BRICS: The Financing of Innovation Michael Kahn Institute for Economic Research on Innovation BRICS Seminar 29 th  January...
Outline <ul><li>Who are we? </li></ul><ul><li>Finance and innovation </li></ul><ul><li>BR; RU; IN; CN; ZA </li></ul><ul><l...
Who are we? Institute for Economic Research on Innovation W orld Bank World Development Report 2007; Economist 31.10.09;  ...
Institute for Economic Research on Innovation South Africa is the leading African source of FDI, accounting for over 70% o...
Finance and innovation <ul><li>Neo-Schumpeterians - financial perspective lacking (Freeman, 1994). </li></ul><ul><li>But S...
<ul><li>Banks and even markets resist financing innovation, particularly in countries that have only recently introduced m...
<ul><li>Freeman (1987): any national innovation system must be prepared to meet the requirements of innovation: </li></ul>...
<ul><li>Innovation activities include </li></ul><ul><ul><li>High level human capital development </li></ul></ul><ul><ul><l...
BRAZIL <ul><li>Military government for two decades to 1986. Period of state enterprises. Expansion of university engineeri...
<ul><li>Universities dominant player in R&D. Business muted. </li></ul><ul><li>Significant incubator movement – 250 across...
RUSSIA <ul><li>Early 1990s shock doctrine of structural adjustment and introduction of market economy under Gaidar. State ...
<ul><li>Higher education limited R&D role; most in research institutes; BERD small proportion; stagnating </li></ul><ul><l...
<ul><li>International experience of financing innovative projects has to be significantly adapted to Russian conditions  <...
<ul><li>A special management company manages each fund. Each fund management company can finance from 10 to 15 innovative ...
INDIA <ul><li>Liberalization post 1992. Deregulation. Still tightly controlled economy with many state industries. </li></...
<ul><li>R&D expenditure of the concerned industries inelastic. Incentives did not form a significant portion of R&D.  </li...
CHINA <ul><li>1978 market reforms under Deng Zhao Ping. Massive disestablishment of state enterprises. Special economic zo...
<ul><li>Venture capital  is important after start-up when the company shows growth potential in the market and positive ca...
<ul><li>Lingering role of the government as itself an economic actor is still strong, as evidenced by the still significan...
SOUTH AFRICA <ul><li>Emerging from three decades of near siege economy and racial exclusion of majority </li></ul><ul><li>...
<ul><li>Numerous sources of finance for  innovation activities : </li></ul><ul><ul><li>Own funds </li></ul></ul><ul><ul><l...
<ul><li>Virtually no role for provincial and local government </li></ul><ul><li>Implied industrial policy: AIDP; PBMR </li...
<ul><li>Risk aversion  and anticompetitive behavior. No shortage of funds available for good innovative ideas to be grown ...
<ul><li>Runs counter to the findings of the innovation survey regarding strong hindering factors: </li></ul><ul><li>Lack o...
<ul><li>Anticompetitive behaviours . <2006 reliable and very cheap electricity for industry. Massive environmental cost  <...
<ul><li>Market capitalism afflicted with Dutch Disease </li></ul><ul><li>What state actions impede innovation? </li></ul><...
<ul><li>Five different experiences </li></ul><ul><li>Different forms of government and governance </li></ul><ul><li>Start ...
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BRICS: The Financing of Innovation

  1. 1. BRICS: The Financing of Innovation Michael Kahn Institute for Economic Research on Innovation BRICS Seminar 29 th January 2010
  2. 2. Outline <ul><li>Who are we? </li></ul><ul><li>Finance and innovation </li></ul><ul><li>BR; RU; IN; CN; ZA </li></ul><ul><li>Closing remarks </li></ul>Institute for Economic Research on Innovation
  3. 3. Who are we? Institute for Economic Research on Innovation W orld Bank World Development Report 2007; Economist 31.10.09; ISSC WSSR 2010 CO2/cap Gini Lit% Curr Ratio % %<$2 Life M yr Life F yr PhD/m GERD/GDP % 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
  4. 4. 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
  5. 5. Finance and innovation <ul><li>Neo-Schumpeterians - financial perspective lacking (Freeman, 1994). </li></ul><ul><li>But Schumpeter (1982) emphasized relevance of the bank system in economic development </li></ul><ul><li>Von Tunzelman: there is a financial system of innovation </li></ul><ul><li>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. </li></ul>
  6. 6. <ul><li>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) </li></ul><ul><li>Nature of investment in innovation in macroeconomic regimes of high inflation rates and high interest rates. </li></ul><ul><li>Impact of import liberalization and flexible exchanges of technology </li></ul><ul><li>Relations between policies for investment in innovation and macroeconomic policies. </li></ul><ul><li>Five countries following their own paths to capitalist accumulation. </li></ul>
  7. 7. <ul><li>Freeman (1987): any national innovation system must be prepared to meet the requirements of innovation: </li></ul><ul><ul><li>Intervention of the State through the public policy; </li></ul></ul><ul><ul><li>Way that enterprises design their strategies of research and development (R&D); </li></ul></ul><ul><ul><li>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; </li></ul></ul><ul><ul><li>Industrial structure prevalent in a particular moment in each country. </li></ul></ul>
  8. 8. <ul><li>Innovation activities include </li></ul><ul><ul><li>High level human capital development </li></ul></ul><ul><ul><li>Mobility </li></ul></ul><ul><ul><li>Knowledge collection </li></ul></ul><ul><ul><li>Knowledge exchange – value chain activities </li></ul></ul><ul><ul><li>Knowledge codification </li></ul></ul><ul><ul><li>Knowledge generation – R&D </li></ul></ul><ul><ul><li>Embodied Knowledge transfer – acquisition of technologies both hard and soft </li></ul></ul><ul><ul><li>Accelerated progress along the technology life cycle </li></ul></ul><ul><ul><li>New forms of innovation – open innovation and user driven innovation </li></ul></ul><ul><ul><li>Social innovation </li></ul></ul><ul><ul><li>Regulation driven innovation </li></ul></ul>
  9. 9. BRAZIL <ul><li>Military government for two decades to 1986. Period of state enterprises. Expansion of university engineering. Strategic missions including liquid fuels, nuclear energy and aerospace. </li></ul><ul><li>Creative in setting up financial instruments for innovation </li></ul><ul><li>By 1980s, venture capital enterprises exists supported by FINEP and by BNDES </li></ul><ul><li>High economic volatility followed Mexico debt moratorium in 1982 paralyzed all these initiatives. </li></ul><ul><li>Only systematically resumed after the return to civilian rule and implementation of the Real Plan </li></ul><ul><li>Agr 9%; Manuf 26%; Services 65% </li></ul><ul><li>Employment: 20%; 15%; 65% </li></ul>
  10. 10. <ul><li>Universities dominant player in R&D. Business muted. </li></ul><ul><li>Significant incubator movement – 250 across country </li></ul><ul><li>Sectoral funds expanded this range of instruments but inadequate long term finance except from public financial institutions. </li></ul><ul><li>Poor coordination and integration and no strategic guidance for integrating these instruments. </li></ul><ul><li>Three instruments for integration: reduction of interest rates, provision of venture capital and subsidies. Using such instruments apart is working into a fragmented, non-systemic way. </li></ul><ul><li>Institutional disarticulation indicates absence of state procurement policy </li></ul><ul><li>Academic science and government work closely together </li></ul>
  11. 11. RUSSIA <ul><li>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. </li></ul><ul><li>Main source of innovation investments is own funds of organisations - which is natural for a market economy. </li></ul><ul><li>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 </li></ul><ul><li>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. </li></ul>
  12. 12. <ul><li>Higher education limited R&D role; most in research institutes; BERD small proportion; stagnating </li></ul><ul><li>Credits and loans market for investing in innovation activities and innovative projects is limited. </li></ul><ul><li>Access to credit possible but only to companies with established business reputation and for near market or market ready products </li></ul><ul><li>The cost of credit is high </li></ul><ul><li>Venture funding has not emerged </li></ul><ul><li>A way of widening funding opportunities for innovative projects is by attracting sponsors. </li></ul><ul><li>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. </li></ul>
  13. 13. <ul><li>International experience of financing innovative projects has to be significantly adapted to Russian conditions </li></ul><ul><li>Lack of entrepreneurial skills and lack of innovative culture </li></ul><ul><li>Domination of mining industries in the economy, etc. </li></ul><ul><li>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). </li></ul>
  14. 14. <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>Despite the growing number of industrial parks and innovation technology centres in Russia, # innovative SMEs static </li></ul><ul><li>Role of the academies under review. </li></ul><ul><li>Severe demographic crisis </li></ul>
  15. 15. INDIA <ul><li>Liberalization post 1992. Deregulation. Still tightly controlled economy with many state industries. </li></ul><ul><li>High R&D in public sector; less so in business. Universities also relatively small R&D role. </li></ul><ul><li>Large foreign R&D sector </li></ul><ul><li>Significant improvements in the innovative output of Indian industry during the recent period since economic liberalisation. </li></ul><ul><li>Restricted to ICT and pharmaceuticals. </li></ul><ul><li>Pharmaceutical industry has been a target of most of these financial incentives  fine targeting of innovation financing in India </li></ul><ul><li>India has three different types of financial incentives for R&D: research grants and loans, venture capital and tax incentives. </li></ul>
  16. 16. <ul><li>R&D expenditure of the concerned industries inelastic. Incentives did not form a significant portion of R&D. </li></ul><ul><li>No comments on the effectiveness of R&D tax incentives. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>Huge diversity and contestation </li></ul>
  17. 17. CHINA <ul><li>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. </li></ul><ul><li>Four kinds of funding sources provide capital for company at different stages. </li></ul><ul><li>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. </li></ul><ul><li>Innovation fund, high-tech zones, incubators and parks are designed for profit growth earning, but are to support innovation corresponding to government’s policy. </li></ul>
  18. 18. <ul><li>Venture capital is important after start-up when the company shows growth potential in the market and positive cash flow. </li></ul><ul><li>Opening of NASDAQ equivalent offers more opportunities for equity finance </li></ul><ul><li>Most bank financing available only at the expansion and later stages of a venture’s development, with local governments acting as guarantors. </li></ul><ul><li>As risk averse institutions, banks finance expansion </li></ul><ul><li>Significant role of government in developing venture capital systems </li></ul><ul><li>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. </li></ul>
  19. 19. <ul><li>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. </li></ul><ul><li>China likely to develop similar to Singapore’s “state capitalism” with its government-linked companies </li></ul><ul><li>Local government both referee (regulator) and player through holding companies and investment agencies </li></ul><ul><li>Rising inequalities; environmental crisis </li></ul>
  20. 20. SOUTH AFRICA <ul><li>Emerging from three decades of near siege economy and racial exclusion of majority </li></ul><ul><li>Post 1994 modernizing agenda - ‘constructed crisis’ with contestation about the distributive role of the state. </li></ul><ul><li>1996 GEAR. </li></ul><ul><li>Minerals-energy complex remains at centre of economy. </li></ul><ul><li>Agr 3%; Manuf 32%; Services 65% </li></ul><ul><li>Employment: 9%; 26%; 65% </li></ul><ul><li>Business is the main actor in R&D </li></ul><ul><li>ARC-Uni-business triple helix highly successful innovator </li></ul><ul><li>Advanced financial system and capital markets. </li></ul><ul><li>Open economy. Freely traded currency with large carry trade. </li></ul>
  21. 21. <ul><li>Numerous sources of finance for innovation activities : </li></ul><ul><ul><li>Own funds </li></ul></ul><ul><ul><li>Venture finance e.g. Venfin; Bioventures; HBD VC </li></ul></ul><ul><ul><li>Bank finance </li></ul></ul><ul><ul><li>Equity </li></ul></ul><ul><ul><li>FDI </li></ul></ul><ul><ul><li>Mobility grants (DST-EU) </li></ul></ul><ul><ul><li>R&D tax incentive </li></ul></ul><ul><ul><li>SARChI </li></ul></ul><ul><ul><li>NRF/MRC grants </li></ul></ul><ul><ul><li>Innovation Fund/BRICS/Thumisamo </li></ul></ul><ul><ul><li>DTI – THRIP, SPII, others: EIP, CIP, SSAS, BPO, CIS </li></ul></ul><ul><ul><li>IDC SBVCU </li></ul></ul><ul><ul><li>Publication subsidy </li></ul></ul><ul><ul><li>Close Corporation company tax incentives </li></ul></ul><ul><ul><li>Backing ‘winners’ – PBMR </li></ul></ul><ul><ul><li>Science Councils and research institutes </li></ul></ul>
  22. 22. <ul><li>Virtually no role for provincial and local government </li></ul><ul><li>Implied industrial policy: AIDP; PBMR </li></ul><ul><li>Four binding constraints: </li></ul><ul><ul><li>Racialized job reservation and skills development </li></ul></ul><ul><ul><li>Foreign-exchange volatility and controls </li></ul></ul><ul><ul><li>Risk aversion </li></ul></ul><ul><ul><li>Anti-competitive behaviors. </li></ul></ul><ul><li>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.’ </li></ul><ul><li>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? </li></ul>
  23. 23. <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>Placing new products in the market is risky – short termism suits shareholders who prefer larger dividend since tax free </li></ul><ul><li>Well-developed markets; run to own logic </li></ul>
  24. 24. <ul><li>Runs counter to the findings of the innovation survey regarding strong hindering factors: </li></ul><ul><li>Lack of internal funds is an obstacle to </li></ul><ul><li>16% of innovating size class 1 firms </li></ul><ul><li>28% of innovating size class 2/3/4 firms </li></ul><ul><li>Lack of external funds is an obstacle to </li></ul><ul><li>14.6% of innovating class 1 firms </li></ul><ul><li>18.9% of innovating class 2/3/4 firms </li></ul><ul><li>High cost of innovation is an obstacle to </li></ul><ul><li>16% of innovating class 1firms </li></ul><ul><li>23% of innovating class 2/3/4 firms. </li></ul>
  25. 25. <ul><li>Anticompetitive behaviours . <2006 reliable and very cheap electricity for industry. Massive environmental cost </li></ul><ul><li>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. </li></ul><ul><li>GEAR was a ‘third way,’ the electricity catastrophe is an example of Naomi Klein’s ‘shock doctrine.’ </li></ul><ul><li>Import-parity-pricing eliminates comparative advantage of commodities inc coal. </li></ul><ul><li>Electricity costs set to double if not triple – the energy constructed crisis . </li></ul><ul><li>A spur to innovation driven by (unintended consequences of) structural adjustment. </li></ul>
  26. 26. <ul><li>Market capitalism afflicted with Dutch Disease </li></ul><ul><li>What state actions impede innovation? </li></ul><ul><li>Politicization of intellectual property – IKS, rules for disposal both FOREX and BEE – new form of techno nationalism </li></ul><ul><li>Industrial policy vs rent seeking behaviours by capital and organized labour. Centrifugal forces. </li></ul><ul><li>Relevance of the science councils to innovation? </li></ul><ul><li>How to boost GFCI & FDI for manufacturing? </li></ul><ul><li>Why do large firms not diversify further? Monopolies and anti-competitive behaviours </li></ul>
  27. 27. <ul><li>Five different experiences </li></ul><ul><li>Different forms of government and governance </li></ul><ul><li>Start ups require capital (angels) and nurturing (incubators) </li></ul><ul><li>Important role of local government </li></ul><ul><li>The BRICS each dominate their own backyard </li></ul><ul><li>IBSA does not eliminate competition for dominance </li></ul><ul><li>South Africa is squeezed by a pincer movement: BR on the West; CN and IN to the East </li></ul><ul><li>A Rainbow Nation fighting about the pot of gold …. </li></ul>Closing remarks
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