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  1. 1. Financing RTD . A Practical Approach : a Global View and the Estonian Case Alar Kolk, Vice President, Enterprise Estonia Knowledge Economy Forum Budapest, March 23 – 26, 2004
  2. 2. Contents <ul><li>General outlook of Estonian Innovation Policy </li></ul><ul><li>About Enterprise Estonia (EE) </li></ul><ul><li>Financing object, objective to finance </li></ul><ul><li>Partnership in financing (How much funding?) </li></ul><ul><li>Segmentation as a prestep for financing (How is funding absorbed?) </li></ul><ul><li>Key aspects of operational practice (How is funding allocated?) </li></ul>
  3. 3. <ul><li>Favourable economic environment and performance </li></ul><ul><ul><li>major macro-economic reforms completed the creation of an open market </li></ul></ul><ul><ul><li>impressive FDI inflow; acquisition of new technology, process techniques and managerial knowledge </li></ul></ul><ul><ul><li>… but no pressure to innovate – low cost/price advantage, no long-term strategic planning </li></ul></ul><ul><li>No “demand” for innovation policy! </li></ul><ul><ul><li>situation similar like in the 7 Candidate Countries today (EC recent CC7 study) </li></ul></ul>It was the year 1999 ...
  4. 4. <ul><li>Domination of “science” in governance system </li></ul><ul><li>Innovation as a result of linear process from scientific discovery to product in market </li></ul><ul><li>National Innovation Programme – full of empty statements and priorities , like a shopping list </li></ul><ul><li>No administrative capacity nor hard cash for policy planning and implementation </li></ul><ul><li>“ Technology parks” ruling in the innovation policy and system </li></ul>Innovation p olicy in 1999
  5. 5. <ul><li>Favourable Economic Environment and Performance </li></ul><ul><ul><li>4th open economy in the world </li></ul></ul><ul><ul><li>second highest FDI stock in CEE </li></ul></ul><ul><ul><li>21st competitive economy in the world </li></ul></ul><ul><ul><li>one of the fastest growing economies in EU </li></ul></ul><ul><ul><li>And probably the only country with </li></ul></ul><ul><ul><ul><li>mobile parking </li></ul></ul></ul><ul><ul><ul><li>E- government </li></ul></ul></ul><ul><ul><ul><li>E-tickets for transportation </li></ul></ul></ul><ul><ul><li>… but, worries about the long-term competitiveness </li></ul></ul><ul><li>Innovation Policy at the top of policy agenda at the national level </li></ul><ul><li>… named as one of the most advanced amongst CCs </li></ul>Four year s later … pretty results?                                                      
  6. 6. National innovative capabilities and related policy Innovative Capacity Index : 11 lowest to 30 highest (Porter & Stern, 2000) Policy Maturity : 1= absence; 2) Design 3) Competing 4) Mature policy +2 years. Policy Delivery : 1= no measures, 2= projects; 3= ad hoc schemes; 4=multi-annual programmes +2 years + or - = recent trend (Reid & Nauwelaers 2002)
  7. 7. <ul><li>EE is today: </li></ul><ul><li>The largest Estonian institution of the business support system </li></ul><ul><li>Largest agency implementing European Union S tructural F unds </li></ul><ul><li>EE representative offices: Helsinki, Stockholm, London, Hamburg, Moscow, St. Petersburg </li></ul><ul><li>EE offers over 40 different services for providing a wide range of support to businesses and research institutions, from specific project financing to wide-based information programs. </li></ul>About E nterprise E stonia (EE)
  8. 8. < We have a dream Estonian business environment will be among the best in the world! We have a dream Estonian business environment will be among the best in the world!
  9. 9. Five directions, one goal We promote Estonian business environment and business competitiveness, increasing s ocial well- being.
  10. 10. Synergies of EE activities Fostering business and regional development Export development Promotion of R&D , innovation Foreign investment involvement Tourism development EE
  11. 11. EE’s main services Consultation program Business infrastructure development program Regional competitiveness enhancement program Competence ( R&D ) center program Training program R&D grant and loan program Export planning program Product development and marketing program for tourist industry Existing businesses Raising Estonia’s reputation as a tourist destination program Starter program for business start-ups Incubator services Mentor services Innovation awareness program SPINNO program Business and living environment Business start-ups
  12. 12. EE structure RDC * *RDC – regional development centers Business start-up’s division Business development division Business and living environment division Marketing Analysis and scheme development Expert assessment Support and financing service Tourism Development Center Information center Foreign Investments and representative offices PHARE unit Supervisory board Management board Internal audit unit Advisory boards
  13. 13. Financing O bject, O bjective to F inance T echnological I nnovation
  14. 14. Financing a change, change in the model <ul><li>You finance change! </li></ul><ul><li>What is the model of technological innovation? </li></ul><ul><li>What about financing the business model? </li></ul><ul><li>What is basic and applied research, what is development? </li></ul><ul><li>Think about marketing from the very beginning! </li></ul><ul><li>What value you create, where? </li></ul>
  15. 15. Investment in knowledge Source: OECD
  16. 16. Theory, s ubsidy and RTD p olicy
  17. 17. Linear m odel of i nnovation is “dead”
  18. 18. An i nteractive m odel of i nnovation
  19. 19. Financing is “ o nly” a p art of the p rocess – develop the whole! IDEA BUSINESS PLAN TEAM START-UP FINANCING COMPANY SET-UP ACTIVITIES’ LAUNCH ADDITIONAL FINANCING PRODUCT DEVELOPMENT WORKING CAPITAL PUBLIC ISSUE Develop the whole process – you create much more value! Be systematic!
  20. 20. Business R&D by industry What industries to finance? Source: OECD
  21. 21. R&D financing and performance What is the main objective? Source: OECD
  22. 22. <ul><li>Client S egmentation – the K ey to I mpact and E ffectiveness </li></ul>
  23. 23. Business R&D by size classes of firms Source: OECD
  24. 24. Segmentation <ul><li>Allocate your financing according to segments </li></ul><ul><li>Every segment needs a specific financing tool </li></ul><ul><li>Attach a change agent to a client </li></ul><ul><li>In the short -term – the effectiveness </li></ul><ul><li>In the long -term – the impact </li></ul><ul><li>You need a tool for segmenting the client – an audit </li></ul><ul><li>Build up your communication strategy </li></ul>
  25. 25. Target areas of financing R&D perfomers = Target area of government instruments = Strategic direction Technology development SMEs Large companies Research institutes, universities Technology development Basic research Pilot projects Product development Market entry Source: Rand Europe
  26. 26. What went wrong? <ul><li>We wanted to help all, finance every firm, every project with a good idea </li></ul><ul><li>We ended up in extensive preconsulting, even building up a project, training in the middle of evaluation. </li></ul><ul><li>Policy makers – just loved it </li></ul><ul><li>What happened - our handling period was long and our troops (consultants) were overworked </li></ul><ul><li>We had wrong clients! </li></ul><ul><li>You should attract only the best of a segment and help the rest – this is the key to impact </li></ul>
  27. 27. Technological capability – the base for programm development
  28. 28. The innovation funnel ATTRACT INFORM ASSIST DEVELOP HARVEST Economic r eturn , additionality
  29. 29. Client engagement process (CRM) and marketing communication Level 4 Level 3 Level 2 Level 1 One to many One to one One to few Many to one Depth of relationship
  30. 30. <ul><li>Partnership in F inancing: </li></ul><ul><li>K ey for S ustainability </li></ul>
  31. 31. You need a financing consortium <ul><li>Your project is not the end, it’s a start </li></ul><ul><li>Who will carry your project to cash? </li></ul><ul><li>What are your tools for the next financing round? </li></ul><ul><li>Do you create grant addicts? </li></ul>
  32. 32. Sample of a financing structure Source: FVCA
  33. 33. Start-up of new technology intensive companies; financiers and promot e rs Time Public investments, benefits Financing for development of business and internationalization ( private investors, public gurrantee ) Venture capital financing (private) Venture capital financing (seed, start-up; no public investments ) Search and identification of new ideas for start-ups ( EE ) Applied research ( EE ) Strategic basic research ( ETF, Academy of Sciences ) R&D funding (grants, product development loans, EE ) Funds for knowledge improvement in business and finance ( grants, EE ) Cash flow of a company $
  34. 34. Financing the Life Cycle
  35. 35. Perceived Practice
  36. 36. Perceived problems: <ul><li>Fragmentation of funding for research </li></ul><ul><li>Research funding is used mainly to cover salaries </li></ul><ul><li>An aging research community </li></ul><ul><li>Research infrastructure issues </li></ul><ul><li>Image of science </li></ul><ul><li>Visions of science </li></ul><ul><li>Science and industry (academia-industry links) </li></ul><ul><li>Science and society </li></ul>
  37. 37. <ul><li>Operational Practice </li></ul>
  38. 38. Financing R TD Feasibility studies Development and applied research Product/process development and preparation of production R T D STRATEGY Planning Max Min TECHNOLOGY RISK % OF SUPPORT Application LOAN – 75% 75% GRANT 25% GRANT – 75% Production, marketing
  39. 39. Joint projects for the integration of “new” and “old” economy EXCHANGE INTEGRATION old economy new economy Creation of high-tech companies, emergence of new markets and sectors, growth. Modernisation, development of existing markets and present competitive advantages. + old economy new economy
  40. 40. Vision of technology development – m apping future technology needs Related technologies Break-through technologies Key technologies 1Y 3YRS 5YRS 7YRS COMPANY´S GOALS TEHNOLOGICAL CAPABILITIES MARKET NEEDS Teach your client to see the future!
  41. 41. Research 3 - 10 years 10% of resources Fundamental research 1 - 20 years - Universities - Scientific institutions <ul><li>Technology programmes </li></ul><ul><li>Technology transfer </li></ul><ul><li>Approx. 1 - 5 years </li></ul><ul><li>E nterprise Estonia </li></ul><ul><li>EU </li></ul><ul><li>- Industry </li></ul><ul><li>- Universities </li></ul>Applied research and product development Approx. 1 - 2 years - Industry - E nterprise Estonia RESOURCES RISKS Strategic choices 2 - 5 years 30% of resources Product development 1 - 2 years 60 - 70% of resources RISKS RESOURCES INDUSTRY MODEL ACADEMIA MODEL Time and sources of financing. Time and allocation of resources. problems and research objects co-operation Strategic basis for industry – c o-operation with academia To teach…one has to understand the operational time - frame of ones clients
  42. 42. Evaluation of RTD projects Aggregate evaluation Marketing Organisation and management Financing Product and technology Guess, where do you find difficult problems, reasons for not financing a project? Not only in technology...
  43. 43. Lessons learned – program level <ul><ul><li>There is no ready-made solution available </li></ul></ul><ul><ul><li>Use of international best practices is important, as well as professional consultancy </li></ul></ul><ul><ul><li>Long - term financial commitment is important for successful implementation of any policy </li></ul></ul><ul><ul><li>Political commitment and trust are needed during the policy-making process </li></ul></ul><ul><ul><li>Delegation of responsibilities </li></ul></ul><ul><ul><li>What is the next instrument to implement? </li></ul></ul>
  44. 44. <ul><li>Transparency </li></ul><ul><li>Do not forget the goal of R&D financing by state </li></ul><ul><li>Real business benefits from financing R&D occur “day after tomorrow”, not “tomorrow” </li></ul><ul><li>It takes at least 2 years to win the confidence of a client </li></ul><ul><li>Avoid mass communication means for R&D scheme introduction </li></ul><ul><li>Finance only the best and help the rest </li></ul><ul><li>Success cases – a tool for awareness raising, marketing </li></ul><ul><li>Develop your clients, partners, financing authorities – difficult to over-do </li></ul><ul><li>Our long-term client pool: FDI and science awareness program </li></ul>Lessons learned – project level
  45. 45. <ul><li>Understanding of innovation is too narrow equalling innovation with R&D based technological innovation and hi-tech. (more awareness, shift in financing) </li></ul><ul><li>Building up new client pool – innovation awareness, international cooperation, FDI </li></ul><ul><li>More towards the creation of new economic structures (long-term) than to the generation of positive changes in traditional sectors (short-term) – innovation management capacity, productivity, value-added, R&D (more cross-selling, broking model) </li></ul><ul><li>R&D and innovation policy is divided between two ministries – Ministry of Education and Research and Ministry of Economy. However, expected impact remains limited, if no introduction into other policy areas takes place </li></ul><ul><li>More development work among (implementation) partners </li></ul>Our further challenges
  46. 46. Synergies in innovation and RTD support New products and technologies Access to new knowledge Surveys , support for technology transfer Increasing of awareness Development of competence Estonian Technology Agency New products and technologies Access to new knowledge Surveys , support for technology transfer Raising innovation awareness Development of competence Estonian Technology Agency EE’s Programs