Firm Level Innovation Upgrading. Experience of India S. Korea and World Bank Melvin Goldman Seminar on Enhancing Latvian Competitiveness, Riga June 8-9, 2004. Firm Innovation Requirements. Solve problem in existing product line Raise quality level or adjust to standard
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Firm Level Innovation Upgrading Experience of India S. Korea and World Bank Melvin Goldman Seminar on Enhancing Latvian Competitiveness, Riga June 8-9, 2004
Firm Innovation Requirements • Solve problem in existing product line • Raise quality level or adjust to standard • Improve existing product or plant • Develop new product or process • Staff training to absorb or develop new technology
Sources of Technology • Supplier or Customer--domestic or overseas • In-house • Consultants • Firm with capability • Technology Institution
How can TIs work with companies? • It all depends • Big or small or new? • What sector? • How technologically advanced is the company? • Local circumstances?
Eight Economy Research Study • Japan, S. Korea, India, China, Hungary, Canada, Mexico • 2049 firms responding, 564 firms interviewed, 157 TIs interviewed • Objective: To determine how firms innovate where they get their tech support and role of TIs and when and how they perform best
Use of Public TIs by Firm-size and in-house lab/department % of responding firms which had used TI at least once * National, regional or local technology institutes, industry association
Use of TI Services by Firm Size( Data excludes Taiwan (China)) % of firms using a TI at least once
Importance of TI Services by Sector Importance (1 to 5) of Services
Successful TIs • Identify their markets and clients. • Are culturally service oriented. Have various ways, formal and informal, for interacting with current and potential clients to serve and determine their need. • Manage and provide incentives, that take account of clients needs, both today’s and tomorrow’s. • Ensure that the quality of people and service match market demand.
Successful TIs(continued) • Build feedback mechanisms with clients (e.g. revenue generation criteria) and technical community (for example, advisory panels for long-term involvement) which ensure that goals are being met. • Give due importance to the confidentiality of clients. • Have various approaches to building new capabilities and learning from others.
TECHNOLOGY INSTITUTIONSBenchmarks: Contracts with clients(Percent of Total Revenues) 0% 10% 50% 75% 90% 100% Technology-- science base, advance sector most sectors or technologies engineering well-developed industry industrial -- no industry in the country soon well developed many development (concerned sectors in technology) medium size firms principal -- R&D and Human Resources multiple, information testing/ services Development to R&D standards/ information
Government Role • Motivate the formation of TIs. • Ensure that the structure avoids bureaucratic management of them--TIs need autonomy and flexibility. • Stimulate industry’s demand for using TIs. • Provide limited support to TIs for carrying out more strategic work. • Develop specialized institution for SMEs. • Encourage SMEs to demand service.
Tech Support for Small-Scale Enterprises • Results of study: Generally, traditional R&D Institutes work better with sophisticated large firms. • Institutions specializing in support to SSE generally support them best.
Mechanisms of Support for Small Scale Industry:Questions to be Addressed • Institutional quality in country • Level of trust by industry in gov’t and other firms • Can institutions attract and keep good people • Extent of corruption • How to ensure that funding achieves its purpose--eg consultants will not raise fees.
Question-2 SSI • How to pay for operating costs of intermediary? • Overhead charge like Steinbeis • Industry Association--India for quality program for members • Government How to motivate SSI to use services--won’t unless dynamic or forced by market Must find way of attracting good consultants Institutions must be free of Government interference
MODEL VSystem to provide range of specific and generic expertise Small Extensionineducational Companies Organization institutions SSI 1 Tech. Center 1 SSI 2 Tech. Center 2 SSI 3 Tech. Center 3 SSI 4 Tech. Center 4
MODEL VIFacilitating particularTechnology Transfer Training CompaniesTrainingSmall Industrial Provider ProgramAss. Program T1 TQM Consulting T2 ISO 9000 Training provider T3 T4
MODEL VIIJapanese Business Association Company 1 transfer transfer Temporary Institution Business Association Company 2 Tech. Foreign Technology Provider transfer Transfer Company 3 Company 4 transfer
1. Technology diffusion, extension • Technology diffusion, extension or whatever it may be called should be a more important component of technology activity and support in almost every country • firms need and want it • it is cheaper - more efficient - to provide than developing new technology
2. Government support • Government must support Technology in SSI by stimulating institutional and program development and partially financing it.
3. Type of programs • A range of programs built on the needs of the industrial sector usually provides better coverage and choice for firms. • The variety include: a) generic technology/productivity support b) industry specific expertise c) institutional sources d) private consultant sources • The particular mix will depend on the institutional culture and industrial structure of the country.
4. Cost sharing • Firm should pay a significant share of the cost, but a subsidy is also required.
5. Linkages and competition • Clients should have choices but multiple linkages. • Similarly among institutions and programs.
6. Funding Technology Providers • They require (whether private or public) a portion roughly 1/3 to build expertise, develop new technology access.
Implementation is the Key • Outside support can be helpful--institutions to countries are like technologies to firms: No country has a monopoly of ideas for structuring institutional (and program) arrangements. Outside support can be very useful. • The WB helped India, Korea and Israel in very different ways. In Taiwan, example of reform with returned, experienced expatriates. • Timing of interventions/ reforms is also crucial
Korea’s Innovation System • Tax incentive for R&D--since 1973 • Technology institutions developed as needed • Programs for joint industry-institution R&D • KTDC --a WB contribution for financing R&D in industry • VC for start-ups
Korea Technology Development Corp • Institution cleverly built to fit Korean institutional culture • Sensible approach to encourage R&D in industry and growth of small firms • Clever Financial incentives, fund raising • Excellent track record for 7/8 years • Gradual success led to hubris • weak supervision and financially driven • As you well know, must be careful with privatization • Too risk averse until privatization
Korea’s not Perfect • Tax incentives clever--tax credit this year for investment in R&D over the next three years-- but didn’t have an impact for nearly 15 years. • More than half of VC for start-ups failed. Underemphasized the difficulty of nurturing start-ups. • KTDC made excellent impact on technology development and had superb track. Then it went from 80% private to 100% private and it lost orientation.
Israel • In the early 1970s the World Bank funded the first financing program to stimulate industrial R&D by the chief Scientist’s office. • This was followed soon thereafter by the creative and hugely successful Bird program to support joint programs of R&D between companies in the US and Israel • Together with the influx of highly trained Soviet scientists and the military culture (like in the US) that spurred technology development, these programs set the base for the rapid growth that facilitated the success of VC during the nineties.
Lesson • It’s always difficult to find the right balance between private and public participation and control or between profit and development motivation.
Project to help Indian firms innovate • How to get them to modernize, do more R&D, and use the available infrastructure? • Liberalize technology import; make firm access easier • Promote increased competition • Provide appropriate incentives to use technology infrastructure • Build up the capability of the infrastructure to be able to and desire to work with industry • Build up a new form of financing and help to grow new and young technology intensive companies
Encourage Technology Infrastructure to work with Industry • Strategic business plans • Limit automatic budget transfers • Incentives--monetary and substantive to institutions, researchers/staff, and research for contracted work with industry
The SPREAD Program • Encourage “sponsored R&D” by firms with any non-captive outfit • Provide “conditional loan” for half the cost • Market new instrument • Appraise carefully to ensure reasonable probability of success. Supervise closely • Managed by excellent development bank • > than 85% success rate
Growing technology companies-- Start-ups and young companies • Equity finance and seed finance • Venture Capital • Lots of advice--eg. strategy, business model • Lots of hand-holding--eg. Introduce to banks, recruitment, accounting, problem solving
People Entrepreneurs Technical talent Financial capability Some trained/ experienced private equity investors Stable Macro and Political Environment Business environment History of good business practice Appropriate regulatory framework--IPR, contract law, courts… Stock market(s) that works fairly Exit routes for smaller companies Ideal Conditions for Venture Capital to Succeed
How does VC Get Going? • It seems to always need a kick-start • Need a positive environment for entrepreneurial endeavor • Need an environment favorable to capital investment • Is there a public sector role?
Government Role for building an environment for VC? Regulatory Framework • Effective capital markets • Contracts and intellectual property • Financial Sector Encouragement of Venture Capital Promoting technology development Good quality education and training particularly technical
India--Prognosis for VC in 1988The Advantages • Entrepreneurial • Lots of good engineers • Resources available within big groups • Financing available from development and commercial banks for industrial growth projects • Existence of contract law, legal system and 100 year old stock market
India--Prognosis for VC in 1988Issues • Government industry licensing rules stifling • Inadequate trading volume of most stocks • IPO price determined by MOF • Legal system slow, difficult to enforce contracts • Entrepreneurs wanted to pass on company to children--exit difficult • Not clear that there were enough good ideas • Even software/pharma success stories were not state-of-the-art; no likely Microsoft
Getting VC Going • ICICI Experimentation • World Bank help • 6 VC Schemes, 9 funds, total of $180 million for 350 investments • Approved first 5 investments in each fund • Regular supervision • Internship of 18 vc executives at vcs in US/UK Regulatory guidelines change to facilitate VC Creation of new stock markets, training
Initial Experience • Separate Management Companies • Experience, risk taking, exit planning • Bankers are not good venture capitalists • Tax pass through important • Average returns must exceed interest rates • Threshhold IRRs must be substantially higher
Problems Encountered • Start-ups (and most companies) require: • lots of nurturing and hand holding • Much more time than anticipated • VC staffing --business skill, industry know-how with resourcefulness, commitment and brains • Staff mobility--Incentives and work environment • Due diligence-- must also be done on foreign partner or provider • Exit must be planned
Examples--Early Learning • Photovoltaics--Success followed by failure • Water filter--Success less than potential • Hotel Software--Need strategic partner • Shrimp and Flowers--fads, risky, know-how • Dosa King--Part of Risk • Blast freeze drying for vegetable/fruit export--advanced process tech--VC role