  all  imperfect  systems  towards  their  perfection  overcoming  one  hindrance  after  another  hindrance  in  its  process.  If  the  hindrances  are  many  and  powerful  the  natural  force  of  evolution  will  consume  more  span  of  time  to  overcome  them.  “Perfection”  is  the  law  of  nature;  and  “Evolution”  is  its  mechanism.  As  per  the  ‘natural  force  of  evolution,  the  capital  should  be  owned  by  all  the  workers  to  attain  its  perfection  and  to  uphold  capital  justice.  In  this  context  we  know  that  our  economic  systems  are  crippled  with  imperfection  and  struggle  hard  to  move  towards  perfection  and  therefore  we  have  no  other  alternative  except  to  wipe  them  out  not  to  plunge  the  world  into  destruction.

As  a  matter  of  fact  if  both  the  imperfect  capitalism  and  socialism  want  to  move  towards  their  ‘perfection’  as  a  rule  of  nature  they  have  to  restore  the  ‘capital’  to  people  and  to  ensure  ‘People’s  Direct  Ownership  of  Capital’  the  ultimate  end  product  of  perfection  in  the  formation  of  economic  systems.  The  People’s  Direct  Ownership  of  Capital  would  be  out  of  all  theoretical  and  moral  contradictions  and  constitute  a  perfect  economic  system  known  as  ‘DEMOCRISM’.  On  the  establishment  of  Democrism  the  capital  will  be  owned  neither  by  a  few  capitalists  as  in  Capitalism  nor  by  the  State  as  in  Socialism  but  the  people  of  all  the  countries.  This  “People’s  Ownership  of  Capital”  will  be  the  rule  of  the  nature  and  the  natural  force  of  evolution  of any economic  system. Nobody  or  no  power  in  the  world will  oppose  it.                                                                                                                                                                                        

                                                                                       

                        

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Things You Should Know About Venture Capital and Investment

Venture Capital Investment

Venture capital investment helps in the development of innovative and entrepreneurial companies in India. It has developed out of the need to provide, risky and unconventional capital for new ventures which are based on dynamic entrepreneurship. Venture investment can be in the form of quasi equity or equity and in some cases, even straight or conditional debt, which is made to a venture backed by a professionally and technically qualified entrepreneur.

Process of Investment

Venture Capital firms receive investment proposals through financial intermediaries or directly. The process starts with desk research on the deal. In case it evinces appropriate interest, the management team is asked to come up with a suitable business model for the company keeping in view the unique aspects and prospects of the business venture. The fund examines the competence and quality of the management team of the aspiring company so as to get a perspective of the overall investment proposal and business prospects. In case the investor finds the venture a profitable proposition, a term sheet containing the terms and conditions of the proposed investment is created and negotiated with the promoters. The next step is a detailed due diligence which is assigned to independent advisors or carried out by the venture capital fund itself. This is to examine the financial, business and legal aspects of the deal in depth. The venture capital firms then have to assess the stages of requirement and the actual quantum itself and other milestones in the proposal. After the completion of due diligence, the fund may modify the terms and conditions or stipulate new conditions. Changes and modifications are negotiated with the promoters. A letter of intent is issued by the venture firm and various formalities are completed.

After the Deal

When the promoters request for venture capital investment funds, the firms release it. The functioning of the invested company is regularly monitored and the investor company may give strategic plan inputs and guidance to invested company to optimize performance.

To know more about venture capital investment, kindly visit – http://www.smccapitals.com/merger-acquisition-private-equity.aspx

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ALBANIA – Foreign Investment in an emerging market

Albania is a South Eastern Balkan country situated on the eastern Adriatic Coast in Europe. The country borders the former Yugoslav provinces of Montenegro, FYR-Macedonia, Serbia and Greece to the South. The capital is Tirana. (The World Bank Group, 2009).

Personal foreign direct investment (FDI) interest in Albania is derived from closely monitoring Albania’s transition into a NATO country and prospective European Union (EU) member. The process of accession of Albania to the EU started in January 2003. Albania’s admission to the EU depends on the countries future economic and political stability. Albania has been engaged with EU institutions and joined NATO (North Atlantic Treaty Organization) April 1, 2009. (Wikipedia Contributors cited 2009). Albania formally applied for EU membership 28 April 2009.

Ranked as one of the poorest European countries, numerous Albanian ex-patriots reside and work throughout the EU and Switzerland. A contributing high birth rate, the country has vast foreign direct investment potential considering its prospective EU status, geographical and geopolitical location. Albania is a distinctive classification of an emerging market and future currency change from the Lek to the Euro (improving the countries purchasing power and wealth), reveals there is a vast monetary opportunity for multinational Australian business to invest in a venture with a controlling interest.

FDI occurs when a firm invests resources in business activities in countries outside its home base (Hill 2009, p11), such as Albania. The main foreign direct investment areas that Australian Multinationals should be considering are Construction (highways, infrastructure), Property, Renewable Energy, Finance and Tourism. The types of companies that may be interested in this type of investment are the likes of Origin Energy, McMahon holdings, Raine and Horne.

Historically, most FDI has been directed at developed nations. FDI into developing or emerging nations has traditionally increased substantially (Refer to Graph 1, Appendix 1) since 1990 (Hill 2009, p243-244). Therefore Albania is an excellent FDI opportunity that may provide substantial profitability for Australian firms. Most recent inflows have been targeted at the emerging economies of South East Asia, hence there is an unexplored potential for Australian firms to invest in Albania.

Real GDP in Albania has averaged 6% in previous years due to a surge in public investment. Consumer price inflation is under the 4 per cent upper limit of the central bank’s informal target. (Refer to Graph 1, Appendix 2). The Albanian LEK will continue to be supported in 2009 by large foreign-currency remittances from Albanians living abroad as well as relatively high interest rates. Exports should grow relatively strongly in 2009 and forecasted current account deficits averaging around 11% of GDP. (Business Eastern Europe, 2008). (Refer to Table 2, Appendix 2).

The feasibility of the client company to enter the Albanian market is positive. The democratic Albanian government encourages foreign investment, thus in an ongoing effort to privatize public enterprises, the government is seeking qualified foreign investors in key sectors, including telecommunications, energy, oil and gas, finance, and construction. (Foreign Investment Climate, 2008)

Albania’s infrastructure is currently inadequate, and there is little budgetary money for improvements. The government inherited a poor highway system from the Communist period. Major road building projects are currently underway, and an estimated 6000 kilometres of roadway will be implemented by 2013. (Euromonitor International, 2009). Therefore there is an immense opportunity for Australian based Civil Engineering/construction firms to tender for a substantial sector of work, and scope for profitable investment.

Feasibility of the client company entering the Albanian markets in a Greenfield capacity is varied. Currently, Albania ranks 89th out of 183 countries in the benchmark of Ease of doing business. Starting a business, Albania rank’s 68th in 2009 and set to move to 46th in 2010. (Refer to Table 1 in Appendix 3). The average time in days for Starting a business is 5 days as compared to 13 days for the overall OECD Average. This demonstrates that the Albanian government is moving in a positive direction to attract foreign investment. (The World Bank Group, 2009). However, the cost of starting a business Cost (% of income per capita) is substantially higher than the OECD Average (Refer to Table 1 in Appendix 4).

“Foreign firms obtaining credit” and “protecting investors” demonstrates that Albania is advanced in certain business investment areas – projected ranking 15th out of 183 country’s in both these facets in 2010, placing Albania in the top 10%. On the contrary, dealing with construction Permits (173rd in year 2010) and Employing workers (105th in year 2010) demonstrates that the foreign direct investment firms specialising in renewable energy and civil construction will need to take these important factors into consideration when investing and starting a Greenfield project. (The World Bank Group, 2009).

 The types of business ventures that are attractive for FDI are centred on construction infrastructure and energy. Albania’s energy crisis has been caused by the annual growth rate in the demand for power. The rate has been in excess of 8% and generation has struggled to keep pace. In a recent EU report it is acknowledged that Albania had undertaken some bold steps to restructure and liberalise the energy sector. The European Bank for Reconstruction and Development (EBRD) indicates that it will provide immense financing for new power generation. Therefore, renewable energy is also an extremely attractive foreign investment option. (GMB Publishing 2009).

Hydroelectricity generation has historically provided the majority of Albania’s energy capacity and continues to represent its main generation source. Through a lack of investment funds, only 35 per cent of potential capacity for development is currently being exploited. (GMB Publishing 2009). Australian based hydroelectric energy firms have a substantial advantage in expertise in exploiting the Albanian market. Studies show that Albania has a good solar energy potential. There are no large scale PV projects currently in operation; however the installation of major solar energy projects in planned by the Albanian government in 2015. (GMB Publishing 2009). Australian solar firms have the opportunity to explore Greenfield solar energy projects.

Various US Asset Management firms are launching into the fledgling Albanian property market to take advantage of the growing mortgage market. Albania is set to benefit from its planned accession to the EU, which it expects to be completed by 2014 and has already received €100m in funding. A 2007 World Bank report highlighted Albania’s high GDP growth and a dramatic decrease in poverty. Albania has received significant investment from international bodies such as International Bank for Reconstruction and Development. (Hirst, T, 2008). Commercial and residential property is an area of foreign direct investment that is attractive with the high power of the $ A as compared to the Albanian LEK currency. Currently A = 85.01 ALL (Albanian LEK) and 1ALL = 0.1177 $ A. (Quick Cross Rates, 2009). When Albania enters the EU zone, their currency will become stronger and inline with Euro zone parity.

Albania’s capital markets remain amongst the most embryonic within the whole of the central and Eastern Europe region. There are encouraging steps taken to put in place the legal and regulatory framework to build a functioning stock exchange. This makes convergence with the EU easier and provides financial and banking opportunities through a foreign investment framework to operate within. (Market Access 2008).

Albania recently witnessed an impressive growth in tourism in 2009. The government of Albania announced that there was a 42 percent increase in the number of tourists visiting the country, AENews reported.  Albanian government is claiming its coasts are more beautiful than those of the Riviera. (Forbes S, 2008). With new hotels, resorts, and restaurants, the Albanian private sector in tourism has been growing an average of 30 percent for five years. The Albanian economy had the best growth in Europe; foreign investments in Albania have increased 59 percent this year. Australian firms can invest in the infant tourism industry by providing expertise, with huge profit potential. (New Europe 2009).

The Albanian government has induced an affirmative attitude towards foreign investment; its strategy to strengthen the business environment was incorporated by the removal of administrative barriers to investment. The privatisation agenda is gaining momentum and the government is encouraging foreign investment. Almost one-third of the country’s population works outside the country. The remittances they provide help alleviate poverty and drive a boom in housing construction as well as infrastructure (Euromonitor International, 2009).

Albania’s Albania’s Democratic Party government knows full well that a battle for foreign investment looms and that Albania has some catching up to do. The previous low level of foreign interest is largely due to the fact that Albania’s international image is poor, but wrongly so. Albania’s service sector, especially its restaurants and hotels, are exceptional. The hospitality is great and Albanians are an outward-looking people. They are ready for an influx of tourists. Albania is also rich in natural resources, such as oil, gas, copper, chrome and hydroelectric potential. (Austin RC 2006)

The Albanian government under Prime Minister Berisha has created an excellent environment to attract investors to Albania. Special emphasis was paid improving infrastructure. The efforts on improving the legal system to protect investors also proved significant. It was also reported that many Western European companies have chosen to escape the high taxes in Europe by investing in Albania as the latter offers the best tax system in Europe with a 10 percent flat tax. (NEWEUROPE 2009).

The Albanian government has worked to make it easier to invest and do business in Albania, instituting a one-stop shop for registering a new business. Education is also emphasized, particularly by the private sector. Since the fall of communism, Albania has been an ally of the US, supplying troops. Its positive foreign policy attitude, economic and anticorruption successes are models for other Muslim nations. (Forbes S, 2008).

 Foreign firms experience various investment restrictions in Albania. Despite some recent improvement, Albania’s business freedom remains constrained by a burdensome regulatory environment. Even though starting a business is relatively quick, obtaining a business license requires 24 additional procedures and almost 100 more days than the world average of 225 days. (The Heritage Foundation, 2009).

Foreign and domestic firms are treated equally under the law, and nearly all sectors are open to foreign investment. Agricultural land may not be purchased by foreign investors but may be leased for up to 99 years. The Albanian state can expropriate an investment or asset for the purpose of public interest, but there are no legal provisions for compensation. This can be a deterrent or restriction for an Australian firm specialising in niche Albanian markets. Non-transparent regulations, inefficient bureaucracy, and corruption also restrict and discourage foreign investment in Albania. (The Heritage Foundation, 2009).

The financial system is relatively underdeveloped by western standards, even though progress has been made. Even though many banks have expanded their services, the use of cheques and credit cards is still not widespread. Although short-term credit is available, it is extremely expensive and difficult to obtain without large collateral security. This can restrict foreign investment for an Australian firm. In addition customer service is relatively poor compared to western standards. (Macro-Accessibility 2007).

The government has separated the Tirana Stock Exchange from the central bank, but the stock market remains inactive, and no shares are listed yet. Australian financial investment firms are currently restricted considering the Stock exchange is at an infant stage. Albania’s judicial system enforces the law weakly and is one of the country’s most tainted institutions. Judges are often appointed strictly for political reasons and can be corrupt. Protection of intellectual property rights is weak, and violations of copyrights and trademarks are common, therefore Australian and foreign firms with patented investments are subject to infringements without legal protection. (The Heritage Foundation, 2009). Land rights are not well defined, especially in coastal areas, and 70 percent of all civil court cases involve property disputes. This could have adverse effects for civil engineering organisations. (The Heritage Foundation, 2009).

Corruption in Albania is perceived as widespread. Albania ranks 105th out of 179 countries in Transparency International’s Corruption Perceptions Index for 2007, a very slight improvement from previous years. Corruption pervades all sectors and levels of government. Albania is a major transit country for the traffic in arms, narcotics, contraband, and humans. (The Heritage Foundation, 2009).

There a vast advantages and gains of FDI into Albania. It stimulates economic development and has helped developing countries such as Albania when faced with economic hardship previously. (Economy Watch 2009). Multi-billion dollar projects are underway in the energy sector to produce energy from wind, and solar sources, in addition to road and infrastructure construction. With FDI in the tourism industry, construction jobs in hotels and resorts are underway, also generating employment in the Albanian services sector. (New Europe 2009).

FDI into Albania permits the transfer of technologies and assists in competition between producers within the local market. Gains in the economy include the development of skills, and human capital resources by Albanian employees of Energy, Construction and Engineering firms receiving training on the operations of a business. The creation of new jobs, and increases the salaries of workers leads to lifestyle enhancement. (Economy Watch 2009).

The profits that are generated by FDIs that are made in Albania can be used for the purpose of making contributions to the revenues of corporate taxes. FDI allows for the development of the manufacturing sector. (Economy Watch 2009).

The Albanian economy has been on the rise, with an average annual GDP growth higher than anywhere else in the region. Such impressive growth has been largely due to controlling inflation in addition to investment. Previously, Albanian professionals would immigrate to other nations. “Brain drain” is used to describe the phenomenon of emigration of highly qualified professionals from Albania to other EU nations. FDI in Albania contributes to positive economic growth, and professionals are a source of capital for developing countries such as Albania. Reversing the brain drain has had positive effects on education, income distribution and economic welfare. (Centre for Social and Economic Studies, 2006)

A country’s balance of Payments accounts calculates its payments to and receipts from other countries.  If the FDI in Albania is a substitute for goods and services, the effect can positively improve the current account of the host countries balance of payments. (Hill CW, 2009). According to a UN report, inward FDI by foreign multinationals has been a major driver of export led economic growth, which can be utilised by Albania.

Adverse effects of foreign investment in Albania mean that enhanced competition as well as being a positive aspect could drive indigenous companies out of business. Additionally, foreign multinationals could raise prices, causing inflationary pressure within the Albanian economy. Key decisions affecting the host country’s (Albania) economy may be made by a foreign investment company that does not have total commitment to the Albanian economy. (Hill, CW, 2009)

Considering there are minimal well established incumbent enterprises in Albania, a Greenfield investment may be an option, even though there may be benefits in acquiring an existing firms skill’s, embedded competencies and culture through purchasing an established organisation. (Hill 2009, p506). However, the process of setting up a new Greenfield hierarchy may be the only viable mode in certain instances in Albania within engineering and construction due to lack of infrastructure and expertise in an ex-communist nation.

Appropriate entry modes of investment into Albania include investing with the Overseas Private Investment Corporation (OPIC) which is a US government agency that sells investment services into emerging markets. The most important fund for the region is the $ US 150 million Southeast Europe Equity Fund (SEEF), managed by Soros Private Funds Management. (Macro-Accessibility 2007).

The Trade and Development Agency is also a US government agency which promotes private sector participation in developing countries. In Albania, TDA has recently financed projects to implement roads, ports, the energy sector as well as various private sector projects. (Macro-Accessibility 2007).

The International Finance Corporation (IFC) is a member of the World Bank Group that offers a full array of financial products to companies in developing member countries such as Albania. The European Bank for Reconstruction and Development (EBRD) promotes competition, privatisation and entrepreneurship taking into account different stages of transition of developing countries. The EBRD has equity positions with the Albanian National Commercial Bank, and the Albanian Reconstruction Equity Fund and the Italian-Albanian bank. (Macro-Accessibility 2007). In addition to acquiring an existing company, obtaining finance from these corporations is a feasible entry point for an Australian firm entering a Greenfield project in Albania.

 Poor transport, telecommunications and other infrastructure are considered to be the main obstacles and barriers to investment. Albania was Europe’s poorest country, but levels of per capita income have more than doubled over the past 10 years. Despite this, the economy remains vulnerable on several fronts due to a culture of tax evasion, significant amounts of long term domestic debt and weak anti-money laundering laws. (Euromonitor International, 2009).

Corruption issues within the government and a weak judiciary system pose problems in Albania’s efforts to achieve greater cooperation with the EU. The EU’s members are concerned about the countries commitment to improving the rule of law and crime. (The World Bank Group, 2009). Multinational businesses may consider the lack of law as an impediment to a foreign direct investment.  (Euromonitor International, 2009).

 A major barrier to investment may be the issue of developing free trade zones to attract foreign investment. Existing law provides the authority to establish free trade zones and a special zone commission has been established by the Albanian government to identify potential free zone sites. However, no free trade zones have yet been established. (Macro-Accessibility 2007).

Apart from the monetary opportunities and profit yields that Australian firms and the home countries establishing FDI’s receive, there are opportunities for the host country (Albania) of such foreign investments. Albania’s young, literate populace represents a surplus of labour, reflected in the unemployment rate of 14 percent. While some members of the labour force are highly skilled, many work in inefficient industries with outdated technology. Via foreign firms investing in Albania, the skill sets and technological capabilities of the Albania’s young work force is enhanced. (Macro-Accessibility 2007). Albania’s are rapidly learning market economic practices and often display impressive entrepreneurship. (Macro-Accessibility 2007). There are definitely significant opportunities for the host country Albania through FDI.

 

References

 

 

Austin RC 2006, ‘Albania’s new investment strategies’, SETimes.com, viewed 22 October 2009,

 

Business Eastern Europe, 2008, ‘Business outlook – Albania’, 10 Oct 2008, Vol. 37 Issue 377, p3-3.

 

Centre for Social and Economic Studies, 2006, ‘From Brain Drain to Brain Gain: Mobilising Albania’s Skilled Diaspora’, Development Research Centre on Migration, Globalisation and Poverty, University of Sussex, UK

 

Economy Watch, 2009, ‘Benefits of Foreign Direct Investment’, viewed 23 October 2009, < http://www.economywatch.com/foreign-direct-investment/benefits.html>

 

Euromonitor International, 3 Jul 2009, ‘Albania: Country profile’ viewed 21 October 2009,

 

Forbes, S 2008, ‘Muslim Success Story’, Business Source Complete, 4 Jul 2008, Vol. 181 Issue 7, p15-16

 

Foreign Investment Climate, 2008, ‘Albanian Investment Overview’ Albania Review 2008, viewed 21 October 2009.

 

GM Publishing, 2009, ‘Renewable Energy in SEE – Albania, viewed 21 October 2009.

 

Hill, CWL, 2009, International Business – Competing in the Global Marketplace, 7th edn, McGraw-Hill Internation Edition, Washington USA.

 

Hirst, T, 2008, ‘Fund Launch’, Fund Strategy, viewed 20 October 2009.

 

Macro-Accessibility 2007, ‘ICON Group International, Inc’, viewed 23 October 2009,

 

Market Access, 2008, ‘Albania: Building a Stock Market’ viewed 20 October 2009,

 

NEWEUROPE 2009, ‘Albania has the world’s best growth in tourism investment’, neurope.eu, viewed 23 October 2009,

 

Quick Cross Rates, 2009, ‘XE.COM exchange rates’, viewed 25 October 2009,

 

The Heritage Foundation, 2009, ‘Index of Economic Freedom – Albania’, viewed 22 Oct 2009,

 

The World Bank Group, 2009, ‘Doing Business in Albania’ viewed 18 October 2009, <http://www.doingbusiness.org/ExploreEconomies/?economyid=3>

 

Wikipedia Contributors, 2009 September 30, ‘Accession of Albania to the European Union’. [Internet]. Wikipedia The Free Encyclopaedia, viewed 21 October 2009, http://en.wikipedia.org/w/index.php?title=Accession_of_Albania_to_the_European_Union&oldid=305088136

 

 

 

 

 

Appendix 1

 

 

 

Graph 1 – Foreign Direct Investment Inflows by Region ($ US Billions). (Hill 2009, p244).

 

 

 

 

 

Appendix 2

 

 

Graph 1 – ALBANIA. GDP and Consumer Prices % Change, Year. (Business Eastern Europe, 2008).

 

 

 

 

 

Table 2. Albania – Data and Forecasts. (Business Eastern Europe, 2008).

 

Category

2008 Rank

2009 Rank

2009 Rank

Population, mn

3.10

3.11

3.12

Exchange rate ALL/EUR

120.25

119.40

119.45

Imports, US$ bn

4.50

4.90

5.30

Exports, US$ bn

1.30

1.50

1.70

Trade Balance, US$ bn

-3.20

-3.40

-3.60

Current account, % of GDP

-6.90

-5.50

-4.20

Forex reserves (gold) US$ bn

2.50

2.95

3.43

Foreign debt, % of GDP

18.2

17.5

16.3

 

 

Appendix 3

 

 

Table 1. This table shows summary Albania Doing Business 2010/2009 data for the selected economy (out of 183 countries), and the rankings by each topic. (The World Bank Group, 2009)

 

 

Ease of…….

Doing Business 2010 Rank

Doing Business 2010 Rank

Change in rank

Doing Business

82

89

+7

Starting a Business

46

68

+22

Getting Credit

15

12

+3

Protecting Investors

15

14

-1

Employing Workers

105

105

0

Dealing with Construction permits

173

170

-3

 

 

 

Appendix 4

 

 

Table 2. This table shows the challenges of launching a business in Albania. Included are the steps entrepreneurs can expect, the time it takes on average, and the cost and minimum capital required as a % of GNI capital. (The World Bank Group, 2009).

 

 

Indicator

Albania

Eastern Europe & Central Asia

OECD Average

Procedures (number)

5

6.7

5.7

Time (days)

5

17.4

13.0

Cost (% of income per capita)

17.0

8.3

4.7

Min. capital (% of income per capita)

0.0

21.5

15.5

 

Understanding Venture Capital by Investment Guru, Len Mcdowall

Everyday we read about companies who have raised millions of dollars of capital to fund the growth and expansion of their business. The reality of raising these sorts of funds is much more complex than the newspapers make it out.

There are many different sources of capital – obtaining it depends on many factors. It also requires careful planning, the right advice and the right pitch. Whether you will get it or not also depends on what kind of business you have, what stage it is at, what industry it’s in, how profitable it is, how much experience you have and how the overall market is tracking.

What is Venture Capital?

The term Venture Capital means capital provided to fund a venture. Essentially venture capital and private equity mean the same thing. However there is a difference between Venture Capital and Private Equity firms. VC firms typically will look at more emerging business and industries and may get involved at an earlier stage. Private Equity firms typically like more traditional industries, and tend to like mature companies with consistent cashflows.

What is a Business Angel?

‘Angel’ investors are individuals who like to get involved at the seed or start up stage of a business venture. They look for very high-growth companies that also have synergy with their own business skills or network. Capital invested can be as little as ,000 and as much as 0,000 initially. Follow on rounds may be an option also. The Angel will typically look to get their hands dirty by taking a small role, going on the board, or acting as a business mentor.

What is a liquidity event?

This is the event that gives the investor their money back. This is most commonly a trade sale or a public float. However, sometimes the investor may get bought out by another investor or by the original owner.

Types of Capital Available…

Below are some terms that are commonly used to describe the various stages of funding:-

Seed – This is at the very beginning of a company’s life, often before any profit or sales are achieved. Sometimes it’s used to fund the formation of the venture and its necessary components in order to get it off the ground.

Start-up – This is when the business has commenced trading but it is still in its infancy. A start up business is typically only six months or a year old.

Expansion – The company has sales plus an established market in a particular segment or location (such as Sydney) and is now requiring funding so they can expand their operations further. Sometimes the company is growing very quickly and needs to scale up in order to meet market demand.

Acquisition – The company is seeking to expand by purchasing other business that are similar or synergistic in nature. The company may not have the necessary funds to do this, which is where acquisition funding comes in.

MBO/MBI – This stands for Management Buy Out or Management Buy In. It means exactly that. These are funds usually provided by a private equity firm or institutional bank which allow the existing management (MBO) or new management (MBI) to buy out the existing owners.

Pre-IPO – The round of funding that precedes an IPO, usually between two months and up to two years. Funds are sought in order to fund an acquisition, expand or pay for listing costs. These deals are only usually available to professional investors, institutional investors or high net worth individuals because the amounts involved tend to be in the millions or tens of millions.

IPO – This means Initial Public Offering and is when a company goes public on an exchange such as the ASX. This is done via a prospectus document and allows ‘mum and dad’ type investors to invest alongside the founders, major shareholders, professional investors and institutional investors. This is the most common way to raise large sums of money, such as m or 0m.

© Len McDowall, Integral Capital Group 28th August, 2007

www.integralcapital.com.au

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