Transcript Financing Innovation - Federal University of Rio de Janeiro

BRICS: The Financing
of Innovation
Michael Kahn
Institute for Economic Research on Innovation
29th
BRICS Seminar
January 2010
Outline
 Who are we?
 Finance and innovation
 BR; RU; IN; CN; ZA
 Closing remarks
Institute for Economic Research on Innovation
Who are we?
CO2
/cap
Gini
Lit%
Curr
Ratio
%
%<
$2
Life
M yr
Life
F yr
PhD/m
GERD/GD
P%
BR
1.8
.57
89
21
21
67
75
44
0.83
RU
9.8
.41
99
-8
12
59
72
209
1.08
IN
1.2
.37
61
5
80
63
64
13
0.80
CN
2.7
.47
91
0
47
70
73
18
1.33
ZA
7.6
.58
82
28
34
44
45
24
0.95
W
o
r
l
d
B
Institute for Economic Research on Innovation
South Africa is the leading African source
of FDI, accounting for over 70% of the region’s
total outward FDI stock. As early as the 1970s it
had already become a major source of FDI from
developing countries. Flows have been
concentrated in developed countries: three quarters
of the country’s outward FDI stock is in Europe
and about one tenth in North America. Although
only 9% of its outward FDI goes to Africa, the
country is among the leading foreign investors in
many African countries.
UNCTAD World Investment Report 2006
Institute for Economic Research on Innovation
Finance and innovation
 Neo-Schumpeterians - financial perspective lacking
(Freeman, 1994).
 But Schumpeter (1982) emphasized relevance of the bank
system in economic development
 Von Tunzelman: there is a financial system of innovation
 Dosi (1990: 301) “…innovative efforts are shaped and
selected also by rates and criteria by which financial
markets and financial institutions (private and public), such
as stock markets and banks, allocate to business
enterprises. Irrespectively of whether resources are
attributed to firms or individual projects, allocative criteria
and rates of allocation should plausibly affect the amount of
resources which the industry devotes to the innovative
search, and also the directions in which the agents search.
 Banks and even markets resist financing innovation,
particularly in countries that have only recently introduced
market capitalism, and that did not build financial systems
able to evaluate intangible assets (Melo)
 Nature of investment in innovation in macroeconomic
regimes of high inflation rates and high interest rates.
 Impact of import liberalization and flexible exchanges of
technology
 Relations between policies for investment in innovation
and macroeconomic policies.
 Five countries following their own paths to capitalist
accumulation.
Freeman (1987): any national innovation system must be
prepared to meet the requirements of innovation:
1. Intervention of the State through the public policy;
2. Way that enterprises design their strategies of
research and development (R&D);
3. Impact of education on the formation of human
resources and training of technicians, researchers
and other workers, and the social innovations related
to such formation of human resources;
4. Industrial structure prevalent in a particular moment
in each country.
Innovation activities include
 High level human capital development
 Mobility
 Knowledge collection
 Knowledge exchange – value chain activities
 Knowledge codification
 Knowledge generation – R&D
 Embodied Knowledge transfer – acquisition of
technologies both hard and soft
 Accelerated progress along the technology life cycle
 New forms of innovation – open innovation and
user driven innovation
 Social innovation
 Regulation driven innovation
BRAZIL
 Military government for two decades to 1986. Period of
state enterprises. Expansion of university engineering.
Strategic missions including liquid fuels, nuclear energy and
aerospace.
 Creative in setting up financial instruments for innovation
 By 1980s, venture capital enterprises exists supported by
FINEP and by BNDES
 High economic volatility followed Mexico debt moratorium
in 1982 paralyzed all these initiatives.
 Only systematically resumed after the return to civilian
rule and implementation of the Real Plan
 Agr 9%; Manuf 26%; Services 65%
 Employment: 20%; 15%; 65%
 Universities dominant player in R&D. Business muted.
 Significant incubator movement – 250 across country
 Sectoral funds expanded this range of instruments but
inadequate long term finance except from public financial
institutions.
 Poor coordination and integration and no strategic
guidance for integrating these instruments.
 Three instruments for integration: reduction of interest
rates, provision of venture capital and subsidies. Using such
instruments apart is working into a fragmented, nonsystemic way.
 Institutional disarticulation indicates absence of state
procurement policy
 Academic science and government work closely
together
RUSSIA
 Early 1990s shock doctrine of structural adjustment and
introduction of market economy under Gaidar. State sells off
many large industries; research institutes and government
entities still own enterprises. Slower pace of
disestablishment than China.
 Main source of innovation investments is own funds of
organisations - which is natural for a market economy.
 Internal R&D expenditures the share of industrial
enterprises’ funds amounts to about 30%, in technological
innovations this figure rises to 86%  unavailability of
other funding sources
 Foreign sources play a minor role in funding R&D and
innovation activities. Compared with the 1990s figures,
their share has even dropped from 7% to 2.3% of GERD.
 Higher education limited R&D role; most in research
institutes; BERD small proportion; stagnating
 Credits and loans market for investing in innovation
activities and innovative projects is limited.
 Access to credit possible but only to companies with
established business reputation and for near market or
market ready products
 The cost of credit is high
 Venture funding has not emerged
 A way of widening funding opportunities for innovative
projects is by attracting sponsors.
 Russian law allows for state guaranties to participants by
sharing project-related risks, the state smoothes the way
for other creditors proving project financing for innovation
activities.
 International experience of financing innovative projects
has to be significantly adapted to Russian conditions
 Lack of entrepreneurial skills and lack of innovative culture
 Domination of mining industries in the economy, etc.
 The role of the Russian Venture Company is to promote
venture investment and financial support for S&T activities
all over the country and invests in closed-end investment
funds only. The resources for the Russian Venture Company
capital are allocated from the Russian Federation
Investment Fund - up to 5 billion roubles in 2006 and 10
billion in 2007 (the total of 15 billion roubles).
 A special management company manages each fund. Each
fund management company can finance from 10 to 15
innovative companies for several years. Thus the end result
may add up to 15 venture funds and 150 innovative
companies.
 Activity of venture investors depends on efficiency and
consistency of government policy. In Russia the government
does not provide full and regular support to creation of
intellectual products even at the early stages of this
process, and does not develop efficient institutional
infrastructure for innovation activities.
 Despite the growing number of industrial parks and
innovation technology centres in Russia, # innovative SMEs
static
 Role of the academies under review.
 Severe demographic crisis
INDIA
 Liberalization post 1992. Deregulation. Still tightly
controlled economy with many state industries.
 High R&D in public sector; less so in business. Universities
also relatively small R&D role.
 Large foreign R&D sector
 Significant improvements in the innovative output of
Indian industry during the recent period since economic
liberalisation.
 Restricted to ICT and pharmaceuticals.
 Pharmaceutical industry has been a target of most of
these financial incentives  fine targeting of innovation
financing in India
 India has three different types of financial incentives for
R&D: research grants and loans, venture capital and tax
incentives.
 R&D expenditure of the concerned industries inelastic.
Incentives did not form a significant portion of R&D.
 No comments on the effectiveness of R&D tax incentives.
 Size of the firm does appear to be an important
determinant of R&D, at least, in the case of some of the
industries. Allowing firms to become larger and through that
process of growth enabling them to become larger investors
in R&D may be a better policy than providing them directly
with subsidies.
 It is also that the total number of firms enjoying these
incentives is not too many. It remains to be seen whether
this is due to any bureaucratic delays or difficulties in the
actual administration of this incentive.
 Huge diversity and contestation
CHINA
 1978 market reforms under Deng Zhao Ping. Massive
disestablishment of state enterprises. Special economic
zones. Opening up selected parts of economy. Inward flows
of FDI from overseas Chinese.
 Four kinds of funding sources provide capital for company
at different stages.
 Beneficiaries of the Innovation fund, startups in High-tech
zones, Incubators and University Science Park require
early stage seed capital. In this stage the entrepreneurs
may only have an idea or new technology and their
companies run at a loss, which need sufficient capital
support.
Innovation fund, high-tech zones, incubators and parks are
designed for profit growth earning, but are to support
innovation corresponding to government’s policy.
 Venture capital is important after start-up when the
company shows growth potential in the market and positive
cash flow.
 Opening of NASDAQ equivalent offers more opportunities
for equity finance
 Most bank financing available only at the expansion and
later stages of a venture’s development, with local
governments acting as guarantors.
 As risk averse institutions, banks finance expansion
 Significant role of government in developing venture
capital systems
 Government has a strong paternalistic view of the
economy, by identifying particular industries as priority
sectors and providing incentives for investment in those
sectors. Also concerned about foreign dominance, and will
continue to do what it considers to be supportive of local
venture capital firms.
 Lingering role of the government as itself an economic
actor is still strong, as evidenced by the still significant
number of enterprises held by local government holding
companies. Local governments will continue to create direct
and indirect ownership and control linkages to new firms
being established in their jurisdictions.
China likely to develop similar to Singapore’s “state
capitalism” with its government-linked companies
 Local government both referee (regulator) and player
through holding companies and investment agencies
 Rising inequalities; environmental crisis
SOUTH AFRICA
 Emerging from three decades of near siege economy and
racial exclusion of majority
 Post 1994 modernizing agenda - ‘constructed crisis’ with
contestation about the distributive role of the state.
 1996 GEAR.
 Minerals-energy complex remains at centre of economy.
 Agr 3%; Manuf 32%; Services 65%
 Employment: 9%; 26%; 65%
 Business is the main actor in R&D
 ARC-Uni-business triple helix highly successful innovator
 Advanced financial system and capital markets.
 Open economy. Freely traded currency with large carry
trade.
Numerous sources of finance for innovation activities:
 Own funds
 Venture finance e.g. Venfin; Bioventures; HBD VC
 Bank finance
 Equity
 FDI
 Mobility grants (DST-EU)
 R&D tax incentive
 SARChI
 NRF/MRC grants
 Innovation Fund/BRICS/Thumisamo
 DTI – THRIP, SPII, others: EIP, CIP, SSAS, BPO, CIS
 IDC SBVCU
 Publication subsidy
 Close Corporation company tax incentives
 Backing ‘winners’ – PBMR
 Science Councils and research institutes
 Virtually no role for provincial and local government
 Implied industrial policy: AIDP; PBMR
 Four binding constraints:
1. Racialized job reservation and skills development
2. Foreign-exchange volatility and controls
3. Risk aversion
4. Anti-competitive behaviors.
 Deep-seated failure to set a realistic agenda for ‘getting
schooling right.’ From ‘pass one, pass all’ to ‘each one teach
one’ to ‘retain all qualified professionals.’
 September 2009 forex relaxation - weaken Rand thereby
compensating for Dutch Disease. Rand:Dollar in range 7.0
to 8.0 pushes domestic labour out of competition with
Central and Eastern Europe and South and Eastern Asia.
The barrier to innovation that resides in the definition of
patents as tangible capital remains. Why then not apply the
same relaxation to IP?
 Risk aversion and anticompetitive behavior. No shortage of
funds available for good innovative ideas to be grown shortage of will to implement and seize the opportunities.
Protracted decision-making both by the inventors and their
accompanying bureaucrats raises the cost of entry to levels
that may deter investment.
 If retained profit, or the cash pile is growing, then this is a
management decision where the business leadership is
seeking optimal return on capital, and will seek the best
way of achieving this, such as an acquisition.
 Placing new products in the market is risky – short
termism suits shareholders who prefer larger dividend since
tax free
 Well-developed markets; run to own logic
 Runs counter to the findings of the innovation survey
regarding strong hindering factors:
Lack of internal funds is an obstacle to
16% of innovating size class 1 firms
28% of innovating size class 2/3/4 firms
Lack of external funds is an obstacle to
14.6% of innovating class 1 firms
18.9% of innovating class 2/3/4 firms
High cost of innovation is an obstacle to
16% of innovating class 1firms
23% of innovating class 2/3/4 firms.

 Anticompetitive behaviours. <2006 reliable and very
cheap electricity for industry. Massive environmental cost
 Lack of investment in infrastructure, poor maintenance,
loss of skills through racialized job reservation, poorly
implemented procurement value chains, the pressure of
economic growth, and bad luck create a perfect storm of
brownouts and blackouts.
 GEAR was a ‘third way,’ the electricity catastrophe is an
example of Naomi Klein’s ‘shock doctrine.’
 Import-parity-pricing eliminates comparative advantage of
commodities inc coal.
 Electricity costs set to double if not triple – the energy
constructed crisis.
 A spur to innovation driven by (unintended consequences
of) structural adjustment.
 Market capitalism afflicted with Dutch Disease
 What state actions impede innovation?
 Politicization of intellectual property – IKS, rules for
disposal both FOREX and BEE – new form of techno
nationalism
 Industrial policy vs rent seeking behaviours by capital
and organized labour. Centrifugal forces.
 Relevance of the science councils to innovation?
 How to boost GFCI & FDI for manufacturing?
 Why do large firms not diversify further? Monopolies
and anti-competitive behaviours
Closing remarks
 Five different experiences
 Different forms of government and governance
 Start ups require capital (angels) and nurturing
(incubators)
 Important role of local government
 The BRICS each dominate their own backyard
 IBSA does not eliminate competition for dominance
 South Africa is squeezed by a pincer movement: BR on
the West; CN and IN to the East
 A Rainbow Nation fighting about the pot of gold
….