On 14 April 2016 the OECD published Financing SMEs and Entrepreneurs 2016. The study covers 37 countries including China, Russia and many OECD member countries. The report notes that governments are looking to small and medium enterprises (SMEs) and entrepreneurs as an important source of economic growth. Access to finance by SMEs is an important factor in enabling growth and in recent years this has been receiving more attention from governments. The data show that after some years of difficulties the financing of SMEs and entrepreneurs has improved. Alternative sources of finance such as crowdfunding are gaining momentum although from low levels. The latest report contains a thematic chapter dealing with angel investments.

Government policy responses

The report notes that credit guarantees are the most widely used instrument to facilitate access to finance for SMEs. The report also notes that guarantees and direct lending schemes are targeting new innovative firms more specifically. There is a realization that small businesses are too reliant on bank financing when compared to larger businesses.

There is therefore an increased effort to provide incentives for equity-type financial instruments such as Belgium’s recent start-up plan to encourage private equity investment and broadly stimulate entrepreneurship. In July 2015 Belgium introduced tax incentives for individuals investing in the equity of new Belgian enterprises (less than four years old with fewer than fifty employees). Canada’s Venture Capital Action Plan announced in 2013 is being implemented with the distribution of CAD 50 million to selected venture capital funds and CAD 350 million for investment in private-sector led funds of funds.

Initiatives in Ireland to encourage equity investment include the Enterprise Ireland Seed and Venture Capital Scheme that provides equity on high growth ventures in their early stages. The Ireland Strategic Investment Fund (ISIF) initiated in December 2014 invests for high returns and to sustain employment and economic development. The Development Capital Scheme improves financing for mid-sized companies with prospects for creation of employment and growth of exports.

There are also efforts to support SME participation in global value chains. Access to finance is an important barrier to seizing global trading opportunities which often require significant investment and additional working capital. About half the countries surveyed provide export guarantees and trade credit and there is an increased focus on helping SMEs to internationalize their activities.

Angel Investors

The countries covered in the report use incentives in the form of reduced tax rates or tax credits for angel investors. The US and Canada also offer incentives at the state and regional level. Several of the countries have also introduced tax incentives for investors in SMEs (including start-ups) that are not specifically targeted for angel investors but also benefit them. For example they are introducing research and development (R&D) incentives or tax allowances for earnings from certain investments that often in practice help angel investors.

Although empirical studies of the effectiveness of tax incentives for angel investors are rare there have been studies of the UK Enterprise Investment Scheme (EIS) that show positive results. EIS investments are positively associated with business performance, fixed asset formation, sales turnover, employment and labor productivity although the effects are small. One study has suggested that 24% of angel investments would not have taken place without the favorable tax treatment. A study of tax incentives for angel investors in two US states found these tax credits to be cost effective with a net positive impact but these tax credits were considered to be better designed than some credits in other US states.

However tax incentives in the Netherlands and Sweden have recently been scrapped because they were not considered cost effective and there was concern about their incentive effect to encourage investments that would not have taken place in the absence of the incentives. It may also be politically sensitive to provide tax relief to wealthy individuals that increase their return on investments. The OECD report points out the need for a stronger evidence base on this type of tax incentive.