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Upgrading Technology at the Firm Level

Upgrading Technology at the Firm Level. World Bank Seminar February 18, 2004. Firm Innovation Requirements. Improve existing product or plant Develop new product or process Staff training to absorb or develop new technology. Sources of Technology. Supplier or Customer In-house

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Upgrading Technology at the Firm Level

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  1. Upgrading Technology at the Firm Level World Bank Seminar February 18, 2004

  2. Firm Innovation Requirements • Improve existing product or plant • Develop new product or process • Staff training to absorb or develop new technology

  3. Sources of Technology • Supplier or Customer • In-house • Firm with capability • Technology Institution

  4. Learning, Doing Competing

  5. How to Work with Companies? • It all depends • Big or small or new? • What sector? • How technologically advanced is the company? • Local circumstances?

  6. For Example--1988 Indian firms • How to get them to modernize, do more R&D, and use the available infrastructure? • Liberalize technology import • 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 SPREAD Program

  7. Korea Technology Development Corp • Sensible approach to encourage R&D in industry and growth of small firms • Clever Financial incentives, fund raising • Gradual success led to hubris • weak supn and finacially driven • Bank ideology of privatization • Too risk averse until privatization

  8. 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

  9. Use of TI Services by Firm Size( Data excludes Taiwan (China)) % of firms using a TI at least once

  10. Importance of TI Services by Sector Importance (1 to 5) of Services

  11. Support for Small Scale IndustryQuestions 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.

  12. Question-2 SSI • How to pay for 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

  13. MODEL VSystem to provide range of specific and generic expertise Small Extensionineducational Companies Organizationinstitutions US SSI 1 Tech. Center 1 SSI 2 Tech. Center 2 SSI 3 Tech. Center 3 SSI 4 Tech. Center 4

  14. MODEL VIFacilitating particularTechnology Transfer Training CompaniesTrainingSmall Industrial Provider ProgramAss. Program T1 TQM Consulting T2 ISO 9000 Training provider T3 T4

  15. 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

  16. 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

  17. 2. Government support • Government must support Technology in SSI by stimulating institutional and program development and partially financing it.

  18. 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.

  19. 4. Cost sharing • Firm should pay a significant share of the cost, but a subsidy is also required.

  20. 5. Linkages and competition • Clients should have choices but multiple linkages. • Similarly among institutions and programs.

  21. 6. Funding Technology Providers • They require (whether private or public) a portion roughly 1/3 to build expertise, develop new technology access.

  22. Growing technology companies-- Start-ups and young • Equity finance and seed finance • Venture Capital

  23. 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

  24. 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?

  25. 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

  26. 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

  27. 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

  28. 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

  29. 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

  30. 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

  31. 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

  32. Fads • Technology • Pre-IPOs--bought-out deals • Invest across sectors • Invest overseas • Software • Internet

  33. Sector-wise Distribution of VC and Private Equity Investments 1998 (Rs. [mil])

  34. ICICI Software Fund--A success • $ 7 million invested in 1996/97 worth about $50 million early 2001. • Nine investments • Summary of performance • Other companies with potential still too early to tell are a software hospitality product company; a services company with strong links and capability to the insurance sector; and a software product company with an advanced inventory management and maintenance software for process industries. There are no failures as yet.

  35. Success Stories • SQL Star: 2 businesses • a) authorized (certified) training centers including Oracle and IBM • b) software services with strong capability in the insurance sector. IPO one year ago. TDICI realized more than double the entire fund for less than ten percent of the fund investment. • Kale Consultants: specializes in work for the airline industry. Has core technology in revenue sharing among airlines. Sought after by midsize airlines. Flagship account is with Air New Zealand. Second area is banking/financial sector. Successful IPO. Expected to grow rapidly based strong IPR position. • Planet Asia: web services and high end website design. Offshoot of web services of successful software services company Microland. One half the shares sold back to the company after a little over one year at 2.7 times initial price. • Ruksun: Specializes in internet software development. Contracts with software product companies, eg Microsoft for email, imap protocol. Second round financing obtained after 18 months at valuation of 23 times the first round investment. Company has strong IPR.

  36. Changes in VC Climate

  37. Results of VC Experience • Returns--can be highly profitable • Examples and professionalism • Growth in demand • Range of VC Operations--different cultures • IT originally under-invested--now the fad • Huge inflow of foreign VC • Becoming an entrepreneur is now the pinnacle of success • Fund availability slowed since late 2000

  38. Stages in India VC Development Herd? • Technology emphasis • Quick buck pre-IPO • General industry • Invest in Silicon Valley • Software, Internet, dotcom • Beginning to mature

  39. VC’s Key Questions for Investment Decision • Does the business proposition make sense? • Can we work with the management? • Is the management totally ethical? • Does the company have the drive to grow? • Do we have the capability to add value? • How and when will we exit?

  40. Where Improvement is Needed • Screening quickly • Management--turnover, incentives, hierarchy • Due diligence--international markets and partner, risk assessment (banking mentality) documentation • Investment phase--Knowing to cut losses, taking control, dealing with troubling cases • Markets--some liquidity for small companies in good times. OTCEI

  41. Basic elements for successful VC--mini-checklist • Entrepreneurs with Drive and Know-how • Business environment fostering growth • Exit Mechanisms that Function • Venture capitalists with business/industry experience who understand start-up prob. • Patient and risk taking investors • Technical education and R&D infrastructure

  42. Lessons for Building a VC Industry • For Early Stage Technology VC • It should be driven bylocal institutions and money • Government should stimulate VC, not run it • Ensure level playing field for local and foreign money • Financial institutions should initiate and be involved but not be the sole body or run it by themselves • VC should be run by entrepreneurs, risk takers and business developers • Develop Exit Mechanisms • Stock exchange needs to be friendly to SMEs • encourage buy-backs and buy-outs

  43. Thoughts for Building a Successful VCC Build overseas links • with VCCs • with expertise in markets and technologies Gather team with business and domain expertise Build focused investment strategy based on market needs and your own capabilities Do not follow herd

  44. Beyond VC • There is a need to build new models of equity and quasi equity hands-on finance for the vast majority of potentially successful companies that will achieve modest IRRs and for which exit is tough: • 3Is model with income/dividend earnings • Start-up funds with clever buy-back provisions

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