Financing RTD. A Practical Approach : a Global View and the Estonian Case

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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
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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?)

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• It was the year 1999 ...

• 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)

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• Innovation policy in 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

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• Four years later pretty results?

• 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 parking
• E-government
• E-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

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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
4multi-annual programmes 2 years or -
recent trend (Reid Nauwelaers 2002)
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About Enterprise Estonia (EE)

• 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.

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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!
lt
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Five directions, one goal We promote Estonian
business environment and business
competitiveness, increasing social well- being.
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Synergies of EE activities
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EEs main services
Business and living environment
Business start-ups
Existing businesses
Product development and marketing program for
tourist industry
Raising Estonias reputation as a tourist
destination program
Starter program for business start-ups Incubator
services Mentor services
Export planning program
Regional competitiveness enhancement program
RD grant and loan program
Competence (RD) center program
SPINNO program
Innovation awareness program
Business infrastructure development program
Consultation program
Training program
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EE structure
RDC
RDC regional development centers
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Financing Object, Objective to Finance
Technological Innovation
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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?

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Investment in knowledge
Source OECD
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Theory, subsidy and RTD policy
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Linear model of innovation is dead
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An interactive model of innovation
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Financing is only a part of the process
develop the whole!
Develop the whole process you create much more
value! Be systematic!
START-UP FINANCING
IDEA
BUSINESS PLAN
TEAM
COMPANY SET-UP
PRODUCT DEVELOPMENT
ACTIVITIES LAUNCH
ADDITIONAL FINANCING
PUBLIC ISSUE
WORKING CAPITAL
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Business RD by industryWhat industries to
finance?
Source OECD
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RD financing and performance What is the main
objective?
Source OECD
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• Client Segmentation the Key to Impact and
  Effectiveness

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Business RD by size classes of firms
Source OECD
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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

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Target areas of financing RD perfomers
Technologydevelopment
Largecompanies
Research institutes,universities
SMEs
Basic research
Technologydevelopment
Productdevelopment
Pilot projects
Market entry
Target area of government instruments
Strategic direction
Source Rand Europe
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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

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Technological capability the base for programm
development
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The innovation funnel
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Client engagement process (CRM) andmarketing
communication
Level 4
One to many
Level 3
One to one
One to few
Level 2
Many to one
Level 1
Depth of relationship
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• Partnership in Financing
• Key for Sustainability

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You need a financing consortium

• Your project is not the end, its a start
• Who will carry your project to cash?
• What are your tools for the next financing round?
• Do you create grant addicts?

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Sample of a financing structure
Source FVCA
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Start-up of new technology intensive companies
financiers and promoters
Public investments, benefits

Cash flow of a company
Financing for development of business and
internationalization (private investors, public
gurrantee)
Venture capital financing (private)
Time
Venture capital financing (seed, start-up no
public investments)
Funds for knowledge improvement in business and
finance (grants, EE)
RD funding (grants, product development loans,
EE)
Search and identification of new ideas for
start-ups (EE)
Applied research (EE)
Strategic basic research (ETF, Academy of
Sciences)
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Financing the Life Cycle
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Perceived Practice
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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

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• Operational Practice

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Financing RTD
RTD STRATEGY

Planning
Application



Production, marketing






Development and applied research
Product/process development and preparation of
production


Feasibility studies



GRANT 75
75 GRANT
25














LOAN 75
TECHNOLOGY RISK



OF SUPPORT
Max

Min

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Joint projects for the integration of new and
old economy

EXCHANGE
INTEGRATION
oldeconomy
neweconomy
Modernisation, development of existing markets
and present competitive advantages.
Creation of high-tech companies, emergence of new
markets and sectors, growth.
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Vision of technology development mapping
future technology needs
COMPANYS GOALS
TEHNOLOGICAL CAPABILITIES
MARKET NEEDS
Break-through technologies
Key technologies
Related technologies
3YRS
5YRS
7YRS
1Y
Teach your client to see the future!
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Strategic basis for industry co-operation with
academia
INDUSTRY MODEL
ACADEMIA MODEL
Time and sources of financing.
Time and allocation of resources.
RISKS
RISKS
Fundamental research 1 - 20 years -
Universities - Scientific institutions
Research 3 - 10 years 10 of resources

• Technology programmes
• Technology transfer
• Approx. 1 - 5 years
• Enterprise Estonia
• EU
• - Industry
• - Universities

Strategic choices 2 - 5 years 30 of resources
Applied research and product development Approx.
1 - 2 years - Industry - Enterprise Estonia
co-operation
Product development 1 - 2 years 60 - 70 of
resources
problems andresearch objects
RESOURCES
RESOURCES
To teachone has to understand the operational
time-frame of ones clients
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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...
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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?

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Lessons learned project level

• Transparency
• Do not forget the goal of RD financing by state
• Real business benefits from financing RD occur
  day after tomorrow, not tomorrow
• It takes at least 2 years to win the confidence
  of a client
• Avoid mass communication means for RD 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

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Our further challenges

• Understanding of innovation is too narrow
  equalling innovation with RD 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, RD (more
  cross-selling, broking model)
• RD 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

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Synergies in innovation and RTD support
New
products
New
products
and
technologies
and
technologies
EEs Programs
Surveys
,
Surveys
,
Access
to new
Access
to new
knowledge
knowledge
support
for
support
for
technology
technology
transfer
transfer
Estonian
Technology Agency
Estonian
Technology Agency
Development
Development
Increasing
of
Raising
of
competence
of
competence
awareness
innovation awareness