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

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. 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?)

3. 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)

4. 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

5. 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 Four years later …pretty results?

6. 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)

7. 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 forproviding a wide range of support to businesses andresearch institutions, from specific project financing to wide-basedinformationprograms. About Enterprise Estonia (EE)

8. We have a dream Estonian business environment will beamong the best in the world! We have a dream Estonian business environment will beamong the best in the world! <

9. Five directions, one goal We promote Estonian business environment and business competitiveness, increasing social well-being.

10. Foreign investment involvement Fostering business and regional development Tourism development EE Promotion of R&D, innovation Export development Synergies of EE activities

11. EE’s main services Business start-ups Business and living environment Existing businesses Product development and marketing program for tourist industry Starter program for business start-ups Incubator services Mentor services Raising Estonia’s reputation as a tourist destination program Export planning program Regional competitiveness enhancement program R&D grant and loan program Competence (R&D) center program SPINNO program Innovation awareness program Business infrastructure development program Consultation program Training program

12. Supervisory board Internal audit unit Management board Advisory boards Business start-up’s division Business development division Business and living environment division Tourism Development Center Marketing Analysis and scheme development Expert assessment Support and financing service Information center Foreign Investments and representative offices PHARE unit EE structure RDC* *RDC – regional development centers

13. Financing Object, Objective to Finance Technological Innovation

14. 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? Financing a change, change in the model

15. Investment in knowledge Source: OECD

16. Theory, subsidy and RTD policy

17. Linear model of innovation is “dead”

18. An interactive model of innovation

19. 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

20. Business R&D by industryWhat industries to finance? Source: OECD

21. R&D financing and performance What is the main objective? Source: OECD

22. Client Segmentation – the Key to Impact and Effectiveness

23. Business R&D by size classes of firms Source: OECD

24. 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 Segmentation

25. Target areas of financing R&D 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

26. 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 What went wrong?

27. Technological capability – the base for programm development

28. ATTRACT INFORM ASSIST DEVELOP HARVEST Economic return, additionality The innovation funnel

29. 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

30. Partnership in Financing: Key for Sustainability

31. 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? You need a financing consortium

32. Sample of a financing structure Source:FVCA

33. 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) R&D 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)

34. Financing the Life Cycle

35. Perceived Practice

36. 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 Perceived problems:

37. Operational Practice

38. 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

39. oldeconomy neweconomy 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.

40. Vision of technology development – mapping future technology needs COMPANY´S GOALS MARKET NEEDS TEHNOLOGICAL CAPABILITIES Break-through technologies Key technologies Related technologies 3YRS 5YRS 7YRS 1Y Teach your client to see the future!

41. Strategic basis for industry – co-operation with academia INDUSTRY MODEL ACADEMIA MODEL Time and allocation of resources. Time and sources of financing. 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 teach…one has to understand the operational time-frame of ones clients

42. Evaluation of RTD projects Aggregate evaluation Product and technology Marketing Organisation and management Financing Guess, where do you find difficult problems, reasons for not financing a project? Not only in technology...

43. 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?

44. 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

45. Our further challenges • 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

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