Firm Level Innovation
Upgrading
Experience of India S.
Korea and World Bank
Melvin Goldman
Seminar on Enhancing
Latvian Competitiveness,
Riga
June 8-9, 2004
Firm Innovation Requirements
Solve problem in existing product line
 Raise quality level or adjust to standard
 Improve existing product or plant
 Develop new product or process
 Staff training to absorb or develop new
technology

Sources of Technology
Supplier or Customer--domestic or
overseas
 In-house
 Consultants
 Firm with capability
 Technology Institution

Learning, Doing, Competing
Elements of
Innovation
People
Doing
Yourself
Training
Bringing in
Incentives
Outside advice
Education,Tax
Machinery
Reverse
Engineering
R&D
Import
Tax, loans
New
Knowledge
Problem
Solving
Ideas
Solve in
company
Brainstorming,
R&D, Seminars,
Tinkering, solving
License, joint or Tax, risk
contract R&D
loans….
Get help
Open to
competition
Cust,supplier,lit Institutions,
erature, network education
How can TIs work with companies?
It all depends
 Big or small or new?
 What sector?
 How technologically advanced is the
company?
 Local circumstances?

Eight Economy Research Study
Japan, S. Korea, India, China, Hungary,
Canada, Mexico
 2049 firms responding, 564 firms
interviewed, 157 TIs interviewed
 Objective: To determine how firms
innovate where they get their tech support
and role of TIs and when and how they
perform best

% of responding firms which had used TI at least once
Use of Public TIs by Firm-size
and in-house lab/department
90
80
70
60
50
Without in house-lab
With in house-lab
40
30
20
10
0
Small (1- Medium
50)
(51-350)
Large
(531+)
* National, regional or local technology institutes, industry association
Use of TI Services by Firm Size
% of firms using a TI at least once
( Data excludes Taiwan (China))
100
90
80
70
60
50
40
30
20
10
0
Information
Training
Problem Solving
Contract R&D
Standards
Small (150)
Medium
(51-350)
Large
(351+)
Importance (1 to 5) of Services
Importance of TI Services by Sector
4.4
4.2
Information
Education &Trainig
Problem Solving
Contract R&D
Standards
4
3.8
3.6
3.4
3.2
Polymers
Autoparts
Software
Total
Successful TIs

Identify their markets and clients.

Are culturally service oriented. Have various ways, formal and
informal, for interacting with current and potential clients to serve
and determine their need.

Manage and provide incentives, that take account of clients
needs, both today’s and tomorrow’s.

Ensure that the quality of people and service match market
demand.
Successful TIs
(continued)

Build feedback mechanisms with clients (e.g. revenue generation
criteria) and technical community (for example, advisory panels for
long-term involvement) which ensure that goals are being met.

Give due importance to the confidentiality of clients.

Have various approaches to building new capabilities and learning
from others.
TECHNOLOGY INSTITUTIONS
Benchmarks: Contracts with clients
(Percent of Total Revenues)
0%
10%
50%
75%
Technology--
science base, advance sector
industrial -development
no industry in the country soon
(concerned sectors in technology)
principal -services
R&D and Human Resources
Development
90% 100%
most sectors or technologies
engineering
well-developed
industry
well developed many
medium size firms
multiple, information
to R&D
testing/
standards/
information
Government Role






Motivate the formation of TIs.
Ensure that the structure avoids bureaucratic
management of them--TIs need autonomy and
flexibility.
Stimulate industry’s demand for using TIs.
Provide limited support to TIs for carrying out more
strategic work.
Develop specialized institution for SMEs.
Encourage SMEs to demand service.
Tech Support for Small-Scale
Enterprises
Results of study: Generally, traditional
R&D Institutes work better with
sophisticated large firms.
 Institutions specializing in support to SSE
generally support them best.

How Best to Provide
Technological Support for SSE?
Mechanisms of Support for Small
Scale Industry:
Questions 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.
Question-2 SSI

How to pay for operating costs of 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

MODEL V
System to provide range of specific and
generic expertise
Small Extension
Companies
SSI 1
Organization
in educational
institutions
Tech. Center 1
SSI 2
Tech. Center 2
SSI 3
Tech. Center 3
SSI 4
Tech. Center 4
MODEL VI
Facilitating particular
Technology Transfer Training
Companies Training
Program
T1
Small Industrial Provider
Ass. Program
TQM Consulting
T2
T3
T4
ISO 9000
Training provider
MODEL VII
Japanese Business Association
Company 1
Company 2
transfer
transfer
Company 3
transfer
Company 4
transfer
Temporary
Institution
Business
Association
Tech.
Transfer
Foreign
Technology
Provider
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
2. Government support

Government must support Technology in
SSI by stimulating institutional and
program development and partially
financing it.
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.
4. Cost sharing
 Firm
should pay a significant
share of the cost, but a
subsidy is also required.
5. Linkages and competition
 Clients
should have choices
but multiple linkages.
 Similarly among institutions
and programs.
6. Funding Technology
Providers
 They
require (whether private
or public) a portion roughly 1/3
to build expertise, develop new
technology access.
Implementation is the Key



Outside support can be helpful--institutions to
countries are like technologies to firms: No
country has a monopoly of ideas for structuring
institutional (and program) arrangements.
Outside support can be very useful.
The WB helped India, Korea and Israel in very
different ways. In Taiwan, example of reform
with returned, experienced expatriates.
Timing of interventions/ reforms is also crucial
Korea’s Innovation System





Tax incentive for R&D--since 1973
Technology institutions developed as needed
Programs for joint industry-institution R&D
KTDC --a WB contribution for financing R&D in
industry
VC for start-ups
Korea Technology Development Corp





Institution cleverly built to fit Korean institutional
culture
Sensible approach to encourage R&D in
industry and growth of small firms
Clever Financial incentives, fund raising
Excellent track record for 7/8 years
Gradual success led to hubris



weak supervision and financially driven
As you well know, must be careful with privatization
Too risk averse until privatization
Korea’s not Perfect



Tax incentives clever--tax credit this year for
investment in R&D over the next three years-but didn’t have an impact for nearly 15 years.
More than half of VC for start-ups failed.
Underemphasized the difficulty of nurturing
start-ups.
KTDC made excellent impact on technology
development and had superb track. Then it
went from 80% private to 100% private and it
lost orientation.
Israel



In the early 1970s the World Bank funded the
first financing program to stimulate industrial
R&D by the chief Scientist’s office.
This was followed soon thereafter by the
creative and hugely successful Bird program to
support joint programs of R&D between
companies in the US and Israel
Together with the influx of highly trained Soviet
scientists and the military culture (like in the US)
that spurred technology development, these
programs set the base for the rapid growth that
facilitated the success of VC during the nineties.
Lesson

It’s always difficult to find the right balance
between private and public participation
and control or between profit and
development motivation.
Project to help Indian firms
innovate

How to get them to modernize, do more R&D,
and use the available infrastructure?





Liberalize technology import; make firm access
easier
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
Build up a new form of financing and help to grow
new and young technology intensive companies
Encourage Technology Infrastructure to
work with Industry
Strategic business plans
 Limit automatic budget transfers
 Incentives--monetary and substantive to
institutions, researchers/staff, and
research for contracted work with industry

The SPREAD Program






Encourage “sponsored R&D” by firms with any
non-captive outfit
Provide “conditional loan” for half the cost
Market new instrument
Appraise carefully to ensure reasonable
probability of success. Supervise closely
Managed by excellent development bank
> than 85% success rate
Growing technology companies-Start-ups and young companies
Equity finance and seed finance
 Venture Capital
 Lots of advice--eg. strategy, business
model
 Lots of hand-holding--eg. Introduce to
banks, recruitment, accounting, problem
solving

Ideal Conditions for Venture
Capital to Succeed

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
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?

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
India--Prognosis for VC in 1988
The 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
India--Prognosis for VC in 1988
Issues







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
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

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

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
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
Changes in VC Climate
management
companies
instruments
exit
entrepreneur
industries
returns
1990
2000
public financial
inst
conditional
loans
difficult, gov’t
control
family, long
term
Every sector,
autoparts,
consumer…
< 10% in $, 2030% in Rs
foreign JVs
equity
IPO, buyout
Techno; temporary
Software, IT pharma
Very high some >
100%
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, then fad, now out of
fashion
Huge inflow of foreign VC
Becoming an entrepreneur is now the pinnacle of
success
Fund availability slowed since late 2000
Key Important lesson

New technology companies




take a long time to build into successful companies
require constant nurturing
need a range of financial support from the VCC in
addition to equity-- low interest loans (with perhaps a
royalty kicker), bridge and convertible loans, buyback provisions
require creative assistance from VCC regarding
finances, strategy, marketing, exit, and general
support
Stages in India VC
Development Herd?
Technology emphasis
 Quick buck pre-IPO
 General industry
 Invest in Silicon Valley
 Software, Internet, dotcom
 Beginning to mature

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?

Sector-wise Distribution of VC and
Private Equity Investments 1998
(Rs. [mil])
Industrial products (24%)
Computer software (20%)
1865.09
2956.67
Consumer related (11%)
Medical (7%)
229.56
426.06
Computer hardware (6%)
448.77
Food and Food Processing (6%)
471.89
Tel/Communications (4%)
718.56
2508.87
735.41
Biotech (4%)
Other Electronics (3%)
817.48
1381.49
Energy related (2%)
Other (15%)
ICICI Software Fund--A success



$ 7 million invested in 1996/97 worth about $50
million early 2001.
Nine investments
Summary of performance-->100% IRR in $
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
after two years. 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
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
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

Lessons for Building a VC Industry

For Early Stage Technology VC


It should be driven by local institutions and money, though
foreigners and foreign money should be encouraged
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
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
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
Mix of equity, low-interest loan and royalty--ala Tom
Gibson and GVFL experience
Conclusion
Tailor intervention to environment
 Find the right leadership and people
 Continuous, intensive supervision
 Flexibility together with tenacity

Examples of Success






India VC and TI Reform
KTDC Establishment and 1980s
ITRI Restructuring--Taiwan
BIRD and PACT Programs
7 SSI extension/tech diffusion program--including
Indonesia and Philippines
Turkey R&D in industry
Some Key Messages






Technology improvement occurs in a variety of ways
through many channels
Requires the right people
Requires continuity and intensive hand-holding and
nurturing
Find the right channels and champions
Build in flexibility, so you can change course to achieve
objectives when an unexpected event occurs
Build in adequate training and TA resources--cheap if
possible, but don’t sacrifice quality