Financing innovation and the role of implicit/explicit policies

1. Financing innovation and the role of implicit/explicit policies José Eduardo Cassiolato Helena Maria Martins Lastres Research Network of Local Productive and Innovative Systems RedeSist - www.sinal.redesist.ie.ufrj.br Federal University of Rio de Janeiro, Brazil

2. Financing Innovation • The role of implicit and explicit policies

3. Research on systems of innovation (whether national or local) has focused on institutions, networks and interactive learning processes. • These systems however are tributary on sources of finance (Schumpeter). • The availability of finance not only for R&D stricto sensu, but also for long-term investment in equipment and facilities and the training of skilled personnel by firms, universities and research institutions, affects and condition their successes, determining their cohesion and longevity.

4. By contrast, less attention has been paid to the conditions under which the key participants in systems of innovation – firms, governments and public bodies – will command the necessary finance allowing them to undertake long term innovation-related investment • Some exceptions: • Christensen (1992) in the well-known Aalborg volume co-ordinated by B-A. Lundvall; • the OECD (1996) report written by J. Guinet, National Systems for Financing Innovation. • Financial activities ‘sub-system’ within Amable, Barré and Boyer’s ‘social systems of innovation and production’ (Amable & al., 1997); • Chesnais and Sauviat (2003) in Cassiolato, Lastres and Maciel (2003) • Mary O’Sullivan in OHI (2005)

5. Financing innovation in BRICS • Innovation • Problems of cost and risk • How BRICS firms finance innovation? • In Brazil • in our sample of 2000 SMEs less than 2% of firms use ANY financial institution to finance investment • In the Brazilian Innovation survey …

6. Brazilian Innovation Survey – Sources of finance for R&D and other innovation activities used by innovative firms

7. Proposal • Analyze the BRICS National Systems of Innovation in terms of their financial systems. • Main research question: Can financial institutions significantly affect the levels of and the changes in innovation development? • To discuss that, examine: • Does the presence (or absence) of particular financial institutions foster or impede long-term economic growth? • One observes significant international differences in industrial investment financing modes. What are the main differences and similarities among the BRICS in this matter? • Since particular forms of ownership and governance of firms – national or multinational - influence resource allocation and production performance, what roles do capital markets play in funding innovation among the BRICS? • A firm’s size is an important variable in the decision-making process of the financial institutions regarding credit allocation. What are the main differences and similarities among the BRICS in the way their financial systems finance large, medium and small firms? • The role of the public sector in financing innovation.

8. Methodology • Explore the understanding of compared development through case studies and the elaboration of indicators. • Country-specific case studies to deal with private and public financing issues on investment in innovation. • Seminars between the groups • Interviews with researchers and professionals of the financial market and of national public agencies and multilateral organizations acting in the area.

9. The role of implicit and explicit policies

10. Acceleration of financial globalization Countries are more vulnerable, however well local IS may have been performing (Freeman, 2003) and have less degree of freedom to implement policies (Chesnais and Sauviat, 2003) Therefore, the argument that a perspective that allows linking micro, meso and macro dimensions of competitiveness is also crucial for all countries and particularly for LDCs LDCs are even more vulnerable: Important constraints to technological (and production) development in these countries have included: macro-economic instabilities, hyper-inflation, high external debt and high interest rates

11. Acceleration of financial globalization LDCs are even more vulnerable: • macro-economic policies have greater importance for firm strategies towards technological change than specific industrial and innovation policies • That is why they have been called, since the 1970s in Latin America, ‘implicit’ industrial and technology policies (Herrera, 1971) • Coutinho, 2003, further elaborated this idea distinguishes benign from malignant macro-economic regimes, arguing that the latter heavily penalizes productive and innovative investments with harmful effects to domestic production and the competitiveness of the country • It is worth stressing that malignant macro-economic of this kind is a common feature among most LDCs

12. A BRICS study on implicit policies • Analyze the influence of the macroeconomic regime on the structure and development of NSIs in terms of • Indirect impacts • how firms define their investment in S&T capabilities within the overall investment portfolio • How they affect State investment to develop and maintain the NSI • Direct impacts • on the efficacy and efficiency of the policies explicitly geared to develop the NSI

13. Methodology • Start with an the analysis of the main traits of the macroeconomic regime in each country: • objectives • operation of the regime • consequences in terms of growth, openness of the economy and investment funding. • Interviews, complemented by data such as the evolution of public expenditures for S&T&I. • Interviews would also serve to study the relative importance of the explicit S&T&I policies (e.g. fiscal and credit incentives) vis a vis the implicit policies contained in the macroeconomic regime. • Since BRICS is a comparative project it is necessary to control factors such as sector, propriety of the firms, size, etc., establishing interviews samples as similar as possible.