Innovation Policies and Mechanisms Political Choices for Growth

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Innovation Policies and Mechanisms Political
Choices for Growth Dr Orna Berry, Chair,
Israel Venture Association Venture Partner,
Gemini Israel Funds

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Credits

• Professors Manuel Trajtenberg, Morris Teubal, Dan
  Breznitz, Gil Avnimelech and Elhanan Helpman
• My experience from my position as the Chief
  Scientist of the Israeli government, the Chair of
  the IVA, and my membership of various
  international expert groups. These include those
  with the Association of Computing Machinery
  (ACM), the European Union, and in Australia and
  Singapore
• The work of the late Professor Zvi Griliches

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IN ORDER TO ENSURE GROWTH

• Topics to address
• Incubation
• Venture Capital
• International collaboration
• Multinational Corporations
• Political choices to make
• Tax
• Securities
• Strategies to put in place supporting the
  process in full
• IN ORDER TO ENSURE GROWTH

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The Case of Israel
Israels development of an innovative Information
and Communications Technology (ICT) sector is an
interesting case exemplifying the potential and
the limitations of a high-tech strategy as a
lever for economic growth

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The Beginning
After two decades of extraordinarily rapid
growth, the Israeli economy had reached an
impasse by the early 1970s Israel has few
natural resources, but plenty of highly skilled
human capital, and scientific and technological
prowess How to mobilize these assets for
economic growth?

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Establishing Policies

• In the late 1960s, the notions of high-tech and
  the knowledge economy were not part of the
  lexicon
• The Israeli government made a crucial strategic
  decision
• it would jump start and breed a science-based
  sector by providing broad financial support for
  commercial RD
• this policy would make up for market failures
• The first manifestation of the new strategy was
  the creation of the Office of the Chief Scientist
  (OCS) in 1969

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Setting a Policy

• Government policy in this realm was neutrality
• the government would not pick winners and would
  not favor specific market segments or
  technologies, but would provide realistic funding
  to selected projects
• it would not support preferred sectors, firms or
  technologies
• rather, it would respond to market demands and
  signals
• this has played an important role in ensuring
  the long-term success of the strategy
• New and varied programs have been created in
  response to
• changing needs
• Existing programs are constantly fine-tuned in
  light of market developments

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The Office of the Chief Scientist (OCS)
The key instrument is the Matching Grants Program
- this is administered by the OCS at the
Ministry of Industry, Trade Labor, the main
government body in charge of innovation
policy Firms submit proposals for RD
projects The OCS reviews the applications
according to set criteria These include
- the technological and commercial
feasibility and merit - the risks
- the potential of these projects for
generating expertise I SHALL NOT ELABORATE
FURTHER ON PROGRAMS THAT EXIST IN FINLAND, IN ONE
FORM OR ANOTHER, WITHIN TEKES

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The BIRD Foundation
The Israel-US Binational Industrial Research
Development (BIRD) Foundation Established in
1977 Received a 110M endowment from the US and
Israeli governments Provides conditional grants
to joint projects between Israeli and US
companies Encourages the productization of
Israeli technology for US markets Since its
inception, BIRD has provided 214M to 672 joint
RD projects The products developed from these
ventures have generated direct sales of 4.1B

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Additional Government Initiatives
In the early 1990s, a series of novel programs
were set up The most important were - The
Technological Incubators Program. This program is
unique in the world for providing seed funding,
qualified mentoring and housing for incubated
projects - The Yozma Program for jump-starting
the venture capital sector - The Magnet Program
for creating consortia of industry and academia

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The Technological Incubators Program

• Incubators provide early stage entrepreneurs with
  the basic means to develop innovative ideas and
  set up new companies
• These include
• A careful selection process that involves the
  evaluation of the team, market, technology and
  financial needs
• financial support
• physical installations
• advisory services mentoring by qualified
  professionals who can provide relevant experience
  and leverage in the market

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The Technological Incubators Program

• The program was introduced in the early 1990s,
  when immigration from the former Soviet Union
  reached its peak
• Many immigrants were scientists and skilled
  professionals
• They had ideas for innovative products
• But they lacked in virtually all other dimensions
  required for commercial success. For example
• knowledge of commercial practices in Western
  economies
• managerial skills
• access to capital the incubators established
  strategic alliances with MNCs and connections
  with VCs

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The Technological Incubators Program

• Technological incubators significantly enhance
  the entrepreneurs prospects of
• Becoming disciplined and competitive in both
  execution and business
• Raising further capital
• Finding strategic partners
• Emerging from the incubator with a business that
  can stand on its own
• Even though it originally targeted new
  immigrants, the program is open to all

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TheYozma Program
From the start, government support for RD was
meant not only to incentivize innovative
activities But also to compensate for the lack
of well-developed capital markets The high-tech
sector could not rely on local sources of
finance And given the impediments at the time,
it could not raise capital abroad either

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TheYozma Program
And while the RD subsidies provided by the OCS
fulfilled an acute financial need They could
hardly make up for the dearth of other financial
sources In addition, Israeli high-tech firms
were traditionally strong in technology But
they lacked managerial expertise

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TheYozma Program
Recognizing the need, in 1992 the
government decided to establish the Yozma
program The government was not to become a
private investor but to incentivize a competitive
private sector in this space This was meant to
jump-start the venture capital market in
Israel In 1993-1994, Yozma established 10
venture capital funds They were initially funded
by the government But they included local and
foreign private investors as well

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TheYozma Program
Yozma provided incentives for foreign investors
to enter the funds. These were - risk
guarantees - financial incentives -
privatization (acquisition of Yozmas shares in
these funds) at a predetermined price within 5
years Yozma attracted prominent foreign
multinational investors They brought not only
their financial resources But most importantly,
their expertise

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TheYozma Program
Shortly after its establishment, Yozma set up 10
venture capital funds It helped raise almost
200M The government contributed 100M At
inception, Yozma had a fixed life expectancy of 7
years Its rapid success enabled the government
to end its participation early In 1997, the
governments direct investment portfolio was
privatized Its mission thus came to an end

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TheYozma Program
The venture capital market in Israel has
boomed There are about 50 funds in
operation From 1993-2008, they raised almost
14B Actual VC-backed investments reached a
high of 2.7 of GDP in 2000

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TheYozma Program
Capital markets have greatly expanded in Israel
since the mid-1990s International access has
improved dramatically - Israel is the foreign
country with the largest number of IPOs on Nasdaq
(closely followed by Canada) The growth of
funding sources indicates that government support
for RD can return to its original role -
subsidizing innovation in order to bridge the gap
between the social and the private rate of
return The government doesnt need to take on a
further financial role the government
jumpstarted the VC and hi-tech sectors and then
mostly left it to the experts

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The Magnet Program
The Magnet Program was instituted in 1993 The
scheme supports the formation of consortia
comprising industrial firms and academic
institutions The purpose of these consortia is
to develop generic, pre-competitive
technologies The consortia are entitled to
multi-year RD support (usually 3 to 5 years)
The support consists of grants of 2/3 of the
total approved RD budget of a project, with no
repayment required

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Claiming Success
Government policies and other factors have
managed to unleash the potential embedded in
Israels abundant human capital For example -
trained young cadres of ICT specialists in the
defense sector - the immigration from the former
Soviet Union

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Phases in the Evolution of the Israeli and the
U.S. VC Industries

Gil Avnimelech and Morris Teubal, Evolutionary
Innovation and Technology Policy A Four-Phase
High-Tech Policy Model (2006), page 6. This was
a paper presented to the DRUID Summer Conference
2006 in Denmark.
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Conditions for a Transition from Phase to Phase

Avnimelech and Teubal (2006), page 13.
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Startups Formation, VC backed, OCS awarded,
Exit and Closure

• Sources IVA (2006), and OCS (2006)
• Less than 10 years old at the IPO date not
  including fire sales (at least 25M or Annual ROI
  of 25).
• Cited in Avnimelech and Teubal (2006), page 15.

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Israel's High-Tech Cluster - Selected Structural
Elements (1969-2005)

Sources Israel Central Bureau of Statistics
(2006), Israel Association of Electronics
Information Industries (2006), Israel Venture
Capital Research Center (2006), OCS (2006), and
US Patent Trademark Office (2006) Some of the
figures in the box are approximations () due to
gaps in the availability of data, and
information from non-official sources F-IB means
foreign investment banks Notice that while
columns 3-6 represent 8 years, column 2
represents only 5 years Avnimelech and Teubal
(2006), page 5
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Hi-Tech Growth
The following facts and figures summarize the
staggering development of high-tech in Israel
since the early 1990s During the 1990s - the
ICT sector grew at an average rate of 16 per
year - it accounted for 5 of GDP in 1990 and 14
in 2000 - it contributed a full 1/3 of the growth
of GDP ICT exports grew by a factor of SIX
during the 1990s They reached 15 billion by
2000 And accounted for 1/3 of total exports

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Establishing the Venture Capital Industry
The Venture Capital sector became the 2nd largest
in the world after that of the US The RD/GDP
ratio reached a peak of 4.6 in 2004, the highest
in the world The number of high-tech companies
is estimated at 4,000 Israel is number 4 in
terms of the number of patents per capita granted
by the US Patent Office to Israeli inventors - it
comes after the US, Japan and Taiwan

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The effect of Multinational Corporations
Multinational Corporations (MNCs) train highly
skilled workers for global management tasks
The experience gained by the RD personnel in
MNCs may well transfer to other firms via -
mobility of workers - mobility of managerial
expertise The presence of MNC flagship labs -
enhances the overall reputation of Israels
high-tech sector - signals its perceived
capabilities - helps to attract investment and
open up global markets

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What Should be Promoted?

• Innovation policies for development should act
  upon
• - skills formation
• the provision of incentives
• access to information
• availability of finance
• Economic growth stemmed historically from all
  types of widely distributed innovations in
  products and in processes
• This has been generated by skilled workers as
  much as by RD labs

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The Future Encapsulated
The issue is How to provide incentives and
basic means for would-be entrepreneurs and small
enterprises to engage in productivity enhancing
investments.

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The HTI Predictive Model

Alan L. Porter et al., High Tech Indicators
Technology-based Competitiveness of 33 Nations,
2007 Report, Technology Policy Assessment
Center, Georgia Institute of Technology, Atlanta
(January 2008), Page 17.
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Summary

• Knowledge can significantly contribute to the
  public good
• once created it costs little to reproduce and
  distribute
• it can be used repeatedly by multiple actors
  without impairing the amount available to others
• Innovation should be widely distributed over the
  whole spectrum of economic activity.
• - i.e. across sectors (not just high-tech)
• There should be different platforms for
  innovation, not just formal RD projects

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Summary
Human capital and the necessary skills refer to
a wide spectrum of capabilities These are
acquired via - formal education - learning by
doing Baseline education should be periodically
revised and upgraded in response to a changing
environment Success in triggering innovation
requires continuous changes in the institutions
supplying human capital - Otherwise, these will
soon turn into bottlenecks holding down further
innovation

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Recommendations to Finland

• Topics to address
• Incubation the real kind
• Venture Capital - the internationally competitive
  kind
• International collaboration
• Multinational Corporations
• Political choices to make
• Tax
• Securities
• Strategies to put in place supporting the
  process in full
• IN ORDER TO ENSURE GROWTH

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