Science Policy Research Unit University of Sussex February 2019 David Kaplan

1. Challenges and Constraints for Government Agencies Supporting Firm Level InnovationSome Reflections from South Africa Science Policy Research Unit University of Sussex February 2019 David Kaplan University of Cape Town david.kaplan@uct.ac.za

2. Defining a start-up • Young firms which have the potential for very rapid rates of expansion • Innovative: they employ new technologies and/or introduce new products and production processes • These two characteristics are interdependent – the firm’s potential for expansion grows directly from its capacity for innovation

3. Why support start-ups? • New firm entrants have higher growth rates and they create far more jobs than do well-established firms • High-productivity employment opportunities with potential for high earnings • Engage the young • Neglected regions and communities • Diversification - particularly for countries based on primary activities

4. Start-ups and support for SMMEs • Vast majority are designed and intended to remain small. • Many have no intention of significantly expanding output or employment. • Entail no new economic activities and give rise to no new approaches to economic and social problems. While government will have policies to encourage small firms in general, the focus should be firmly on start-ups - firms with a high potential to grow, where this high potential results directly from the capacity for innovation

5. Selecting firms for innovation support • A hype: • silicon valley • national champions and pride • a growing entrenched constituency • But, is selecting individual firms possible and if so what forms of support are optimal?

6. Challenge: identifying firms for support Assumption: young, small , high-tech, growing continuously • Tend to be younger than the average firm • but most will have been in business for at least a couple of years before any growth spurt • Many are larger than the average firm at the beginning of a high-growth episode • and are larger than the average firm after 3 years of growth • Not necessarily high-tech • do not appear in the same sector across countries • “One hit wonders” • half the firms that experienced a high-growth event in the previous 3 years are likely to exit the market altogether in the following 3-6 years; • fewer than 15% are likely to repeat a high-growth episode

7. Challenge: identifying firmsfor support • A policy maker must identify the “right” firm and the “right” time • Differentiate growth via fundamentals or fortuitous demand. Data not available ex ante • Predicting growth on the basis of criteria - business plans, demographics, socio-emotional skills: very low. • Public funds to the already better off, perpetuating inequities. Selection is extremely difficult and subject to significant error – even where there is significant expertise

8. Is support for NTBs best directed at innovation? • The paradox of innovation • The need for complementary assets • The likely absence of complementary assets – market failure Should be no automatic assumption that what firms most need is support for innovation

9. Government capacities and agencies • Limited government capacities • Government agencies • developed countries • developing countries • Considerable variation • Lack of evaluations

10. South AfricaTechnology Innovation Agency (TIA) • Not an evaluation of TIA • Illustrative of some constraints and difficulties faced by direct government funding and support

11. South Africa: The Technology Innovation Agency (TIA) • Mission: translate South Africa’s knowledge resource into sustainable socio-economic opportunities. • Main goal to create new knowledge-based economic activities and industries to grow and diversify the economy • Focus on technology and commercial development • Engaged with firms from proof of concept to entry of commercial partners and investors • Seed Fund, the Technology Development Fund and the Commercialisation Support Fund. • Provide support to applicants on a competitive basis • TIA’s Innovation Skills Development (ISD) unit provides managerial, business and mentoring support in the areas of business and entrepreneur development

12. Innovation Funding Landscape

13. How should TIA provide support? Two different approaches: • Government funding to support private VCs • Limited and structured to somewhat reduce the risk. • Government a passive role. • India (fund-of-funds) • Direct government funding • Mexico • South Africa Is government in line with a private VC or does it seek additional socio-economic objectives?

14. Growth and inequality: A South African Trade-Off • Severe skill shortages • Few black graduates • BBBEE Combine to ensure very low black participation in start-ups A racial division of entrepreneurship Enhanced likelihood of resource misallocation

15. Simplicity and speed of approval • Time and ease of access • Difficult procedures and slow turnaround times • A trade-off between speed and reporting procedures designed to limit arbitrariness, capture and corrupt practices

16. Safeguarding against corruption and capture • Matching grants • Tranches • Internal and external audit functions But problem remains – dispensing public monies

17. Operational costs • Highly skilled employees resulting in high wage costs • The efficiency ratio Trade off as between lowering costs and ensuring an effective organisation

18. Acquiring skills and competencies • Requires a range of skills • intellectual property legal advisors • portfolio managers • investment auditors with quality assurance experience • technical skills to evaluate projects • Unlikely to be in the position to offer significant non-financial support to applicants “It is very unlikely that matching grants are the mechanism of intervention to optimally address most innovation failures, especially if they are not tightly linked to technical assistance, given the large information asymmetry and lack of knowledge in SMEs to implement innovation projects.” (Cirera and Maloney, 2017)

19. Ensuring secure long-term funding • Difficult to cut-back - multi-year grants with commitments for the future • Results in efficiency and credibility issues Vulnerable to government funding cutbacks

20. Monitoring and evaluation Particularly important since this a new field and potential for failure is high • Some potential measures • Some difficulties • Over what time period is it valid to make an assessment –some gains may only be long-term • Can success be attributed to the agency? • In the absence of the agency, might successful firms have found support elsewhere? • Need for an external review

21. A last word “Academic and policy discussions about innovation policy often omit the question of who actually implements it. The role public servants, ministries, and agencies play in ensuring or undermining the effectiveness of policy instruments is rarely considered… Overall, the issue of capabilities in innovation policy making and how to improve them is probably one of the most pressing, yet unacknowledged agendas in innovation policy in developing countries.” (Cirera and Maloney, 2017: 138)

22. Thank you David Kaplan david.kaplan@uct.ac.za