Transcript GOVERNMENT PROMOTION OF LEARNING AND INNOVATION …

FROM DIRECT GOVERNMENT SUPPORT
OF INNOVATIVE SME’S TO VENTURE
CAPITAL/PRIVATE EQUITY(VC/PE)
A Three Phase Policy Model based
on the Israeli Experience
Gil Avnimelech and Morris Teubal
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OBJECTIVE
• Propose a generic three-phase Innovation &
Technology Policy (ITP) ‘model’ for the support
of SME’s in Developing Economies
• The model refers only to one specific plan of
action out of a Multi-pronged Strategy for
Economic Development (there are others)
• It is based on the Systems of Innovation (SI) or
Systems/Evolutionary perspective to ITP
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OBJECTIVE-2
• While initially suggested by the Israeli
experience (focusing on R&D and high
tech) variants of the model exist or could
be developed for various types of
industrializing economies
• In the model, Innovation is broadly
conceived (Schumpeterian perspective)
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BROAD DEFINITION OF
INNOVATION
• Not only new products/processes resulting
from R&D should be supported
• Also those resulting from Design,
Engineering, Acquisition/Transfer of new
Technologies, Production Learning, etc
• New Services
• New Organizations (“Social
Technologies”)/Markets/Strategies
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Systems of Innovation(SI) or
Systems/Evolutionary
Perspective to ITP
Teubal, M 2002:”What is the Systems Perspective
to Innovation and Technology Policy (ITP) and how
can it be applied to Developing and Industrialzing
Economies” Journal of Evolutionary Economics,
Vol 12, pp. 233-248
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The National Innovation System
(NIS): Definitions
The Complex Network of Agents,
Institutions, Organizations and
Policy Mechanisms Supporting the
Process of Technical Advance in an
Economy
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“SI”AGENTS/INSTITUTIONS:
Narrow View
1.Organizations and Institutions directly
Involved in R&D: Business Firms,
Universities and Research Laboratories
2. This was the original view of NSI (during the
1980s)-a mix between Neoclassical &
Structuralist perspectives
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SI Agents/Institutions: Broad
View
In addition to those included in Narrow View of
NIS, other Economic, Political, and Social
Institutions which indirectly affect
Innovation/Technical Change e.g. parts of the
Financial System (Venture Capital); the
Business Sector & its structure, Users of
Innovations; Macroeconomic Policy agencies,
etc
Relevance: when considering
Country/Economy Adaptation to Radical
Changes in the Environment
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Analysis of SI perspective
A. Focus & Approach
B. “Positive” aspects:
B1:System Components
B2:General Principles
C. “Normative” aspects
D. Other (e.g. policy process)
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B. POSITIVE ASPECTS: System
Components
a: Business Sector (Subsystem-BS)
b: Supporting Structure (Subsystem-SS)
c: Institutions & Markets
d: Links & Interactions
e: Culture and Social Structure
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C: Normative Aspects -1: Justifying
Government Intervention
• System Failure-Example: When the failure to allocate
sufficient resources to Innovation/Technology is not due
(only) to lack of incentives given to market forces but to
more fundamental causes such as:
-lack of R&D capabilities when this weakness is (also) due to
deficiencies in e.g. the Higher Education System (e.g. low
quality engineering graduates)
-lack of high tech entrepreneurship [a cultural constraint]
-inadequate institutional framework (“rules”) under which
market forces operate e.g. intellectual property, corporate
governance, regulations concerning capital markets
[e.g.accounting & auditing procedures] ; etc
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C:NORMATIVE ASPECTS OF
ITP-GENERAL PRINCIPLES-1
Objective of ITP: Promote learning and SI transformation by
overcoming System (& Market) Failures.
The specific ‘failures’ reflect the strategic priorities of the country
(these in turn depend on a process of generating a ‘vision’ and a
‘strategy)
ITP should be viewed in an integrated whole-- a portfolio of incentives
programs & changes in institutions
SI transformation requires looking at the whole system which also means that the
success of any one program or policy action will depend on the simultaneous
existence or non-existence of other policies.
Coordination and appropriate timing of policies are crucial
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C: NORMATIVE ASPECTS- GENERAL
PRINCIPLES-2
Nature of Policy Making
• ADAPTIVE POLICY MAKER
• POLICY AS JUDGEMENT
• AN EXPLICIT STRATEGY
• POLICY IS CONTEXT SPECIFIC
• A PORTFOLIO OF COORDINATED POLICIES & PROGRAMS
Learning, Demand and Dynamics
• STIMULATING DEMAND FOR ‘CRITICAL COMPONENTS’
• LEARNING DURING PROGRAM IMPLEMENTATION
• POLICY CYCLE & PROGRAM SEQUENCING
• POLICY LEARNING AND POLICY CAPABILITIES
• MIX BETWEEN TOP DOWN AND BOTTOM UP INITIATIVES
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C:Structure of Policy Portfolio
• Mix between Institutions and Incentives (Programs)
• Mix between programs directed to BS and those directed
to SS
• Mix between Horizontal & Targeted programs
• R&D versus non-R&D focus
• Degree of Coordination among Programs/Policies
The policy portfolio of a country may be ‘biased’- relative
to the requirements of a ‘reasonable’ path of SI
transformation
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D: Other-Policy Process
It consists of a number of phases
1)Setting “Strategic” Priorities: Searching for a small
number of alternative SI transformations; and focusing
on one or a small number of possibilities (a
‘vision/strategy’)
2)Formulating Programs (and/or changes in Institutions)
3)Implementation of Programs
4)Feedback
5)Learning-Evaluation
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SYSTEM FAILURES CONFRONTING
INNOVATIVE SMEs
• Innovation and Learning Externalities-e.g.
from R&D, penetration of new markets, management, etc
• Collective Learning (also involving issues of critical
mass and missing System Components)
• Knowledge Based Entrepreneurship
(KBE)-e.g. Cultural Constraints; Bankruptcy Laws
• Finance and Support (see below)
• Creating Networks-recognized by OECD in connection
with SU and VC
• Other-Reputation, coordination, infrastructure, clusters effects
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SUMMARY 3-PHASE MODEL*
Phase 1: Subsidies or other support to Innovative SMEs
(Israel 1969-1989)
Phase 2: Transition Phase-preparing the stage for VC/PE
policies (1989-1992)
Phase 2: VC/PE directed Policies (1992-1997/8)
* Avnimlech/Teubal, (1) Economics of Innovation and new
Technology, 2004; (2) Revue Economique (forthcoming); (3)
submitted to Industrial and Corporate Change
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PHASE 1:Subsidies (or other Direct
Support) to Innovative SMEs
Objectives:
• Diffusion of Innovation, Learning and generation of
Innovation/R&D Capabilities
• Creating of an Innovative SME- based segment
• Create ‘demand’ for VC, PE (‘private financial
infrastructure’)
Direct Support-Critical but Not Enough
Requires Considering the whole SI
• Education, Science and Universities
• Links with Business Sector; etc
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EXAMPLE-ISRAEL’S GRANTS TO R&D
PROGRAM 1969--
• General
• Institutional Background: Creation of OCS in
1969-a specialized agency in charge of ITS
directed to the Business Sector
• Focus on direct R&D Grants to business
enterprises (initially all were SMEs)
• A ‘backbone” Horizontal Program
• Weak Budget Constraint till the mid 90s
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Learning in Phase 1 (Israel)
• Intra-firm Learning
•
•
•
•
How to search for market and technological information
How to identify, screen, evaluate and choose new innovation projects
Learning to generate new projects, including more complex ones
Learning how to managed the innovation process (e.g. linking R&D
to production/marketing)
• Collective Learning
•
•
Importance of marketing
Policy learning through an informal policy network involving OCS officials
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GENERAL PRINCIPLES OF
HORIZONTAL PROGRAMS
• Two sub periods in implementationinfant and mature
• infant: focus on learning and capability
development (previous slide); Neutral
Subsidies
• Later/mature: focus on restructuring
• Elements of Learning Approach: assuring
critical mass of projects; creating a policy implementation network;
generating relevant typologies of R&D projects/innovations;
codifying and diffusing knowledge; special attention to diffusing
R&D/innovation; building policy capabilities; other
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HORIZONTAL PROGRAMSMATURE PHASE
•
•
•
•
Reduction in the average subsidy
Greater amount of selectivity
Identifying areas of competitive advantage
Identifying areas for targeted promotion
(e.g. selected product areas; and VC/PE)
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TRANSITION (PHASE 2)
Objective: Reinforce Innovative SMEs; and
prepare the stage for VC/PE policies
In Israel (1989-1992: Pre-VC Emergence Period)
• A set of complementary programs (Incubators;
Magnet, Inbal Program-first VC program:
failure)
• Business Experiments (e.g. SU organization) and
Policy Learning (e.g. from failure of Inbal)
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Chile in Transition Phase?
• Limited Deal Flow hampered creation of a VC/PE industry
• Probably: a significant reinforcement of Business Sector Innovation
and University training and Research may be required before
success with VC.
• This may further diffuse of R&D/Innovation and promote the
establishment of several hundred new innovative SMEs
• Continuation and Expansion of Public/Private Experiments both as
regards Innovation and with respect to the future VC/PE industry
• Critical Roles played and to be played by
CORFO
Fundacion Chile
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ITP MODEL-PHASE 3: TARGETED
SUPPORT OF VC/PE
Objective
• Emergence of an Effective VC/PE industry that could
support growth of an innovative SME-sector
Conditions for Success
• Timing and ‘right’ Context are critical for success. Most
VC policies failed not, also in Advanced Countries!
• Frequent reasons for failure: Background conditions
were not yet ripe (Phases 1 & 2 were not yet completed);
Also: VC was considered a pool of money and not an
industry
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VENTURE CAPITAL (VC) &
PRIVATE EQUITY (PE)
• Specialized , independent financial organizations
focusing on equity based investments in high growth
companies
• VC (‘Strict Definition’) focuses on high tech Start
Ups(SU) and on ‘early (R&D) phase’ finance of these
SMEs
• PE oriented to mid/low tech and to services, with a
smaller share of high tech investments (if at all)
• PE also invests in mature, ‘public’ companies; and in
later phase investments including such things as MBO,
MBI, etc
• Mix of VC and PE required for Industrializing
Economies
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CHARACTERISTICS OF VC
(lesser extent -of PE)
• Equity Investments, adding value to portfolio
companies & exit
• Added Value: Management Support, Marketing
and Production, Overseas Expansion,
Certification, Head Hunting, going public (IPO)
• Exit-mostly IPO or Acquisition by another
company (also trade sales, repurchase of shares
by entrepreneur, etc)
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CHARACTERISTICS OF VC/PE- (2)ORGANIZATIONAL FORMS
•
•
•
•
•
LIMITED PARTNERSHIPS (LP)
Public VCs (quoted in stock market)
Government Owned
Linked to Banks or Corporations
Other (especially PE): Investment
Companies; Mutual Funds; Closed Funds;
etc
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SYSTEM FAILURES CONFRONTING
INNOVATIVE SMEs-Limitations of
BANKS & BANK LOANS
• Pertaining to Innovative SMEs
•
•
•
•
Knowledge Asymmetries
Uncertainties of Markets and Technology
Frequently, unknown entrepreneurs
High Share of Intangibles in total Assets
• Pertaining to Banks
• Knowledge & Capabilities Constraints
• Regulatory Constraints(sometimes)
• Bank Strategy/Routines
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HOW VC(SOME EXTENT PE) OVERCOME
SYSTEM FAILURES
• Strong Capabilities: background of entrepreneurs;
specialization; learning/experience (screening, due diligence,
investment, monitoring, adding value and exit); networks involving
suppliers, investors, clients, partners,etc; know-whom
• Incentives and Organization: advantages of
Limited Partnerships (flexibility, incentives, taxation); proactive role
by virtue of owning stock; strategy; etc
• Participation in Board of Portfolio SMEs
• Access to information within the firms
• Phased finance, etc
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EXAMPLE OF PHASE 3 POLICIESISRAEL’S TARGETED SUPPORT OF VC
1993-8
• Background: late 80s-lots of companies receiving R&D
support failed; lack of VC identified as System Failure
• First Attempt-the Inbal Program 1992:support of public
VC; failure
• 1993-7: Implementation of Yozma (2nd successful VC
policy attempt)
• Specific System Failures dealt by Yozma: world class
world class foreign partners, critical mass, coordination,
selection of organization and strategy; promotion of
learning; and signaling
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Table 4: OCS R&D Grants (M$)
Year
Regular fund
Incubators
Magnet
Other
Total grants
Royalties
1988
118
0
0
2
120
8
1989
122
0
0
3
10
1990
133
0
0
3
125
136
1991
171
4
0
4
179
20
1992
177
16
1
5
199
25
1993
199
24
4
4
231
33
1994
272
27
10
8
317
42
1995
294
26
16
10
346
56
1996
279
26
37
6
348
79
1997
309
27
55
6
397
105
1998
305
29
61
5
400
120
1999
331
27
63
7
428
134
2000
337
29
68
6
440
139
2001
291
27
50
6
145
2002
267
27
58
4
374
346
Source: OCS
14
125
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Table 1: Capital Raised by the Israeli VC industry:
1991-2002
4000
3500
Total VC Capital Raised
3000
2500
2000
3701
1500
1851
1000
1389
729 706
397
58 160 374 374 156
500
-18
0
-500
1991
Source: IVC
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
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Table 2: Capital invested in Israeli startups
by Israeli and foreign VCs: 1997-2002
3500
Total
3000
3092
BY Israeli VCs
% of Israeli VCs
2500
1985
2000
1500
1270
1000
500
1140
1011
812
440
250 57%
589
334
481
440
57%
41%
43%
42%
41%
0
Source: IVC
1997
1998
1999
2000
2001
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2002
VARIANTS TO TWO PHASE
MODEL (reflecting different contexts)
• Variant 1:Some countries/regions have strong Universities/Science
and might have a pool of innovative SMEs---> might start directly at
phase 2, but even here the set of public/private experiments required
might differ across countries
• Variant 2: A minority of countries may not need targeted VC/PE
policies since “industry” emergence will occur endogenously e.g.
spearheaded by foreign VC/PE
• Variant 3:Differences in initial structure of SME segment; and in
the broader institutional, capabilities and policy context--->may
determine different portfolios of Phase 1 policies( and to scope and
variety of system failures to be dealt with)
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APPLICABILITY OF THE TWO PHASE ITP
‘MODEL’ TO INDUSTRIALIZING
ECONOMIES
• There are two categories of reasons why
the R&D/VC experience of Israel may be
applicable –
• Reason 1:Top Tier Industrializing Economies
may be interested in Software/IT high tech (the
experience would be more directly applicable)
• Reason 2: Increasing commonalities between a
VC industry serving high tech SU and a PE
industry serving a broader segment of innovative
SMEs
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REASON 1
• In several countries suitable ‘background
conditions’ are emerging for the development
of R&D intensive industries
•
•
•
Russia, India, China, Singapore, Brazil, Chile etc
Some are increasingly involved in Software & IT services; good links with
MNEs and their needs; increasing reputation and reliability
MNEs are establishing R&D labs, the basis for future spin-offs to high tech
industries
• Government subsidies to emerging R&D
performing companies may accelerate the
process (also set the basis for a domestic VC
segment)
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COMMONALITES BETWEEN A VC-SU
SEGMENT AND A PE-INNOVATIVE SME
SEGMENT
• Increasingly innovative SMEs will operate in a
knowledge intensive, global & highly
competitive environment-somewhat similar to
the environment facing high tech SU
• Therefore, PE (or a mix of VC/PE) companies
must emerge to provide a profile of support to
SMEs which is similar to that which ‘strict’
VCs provide to high tech SU
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WHY IS THIS SO?
• Increasing importance of Knowledge
• Rapid Deployment in Global Markets
• Increased importance of management skills,
networking and reputation to compete in the
global market
• System failures blocking the transformation of
traditional SME segments
• Advantages of Equity based mechanisms (over
traditional mechanisms) in overcoming such
failures
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