Financing RTD. A Practical Approach :

a Global View and the Estonian Case

Alar Kolk, Vice President, Enterprise EstoniaKnowledge Economy ForumBudapest, March 23 – 26, 2004

Contents

•General outlook of Estonian Innovation Policy

•About Enterprise Estonia (EE)

•Financing object, objective to finance

•Partnership in financing (How much funding?)

•Segmentation as a prestep for financing (How is funding absorbed?)

•Key aspects of operational practice (How is funding allocated?)

Favourable economic environment and performance• major macro-economic reforms completed the

creation of an open market• impressive FDI inflow; acquisition of new technology,

process techniques and managerial knowledge

…but no pressure to innovate – low cost/price advantage, no long-term strategic planning

No “demand” for innovation policy!• situation similar like in the 7 Candidate Countries

today (EC recent CC7 study)

It was the year 1999 ...

• Domination of “science” in governance system

• Innovation as a result of linear process from scientific discovery to product in market

• National Innovation Programme – full of empty statements and priorities, like a shopping list

• No administrative capacity nor hard cash for policy planning and implementation

• “Technology parks” ruling in the innovation policy and system

Innovation policy in 1999

                         

                         

Favourable Economic Environment and Performance– 4th open economy in the world – second highest FDI stock in CEE– 21st competitive economy in the world– one of the fastest growing economies in EU– And probably the only country with

mobile parkingE-governmentE-tickets for transportation

…but, worries about the long-term competitiveness

Innovation Policy at the top of policy agenda at the national level… named as one of the most advanced amongst CCs

Four years later …pretty results?

National innovative capabilitiesand 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)

Czech 21,3 2 3-Estonia 21,2 3+ 3+Hungary 21,1 2+ 4-Slovenia 20,4 2 3Slovakia 20 1 3-Poland 19,6 3 3Lithuania 19,2 2+ 3Latvia 18,5 3 2+Turkey 17,8 4 4Bulgaria 16,8 2 2+Romania 16,3 2 3Malta n.a. 1 1Cyprus n.a. 2 2

Country Innovative

Policy maturity

Policy delivery

EE is today: The largest Estonian institution of the business support system Largest agency implementing European Union Structural Funds EE representative offices: Helsinki, Stockholm, London,

Hamburg, Moscow, St. Petersburg 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.

About Enterprise Estonia (EE)

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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!

Five directions, one goal

We promote Estonian business environment and

business competitiveness, increasing social well-

being.

Synergies of EE activities

Fostering business and regional

development

Exportdevelopment

Promotion of R&D, innovation

Foreign investment involvement

Tourismdevelopment

EE

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

EE structure

Business start-up’s division

Businessdevelopment

division

Business and living

environment division

Marketing

Analysis and scheme development

Expert assessment

Support and financing service

Tourism Development

Center

Informationcenter

Foreign Investments and representative

offices

PHARE unit

Supervisory board

Managementboard

Internal audit unit

Advisory boards

RDC*

*RDC – regional development centers

Financing Object, Objective to Finance

Technological Innovation

Financing a change, change in the model

• You finance change!• What is the model of technological innovation?• What about financing the business model?• What is basic and applied research, what is

development?• Think about marketing from the very beginning!• What value you create, where?

Investment in knowledge

Source: OECD

Theory, subsidy and RTD policy

Linear model of innovation is “dead”

An interactive model of innovation

Financing is “only” a part of the process – 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!

Business R&D by industryWhat industries to finance?

Source: OECD

R&D financing and performanceWhat is the main objective?

Source: OECD

Client Segmentation – the Key to Impact and Effectiveness

Business R&D by size classes of firms

Source: OECD

Segmentation

• Allocate your financing according to segments• Every segment needs a specific financing tool • Attach a change agent to a client• In the short-term – the effectiveness• In the long-term – the impact• You need a tool for segmenting the client – an audit• Build up your communication strategy

Target areas of financing R&D perfomers

= Target area of government instruments = Strategic direction

Technologydevelopment SMEs

Largecompanies

Research institutes,universities

Technologydevelopment

Basic research

Pilot projects

Productdevelopment

Market entry

Source: Rand Europe

What went wrong?

• We wanted to help all, finance every firm, every project with a good idea

• We ended up in extensive preconsulting, even building up a project, training in the middle of evaluation.

• Policy makers – just loved it• What happened - our handling period was long and

our troops (consultants) were overworked• We had wrong clients!• You should attract only the best of a segment and

help the rest – this is the key to impact

Technological capability – the base for programm development

The innovation funnel

ATTRACT

INFORM

ASSIST

DEVELOP

HARVEST

Economicreturn, additionality

Client engagement process (CRM) andmarketing communication

Level 4

Level 3

Level 2

Level 1

One to many

One to one

One to few

Many to one

Depth of relationship

Partnership in Financing:

Key for Sustainability

You need a financing consortium

• Your project is not the end, it’s a start

• Who will carry your project to cash?

• What are your tools for the next financing round?

• Do you create grant addicts?

Sample of a financing structure

0% 20% 40% 60% 80% 100%

Seed

Start-up

Other early stage

Expansion

Bridge financing

MBO

MBI

Turnaround

Private

Public

Source: FVCA

Start-up of new technology intensive companies; financiers and promoters

Time

Public investments, benefits

Financing for development of businessand 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 businessand finance (grants, EE)

Cash flow of a company

$

Financing the Life Cycle

Perceived Practice

Perceived problems:

• Fragmentation of funding for research• Research funding is used mainly to cover salaries• An aging research community• Research infrastructure issues• Image of science• Visions of science• Science and industry (academia-industry links)• Science and society

Operational Practice

Financing RTD

Feasibility

studies Development and

applied research

Product/process development and

preparation of production

RTD STRATEGY

Planning

Max Min

TECHNOLOGY RISK

% OF SUPPORT

Application

LOAN – 75%

75% GRANT 25%

GRANT – 75%

Production, marketing

Joint projects for the integration of “new” and “old” economy

EXCHANGE INTEGRATION

oldeconomy

neweconomy

oldeconomy

neweconomy

Creation of high-tech companies, emergence of new markets and sectors,

growth.

Modernisation, development of existing markets and

present competitive advantages.

+

Vision of technology development – mapping future technology needs

Related technologies

Break-throughtechnologies

Key technologies

1Y 3YRS 5YRS 7YRS

COMPANY´S GOALS

TEHNOLOGICALCAPABILITIES

MARKETNEEDS

Teach your client to see the future!

Research3 - 10 years

10% of resources

Research3 - 10 years

10% of resources

Fundamental research1 - 20 years- Universities- Scientific institutions

Fundamental research1 - 20 years- Universities- Scientific institutions

Technology programmesTechnology transferApprox. 1 - 5 years- Enterprise Estonia - EU- Industry- Universities

Technology programmesTechnology transferApprox. 1 - 5 years- Enterprise Estonia - EU- Industry- Universities

Applied research andproduct developmentApprox. 1 - 2 years- Industry- Enterprise Estonia

Applied research andproduct developmentApprox. 1 - 2 years- Industry- Enterprise Estonia

RESOURCES

RISKS

Strategic choices2 - 5 years

30% of resources

Strategic choices2 - 5 years

30% of resources

Product development1 - 2 years

60 - 70% of resources

Product development1 - 2 years

60 - 70% of resources

RISKS

RESOURCES

INDUSTRY MODEL ACADEMIAMODEL

Time and sources of financing.Time and allocation of resources.

problems andresearch objects

co-operation

Strategic basis for industry – co-operation with academia

To teach…one has to understand the operational time-frame of ones clients

Aggregateevaluation

MarketingOrganisation

and management

FinancingProduct andtechnology

Evaluation of RTD projects

Guess, where do you find difficult problems, reasons for not financing a project? Not only in technology...

Lessons learned – program level

There is no ready-made solution available Use of international best practices is important, as well

as professional consultancy Long-term financial commitment is important for

successful implementation of any policy Political commitment and trust are needed during the

policy-making process Delegation of responsibilities What is the next instrument to implement?

Transparency Do not forget the goal of R&D financing by state Real business benefits from financing R&D occur “day after

tomorrow”, not “tomorrow” It takes at least 2 years to win the confidence of a client Avoid mass communication means for R&D scheme

introduction Finance only the best and help the rest Success cases – a tool for awareness raising, marketing Develop your clients, partners, financing authorities –

difficult to over-do Our long-term client pool: FDI and science awareness

program

Lessons learned – project level

• Understanding of innovation is too narrow equalling innovation with R&D based technological innovation and hi-tech. (more awareness, shift in financing)

•Building up new client pool – innovation awareness, international cooperation, FDI •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)

• 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 • More development work among (implementation) partners

Our further challenges

New products and technologies

Access to new knowledge

Surveys, support for technology

transfer

Increasing ofawareness

Development of competence

Estonian Technology Agency

New products and technologies

Access to new knowledge

Surveys, support for technology

transfer

Raisinginnovationawareness

Development of competence

Estonian Technology Agency

EE’s Programs

Synergies in innovation and RTD support