PUBLIC SUPPORT TO INNOVATION: NURTURING A SELF-CATALYTIC VIRTUOUS CYCLE

1. PUBLIC SUPPORT TO INNOVATION: NURTURING A SELF-CATALYTIC VIRTUOUS CYCLE Morris Teubal Hebrew University of Jerusalem

2. Acrónimos TIP Technology and Innovation Policy R&D Research & Development; PS Productive Sector; VC Venture capital; STE Science, Technology and Superior Education; I Innovation; IS Innovation Systems; S/E Systemic-Evolutionary; SCA Sustainable Competitive Advantages; SMEs Small and Medium Enterprises; HTSC High Tech Start Up Company.

3. A. MOTIVATION AND BACKGROUND-1 Important changes in the global scenario are gradually changing the TIP approach of the countries. It is clearer than ever that the TIPs will have to be more systematic and explicit. Besides, they will need to incorporate, more than ever, dynamic and evolutionary aspects. The so-called IS perspective (an approach that incorporates evolutionary aspects) is already being used in Europe. Another reason for a change of approach are the failed attempts at TIPs. For example, VC promotion policies in Europe and in at least one Latin American country.

4. A-2 Three aspects of the new perspective are: (1)A possible TIP objective is to trigger (and maintain) cumulative processes with feedback effects. E.g., diffusion of R&D/Innovation in the PS (2)Innovation growth (e.g., as a result of a support policy ) would be accelerated as long as a virtuous co-evolution I-STE process were generated. It could change innovation into a cumulative process so that an initial increase of I would induce an increase in STE (“demand pull” demand of engineers); and more STE would induce more I (“supply push”) (3)TIPs are linked through time There are several possible configurations. All of them would generate self-catalytic virtuous processes of I and STE mentioned above; and this explains the subject and title of this presentation. We circumscribe ourselves to two of the multiple dynamic processes of this kind that would be possible; both triggered by a TIP program of direct support to R&D at PS business

5. A-3: Objectives of the presentation B. Other aspects of the S/E to TIP perspective C. Application of the main S/E principles to the design and implementation of direct R&D/I support programs in firms - detailed discussion D. Application of the S/E principles to the design and implementation of VC support programs – general comments Closing remarks

6. B. The S/E approach: Other Aspects (4) The new global scenario entails high risks: competence, market turbulences, etc., along with ample opportunities, e.g., a global market for innovation results -> It requires a fast adaptation capacity including taking advantage of new opportunities -> need to anticipate possible threats/opportunities; need to generate capabilities (5) Not less important than the functioning of the market forces for Innovation, is the generation of capabilities at all levels infrastructure, firms and policy making (6) Importance of a Strategic level of the TIP with the specific purpose of setting new strategic priorities and applying them in new TIPs Facing significant environment changes, it is highly probable that the existing TIPs do not respond to the new needs and opportunities

7. B-4 (7) A re-interpretation of ‘Policy Targeting’ e.g., industry support policies -‘Evolutionary Targeting’. This vision corresponds with that of Rodrik’s and some new trends at the World Bank (8) In general terms, the TIP is more complex than it would appear to be; and a main issue is how to re-assess what is envisioned as a new Knowledge Area relevant to economic and social development. A significant input of intellectual effort (‘thinking’ or ‘policy framing’) is required before implementing TIP

8. C. DIRECT R&D/I SUPPPORT IN BUSINESS Many countries implemented this kind of programs. The European project IMPLORE, in its preliminary 4/2006 report, analyzes the R&D Public Support Programs of a selected group of European countries. A diversity of programs are implemented e.g., some with a business R&D support component and others without; some requiring collaboration with other firms or labs and others not, etc. Most of the programs in the countries researched (U.K., Germany, France and Austria) support Science and/or are oriented towards Public Labs of Public Research and/or involve collaboration between companies and/or those institutions. 13 out of the 63 studied programs specialize in financial support to SMEs. Eight of these are implemented in Austria which shows a good SMEs performance in R&D. Many of them do not need collaboration even though some do. It would appear that public subsidies to R&D of the PS are available only for SMEs.

9. C-2 It would appear that there are few programs in Europe that support R&D/I in firms and that: i) are open to all PS companies, ii) regardless of the sector or technology used and iii) do not require collaboration with STE institutions. One exception is a German fund that is open only to companies located in the former East Germany territory. There were programs in Latin America with the above mentioned characteristics – e.g., in Argentina, Chile and Mexico around the late ’80s or ’90s (much earlier in Brazil). Also Singapore has this kind of programs

10. C-3: A Benchmark Program We studied a business direct support program of the type mentioned before and according to the S/E vision . The final goal is to trigger a self-sustained virtuous process of Innovation growth. Its characteristics are: • The support is for R&D/I in firms projects -without the cooperation/collaboration requirement. • Horizontality - open to all productive sector firms and to any R/D/I project [‘bottom-up determination of projects’] • Instrument: Subsidies or Subsidies/Conditional Loans – excluding Loans or tax concessions Such a program is like or similar to programs implemented in Austria, Singapore and Israel

11. C-4: Justification of Public Support Traditionally, justification was based on “Market Failures” in everything concerning R&D/I in firms (sub-investment in the activity). This is still relevant, but it is not the only one From the S/E perspective, there are other reasons that explain the sub-investment mentioned above. These “System Failures” would include e.g., supply restrictions in the STE institutions; inadequate priorities from the economic and social development point of view. E.g., business R&D/I supports under-assignment for political reasons, etc. And even more, the failing that requires an answer in TIP terms is the one that blocks or interferes the triggering of a self-sustained growth of I and of STE

12. C-5 Characterization - Specific Objectives of the Support Programs Horizontal or “Targeted” Programs Instruments used: • Implementation • Dynamism • Impact

13. C-6 Specific Objectives Their achievement would trigger an Innovation growth virtuous process (accompanied by deep changes in the economy, society and the State’s role) 1) Expansion of R&D/Innovation in the PS During the ’60s and ’70s it was believed that all this would automatically lead to economic growth stimulation. 2) Development of Innovation capabilities in companies. This means that the objective is to promote “Learning” in the Innovation area in firms. This not only requires “experience” but also that it be significant; from this results e.g., the obtaining of a critical mass of Innovation activity in the PS. 3) Promotion of the Innovative Businessmen 4) Identification of Sustainable Competitive Advantages (SCA) areas

14. C-7: Horizontal or Targeted Programs A priori there would be important reasons for considering the implementation of horizontal programs in the first stage of Governmental support to innovation in the PS. One is the lack of knowledge by the TIP agents regarding where (sector; technology; etc.) the market and systemic failures would be found. This would also explain the importance of some degree of neutrality regarding the incentives offered (incentives’ neutrality).

15. C-8: Instruments In my opinion, it is important to seriously consider the granting of Subsidies or Subsidies/Conditional Loans Tax concessions might not work well as in the majority of the situations there would be no incentives to firms without business profits (as many innovative SMEs and SU are) Australia’s example in the 1980s

16. C-10 Subsidy elimination favoring loans could significantly reduce Innovation Increase of risk and bureaucracy would explain the phenomenon Possible example: Fontar program in Argentina during the nineties. Thus, it is important to consider conditional loans/grants (Israel, mid eighties) as an alternative

17. C-11: Implementation I refer to three topics: 1.Critical Mass Collective Learning Learning in the first stages of R&D/I insertion in the PS contains an important collective learning component. 2. Overcome the lack of ‘Demand’ by the companies of the PS Need of a pro-active standing; of reducing bureaucracy; etc.

18. C-12 3. Create and maintain the Implementing Agency’s Prestige Need of a “credible partnership between firms on the one hand and the Government on the other”. This is because the decisions of the companies to transform into innovative are long term ones. The Government must let the companies know that the support will be consistent through time.

19. C-13: Impact y Dynamism Internalization of R&D/Innovation Creation of a Collective or Social Capability for Innovation

20. D. Venture Capital and Evolutionary Targeting The above mentioned changes will create new TIP opportunities and a new stage in the virtuous and self-sustaining growth process of Innovation and STE A very important one would be the promotion of VC (Israel 1993-7/8) This would bolster a new Innovation dynamic

21. CONCLUSIONS • The TIP agents in Latin America could benefit from the rising S/E approach • The TIP emphasis would at least change somewhat into triggering and supporting cumulative and self-catalytic processes of Innovation growth.

22. -2 • The new approach would stress policies’ links through time as well as of co-evolution processes • Two main processes were considered: • The I—STE linkage • The impact of direct support to R&D/Innovation in business and the implementation of VC supporting policies in the future.