Document ID: IPF VINNOVA Dno: South Korea SME Innovation Support Schemes

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1 Document ID: IPF VINNOVA Dno: South Korea SME Innovation Support Schemes Final Report on IPF Review visit to South Korea April 2012

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3 Summary This report describes the results of the research and study visit which was conducted to investigate aspects of the SME innovation support in South Korea as part of workpackage 5 activities. As outlined in the body of the report the study found several approaches used by Korean agencies which were considered good practices and which could be considered for transfer to a European context. Some of these could be considered practices which could be the basis of new approaches to programmes such as the KTRS system used by KOTEC for the loan guarantees. Others are practices which should be considered for implementation at an operational level to improve the delivery and operation of existing programmes. These include, the techniques used by KOTEC to provide feedback and improve the objectivity of its assessors, the IT systems used by KEIT for programme delivery, the payment system operated by KIET for the payment of grants to SMEs and the impact analysis data collected on the completed projects. Dissemination level: The dissemination level set for this report is PP i.e. restricted to program participants (incl. the Commission Services). PAGE 3

4 This report was prepared by: Terence O Donnell Contact details: Enterprise Ireland, Rossa Avenue, Bishopstown, Cork, Ireland Phone: terence.odonnell@enterprise-ireland.com Disclaimer The views expressed in this report are those of the author and the Peer Review Team. They do not necessarily reflect the opinion or position of the European Commission and in no way commit the involved organisations. PAGE 4

5 1 Introduction Visit Background, Overview & Objectives Visit Overview South Korean Policy Mix, Objectives and Delivery Innovation Policy Policy Objectives as regards SMEs SME Financing Policy Delivery: The Main actors in SME support Ministry of Knowledge Economy (MKE) Small & Medium Business Administration Korea Evaluation Institute of Industrial Technology (KEIT) Korean Institute for Advancement of Technology (KIAT) Small and medium Business Corporation (SBC) Korean Technology Finance Corporation (KOTEC/KIBO) Other Actors Loan Guarantees for High Tech SMEs KOTEC KOTEC Background The Technology Appraisal System Technology Appraisal for Creative Industries Good Practices & Transferability The overall KTRS Approach Removing Assessor Subjectivity Tailoring the System to Different Sectors and Uses SME RD&I Funding Programmes SME Innovation Support Programmes Technology Innovation Development for SME Product Development with Option to Purchase Evaluation and Monitoring of Projects R&D Management Information System R&D Funds Payment System Good Practices & Transferability Points Payment System for R&D Grants IT Systems used for project tracking and monitoring Project Evaluations and Impact The Demand Survey Summary and Recommendations based on Good Practices PAGE 5

6 Appendix A: Itinerary for IPF & EPISIS Joint Visit to South Korea Background & Objectives Visit Overview Visiting Team Appendix B: SME Technology Innovation Development Program The INNO-Partnering Forum for better SME innovation support services (IPF) SME Innovation Support Measure Overview Appendix C: New Technology Purchasing Assurance Scheme The INNO-Partnering Forum for better SME innovation support services (IPF) SME Innovation Support Measure Overview Appendix D: Korean Technology Finance Corporation The INNO-Partnering Forum for better SME innovation support services (IPF) SME Innovation Support Measure Overview Appendix E: Technology Rating Indicators PAGE 6

7 1 Introduction The Inno Partnering Forum (IPF) is concerned with identifying and learning from best practice in SME innovation support programmes in Europe and around the world. Specifically Workpackage 5 within the project was to identify countries and programmes outside of Europe with the potential to supply examples of good practice. An initial phase of desk research identified a number of countries and SME innovation support programmes within those countries which could potentially be considered good practice. A second phase of the work focused on conducting more detailed research on a short list of identified programmes including a review or study visit to countries of particular interest. The third phase of the work involved the analysis and formulation of possible new measures based on the programmes and practices identified during the study visits. South Korea was identified as one such country of interest and this report is the output from the more detailed research and the study visit conducted to South Korea. Although the main objective of the study visit was the identification of good practices, it is also important to understand the context within which the measures operate. Therefore this report also tries to briefly explain some of the background to the Korean innovation system, in particular with respect to its support for SMEs. The report is structured as follows; Section 2 gives an overview of the motivation and objectives and agenda of the study visit to Korea. Section 3 presents some brief background on the Korean economy, its innovation policy and in particular the policy mix with respect to supporting innovation in SMEs. A brief overview of some of the main agencies is also given. There were two main aspects of SME innovation support studied during the visit, - the provision of loan guarantees to innovative, high tech SMEs which is described in Section 4 and the provision of grants for technology innovation in SMEs which is described in Section 5. Both of these sections also describe the good practices which have been identified and discuss transferability issues. 2 Visit Background, Overview & Objectives South Korea was identified as a country of interest because it is a country which is among the top innovation performers in the world, and it has a very strong focus on developing its SMEs and an extensive SME innovation support system. During the desk research phase several SME innovation support programmes in South Korea were identified for deeper study based on the fact that they had previously been referenced as good practice, were considered very successful, had elements which are not commonly used in Europe, and fit with the IPF priority themes (demand led programmes, high growth programmes, service delivery). PAGE 7

8 During the desk research phase prior to the visit, the following programmes, were identified which we believed had unique elements not widely used in Europe. SME Technology Innovation Programme (SMBA/KEIT): This in one of the major SME innovation support programmes in South Korea. New technology Purchasing Assurance Programme (SMBA/KEIT): This is a Public-Private-Partnership programme based around procurement of innovative technologies and products from SMEs. Technology Appraisal Guarantee Scheme (Korean Technology Finance Corporation (KOTEC)): KOTEC is a large institution which operates a guarantee system for loans to SMEs. The SME loan guarantees are based on an SMEs technology and business prospects as opposed to its financial assets. What makes it unique compared to European systems is the very structured and formalised Technology Appraisal system which it operates through a network of technology appraisal centres. In the case of first two programmes above there is limited English language information available on the operation of the programmes. It is also difficult to gain an understanding of the context and landscape within which the programmes and agencies operate. One purpose of the study visit was to obtain a better understanding of these aspects. It is worth noting the difference between the study of these programmes and the peer review of European programmes carried out under workpackage 2 of the project. The programmes which have previously been peer reviewed under the IPF, have typically been reviewed over the course of days and details of procedures have often been supplied in advance by the host agencies who have requested that their programme be reviewed. It was not anticipated that the same level of detailed review would be possible in the case of the Korean programmes, as in this case the IPF have requested the visit to the host agency, there is limited time available for the visit and there is a lack of English language background information on the programmes. Also as a matter of diplomacy it would be difficult to request significant levels of information on the programme operation and procedures in advance. Therefore the study visit was to mainly focus on the following; An overview of the Korean innovation system with respect to SME innovation support, the main actors, their roles and their main supports. For the various programmes, a good overview understanding of the operation of the programme. An understanding of the success of the programme and the Results and Impact. Identification of practices not widely used in Europe and which might have the potential to be transferred to Europe. Issues which would prevent transferability of the programme to a European context. PAGE 8

9 2.1 Visit Overview The visit to South Korea was conducted jointly with the EPSIS Inno-Net project which has a focus on innovation in services. The joint delegation from the EPISIS and Inno- Partnering Forum INNO-Nets took part in the visit to South Korea from November 21 st to 26 th The final agenda for the visit and list of team members is included in Appendix A: Itinerary for IPF & EPISIS Joint Visit to South Korea (21 25 November 2011). The visit started on Monday 21 st of November where the joint delegation got a briefing on the Korean innovation system from the EU delegation in Korea and some perspectives on the Korean system from the EU Chambers of Commerce in Korea (EUCCK). On the morning of Tuesday 22 nd the IPF delegation visited KIAT (Korean Institute for advancement of Technology). KIAT run industrial R&D and international co-operation programmes such as participation in Eureka, FP7, and bilateral R&D programmes. All these programmes are open to SMEs. On the afternoon of Tuesday 22 nd, the delegation visited KEIT (The Korea Evaluation Institute of Industrial Technology) which is the agency responsible for managing R&D grant funding mainly for domestic industrial R&D projects. On Thursday 24 th the team met with KOTEC (Korean Technology Finance Corporation) who specialise in providing technology based loan guarantees to SMEs. On the Friday 25 th the delegation participated in Forum on Innovation Support for SMEs Korea-EU organised by KOTEC and KEIT where the delegation got an opportunity to exchange views regarding the Korean and European approaches to SME innovation support with a number of actors from the Korean SMEs support system. 3 South Korean Policy Mix, Objectives and Delivery Korea has grown from being one of the poorest countries in the world with no natural resources, in the 1960s to now being ranked among the G-20 major economies, with a GDP per person higher than that of the average for Europe. This success has been built on a model of importing technology, building very large conglomerates or chaebols (such as Samsung, LG, Hyundai-Kia, Daewoo, etc.) and a very high degree of social cohesion and hard work from the population. The South Korean economy is open and is very much export oriented; it has free trade agreement with EU, USA, China etc. and in 2010 it was the seventh largest exporter in the world. The major export goods include semiconductors and electronics, motor vehicles, ships, steel and petrochemicals. Although the population of Korea is approximately 45 million, Koreans often refer to it being a small open economy. Traditionally SMEs in Korea have been relatively weak, with low productivity and innovation levels compared to the large companies. The government has led a very active effort, especially since the financial crisis of 1997, to develop the high tech SME sector. PAGE 9

10 These efforts have shown success with R&D expenditure by SMEs growing fivefold between 1997 and 2006, when it accounted for 24% of all total firms R&D expenditure, also by % of all researchers worked in SMEs up from 24% in Recently Creative industries such as fashion, cinema (e.g. Hallyu Korean wave), are becoming important with the cultural contents industry being identified among the new growth engine sectors. 3.1 Innovation Policy It is evident that the government is very committed to increasing investment in innovation and the knowledge economy. The budgeting and planning for R&D investment is organised according to 5 year plans, the latest of which runs from (Science and Technology Basic Plan: 577Initiative i ). Under this plan the goal of the government is to have 5% of GDP invested in R&D by 2012, investment in R&D will focus on 7 technology areas and the plan calls for a focus on the development of 7 aspects of the innovation system. SME s innovation is one of these 7 areas. The seven technology areas have been further subdivided into 50 critical technologies and 40 candidate technologies. The seven technology areas with example of subtechnology areas are; Key industrial technologies (e.g. automotive, shipbuilding, machinery and manufacturing, semiconductors, liquid crystal displays, etc), Emerging Industrial technologies (e.g. Next-generation system S/W, cancer, diagnosis and treatment, brain science, drug discovery and development technology, etc) Knowledge-based service technologies, (e.g. software, culture technology and design) State-led Technologies (e.g. construction, transportation, space and ocean, nuclear power) National issues-related Technologies, ( e.g. Immune disease and infectious disease response, food safety evaluation, IT nano-device technology, ) Global issues-related technologies, (technologies related to energy, climate change, environment and food, etc) Basic and convergent technologies (e.g. platform technology development Biochip and biosensor, intelligent robot, nanotechnology-based, convergent/composite materials, technologies) In addition to promoting private investment in R&D the government has increased the public expenditure on R&D each year since 2005 on average by 11.9%. The portion of governmentally funded R&D expenditures has increased to 28.7% in 2009 from 24.3% in ii In 2009 Korea s gross expenditure on R&D (GERD) was 3.57% of GDP. The target is to have 50% of the government R&D budget go towards basic and fundamental research. In addition the Ministry of Knowledge Economy have selected technologies which its expects to serve as the future drivers of economic growth, - these are referred to as New Growth Engine technologies, which will receive special attention in terms of promotion and fostering. Since 2011 the government has decided to focus on 10 new PAGE 10

11 growth engine sectors. These ten projects are fourth generation mobile communications, system semiconductors, biotechnology, the cultural contents industry, electric cars and related infrastructure, offshore wind energy power, thin film solar cells, energy efficient buildings and water treatment technology. 3.2 Policy Objectives as regards SMEs SMEs are considered the root and backbone of the Korean economy with the future of the Korean economy being heavily dependent on the development of SMEs with the plan that they dominate the economy in the 21 st Century iii. As mentioned above SME innovation is listed as one of the 7 system areas to be developed under the 577 initiative. Specifically this plan calls for support for SME Innovation in the following areas; Expanding R&D support for enhancing the technological innovation capability of SMEs - R&D support through the Korea Small Business Innovation Research Program (KOSBIR) Ensuring a good environment for the new technology-based start-up similar to that of advanced countries including the deregulation on the new technologybased start-up and the simplification of the start-up process Activating financial support for technological development of SMEs and reinforcing enticement of participation of private sector financial institutions in the technology financing - Target for establishment of technology financing: 5.0 trillion Korean won in 2007(approx. 3.4 billion) to 7.7 trillion Korean won in 2012 (approx. 5.2 billion). In addition to the national plans the enacting of laws is an important mechanism for the directing and co-ordinating of ST&I in Korea iv. There are many laws which have been enacted in order to help promote and foster SME development and which provide the legal framework within which SMEs are supported. These include, Framework Act for SMEs in Korea (1966), SME Promotion Act (1978), SME Start-up Support Act (1986), Special Measures on Venture Business Support (1997), and very recently the Act to foster one-person creative corporations, (2011). There are also laws regarding procurement (SME Product Procurement promotion Act (1981) and laws on the relationships between large and small companies. Some of these laws provide a legal definition of a certain category of SME, e.g. Venture business, One-person creative, etc. who are then eligible for special consideration in terms of access to programmes for financial and other support. For example according to the 1997 law on Special measures on the promotion of Venture Companies, a venture business is defined as a company in which a venture capital firm has invested, or which has a relatively large R&D spend as a percentage of sales, or whose business stems from technology, such as patents. (A company investing 5% or more of sales into R&D, financed with venture capital, or with patents or new commercialized technologies). As of 2010 there were approximately 20,000 Venture Businesses in existence. In general Korea seems to make considerable use of these certification systems for SMEs. Under this system SMEs can be certified as Venture Businesses, Inno-Business and more recently certification as a Green enterprise. PAGE 11

12 Since 1996 there is a special department of the civil service, - the Small and Medium Business Administration, which looks after the interests of SMEs. Although its remit would appear to much wider than just innovative SMEs, its overall stated focus is on the globalisation of SMEs, i.e. the development and promotion of Global Star SMEs. It facilitates this through provision of assistance in terms of promotion, marketing, financing, technology, support of business start-ups and micro-enterprises, etc. Much of the SME funding is provided by the SMBA although in many cases the actual management of the programmes is done by other agencies. Current SME policy is directed to the following areas iii ; Expansion of liquidity financing to SMEs, through the expansion of the policy loan and guarantee schemes. The promotion of technology and knowledge based start-ups in order to create employment. Fostering innovative technology based SMEs though the use of certification schemes such as Venture Business, Inno-Biz and Green Business Enterprises and the expansion of support for R&D commercialisation for SMEs Establish a win-win cooperation between large companies and SMEs with the enhancement of competitiveness of the part and materials suppliers to the large companies SME Financing In terms of general finance for SMEs, the Korean system makes use of loan guarantees, policy loans (loans direct from government to SMEs), grants and VC investment. General SME finance is dominated by the loan guarantee system, which supplies approximately 35 billion worth of guarantees, compared with 2.1 billion worth of policy loans, and a VC investment of approximately 0.85 billion. The loan guarantee system is also the dominant financing mechanism as regards SME innovation. According to 2009 figures technology based loan guarantees accounted for 65% of the financing for technology/innovation raised by SMEs with policy loans accounting for 16%, R&D grants accounting for 12% and 7% coming from venture investment. The total finance raised in 2009 was approximately 8.1 billion. The loan guarantee system for the high tech SMEs is based on a very developed technology appraisal system which is operated by KOTEC and which was one of the main subjects of the IPF visit. The IPF visit got some insight into the operation of the loan guarantee schemes though the discussions with KOTEC and the grant schemes, from discussions with KIAT and KEIT. However the policy loan schemes were not investigated in any detail. Banks and financial institution also have an important role in the financing of SMEs. The Industrial bank of Korea, which is a state owned bank, was established in 1961 with the charter of financing SMEs. The Kookmin Bank also provides commercial banking to SMEs. There are also mandatory rules on the percentage of loans which banks must pro- PAGE 12

13 vide to SMEs (e.g % for commercial banks, 55 80% for local banks). The Industrial bank of Korea is one of the main financial institutions providing loans under the loan guarantee scheme and it also provides the financial facilities for the R&D grant payment systems as describe in Section 5.4 below. The involvement of SMEs in public procurement is also an important part of policy. To quote from the 2010 ERAWATCH report on Korea; The Korean government also introduced public procurement policies in 2006 for innovation-oriented SMEs and has increased procurement of innovative goods and services based on new technology with various instruments such as obligatory procurement of some proportion by local governments and national companies, giving a priority for products with technology certification such as NEP (New Excellent Product), NET (New Excellent Technology), the GS (Good Software), and the EPC (Excellent Performance Certification) by governmental organisations, increasing procurement of green products, pre-commitment of procurement for SMEs participating in national R&D projects. The MKE and the SMBA in charge of procurement policies have tried to regularly hold workshops and communication activities between local governments and technology-based SMEs at both national and regional level to promote public procurement. The policy turned to be effective; the proportion of public procurement of goods and services of innovation-oriented SMEs accounted for up to 7% and more than 1.3b (2 trillion KRW) in The main actors in SME innovation financing include the SMBA (Small and Medium Business Administration) a small ministry which looks after the interests and funding for SMEs, the agencies KIAT and KEIT which manage R&D grants and funding, and the Korean Technology Finance Corporation (KOTEC) which specialises in loan guarantees for technology based SMEs. Each of these actors is discussed briefly in the section below and their role in the support of SMEs is illustrated in the diagram in Figure 1. PAGE 13

14 SMBA Small & Medium Business Administration Korean Technology Information Promotion Agency (TIPA) Policy Loans KOTEC SBC SME Programmes: R&D Grants - KOSBIR Project Evaluation, Project Monitoring Banks Technology Appraisal Guarantees Technology Appraisal Certificates Guaranteed Loans Innovative, technology based SMEs start-ups MKE Ministry of Knowledge Economy KEIT KIAT Industrial R&D Programmes in which SMEs can participate, but not exclusively for SMEs SMEs MEST Ministry of Education, Science & Technology KISTEP Figure 1: Map of the SME Innovation Support system in South Korea PAGE 14

15 3.3 Policy Delivery: The Main actors in SME support Ministry of Knowledge Economy (MKE) The Ministry of Knowledge Economy is the main ministry with responsibility for economic policy in the industrial and energy sectors. This is the Ministry which is responsible for much of the R&D budget allocated to industrial research, which corresponded to approximately 30% of the total government R&D budget for 2011 v (4.5 trillion won, or approx 3.0 billion) Small & Medium Business Administration The Small and Medium Business Administration was set up as a government department in 1996 with the remit of developing systematic policies and co-ordinating administration and support for SMEs. Its overall role is in the promotion and development of SMEs in general with its stated focus being on the globalisation of SMEs, i.e. the development and promotion of Global Star SMEs. In 2011 its budget for R&D support in SMEs was 628 billion won ( 420 million), approximately 4.2% of the overall government R&D budget Korea Evaluation Institute of Industrial Technology (KEIT) The Korea Evaluation Institute of Industrial Technology (KEIT) (267 staff, 2011 budget of approx trillion won, approx. 1.4 billion) is a government affiliated organization under the Ministry of Knowledge and Economy. KEIT is mostly concerned with supporting domestic R&D for the industrial sector, with over half of its budget allocated to Industrial Strategic Technology Development Programmes. It is also nominated as the specialised agency for the management and evaluation of the SME R&D grant programmes funded by the SMBA. In particular KEIT handles project planning, development of projects, and project calls, selection of projects and review by evaluation, monitoring of projects and evaluation and follow-up surveys. The SME programmes managed on behalf of the SMBA correspond to approximately 13% of KEIT s budget (2.0 trillion won, or approx. 1.3 billion) Korean Institute for Advancement of Technology (KIAT) KIAT is a sister agency of KEIT, also under the Ministry of Knowledge Economy (approximately 300 staff and 1.17 billion budget for 2011). Its main role is more concerned with international R&D (it is the organisation which deals with the Korean involvement in FP7, Eureka, Enterprise Europe Network, etc), R&D infrastructure development, and planning and policy for the industrial technology sector. KIAT s functions include; Planning for industrial technology, International R&D programmes 5% of the budget, Support for technology transfer and commercialisation of R&D 9% of the budget, Building PAGE 15

16 R&D infrastructure (research facilities, training initiatives, HR development, etc.) 16% of the budget, Promotion of regional industries 65% of their budget is spent on regional clusters, Planning of materials and components technology Small and medium Business Corporation (SBC) The Small & medium Business Corporation (SBC) is a non-profit, government-funded organization established to implement government policies and programs for the growth and development of Korean SMEs. SBC provides financing for SMEs to expand operations, develop new products and convert their business structures. It also operates non-financial programmes including consulting, training, marketing and global cooperation programmes, aimed at supporting SMEs to enhance their global competitiveness. SBC mainly provides financing through loans and is responsible for the allocation of policy funds/loans Korean Technology Finance Corporation (KOTEC/KIBO) The Korean Technology Finance Corporation (KOTEC as it is referred to in English or KIBO in Korean) is a non profit, guarantee institution that provides comprehensive services to competitive SMEs and venture enterprises. KOTEC s main activities consist of providing technology guarantees, performing technology appraisals and providing technological and management support. In terms of technology guarantees, KOTEC provides guarantees to SMEs that possess good technology based business prospects but lack the security for loan financing according to normal financial institution criteria. Since its foundation in 1989, KOTEC has provided a total of approximately 75 billion worth of such guarantees. More than 80% of the total guarantee amount has been provided to the companies who desired to develop or apply new technologies via the Technology Credit Guarantee System. KOTEC s loan guarantees are underpinned by its technology appraisal and ratting system (KTRS) which is operated through a network of Technology Appraisal Centers (TAC). The KTRS system of KOTEC is reviewed in section 1 below Other Actors There are many other actors which have a role in SME innovation support in Korea, however it is not the goal of this report to describe these in detail. Some of the other actors which were referenced during the IPF visit were; Korean Institute of Energy Technology Evaluation and Planning (KETEP) which runs and manages R&D programmes in the energy sector. Korean Technology Information Promotion Agency (TIPA): TIPA helps SMEs carry out management innovation by providing professional services related to informatization and technology innovation. It has been mentioned during the visit that for example KEIT only deals with companies which are greater than 5 year old and that PAGE 16

17 TIPA deals with companies which are less than this. KOTRA, The Korean Trade Investment Promotion Agency, which deals with overseas trade and export promotion. 4 Loan Guarantees for High Tech SMEs KOTEC As mentioned above the loan guarantee system is the most important SME funding mechanism in Korea as regards the volume of funding. KOTEC (or KIBO in Korean) is the agency responsible for operating this loan guarantee scheme specifically for high-tech SMEs and could therefore be considered the largest SME technology financing organisation in Korea. For a very detailed overview of the structure, goals and operations of KOTEC one is referred to the KOTEC Annual Report vi 4.1 KOTEC Background To understand the significance and uniqueness of what KOTEC does it is worth describing a little of its history. KOTEC started out as one of several institutions in Korea providing loan guarantees to SMEs (the others are KODIT and the 16 regional credit guarantee funds). KOTEC however was specialised in the provisions of guarantees to high tech SMEs. It initially had a credit rating system which somewhat took into account technology related matters, - this was known as the Technology Preferential Guarantee Scheme but was still largely similar to other credit guarantee approaches but with a bias towards technology. However, under this system the default rate (i.e. the percentage of loans not repaid) for loans to high-tech SMEs was relatively high at approximately %. It was argued that the default rate was just a natural result of lending to the target group, i.e. high risk, technology intensive SMEs who were often too high risk for normal bank loans. Nevertheless, in order to distinguish itself from other credit guarantee organisations, KOTEC was motivated to develop its KTRS (Kibo Technology Rating System) system vii. This system was developed in collaboration with Yonsei University and since the introduction of the new KTRS system in 2005, the default rate for loans has been steadily reducing to an average default rate of 4.7 % in Considering that these loan guarantees are generally given to a select, high risk target group, this default rate is remarkably low and compares very favourably with default rates on general loan guarantees schemes for SMEs which can be in the range of % viii KOTEC is an organisation of 1,072 staff, with a headquarters in Busan, the second largest city in South Korea, located in the south of the country. It operates a network of 2 technology appraisal institutes and 51 technology appraisal centres. The core customers for its guarantees are technology intensive SMEs, Venture and Inno-biz firms, technology start-ups and SMEs from the knowledge services sector. In 2010 it issued guarantees for loans worth 9.4 billion. As a loan guarantee provider KOTEC must have sufficient capital funds to ensure adequate coverage of loan defaults. In general KOTEC gets its funding from the government, from fees paid by financial institutions for the guarantee service, and from guarantee PAGE 17

18 fees paid by companies. However in 2010 KOTEC did not receive any funding contribution from the government and was entirely funded from contributions from financial institutions and guarantee fees. KOTEC provides loan guarantees to SMEs who have been refused loans through the normal process used by financial institutions typically due to a lack of collateral. Typically the SME will approach KOTEC, who will then perform a technology appraisal and rating on the SME. KOTEC will provide a loan guarantee for SMEs which get a B rating or higher under its rating system. KOTEC s main customers are technology-innovation SMEs and technology based start-ups, and more recently those in the knowledge based services and cultural contents sectors. The KOTEC guarantee can cover loans for the purposes of technology development and commercialisation, but also operating and facilities costs. In the case of a default by a loan recipient, KOTEC pays the bank and then attempts to recover what it can from the SME (from assets, properties, etc.) though its dept collection department. KOTEC also play an important role in the financing of start-ups through the use of its customised KTRS Start-up model. For example in 2010 it provided almost 1.2 billion in guarantee support to start-ups and discovered over 6,000 new start-up companies. 4.2 The Technology Appraisal System The central aspect of KOTECs operation is its Technology Appraisal Methodology, - the KTRS system. The overall aim of the system is to identify and support those companies who have strong technology and strong business prospects but who would not qualify for a loan under a normal credit analysis because of low collateral. Put another way the system aims to identify those high-tech SMEs who will be successful despite currently weak finances. See the information in Appendix C for an overview of how this system works in more detail. The system aims to provide a quantitative analysis of a company s business prospects. In the end the system quantifies a company s prospects in terms of a technology rating grade. This technology rating grade (TRG) determines whether or not a company will be supported for a loan guarantee. The methodology used to derive the TRG is explained in the diagram in Figure 2. The final grade is derived from a matrix combination of two factors, - a risk level and a technology level. Both of these factors can have 10 levels (see appendix C for the matrix used to combine the factors to derive the grade). The Technology level is a quantification of the company s technological and commercial viability. For any particular company its technology level is determined from how it is rated against a number of different indicators. These indicators fall into four top-level categories (Management Competence, Technical feasibility, Marketability and Business Feasibility and Profitability). See PAGE 18

19 Appendix E: Technology Rating Indicators for a list of the indicators used. Typically there are 34 different indicators used, on which a company is assessed with a rating given for each indicator. (The list in the appendix contains 45 indicators, but recently this has been refined to 34.) The final technology level is determined from a weighted combination of these indicator ratings, performed using an AHP (Analytic Hierarchical Process) analysis ix. In fact these weightings and indicators used can be different for different industry sectors. The real key to a good technology level rating is the correct determination of these weightings. The Risk level is a quantification of the risk associated with the company based on the company s own commercialisation risks and external risks in the environment (i.e. economic cycle, etc). Macro-economic environment variables are input in order to account for the external risk. The risk to commercialisation is determined from the indicators used earlier. The actual risk level is determined by the application of a statistical Logistic Regression Model, which is based on the input data and results from the 5 years and 22,445 cases of technology appraisal which have previously been performed. PAGE 19

20 External Economic factors such as general economic indicators Risk weights derived using Logistic Regression Analysis on actual data accumulated from 5 years of appraisals (> 22,000 cases). Matrix Combination of risk level and technology level 10 levels 10 levels 10 Grades AAA - D Assessment performed by 4 Modules, 34 indicators 1. Management, 2. Technology Prospects, 3. Market Feasibility 4. Business and Profit Prospects Weighting for various indicators are derived from AHP analysis. Weightings are different for different industries, - general, Software, Dot-com, Design, Bio, Environment. Figure 2 : Methodology used by the KTRS to derive a technology rating grade for a company. Over the years the KTRS models have been refined and customised for different sectors and uses. In terms of customisation, different models have been adapted to cater for different company types or sectors, and the uses of the system have also been expanded beyond the original use in the provision of loan guarantees. The diagram in Figure 3 gives an overview of the current purposes, models used and results of the various appraisals which can be carried out. The technology appraisal guarantees still accounts for 89% of the appraisals. Approximately 92% of the technology appraisal guarantees are provided to technology- PAGE 20

21 innovative SMEs and approximately 38% are provided to start-ups (companies within 5 years of being founded). Figure 3 : The Purpose and the various models of the KOTEC Technology Appraisal System Recently KOTEC have moved from not just providing a Technology Appraisal Guarantee Scheme, to also providing a Technology Appraisal Certificate Scheme. This is where KOTEC provide a technology appraisal certificate for a company, which can be used for other purposes. This is a move by KOTEC to position itself as a partner to other key independent players in the system such as banks, venture capitalists, etc. As mentioned above the critical part of the KTRS system are the indicators used to assess performance of a company and the weightings given to these indicators. These indicators are derived initially from a consensus of experts, but have been refined or indeed reduced over the years (e.g. a reduction from 45 indicators used initially to 34 now). The weighting given to the indicators is derived based on AHP analysis x. The indicators consist of qualitative indicators, which rely to some extent on the judgement of the evaluator and objective or quantitative indicators. There is an ongoing effort to make more of the indicators quantitative and/or objective, e.g. the indicators used to consist of 25 out of 45 objective indicators, but now consists of 21 out of 34. PAGE 21

22 The calculation of the risk in technology feasibility includes a calculation of business insolvency risk over time based on the accumulated results of appraisals done on similar companies picked from the 5 years worth of accumulated data from technology appraisals and results (i.e. defaults, success etc). The technology appraisal method has also been specifically adapted to be used for appraisal of start-ups. In this case the number of indicators is reduced (from 34 to 23), there is more focus on the owner s entrepreneurship and there are only 8 possible grades. The highest two grades AAA, and AA are not given to start-ups. A central part of KTRS is an assessment of the company performed by an evaluator. In the KTRS approach there is a concerted attempt to remove the subjectivity of the evaluator from the process. This is done by providing feedback to the evaluator based on their tendency relative to other evaluators and their consistency over all evaluations. This feedback, compiled from a statistical analysis of all evaluations, can tell an evaluator whether their tendency is to be too generous compared to others and whether their evaluations are consistent (e.g. too random or too concentrated). The evaluator s position can be plotted on a 2D plot of consistency vs. tendency where it would be expected that their position would fall within 2 standard deviations of the mean. Note this is one of the aspects of the KTRS system which is covered by a patent. Moreover KOTEC have realised that in order to ensure consistency in evaluation it is important to provide access to up to date technology and market information to its assessors in a consistent and easy to access manner. They are in the process of providing this through an on-line appraisal assistance system which can access technology and market information databases. Note the KTRS, KTRS-Startup and the feedback system are patented. The system was first patented in Korea in 2007, followed by an international patent granted in Singapore in 2008 and a world patent application xi. The system is also patent pending in Japan and China. As part of the presentation KOTEC compared and contrasted the KTRS approach to a typical credit rating process and to the TechRate system used by OSEO in France (and also experimented with by Tekes in Finland). The KTRS system differs from a credit rating approach in several aspects. The typical credit rating approach focuses on financial aspects and past history of the company. In contrast the KTRS approach focuses on the company s future potential and non-financial aspects, such as the technology excellence and business feasibility are dominant in the appraisal. This means that it is particularly suited to analysing the potential of small companies and start-ups which do not have a long/any financial history. The KTRS system shares many things in common with the TechRate system, especially in terms of the technology appraisal which assesses a company s prospects under similar categories (Management, Technology, Market and Business Feasibility) using similar indicators. However the TechRate system places considerably more emphasis on financial data than does KTRS. Moreover the KTRS approach tries to make the assessment as objective as possible (see below for further discussion of this), i.e. to eliminate or mini- PAGE 22

23 mise the subjectivity of the evaluator. The use of the KTRS approach in the Korean system appears to be much more widespread than the TechRate system in France. Trust in the KTRS system also seems quite high; - in a satisfaction survey of government systems users (government and SMEs), KOTEC s KTRS system came top out of 22 organisations. 4.3 Technology Appraisal for Creative Industries Currently KOTEC is moving beyond the support of technology intensive SMEs into providing support for companies in the Cultural, Creative and Knowledge based services industries. Indeed it has recently developed in 2009/2010 a new model of its appraisal methodology for such companies. This cultural contents appraisal model has been developed in order to boost support for the cultural industry (online games, soap opera, film, animation, musicals, etc). The Korean Wave of entertainment, or Hallyu as it is referred to, has been enormously successful in the past years, with Korean exports in entertainment reaching 2.3 billion in This success of the sector has prompted the government to change its policy towards the Korean creative industries from one of protectionism to one of pro-active promotion and support. It is this change in policy which provides the background to KOTEC s development of its cultural contents appraisal model, which has been developed in cooperation with the Ministry of Culture, Sports and Tourism and KOCCA (Korea Creative Content Agency). The objective of the Cultural Contents appraisal was to develop a standardised evaluation criteria for creative industries, and to provide as objective as possible a tool for assessment of the potential success/business prospects for any venture. The tool was aimed to be used not only by KOTEC for its loan guarantees but also by VCs and financial institutions in the provision of equity. Different models have been developed for different genres, i.e. Drama, Film, Games, Animation, Character. The key aspect of the model development is to derive the indicators which would be used in an appraisal and their weightings in the AHP model, which are relevant to this genre within the industry. The development of the model has been done using an iterative process. Initially an entire value chain analysis is conducted in order to understand the key players and the key variables (e.g. variable such as the writer, the actors, production costs, etc.). For an example of the value chain analysis and variable in film production see the reference (xii). The value chain analysis is backed up by interviews with industry insiders and experts. Based on this an initial model was developed which was further developed with feedback from experts. Several cycles of simulation (testing of the model on real cases) and feedback were conducted to improve the model. Based on these the AHP-based weightings for the model were finialised. The final model developed consisted of 9 to 24 indicators (more or less indicators depending on the genre) in 3 top level categories of Production Infrastructure, Content Competitiveness, and Value Creation. Although there are some indicators which are common with the more mainstream technology appraisal indicators as shown in Figure PAGE 23

24 3 the majority of the indicators are different. The Cultural Contents model is therefore not just an extension of the previous models, but rather represents a significantly new approach. (For example, compare these to the 4 top level categories used for a more mainstream technology appraisal as shown in Figure 3) 4.4 Good Practices & Transferability The overall KTRS Approach The overall approach of using a technology appraisal to assess the future potential of a company rather than the past credit history is considered a good practice. The success of this system in Korea is evident from the significant decrease in the loan default rate after its introduction, - in other words the system does seem to work very well. In general most financial institutions do not understand technology related businesses and therefore do not lend to SMEs which do not have tangible collateral. The primary rationale for a system such as KTRS is to fix this information asymmetry and so facilitate a flow of finance from financial institutions to what might be normally termed more risky SMEs. One of the things which differentiate the KTRS approach from other rating systems is that it is predominately focussed on the technology based business prospects and deemphasises the financial status of the company. It is probably true to say that all evaluations typically involve some assessment of criteria similar to those used in the KTRS system, albeit typically in a less quantitative manner and typically reliant to a great extent on the expertise of the assessors. Moreover it is probably more common that technology evaluation and commercial evaluation are separately assessed and not fully combined to estimate the business insolvency risk as is the case in the KTRS approach. Therefore the KTRS approach is differentiated by being quite integrated and systematic combining an assessment of the technology s commercial prospects, the company s ability to exploit the technology, the technology value and the external economic environment to estimate viability of the company. In terms of transferability, in principle there is no reason why such a system could not be used in a European context. There are of course practical challenges which would need to be overcome. In Korea KOTEC works very closely with the financial institutions and indeed many of the actual loans are provided from the Industrial Bank of Korea which has the remit of funding SMEs. Also the operation of the system in the manner it is used in Korea requires significant investment in terms of the set-up of technology appraisal centres with highly qualified staff (e.g. over 500 KOTEC staff are involved in technology appraisal) etc. This dwarfs the entire staff of many European innovation agencies (e.g. 140 at the Technology Strategy Board in the UK) and it seems unlikely that in the current climate of austerity, that funding for significant new staff and resources would be available to implement such a system in any single European innovation agency. On the other hand many agencies have access to a body of staff who perform technology assessment, and training such staff in the use of a KTRS type system might be possible. Further study is required in order to determine which are the essential elements of the system which need to be implemented in order to make it successful and how these could be implemented with less resources than those employed by the KOTEC system. PAGE 24

25 Transferability does not rest solely on the resources required, there are other technical challenges relating to transfer. For example part of the calculation of the risk levels rely on a statistical comparison with the previous results of similar cases picked from a large database of past evaluation cases. KOTEC have accumulated a database of 5 years worth of previous evaluation data in order to do this. Obviously this data would not exist in any country setting up the system for the first time so that a technical work-around would have to be implemented. In addition the environmental risk factors which are part of the grading would require careful evaluation to assess their suitability to a European context. It is also unclear whether the weightings given to certain indicators in the KTRS system would be transferable to other countries, i.e. are there any Korea specific context factors inherent in the indicators/weightings? The potential impact of such technical issues on transferability would require further deeper study by experts. Another important issue to consider regarding transferability is the fact that the KTRS system is the subject of an international patent application filed in 2006 with coverage in Europe. However during the visit KOTEC indicated that they did not consider the existence of the patent would to be a major issue and that they were open to considering collaboration in the implementation of the KTRS internationally. In any case for the transfer of the KTRS system to a European context close collaboration with KOTEC on the implementation of such a system would be required. An important question regarding the operation of such a system is by whom it would be operated. In Korea KOTEC issue the loan guarantees and suffers the loss on loan defaults, therefore they have an obvious incentive to refine the system and make it work. This incentive to minimise risk is potentially an important aspect to take into account in making such a system work. This would be an especially important consideration if the assessment is done by a third party independently from the guarantee issuing organisation. In such a situation issues around the responsibility for the quality and the risk would need to be resolved. On the other hand, the success of such a system will depend to a large extent on it gaining recognition as a trusted, objective and independent rating system and the operation of the system by an independent organisation may well assist in attaining this recognition. As described above KOTEC seem to have made significant efforts to make the system objective and hence in Korea the system seems to have achieved this status. Perhaps from this perspective the only possible way that this could realistically be implemented in Europe, is as a Europe-wide service, with central funding. In summary the KOTEC system is refined, detailed and quantified to an extent that would be difficult to attain in many European countries. The rating of company innovation projects (and loan requests to finance them) in Europe seems to be more based on subjective opinions of experts or panels and in reality the introduction of such a quantified system to replace established national procedures may be difficult for national programmes Removing Assessor Subjectivity One of the important success factors in KTRS and another good practice is the strong focus on the removal of the assessor subjectivity from the appraisal. As mentioned above, this has been approached from two angles, a) attempting to make more of the assessment indicators objective and/or quantitative and b) calibration of the assessors PAGE 25

26 and feedback to assessors on the relative to others. It is recognised that minimisation of the assessor subjectivity is very important in establishing the trust in the system. This approach of providing feedback to assessors is probably an approach which could be used in many programmes, which require an assessment as part of the evaluation procedure. Because the feedback is based on a statistical analysis of an assessor performance over all their assessment and relative to other assessors, it would be necessary that assessment results are recoded electronically and that they exist in sufficient numbers to allow a valid statistical analysis Tailoring the System to Different Sectors and Uses The KTRS system is very much a growing system in that it is constantly being refined and adapted to make it easier to use, more reliable and suitable for different uses. This dedication to the constant refinement of the system is another good practice and an important factor in establishing the success of the approach. Considerable efforts have been made to adapt the system to better suit different sectors and there are currently somewhat different models used for 6 different industry sectors. A good illustration of the commitment to the constant development of the approach is the recent development of the model for the cultural contents industry described above. It is also worth noting that there are existing models or models being developed for start-ups, knowledge based service industries and one person enterprises. It is probably also the case that the uses for such a system as KTRS can potentially go far beyond the use in the provision of loan guarantees. Indeed this is recognised by KOTEC and as the diagram in Figure 4. shows the system is already put to different uses including, company certification schemes (e.g. Inno-biz, Green business, etc), technology valuation, business prospects of patents, valuation for stock market listing, etc. The expanded use of the system in the appraisal of R&D grants programmes is also being pursued as a means to improve the commercialisation rate of R&D projects. It is important that any implementation of such a system in a European context would include feedback mechanisms and processes whereby the system and approach can be constantly refined. 5 SME RD&I Funding Programmes In Korea there is a considerable array of programmes which SMEs can access for funding RD&I. Two of the main agencies which run industrial R&D programmes aimed at enterprise are KIAT and KEIT. (Another is KETEP, which deals with R&D in the energy sector.) KIAT has a number of programmes in the areas of International Cooperation (e.g. Eureka, FP7 and bi-lateral programmes), support for technology transfer and commercialisation and building R&D infrastructure. The largest part of its budget (approx. 63%) goes towards supporting regional innovation and clusters to ensure balanced industrial growth in the country. PAGE 26

27 KEIT s major programmes include the Industrial Strategic Development, Components & Materials Technology Development, Global Excellent Technology Innovation, SME Technology Development and others. Many of these are open to SMEs but not exclusively and may be collaborative programmes involving Universities, research centres, companies, etc. However there are programmes which are exclusively for SMEs which fall under what is sometimes referred to as the SMBA s KOSBIR programme, which in reality is an umbrella programme for many sub-programmes (see below). The SME Technology Development programme which is managed by KEIT falls under this. These are the programmes which were the subject of the IPF discussions with KEIT. Note that typically these programmes only allow participation by established companies which are greater than 5 years old. For companies younger than 5 years, it seems that the Korean Technology Information Promotion Agency is the relevant agency. 5.1 SME Innovation Support Programmes The funding of programmes which are exclusively for SMEs comes mainly though the SMBA. The SMBA support budget for R&D was approximately 420 million in This is divided in to direct supports for R&D in companies (approx 317 million) and Industrial Education Supports ( 103 million). The direct R&D support is further divided into 11 sub-programmes of which the Technology Innovation Development for SMEs is the largest accounting for approximately 44%, the Establishment of Growth Technology is next with 20% and the Product development with Option to Purchase is next (11%). The entire list of sub programmes is given in the diagram in Figure 4. PAGE 27

28 SMBA Support Programmes for R&D (2011) (2009: 487 billion won, 2010: 561 billion won, 2011: 623 billion won) R&D Support (budget in billion won) Technology Innovation Development for SMEs (209) Establishment & Growth technology (95) Product Development with Option to Purchase (53) R&D of Greener Production Environment (40) Industrial Education Support Industrial-Education Cooperation in R&D (82) Support for establishing business institute (38) R&D of Methods utilizing equipment (20) Support for pooling R&D equipment (15) R&D for SME Convergence technology (23) R&D with private and Government coinvestment (20) R&D of Services (10) R&D of transferred technology (10) R&D with overseas market cooperation (7) Innovate R&D planning capabilities (5) Innovate R&D planning capability R&D of IT integrated production process (1.5) Figure 4 : The Small and Medium Business Administration R&D Support programmes and budgets. PAGE 28

29 5.1.1 Technology Innovation Development for SME As can be seen from Figure 4 the Technology Innovation Development programme is the largest programme in terms of budget and is one of the main innovation support programmes for SMEs in Korea. This program was designed to foster SME technology innovation by partly providing funds to SMEs capable of their own product development so that they can use it for new product development. Up to 75% of project costs can be funded. However it is expected that if the project is deemed successful, after final evaluation, the participant must pay back 30% of the costs as technology fees in instalments over five years. Note support under this programme can be allocated in different categories such as: Global investment challenge support, future leadership challenge support, and entrepreneurship and practical issues support. (A Korean language version of the programme overview is available at the following link ) Product Development with Option to Purchase The concept of the scheme is that it brings together purchasers of technology or new products (such as public organisations, state companies or large private companies), and SME suppliers of such technology and the technology development funding agencies (such as the SMBA). The basic idea is that the government, through the SMBA, agency will help fund the technology or product development of an SME where the outcome of that development has been guaranteed to be purchased by an organisation for a period of time. The scheme is also sometimes referred to in English as either the new technology purchasing assurance scheme or the conditional purchase new product development. Although time did not permit a detailed discussion of this scheme during the IPF visit, some details on the operation of the programme which have been gathered from desk research are given in Appendix C: New Technology Purchasing Assurance Scheme It would appear that the operation of the programme shares many common elements with the other SMEs programmes, with the exception that the initial step in the scheme requires the purchasing organisation to specify its requirements for a new technology or product. These specifications or proposals are submitted to the SMBA, who advertise them and invite SMEs to apply to provide a solution. This process of challenge specification and advertisement id done through the Demand Survey, as described below. Similar to the other programmes, SMBA/KEIT evaluates the SME applications and will fund the technology development costs of the SME up to a maximum of 75%, with the SME expected to fund the remaining 25%. However in the case where the purchaser is a large company then the SMBA will only cover up to 55% of the costs, with 20% being covered by the purchasing company and the remaining 25% by the SME. Success of scheme is partly driven by the fact that Public organisations are mandated to use 5% (2005) to 10% (2010) of their budgets to purchase new technology products. (An overview of the programme in Korean is available from the following web link, ) Although the funding for the SME programmes is provided by the Small and Medium Business Administration, KEIT is the organisation which has the main role in the planning and execution of these R&D funding programmes. KEIT therefore acts as what is referred to as a specialised agency for the SMBA, where it provides the function of pro- PAGE 29

30 ject planning, project evaluation, project monitoring etc. The time available in the meeting with KEIT did not permit a detailed discussion of the objectives of the various subprogrammes. Instead the delegation got a good overview of the funding, evaluation and monitoring system which is common to all programmes and quite a detailed presentation on the IT based management system used to manage the programmes which is a major part of the service delivery system. An important aspect of how these programmes are run is what is referred to as the Demand Survey. The SMBA and KEIT conduct an annual survey, the Demand Survey, which collects inputs from SMEs on their needs in terms of areas for funding for the coming year. The SMBA budget is then assigned to different sub-programmes or themes based on the results of this survey and these sub-programmes or themes are published at the start of the year. There are programme calls announced based on the results of the demand survey. The Demand Survey topics for the year are announced in January of each year. It is still possible for SMEs to apply for funding for projects which fall outside the scope of these programmes however such programmes seem to have a significantly lower success rate than those which result from the demand survey. Success rates of 1 in 3 were quoted for applications which fall within the demand survey and 1 in 9 for those which fall outside the scope of the demand survey topics. R&D support can cover all activities associated with R&D commercialisation up to preproduction. It should also be noted that with respect to the programmes managed by KEIT, only companies greater than 5 years old are eligible. The administration of the programmes for SMEs is done jointly by the SMBA, KEIT and the 12 regional offices of the SMBA. Because of the different agencies involved and the different physical locations of these agencies there was a considerable need for a unified electronic management system for running the projects. Such a system was implemented from 2004 and is referred to as the R&D Assignment Management Information System which is described in greater detail below. The R&D grant system in Korea, which is common to many of the funding schemes run by KIAT and KEIT, typically allows for a 75% grant to SMEs. However for successful projects there is a payback of 20-30% of the grant over the course of 5 years. This payback is referred to as technology fees and is collected by the agency administrating the grants. 5.2 Evaluation and Monitoring of Projects The evaluation system for grants typically follows a three stage process, consisting of first the evaluation of the proposal documentation by an Assessment committee. In the second stage about 50% of these projects which score above 60 points undergo a face to face evaluation, with the committee. Thirdly a field evaluation, - i.e. an on-site visit by the regional SMBA office is conducted for a selection of the successful projects. The final project selection is done by the deliberation and Mediation committee of the SMBA. Selection is based on a weighted average of the face-to-face evaluation, the on-site evaluation, plus preferential points which can be added or deducted based on previous trackrecord PAGE 30

31 The evaluator panel for a project typically consist of 5-7 people per project and can consist of people with different backgrounds, i.e. technical, VCs, financial people etc. Evaluators are picked from a database with about 40,000 evaluators which is a common database with other agencies. Evaluators also do annual project progress check with on-site visits if necessary. Generally project monitoring is performed by the evaluation of progress reports. Support to projects can be stopped if progress is not satisfactory. The participant expenditure on the project can be reviewed and monitored in real time through the use of the electronic banking system (described separately below), so that any errors or misuse of funding can be determined at an early stage. All of the evaluation and monitoring, including the financial monitoring is handled through the use of the IT management system. Project monitoring can include unannounced visits to the participants in cases where wrongdoing is suspected. When a project is finished there is a final evaluation which looks at the project results and grades the project either as a success or a failure based on achievement of the original objectives and commercialisation probability. This evaluation has only two outcomes either success or failure. In addition to the evaluation of project results there is an evaluation of the business success of the project to determine the outcomes and impacts of the R&D in terms of profit, increase in employment, etc. These outcomes from the project for the company are surveyed for up to 5 years after the project finishes. The post project evaluation uses 5 indicators to examine the business outcomes from the project and determines whether the company in future might receive preferential or non-preferential treatment. The business indicators used is the post project evaluation include; Total Company Sales, Company Job Creation, Technology Level compared to leading countries, R&D Product Sales and Estimated R&D product profit. The indicator related to Technology Level seems to be evaluated by comparing such things as the technology gap (in years) to leading countries in the area, and the product s competitive position in the world market. The impact figures suggested by the companies are checked by the evaluation panel who originally evaluated the project which comprised of VCs, financial people, technology people etc. For the programmes run by KIAT it was mentioned that the measurement of non-financial impact is also taken into account knowledge, networking, etc. 5.3 R&D Management Information System A comprehensive, on-line, management information system was setup to manage the applications and operations of the Technology Innovation Development Programmes The motivation for the implementation of the system was to overcome the physical limitations of the different agencies and locations involved in the running of the programmes, i.e. the SMBA, KEIT and the 12 regional SMBA offices. The system was initiated in 2005 and has since then been expanding the number of programmes which it covers, e.g. from one field in 2005 to 17 in The operations which the system can handle PAGE 31

32 have also been expanding over the years. The system now handles all of the following aspects for the programmes; Collection of data for the Demand survey from SMEs Announcement of programmes Applications participants apply on line. On-line assessments of projects, e.g. about 6,000 assignments in 2010 On-line Electronic contract signing by means of an official e-signature. Project progress reports and final reports can be submitted online. It is integrated with the R&D fund points and credit card system for payments. Linked with the Industrial Bank of Korea. Post Project evaluation and control i.e. collection of technology fees the portion of the grant which is payable back to the government from successful projects. In addition the website acts as an R&D information portal for business and commercialisation information. It also handles applications for the assessment committees i.e. applications to be an evaluator. Electronics notifications can be sent from the system by , SMS and fax. The system links with several other agencies such as the NTIS for statistics (the National Science and technology Information Service, - i.e. a database which records information and statistics on all national funded R&D projects), the Industrial Bank of Korea for the financial control, the national Company database for financial information on companies, and the public business certification system. The system is managed by KEIT and run by 7 personnel, one KEIT person and 6 service staff. The system had about 1.8 million user visits in It was claimed that the implementation and use of this system allowed for the time to contract to be reduced from 3 months to 2 months. 5.4 R&D Funds Payment System The payment system which has been developed to pay the grant funding to the participants is worth a separate description. This system has been developed in order to allow SMEs have access to the funding when they need it, but at the same time maintain tight control and monitoring of the use of funds. Before the development of this approach the payment system for the R&D grants involved an up-front payment to participants, with the actual expenditure and use of the funds being checked later when expense reports were submitted by the participants. This system however was open to abuse and could not facilitate early identification of misuse of the funding. In 2003 a new system referred to as R&D Fund card system was introduced which allowed for the use of a credit card by the participant to make payments from the grant PAGE 32

33 funds. However it appears that the take-up for this credit card payment system was not significant. In 2007 for example only 10.8% of payments were being made using the credit card approach, whereas 86% were still being made by wire transfer of funds. In 2007/2008 a new payment system was introduced referred to as the R&D Points System. This system was introduced in order to address the potential misuse of the upfront payment system previously used, but still allow the SMEs to access the money when they need it. The SMBA pay the R&D funds into a unified R&D account in the bank. The bank involved here is the Industrial Bank of Korea, which is the state owned bank with a remit of providing finance to SMEs. Since the grant is a typically a maximum of 75% of the total project costs, at least 25% of the costs must be borne by the participant. It was stated that the participant must have this 25% of the funds available up-front to transfer to the bank account at the start of the project. When an SME participant is awarded a project, they are issued with a number of points which represents the funds available to it under the R&D grant. No payments are made direct to the SME, - they are only issued with a points allocation. When a participant wants to spend some of the project budget, they request a payment from the bank and the actual funds are paid in real time, and their project point balance is reduced by the appropriate amount. In order to make a payment from the project funds (payment to a supplier, salary payment to staff, etc) the SME makes a request to the bank for payment which includes the purpose, amount, etc. After some automatic checking, the payment is then made by the bank to the SME participant who can then pay the supplier etc. The SME also Registers the bank accounts of employees and salaries of staff working on the project are transferred directly to the staff accounts. After a payment the equivalent number of points representing the payment are then deducted from the balance available to the SME. An important feature of the system is that, once a request for payment is made all the processes are carried out in real-time and online, so that there are no delays or lengthy approval processes. Also because every transaction is recorded on-line as it happens, tracking and monitoring of expenditure can be performed easily. There is built-in monitoring, provided by the bank, which automatically detects misuse of funds and issues alerts. The responsibility for monitoring the fund usage rests with the monitoring agency i.e. KEIT in this case. The automatic monitoring includes monitoring of funds for overuse (e.g. > 70% of budget spent in first three months), underuse (e.g. < 10% in first three months), cancellation of transaction, multiple payments to the same receiver, over-expenditure in any category (labour, equipment, consumables, etc.). The monitoring system is also linked to the submission of progress reports and to the Korea Enterprise Data Information system (i.e. national company database) which will send notifications of suspension of business, bankruptcy, etc. Thus much of the administration and checking is done in an automated manner. PAGE 33

34 The participant can use a credit card (presumably a special card issued by the Industrial Bank of Korea) for purchases etc and the credit balance is paid by the bank. Alternatively payments can be executed by wire transfer or by cash payment. The system relies on an IT system which is common between the banks, card companies and KEIT. The system was only fully implemented 2 years ago and so full analysis of its effectiveness has not been possible, however KEIT stated that the number of cases requiring investigation (presumably for potential misuse of funds) has decreased. KEIT were unable to estimate by how much. 5.5 Good Practices & Transferability Points Payment System for R&D Grants The points based payment system for the payment of the grant to SMEs is a good practice which can have several advantages from both the perspective of the SME participant and the agency making the payments. It is worth comparing this approach to the more common approaches of providing up-front payment or requiring SMEs to make retrospective claims. The upfront payment approach has the advantage that a portion of the finance is provided immediately to the SME, however it may take some time for ineligible expenditure to be identified, and potentially gives rise to the situation where repayment of such expenditure by the SME is necessary. With the retrospective payment approach, ineligible expenditure is not paid out, but the SME must first spend the money before it can be reclaimed. The points payment system used by KEIT solves these issues by allowing for payment of expenditure in real time when it is required. From the perspective of the SME it has the advantages that they receive the funds when they need them, i.e. there is no significant waiting period after incurring the expense. Also they can have early notification if any expenditure is outside the terms of the grant. In addition there is no complex retrospective claims procedure for the SME participant with all expenditure being recorded as it happens. The company has access to an instant overview of the fund expenditure and remaining funds/points in various categories. The requirement of 25% of the funding up-front from the company could be an issue for smaller companies, but there does not seem to be any reason why the more usual (in Europe) requirement of funding this portions from cashflow or from in-kind funding cannot be used. From the perspective of the agency the risk of misuse of funds is significantly reduced as there is no upfront payment to participants and errors can be identified early and fixed. It may also eliminate much of the grant inspection process making for a more efficient agency operation, as the up-to-date expenditure details for any project are always available online. Automatic checks on over and under spend are also easily built into the system, which can give early indications of problems in project execution. In addition in the Korean system much of the system makes use of the pre-existing financial transaction infrastructure of the banks and pre-existing fraud-monitoring techniques, which means that the monitoring role performed by the agency can be carried out by a relatively small number of staff. PAGE 34

35 In principle this points payment system or a variant is entirely transferable. However its implementation obviously requires a very close working relationship with banks and credit card companies. In Korea the state bank, Industrial Bank of Korea is used for the payment, which means that the agency does not need to pay the bank to perform this service. To implement this similarly in a European country may require paying a commercial bank to deliver the service or extending a national bank s services. Many European countries banks are private and commercial, and national banks, may not typically provide these commercial type services. It also requires a secure IT system which is shared between the banks, the monitoring agency and the participants IT Systems used for project tracking and monitoring Another good practice is the extensive on-line system for application, monitoring, evaluation, reporting, etc., which allows the co-ordination of inputs from several different organisations. As described above the system handles all aspects from the demand survey, announcement of programmes, applications to programmes, contracts, payments and financial tracking, etc. There seems to be a high degree of integration in the system between the banks, the agency managing the system and other organisations in Korea. It also seems that participants can access the system and check the status of their application on-line at any time. The system also seems to allow for checking that there is no overlap in funding of projects from other government agencies. Such IT systems are of course already used in Europe, e.g. the IT system used by Eurostars for monitoring its projects facilitates, applications, evaluation, submission of project reports. The Korean system does however go further with the integration of the expenditure, the links with other system such as the banks, national company databases, etc. and allowing applicants to track the progress of their proposal. There are no particular transferability issues, other than requirement to invest in the infrastructure and the fact that it requires co-operation between different organisations such as government agencies, banks, statistics agencies, etc. This probably requires a strong top-down commitment and push to make it work. Obviously it also requires a developed IT infrastructure and a high degree of IT literacy and broadband and computer access among the target group, so that for example all participants can access and use the system. In most European countries broadband is available and effective in cities but this is not always the case in more rural areas Project Evaluations and Impact The Korean system seems to put considerable emphasis on the tracking and monitoring of project progress. A particularly good practice is the use of the original evaluation team in the monitoring of the project progress. This achieves continuity between evaluation and monitoring which is not always present in funding programmes. There is also considerable emphasis put on the tracking of impact of SME project funding and this is a good practice. The ability to justify support in terms of economic impact is obviously an important for every funding agency. In Korea the collection of the data for this impact assessment is built into the programme process. In particular there is post project evaluation conducted for up to 5 years after the project is completed which focuses very much on the commercialisation success of the project. This evaluation attempts to col- PAGE 35

36 lect from the participants the impacts in terms of increases in turnover, employment, profit and sales from the products derived from the R&D. Interestingly the impact on technological development of the company is also assessed. This is measured by attempting to quantify the technology gap for the product in years compared to leading countries and to quantify the product position in the world market. It was admitted that inevitably the responses from companies can be overly optimistic. However an expert in the field is typically included in the evaluation panel in order to provide a check on the realism of the figures. There also appears to be a linking of future support to the track record of success in previous supports. i.e. companies can get preferential or nonpreferential treatment depending on the business success of the project. This should provide an incentive for companies to return the impact data after the project has finished. It should also be remembered that successful projects are required to pay back up to 30% of the grant in technology fees which may act as a disincentive to overly inflate the project success. There are no specific barriers to transferring this type of impact assessment collection data. Efficient implementation would require the data collection process to be integrated with project management IT system. Indeed programmes such as Eureka and Eurostars for example already incorporate similar type of impact forms after project completion. In the Korean case the fact that companies can get extra points in future project evaluation based on the success of previous project does provide a good incentive for a high return rate on the impact assessment data The Demand Survey The annual Demand survey conducted by the SMBA is also an interesting practice. Each year a demand survey is carried out among SMEs so as to gauge the demand for programmes. Based on the results of the demand survey the budget of the SMBA is allocated to various programmes. The advantage of this approach is that it allows the SMBA to tailor its programmes and budget to be in line with the requirements of its target group. 6 Summary and Recommendations based on Good Practices The study of SME innovation support in Korea by the IPF was motivated by the fact that Korea is a country which has a very strong support systems for SMEs with a very strong focus on the fostering of innovation in SMEs. As outlined in the body of the report the study found several approaches used by Korean agencies which were considered good practices and which could be considered for transfer to a European context. Some of these could be considered practices which could be the basis of new approaches to programmes such as the KTRS system used by KOTEC for the loan guarantees. Others are practices which should be considered for implementation at an operation level to improve the delivery and operation of existing programmes. As background to the Korean system it is important to understand that the funding for SME innovation is dominated by the loan guarantee system. The KOTEC organisation is an important player in the provision of loan guarantees to technology intensive SMEs. Other support mechanisms including policy loans and grants are also an important part PAGE 36

37 of public support for SME innovation. In the provision of grants for RD&I the Small and Medium Business Administration (SMBA), and the agencies KEIT and KIAT are the important players. The SMBA also oversee the provision of policy loans to SMEs, however these could not be investigated in detail as part of this study. The main new programme approach which could be recommended as an approach to be adopted in Europe is the technology appraisal system, KTRS, used by KOTEC to support loan guarantees. KTRS, (Kibo Technology Rating System) is a system for rating an enterprises business prospects based mostly on its technology, management capacity, market prospects and business feasibility but which places very little emphasis on it finances. The rating system is typically used for technology intensive SMEs and start-ups who have very little collateral with which to secure a normal bank loan. This approach is impressive as an objective, mainly quantitative, means of determining high potential enterprises which should be prioritised for access to finance. The evidence from Korea is that the approach has proved extremely successful in reducing the loan default ratio for credit provided to what would be considered a very high risk target group. There are many potential uses for such a rating system in the appraisal of participants accessing public or private funds at a national or European level. However since the success of such a system depends on establishing trust in the independence and objectivity of the appraisal the approach is perhaps most suitable for introduction at a European level. For example the use of this type of approach as part of the evaluation and prioritisation of applications to a European level loan guarantee scheme is worth consideration. From a national perspective, in many European countries, governments seem to prefer banks and companies to strike deals without such government involvement and care might have to be taken to ensure that a scheme such as KTRS is restricted in its use to the specific target group. For example in the Netherlands a roughly similar system of public guarantees on bank loans to small companies exist but it has some brakes built in that make companies and banks think again before applying. The company has to pay for the guarantee (2-4% on the main amount, similar to the Korean scheme) and only half the possible loss is guaranteed, so the bank runs a risk too. In this way, the guarantee scheme focuses just on innovative and risky loans. In general under the Korean system loan guarantees seem to cover a much greater share of the loan market. It is doubtful whether European countries would be willing to move into that direction However in practice the transfer of such a system so that it is successful in a European context is not a trivial matter and would require careful expert study particularly with respect to the technical issues discussed in the report, such as the validity of the criteria and weightings in a European context, and the use of accumulated data for risk prediction. In addition, considering that KTRS is patented by KOTEC the approach to IP would also require resolution. In any case transfer of a KTRS based system to Europe would most likely require close collaboration with KOTEC. A more detailed expert study is required to determined how best to implement such a system in Europe. Such a study should include the following; Detailed assessment by experts of the validity of KTRS criteria, weightings, risk analysis etc. in a European context. PAGE 37

38 Scoping of the possibilities of the implementation of a KTRS like system in Europe in terms of IP and collaboration with KOTEC. Detailed comparison by experts of the KTRS approach with others such as the TechRate system used by OSEO in France or the Imp 3 rove xiii approach to innovation management. It is worth noting however that the KTRS system has the advantage of having a significant history of successful usage in Korea which would potentially significantly reduce any testing/validation phase required to establish the necessary confidence and trust in any new approach. Implementation options in a European context which make use of existing resources/information so that the system could be operated in a manner not requiring significant new investment. Simulation, Trial and testing of the approach perhaps by comparison with existing data or trialling in parallel with existing appraisal. Consideration of the best way to establish trust and confidence in such a system, especially if a Europe-wide system were to be used in national and commercial banks. This could require national agencies to employ a champion or relationship manager, but may vary depending on national contexts. In addition there are several of the other identified approaches described in the report which are recommended for consideration as good practice which agencies could implement to at an operation level in their programmes. The techniques used by KOTEC to provide feedback and improve the objectivity of its assessors is an approach that could be very usefully implemented for any programme where assessments are electronically stored and exist is sufficient quantities to allow meaningful statistical comparison to be made between assessors (e.g. Eurostars is an example of such a programme). Such a system serves two purposes, it allows an agency to monitor the performance of individual assessors and it allows anonymous, automatic feedback to assessor to improve the quality of their evaluations. It should be noted that KOTEC also indicated that this technique was the subject of a patent. The IT system used by KEIT is a very good example of a true paperless system for programme delivery which addresses all aspects of programme delivery. Although there are examples of such paperless systems in Europe, the Korean system is quite advanced in that it also integrates the payment and expenditure, the links with other system such as the banks, national company databases, etc. and allows applicants to track the progress of their proposal online. The payment system operated by KIET for the payment of grants to SMEs is also worthy of consideration as a simplified means of grant payment. This potentially simplifies the grant payment, claim and validation aspects for both the SME and the agency. In addition it makes it easy for the SME to access the funding through the use of credit card payment facilities. On the other hand it does require close cooperation with financial institutions in order to set up the system for operation. PAGE 38

39 The collection of data for impact analysis for up to 5 years after programme completion is a good practice which programmes at national or European level should strive to incorporate. The collection of the data is integrated into the IT system and there is an incentive for participants to return this data as successful past applicants can get preferential treatment in future applications. PAGE 39

40 Appendix A: Itinerary for IPF & EPISIS Joint Visit to South Korea (21 25 November 2011) Background & Objectives The INNO-Partnering Forum (IPF) is concerned with identifying and learning from best practice in SME innovation support programmes in Europe and around the world. The IPF have identified South Korea as a country which has a very strong SME innovation support system with examples of best practice from which Europe could learn. Several SME innovation support programmes in South Korea have been identified for deeper study based on the fact that they have previously been referenced as good practice, are considered very successful, have elements which are not commonly used in Europe, and fit with the IPF priority themes (demand led programmes, high growth programmes, service delivery). Visit Overview The itinerary for the visit is outlined in the table below. Day IPF Agenda EPISIS 19/11 Travel to Seoul 20/11 Arrive in Seoul 21/11 AM: Team Meeting to prepare PM: Briefing with EU delegation on Korean Innovation system Meeting with EU Chamber of Commerce 22/11 AM: Possible meeting KIAT (TBD) AM: Team meeting to prepare 14:00: Meeting with KEIT (Korean Evaluation Institute for Industrial Technology) Contact: Jong Sung Park, jsung2@keit.re.kr Agenda: 1) KEIT s role in support of SME innovation and in particular the SME Innovation 14:00 Meeting with MKE - the Korean Government, Ministry of Knowledge Economy (MKE), Service Industries Division - Host: Lee, Sanghoon, Director, Service Industries Division - /eng/ Agenda: PAGE 40

41 Centre 2) Korean SME support schemes a) The New technology Purchasing Assurance Programme, b) the SME Technology Innovation Programme. 3) KEIT s use of comprehensive on-line management systems and credit card payment systems. 1. Presentations by EPISIS partners and The Commission on their support measures for service innovation 2. The South-Korean government s policy in support of services and service innovation Possible dinner with KEIT in evening (TBD) 23/11 Travel to Dajeon, (by high speed train) Dajeon is approximately 1 hour by high speed train from Seoul Meeting with Small & Medium Business Administration (TBC) Travel to Busan (by high speed train) Busan is approximately 2 hours by high speed train from Dajeon. Wednesday on 23rd of November 2011, 14:00 - Science and Technology Policy Institute (STEPI), Service Innovation Research Team : - Host: Jang, Pyoung Yol, Director, Service Innovation Research Team - Agenda: 1. STEPI s activities in the field of services and service innovation 24/11 Meeting with KOTEC (Korean Technology Finance Corporation) Contact: Hee Chang (Leo) Park, Senior Manager/MBA(Duke-Fuqua) Technology Valuation Modeling Team, Technology Appraisal Department Thursday on 24 th of November 2011, at 13:30-18:00 - The 2nd International Conference for the knowledge Intensive Service Industry - Host: MKE, Organizer: NIPA PAGE 41

42 Korea Technology Finance Corporation(KOTEC) Tel: Cell: Discussions with KOTEC staff on their support schemes and their technology appraisal system. Detailed agenda to be defined. Possible dinner with KOTEC (TBD) 25/11 Meeting with KOTEC and representatives from other Korean agencies. Join in KOTEC in forum on better ways to serve high-tech SMEs Detailed Agenda to be defined 25th of November 2011, visit time announced later - National IT Industry Promotion Agency (NIPA) - do?table_num=46 Agenda: - NIPA s activities in the field of services and service innovation 26/11 Travel to Singapore Travel back to Europe PAGE 42

43 Visiting Team Team Member Ari Gronroos, Executive Director Funding, Tekes (Finland) Aneta Wilmanska, Deputy Chief Executive Officer, Polish Agency for Enterprise Development, Poland Franc Gider, Director General, Public Agency for Technology of the Republic of Slovenia (TIA ) & Representative of the Slovenian Ministry of Higher Education, Science & Technology (Slovenia) Ann-Mari Fineman, Head of Department, IT-applications and Services, Vinnova (Sweden) IPF IPF IPF IPF Kate Yarrington, International Projects Manager, Technology Strategy Board (United Kingdom) Terence O Donnell, Senior Project Manager, International Technology Programmes, Enterprise Ireland (Ireland) IPF EPISIS Steering group: Allan Mayo, Head of Services Policy Unit, Department of Business, Innovation and Skills (the UK) Hanne Forsch, Head of Section, DASTI's Innovation Policy Center (Denmark) Irene Martinsson, Senior Programme Manager, Vinnova (Sweden) EPISIS EPISIS EPISIS Tiina Tanninen-Ahonen, Director of service Innovation Competence Area, Tekes, Finland (+ Chair of EPISIS Steering group) Anna-Maija Sunnanmark, Senior Adviser, Services and wellbeing Industries Tekes (Finland) (+ Coordinator of EPISIS project) Subcontractor for EPISIS global follow-up: Dr. Jari Kuusisto, Managing Director, European Touch Ltd. Lisbeth Balh Poulsen, Policy officer, Directorate-General for Enterprise and industry, EU Commission EPISIS EPISIS subcontr actor EC PAGE 43

44 Appendix B: SME Technology Innovation Development Program The INNO-Partnering Forum for better SME innovation support services (IPF) SME Innovation Support Measure Overview Country Korea Name of Measure SME Technology Innovation Development Program Funding Agency KEIT / Small and Medium Business Administration (SMBA) Manager Responsible (if available) General Information Overview of the measure (General overview of the measure) In 1997, the government created the SME Technology Innovation Development program with a budget of 30 billion won (approx 20 million)in an effort to assist SMEs suffering from technology development. This program was designed to foster SME technology innovation by partly providing fund to SMEs capable of their own product development so that they can use it for new product development. The government receives back 30% of its contribution as technology fees in installments for five years when the development task is successful. Overall, the program creates a virtuous circle so that the government can use the repayment fees for investing in SME technological development or for establishing infrastructure. Rationale and objectives (Why was the measure created and what are its goals?) Korean SME policy during the 1970s to 1980s was geared toward protecting SMEs in a vulnerable position from market structure driven by large companies. Starting in the late 1990s, the trend of world economy has been shifted from the comparative advantage over production factor costs structure to the innovation-led economic PAGE 44

45 structure using knowledge and information. To meet the ever-changing environment, the needs for technology and knowledge-led industrial development and SME technology innovation have become stronger than ever. Given SMEs were suffering from shortages of capital and skillful labors, it became a top priority for the government to promote SME technological innovation and to sharpen SME competitive edge. Thus, the government launched the SME Technology Innovation Program, as one of the government-initiated programs, to foster technological innovation of SMEs. Policy Context (What policy priority is addressed by the measure? Are there other related policies or measures which are complementary (or conflicting) at the same policy level? ) The main policy priority addressed is the promotion of technological innovation in SMEs Complementary programs include certification schemes such as; Venture business Inno-biz Description of the measure Target Group (Who are the targeted beneficiaries?, e.g. All companies, SMEs, researchers, entrepreneurs, etc.) Financing target is limited to SMEs capable of their own technology development but having inferior condition compared to large companies. In other words, small and medium-sized manufacturers holding factory registration certificates are entitled to apply for the government funded projects. Possible candidates are as follows: 1) SMEs equipped with their affiliated research institutes according to the Technology Development Promotion Act; 2) SMEs who prepare to move into venture and technology incubation centers; 3) micro enterprises having less than 50 employees with less than 500 squared meters of its factory area according to the Act on Special Measures for Support of Small Enterprises and Small Commercial and Industrial Businessmen. PAGE 45

46 Supported Activities (What are the supported activities e.g. Research, commercialisation, training, mentoring, advice, etc and what assistance is offered?.) The characteristics of the program lie in using new technologies and develop new products or new product models so that they can bring positive economic impacts. Applicants can apply for the program in order to enhance overall technology competitiveness as well as patent technology development. Note this programme is subdivided into several sub-programmes: Global investment challenge support, future leadership challenge support, and entrepreneurship and practical issues support where the supported activities are somewhat different as follows; Import substitution and export growth for the global investment challenge 'support Supporting key national issues such as green growth 'for the future leadership challenge' support Small business start-ups and technology innovation base for the expansion of 'entrepreneurship, practical issues' support Funding Instruments (How is the measure funded? E.g. grants, loans, equity, etc, What level of matched funding is required from applicant?.) For the SME Technology Innovation Development program, fund is provided within 75% of total technology development costs. SMEs whose projects are evaluated as successful by a specialized institute should repay 30% of the government contribution in five years in instalments one year after completion. There is fee-reduction for SMEs when they pay back technology fees in early times. What is the annual budget for the measure? What is the maximum budget per project? 100 million won ( approx. 66,000) for one year projects 300 million won (approx. 198,000) for maximum two year projects. PAGE 46

47 Implementation of the Measure Implementation Structure (What is the process for submitting proposals? Is there phased access to the programme? ) The SBMA established a basic plan to support R&D project and created the SME Technology Innovation Development program in It set up strategic tasks to assist high tech areas which can create a new growth engine for SME In 2001, designated a specialized institute for the program oversight in 2002, and a credit card system for SME technology development was introduced in 2003 in order to increase transparency of technology development fund. 100 million won ( approx. 66,000) for one year project is offered for general tasks, in which SMEs freely apply for a project. 300 million won (approx. 198,000) at maximum for two years is also offered for strategic tasks, of which areas are specially selected after the government conducts studies on technology demand for SMEs. In 2004, a comprehensive management system for the program was established ( to facilitate computerization and real-time performance analysis, and it conducted comprehensive performance analysis for SMEs who had applied SME Technology Innovation Development Program from 1997 throughout Selection Process (How are the beneficiaries/participants selected?, What assessment criteria are used?) In 2006, qualification for the application is limited to SMEs with their affiliated research institutes, venture businesses and Inno-Biz. Each regional office of SMBA accepts project proposals, conducts on-site visits to applicants and examines research work force, equipment and technology development. When visiting the site, a SMBA official in the local areas is supposed to be accompanied by an expert to ensure expertise in on-site visit. As for selecting tasks, regional offices of SMBA establish an evaluation committee comprising more than 5 experts from industries, academia and research institute and conduct evaluation of technology and marketability of selected tasks. In case of strategy tasks, an institute specialized in evaluation undertakes the job regardless of region. In addition, the 7,000 expert pool from industries, academia and research institute conducts evaluation procedure. In particular, experts on accounting must be included into the committee for evaluation of marketability. PAGE 47

48 Results & Impact Success of the Measure ( Is the measure considered successful?, What is the evidence for this?, Have there been any evaluations? What performance indicators are used to measure the results?) The SME Technology Innovation program has seen outstanding performance. The success rate of the program was 92.3% in 2002 and 93.7% in 2003, respectively. As of 2004, 47.5% of 2002 project was on the market for sale and 77.9% of it was in the process of marketing and production. Only 10.3% out of the 2002 project failed to be commercialized. Given that 38.3% of 2003 project, which was due to be finalized in one year, was introduced in the market for sale, it is highly marketable. As for 2002 project, it ended up obtaining 570 million won per task in sales with an annual averaged 110,000 dollars of export (as of 2004), and it reached 860 billion won in sales, 9 times high compared with the 2002 budget (99.3 billion won). Moreover, among the governmentoffered budgets for 3,503 tasks from 1997 to 2001, government contributions for 1,981 tasks were repaid. Overall, the program is highly efficient SME assistant policy with a repayment rate of 56.5%. Technology independence of SMEs participating in the 2002 project (as of 2004) was improved to 92% from 61%, while their technological level in comparison with advanced economies was upgraded to 90% from 55% with technology gap being narrowed to 1.6 years from 5.6 years. Dramatic improvement was made during the process of project implementation, and such positive effects came even after the government-initiated project was completed. As of late 2005, SMBA had provided fund worth billion won for total 11,425 SMEs after the SME technology innovation development program was firstly initiated in It also offers R&D budget worth billion won for 2006 budget. What are considered the strong points of the measure? Starting from 2003, the government has introduced a technology development credit card system, in which the government contribution is being paid by the credit card issued by the government. In 2004, a comprehensive management system for the program was established to facilitate computerization and performance analysis ( This system enables a paperless work environment: all application procedures, including application proposal, evaluation and ex-post monitoring, are being managed electronically. It clearly reflects the development of Korea s IT infrastructure and informatization. In general, the system is very useful in a way that applicants are able to check the status of their application procedure online at any time. In addition, concerning about moral hazard, the comprehensive management system for SME technology development allows SMEs can check to see whether a task they undertake is overlapped by other government assistant programs. SMBA continued to conduct comprehensive and integrated evaluation of all participating SMEs, studying their work performance before and after they join the project. As a result, SMBA successfully undertakes reasonable performance management initiative by reflecting the difficulties and improvements of SME project participation in the SME Technology Innovation Development program down the road. PAGE 48

49 Appendix C: New Technology Purchasing Assurance Scheme The INNO-Partnering Forum for better SME innovation support services (IPF) SME Innovation Support Measure Overview Country Korea Name of Measure New Technology Purchasing Assurance Scheme or Conditional Purchase New Product Development Funding Agency KEIT / Small and Medium Business Administration (SMBA), - Manager Responsible (if available) General Information Overview of the measure (General overview of the measure) (Note the following information has been pieced together from several sources including translations from Korean where the meaning is not always very clear. The information may therefore not be 100% correct, but is hopefully sufficient to obtain a picture of the scheme.) The concept of the scheme is that it brings together purchasers of technology or new products (such as public organisations, state companies or large private companies), and SME suppliers of such technology and the technology development funding agencies (such as the SMBA) and SMEs. The basic idea is that the government, through the SMBA, agency will help fund the technology or product development of an SME where the outcome of that development has been guaranteed to be purchased by an organisation for a period of time. To quote from Lee 2009, In an effort to further commercialize new technologies, government agencies, public institutions including Defense Ministry, KEPCO (Korea Electric Power Corp.), KOGAS (Korea Gas Corporation), and Korea Railroad Corporation and private business, commission SMEs to develop a new technology with the assurance that they will purchase the technological products. Under this program, the SMBA finances the technological development of SMEs, while public institutions purchase the products for a PAGE 49

50 certain period of time. The scheme is sometimes referred to in English as either the new technology purchasing assurance scheme or the conditional purchase new product development. In most cases the initial step in the scheme is that the purchasing organisation specifies its requirements for a new technology or product. (It is unclear if the guarantee to purchase the product which meets the specification is implicit in the proposal). These specifications or proposals are submitted to the SMBA, who advertise them and invite SMEs to apply to provide a solution. The SMBA evaluate the SME applications and will fund the technology development costs of the SME up to a maximum of 75%, with the SME expected to fund the remaining 25%. In the case where the purchaser is a large (private?) company then the SMBA will only cover up to 55% of the costs, with 20% being covered by the purchasing company and the remaining 25% by the SME. Success of scheme is partly driven by the fact that Public organisations are mandated to use 5% (2005) to 10% (2010) of their budgets to purchase new technology products. The procuring organisations, i.e. purchasing organisations can be either public organisations (e.g. National Police agency, defence department, local government, Korea Coal Corporation, Korea gas Corporation, Seoul Metro, etc.) or large private firms. Sources of Information The English language website of the the Small and Medium Business Administration (SMBA) is as follows; The Korean language website of the SMBA. The Korean language website describing the measure is as follows; mc=smba_policy_30&lclasid=c00000&brd_id=12ad There is a presentation given by Dr. Woosung Lee (STEPI) on Strategic Procurement Policies for Innovation at an OECD Workshop on Demand Led Innovation in Sep The Korean Steel works company website gives some details on their participation in the scheme as a private company which procures solutions from SMEs. Rationale and objectives (Why was the measure created and what are its goals?) PAGE 50

51 Policy Context (What policy priority is addressed by the measure? Are there other related policies or measures which are complementary (or conflicting) at the same policy level? ) One of the main complimentary policies are the mandated targets for procurement of new products. In 2005 targets for procurement were introduced by legislation; 5% target for the procurement of new technological product rising to 10% in There is a requirement to purchase 20% of New Excellent Products (NEP is a product certification) There are several complimentary policies which seem to have been introduced which aid the takeup of the scheme. An example of these are as follows; Performance Insurance for SMEs products was introduced in order to mitigate against the risk aversion behaviour of public procurers. Performance certification for SMEs products was introduced in order to mitigate the perceived uncertainty and unreliability of new technology products from SMEs. Performance certifications include NET New Excellent Technology, and NEP New Excellent Product. NEP (New Excellent Product) is a program that promotes new products so that it can be successfully commercialized through the use of state-of-the-art technologies uniquely developed for the first time in Korea or innovative technologies improved from existing technologies. NEP is run by KATS Korean Agency for Technology and Standards. A Committee for procurement promotion of SMEs technological products was established. Description of the measure Target Group (Who are the targeted beneficiaries?, e.g. All companies, SMEs, researchers, entrepreneurs, etc.) Small businesses Small manufacturers with registered manufacturing facility R&D companies with businesses (this is the direct translation but it maybe means R&D institutes with businesses?) Business incubator tenants Software development companies PAGE 51

52 Supported Activities (What are the supported activities e.g. Research, commercialisation, training, mentoring, advice, etc and what assistance is offered?.) Funding Instruments (How is the measure funded? E.g. grants, loans, equity, etc, What level of matched funding is required from applicant?.) The public sector supports up to 75% of the costs of the developments up to the maxima indicated below. The other 25% of costs are supported by the SME doing the development. In the case where the procuring entity is a large private company the public sector supports up to 55% of the development costs, with 20% coming from the procuring company and 25% from the SME doing the development. The provision of the funding to the SME is possibly through a loan although this is unclear, however it is mentioned that when a technology is successfully developed the government will take a 20% overhead. What is the annual budget for the measure? 60 billion won in 2010 (approx 40 million ) What is the maximum budget per project? 1 year up to 0.25 billion won (approximately 165,000 ) 2 years up to 0.5 billion won (approximately 330,000 ) 3 years up to 0.75 billion won (approximately 495,000 ) PAGE 52

53 Implementation of the Measure Implementation Structure (What is the process for submitting proposals? Is there phased access to the programme? ) The Application process is on-line at Announcements of procurement challenges/requirements are online at The programme seems to distinguish between different categories of projects as follows; leading projects, Technology/solution specified as being required by some procuring organisation the requirement originates from a demand survey which is conducted. Research project output needs to be a tested and proven technology Max development period of 2 years Max 75% funding provided for SMEs, 55% if procurer is a larger company, If procurer is a large company then they pay 20% of costs? not entirely clear on this SMEs covers 25% investment linkage projects, Technology/solution specified as being required by some procuring organisation the requirement originates from a demand survey which is conducted. Involves large scale technology development, Requires Private investment from organisations such as VCs, Industrial bank, Korea Venture Investment Fund, etc. Max development period 3 years practical projects The topic does not have to originate from a demand survey 1 year project The general process for how the programme is run seems to be as follows; Purchasing organisation proposes a problem which remains a daunting challenge (Problem collected through a demand survey?) SMBA advertises the problem and receives applications There is an on-site visit to company by SMBA? Project Evaluation by professional bodies Final screening and confirmation of funding by SMBA Negotiate Agreement/Financing between the procuring body and the SME. PAGE 53

54 Agreement/Financing passed by professional bodies Progress and monitoring by SMBA There is also further information available on how the scheme works from the perspective of a procurer on the webstie of the Korean Steel works company (POSCO). POSCO participate in the scheme as a procuring company. The following information is taken directly from the POSO website It is designed to promote technology development and stable management base of SMEs by guaranteeing the purchase of newly developed product or the localized products that can replace the imported ones. POSCO signed agreement with Small and Medium Business Administration in November 2005 and has been conducting 13 projects in Through this program, SMEs can secure the stable purchaser and POSCO can reduce the cost and improve productivity. We will continue to explore the new project to strengthen the strategic partnerships and create more opportunities for more SMEs to use the program o When SME develops a product needed by a large enterprise, the Small and Medium Business Administration (SMBA) supports development costs while large enterprise guarantees purchase for a certain period of time Qualifying Projects: Localization/new technology, new product development goods (Development period: Within 1~2 years) Support Details o - Development cost support: Up to 500 million KRW within 55% of total development cost - 3-year long-term contract rights granted, additional points offered in Supplier Relationship Management (SRM) evaluation Applications Accepted: Once a month Qualifications: SME with factory registration certificate Process Government and large enterprises form a joint R&D fund to support new product development under conditional purchase, allowing the large enterprise to promote quality improvement and SMEs to secure R&D fund benefits and stable outlets Fund Amount: 10 billion KRW (POSCO 3.33 billion KRW, Government 6.67 billion PAGE 54

55 KRW) Qualifying Projects: Total purchase amount more than 2 billion KRW of localization and new technology, new product development goods Support Details: Up to 1 billion KRW within 75% of total development cost (Government 50%, POSCO 25% all cash support) 3-year long-term contract and additional points in Supplier Relationship Management (SRM) evaluation Applications Accepted: Year-round Program Comparison Category Qualifying Projects SMBA Selection Private-Government Joint R&D Fund Same Large enterprise recommends and selects SME Product Development under Conditional Purchase Government receives applications and selects SME Support Details Support Limit (Per Project) Within 75% of total project cost, up to 1 billion KRW (Government 50%, Large enterprise 25%) Within 75% of total project cost, up to 500 million KRW (Government 55%, Large enterprise 20%) Financing Method Cash financing Cash or financing in kind Development Period Within 3 years Within 2 years POSCO is running joint research with SMEs to respond to the government policy to foster technology-intensive SMEs and develop necessary technologies with SMEs that have production tech capacity and promote actual application of developed technologies. This joint research system was adopted as one of technological supports for SMEs, and through this system, the win-win cooperative relationship is maintained; SMEs are entitled to supply developed products to POSCO and POSCO can achieve cost reduction and quality improvement. Since 1999, the joint research has covered various areas such as improvement and localization of resources, raw materials, measuring instrument, and technology for product process and steel utilization. It has undertaken 74 projects with 99 companies and provided KRW 12.9 billion. In 2007, the company will strengthen the coexistence cooperation ties with SMEs by actively exploring new joint research themes. PAGE 55

56 Selection Process (How are the beneficiaries/participants selected?, What assessment criteria are used?) Results & Impact Success of the Measure ( Is the measure considered successful?, What is the evidence for this?, Have there been any evaluations? What performance indicators are used to measure the results?) The annual budget and number of firms supported under the New Technology Purchase Assurance Program ( 1 billion won approximately equal to 0.66 million Euro) Year Support to SMEs Procuring Organisations Subsidy (billion KRW) # of Firms Supported TOTAL Public organisations Large Firms What are considered the strong points of the measure? Hybrid model of Push and Pull innovation policy o Started from R&D program and advanced to including procurement demand policy Public-Private Partnership o government provides R&D grants and public/private sectors provides procurement Mitigating risk aversion: Complementary Policies o Performance Insurance and Performance Certification Limitations: only applies to Manufacturing not services PAGE 56

57 Appendix D: Korean Technology Finance Corporation The INNO-Partnering Forum for better SME innovation support services (IPF) SME Innovation Support Measure Overview Country Korea Name of Measure Technology Appraisal Centres which are operated as part of Korean Technology Financing Corporation Funding Agency Korean Technology Financing Corporation (KOTEC) or previously know as KIBO Technology Fund. Manager Responsible (if available) General Information Overview of the measure (Short summary description of the measure) KOTEC is a non profit, guarantee institution, that provides comprehensive services to competitive SMEs and venture enterprises. KOTEC s main activities are outlined in the diagram below and consist of providing technology guarantees, performing technology appraisals and providing technological and management support. In terms of technology guarantees, KOTEC provides guarantees to SMEs that possess prominent technology and business prospects but lack the security for financing. Since its foundation in 1989, KOTEC has provided a total of US$99.7 billion worth of such guarantees. More than 80% of the total guarantee amount has been provided to the companies who desired to develop or apply new technologies via the Technology Credit Guarantee System. In order to provide objective and fair evaluation on an intangible asset (i.e. the technology), KOTEC opened the Technology Appraisal Center (TAC). These TACs contribute to forming an advanced financial environment where SMEs who possess outstanding technology can easily obtain loans from financial institutions without collateral. In total, more than 74,000 cases of evaluation had been made, PAGE 57

58 and the Centers are evolving both in quantity and quality by continuously developing new evaluation models and acquiring advanced evaluation techniques. There are approximately 14 technology evaluation centres and one central technology appraisal institute, where TAC will have specialised teams in charge of various industries. KOTEC also provides a technological and managerial advice service to SMEs which provides business consultation and support for company restructuring and technology transfer. In additions, KOTEC runs a support system for technology start-ups in order to stimulate the establishment of start-ups with advanced technology, viewing them as an engine of future growth. They provide a onestop support service for accessing government project funds, to enable them to use technology development funds in a timely manner, without inconveniences such as overlapping examinations, usually associated with the fund. KOTEC also manages the claims and defaults associated with guarantees. The diagram below illustrates the main activities of KOTEC. Sources of information: KOTEC Website, PAGE 58

59 Rationale and objectives (Why was the measure created and what are its goals?) The credit guarantee system was first institutionalized in 1961 in Korea with the aim of alleviating the financial difficulties of SMEs. From then on, the credit guarantee system played a part in reducing the prevalent practice of collateral-based loans and activated a new loan practice in which the business prospect of companies becomes a major barometer. In the 1980s when different economic players wanted more freedom in their activities and technological innovation was widely recognized as the best alternative to secure the competitive advantage, a national consensus was reached that Korea needed to nurture technology-intensive companies. Under these circumstances, KOTEC was founded in 1989 by the Korean Government as a non-profit guarantee institution under the special enactment, "Financial Assistance to New Technology Businesses Act" which went through a full-scale revision and was newly titled "Korea Technology Finance Coperation Act."in Policy Context (What policy priority is addressed by the measure? Are there other related policies or measures which are complementary (or conflicting) at the same policy level? ) The mission of KOTEC is to contribute to the national economy by providing credit guarantees to facilitate financing for new technology-based enterprises while promoting the growth of technologically strong Small and Medium Enterprises (SMEs) and venture businesses. KOTEC operates under the KIBO Technology Fund Act of The operations of KOTEC are dependant on strong links with financial institutions which provide the loans. Other complimentary policies which are an integral part of the way KOTEC operates are; The Technology Appraisal Certification System The Technology Appraisal Guarantee System The Technology Appraisal Centres seem to provide the technology evaluation for a range of Korean policy measures related to the promotion of start-ups and SME development. For example the Korean Government has accredited the Technology Appraisal Centres as the technology evaluation institution for other policies such as the "Act on Special Measures for the Promotion of Venture Businesses", the "Invention Promotion Act", and the "Foreign Investment Promotion Act. PAGE 59

60 Description of the measure Target Group (Who are the targeted beneficiaries?, e.g. All companies, SMEs, researchers, entrepreneurs, etc.) Eligible Enterprises: - SMEs engaging in new technology business - New technology companies with 1,000 or fewer employees and total assets of 100 billion won or less ( 66.5 million ) - Industrial Research Cooperatives Eligible Financial Institutions: - Banks and non-banking financial institutions Supported Activities (What are the supported activities e.g. Research, commercialisation, training, mentoring, advice, etc and what assistance is offered?.) KOTEC seems to provide technology guarantees to SMEs to cover loans for a wide range of purposes, including general loans, payments, leases, tax, bills, etc (see ) The following table from the website gives some more detail on the various activities which KOTEC supports. Technology Guarantee Guarantees for monetary liabilities to financial institutions - Guarantees given to new technology businesses - Obligation to provide at least three-quarters of the total technology guarantees under the KOTEC Act Guarantees given to innovation-leading SMEs - SMEs with excellent technologies, the nation s top 10 next generation growth engine industries, as well as six promising industries for future growth (6T) and knowledge-based service businesses Technology Appraisal Guarantees - Guarantees to qualified businesses through Technology Appraisal Certification System Technology Appraisal Adoption and utilization of the Technology Appraisal Certification System - Future-centered value appraisal of businesses for loans, guarantees and investment Technology Value Appraisal - Appraise intellectual properties - Evaluate collateral value of technology - Assess monetary value for technology transfer Feasibility Assessment of Technology PAGE 60

61 - Certify venture enterprises - Select the beneficiaries of government project funds - Appraise technology for extending technology guarantees Comprehensive Technology Appraisal - Appraise corporate value for investment - Designate superior-technology ± companies - Support venture businesses for KOSDAQ-listing Technological and Managerial Advisory Service Business Consultation - Help SMEs rationalize management - Facilitate technology development - Clear managerial and technological obstacles Support for Company Restructuring and Technology Transfer - Provide financial & legal advice for restructuring - Formulate business strategies for technology transfer - Provide match-making service between sellers and buyers Management of Guarantee Defaults and Claims Investigation of Debtor's Properties Subrogation Payments Legal Procedure for Debt Collection Funding Instruments (How is funding provided? E.g. grants, loans, equity, etc, What level of matched funding is required from applicant?.) From the SME perspective the funding is a loan provided by a financial institution which is backed up by the credit guarantee from KOTEC. The SME also pays an annual guarantee fee or insurance premium to KOTEC. PAGE 61

62 What is the annual budget for the measure? KOTEC has capital funds which are used to guarantee the loans. The capital funds of KOTEC, as a non-profit organization, are mainly provided by the government and financial institutions. The following table gives an indication of budget from 2004 to Guarantees: value of guarantees given out to SMEs Contributions: - funds provided to KOTEC by the government and the financial institutions Capital: - operating capital of KOTEC ( 100 million won 66.5 million ) ( Unit:100 million won ) Guarantee (A) 135, , , , , ,448 Contributions 8,550 9,678 8,092 6,082 5,959 14,017 From the Government (6,190) (3,500) (6,000) (2,000) (1,575) (7,200) From the Financial Institutions (2,360) (6,178) (2,092) (4,082) (4,384) (6,817) Capital (B) 1,172 8,056 11,526 14,462 17,297 27,228 Guarantee Utilization Ratio(A/B) PAGE 62

63 What is the maximum budget per project? For the Technology Credit Guarantees, KOTEC's maximum guarantee ceiling per company is 3 billion Won ( 2.2 million). However, KOTEC can guarantee up to a maximum of 10 billion won in the following cases. 1. Up to 5 billion won ( 3.3 million) - Guarantees to Industrial Research Cooperatives - The fair value of technology evaluated by KOTEC - Guarantees for loans for purchasing materials or services - Guarantees for technology-intensive enterprises specially designated by KOTEC's president & chairman - Collateralized Guarantees for E-commerce 2. Up to 7 billion won ( 4.6 million) - Trade Loans & SMEs Export Loans from the Export-Import Bank of Korea - Opening of L/C accounts to import raw materials for goods to be exported - Collateralized Guarantees for E-commerce and Contract Performance Guarantee for the technology- intensive enterprises mentioned above. 3. Up to 10 billion won ( 6.6 million) - Facilities funds of SMEs (precondition : the termination of guarantee contract shortly after Banks taking the facilities as securities) The SME is expected to pay a guarantee fee/insurance premium to KOTEC. Guarantee fees are normally charged according to companies ratings, its total amount of guarantee used and its transaction period with KOTEC. The Guarantee Fee Per Annum therefore varies between 0.5% and 3.0% of the guarantee amount depending on these factors. PAGE 63

64 Implementation of the Measure Implementation Structure (What is the process for submitting proposals? Is there phased access to the programme? ) Technology Guarantees For SMEs, obtaining lending facilities from financial institutions, in particular commercial banks, constitute an essential part of their growth strategy. However, SMEs in Korea find it difficult to borrow from lending institutions. The reasons why SMEs, even those with high growth potential, have limited access to institutional finance are as follows: Lending to SMEs is considered to be risky. The uncertainty facing small industry and their vulnerability to market and economic changes make banks reluctant to deal with them; Banks and financial institutions are biased in favour of lending to large corporate borrowers; And, among other reasons, SMEs seeking loans are unable to provide securities or collateral for the loans. In an attempt to help SMEs overcome the above difficulties in financing, KOTEC launched its technology guarantee service. Various technology guarantee schemes were set up with the purpose of covering the losses incurred when borrowers default on loans. The purpose of such schemes is also to encourage financial institutions to lend to SMEs with viable projects and good prospects of success but which are unable to provide adequate collateral or which do not have a suitable record of financial transactions to prove that they are creditworthy. The general description of the usual process of technology guarantee scheme is as follows. A potential borrower who cannot meet a bank's lending criteria --which usually means the borrower cannot provide satisfactory collateral--is referred by banks to KOTEC. Staff in KOTEC s branches carry out an independent appraisal of the loan guarantee application to investigate the borrowers' creditworthiness, the use to which the loan is to be put, his prospective ability to service the debt, and above all, the superiority of the technology. In most cases, the banks rely on investigation and approval by KOTEC for their decision of the loan extension. If it is found that the case is suitable for a guarantee, the borrower returns to the bank with a letter of guarantee issued by KOTEC and take out the loan. Usually, the guarantee involves the payment of guarantee fee, whose amount depends on the size of the amount being guaranteed. The steps can be summarised as follows; 1. Application for Loan by the SME to the Financial Institution 2. SME referred to KOTEC for consultation and Application for technology Guarantee 3. KOTEC carries out a credit Investigation and evaluation of the SME 4. KOTEC approves the technology Guarantee 5. KOTEC issues a Letter of Guarantee to the Financial Institution 6. Financial Institution provides the loans to the SME Credit Investigation Credit investigation is one of the most important procedures to examine a company and approve the guarantee provision. KOTEC analyses the company with criteria such as credit ratings, business prospects, appropriateness of guarantee amount and others. KOTEC's credit investigations focus on future-oriented elements such as business prospects and benefit to public interests rather than on payment ability and collateral. Thus, KOTEC can provide various kinds of assistance to a company if it has bright business prospects and can contribute to the national economy, even if it currently has poor repayment ability or lacks collateral. To help its staff conduct a systematic and comprehensive credit investigation and to boost operational efficiency, KOTEC developed the Artificial Intelligence Credit Evaluation Model in 2000, a credit PAGE 64

65 investigation solution which employees a neural network, genetic algorithm and Analytic Hierarchy Process(AHP) techniques. The model carries out both financial evaluation (objective)and non-financial evaluation (subjective) respectively. The final ratings of the financial and non-financial evaluation are weighted-averaged according to the company"s size, industry and other variables and, finally, the credit scorings of companies are expressed in 100-point scale. KOTEC has 10-grade credit rating system. Technology Appraisal Centres Technology is thought to be the most important asset of a business concern which determines the future of the company. However, until recently, it has hardly been accepted as collateral in financial institutions, as it is hard to quantify the monetary value of such intangible assets and is not easily traded like commodities. Moreover, there were no reliable and specialized institutions in charge of appraising technology. In this situation, KOTEC initiated the technology appraisal service by launching the Technology Appraisal Center (TAC) in 1997 in order to introduce credit guarantee facilities which are provided based on the technological capabilities of business enterprises. In an attempt to expand its technology appraisal power, KOTEC also reorganized its infrastructure of the technology appraisal manpower. The Technology Appraisal Bureau was launched to carry out its mission independently in In connection with the effort to enhance the technology appraisal capability and respond to growing demand, 308 technology appraisal experts, including 49 PhDs, are currently working at its headquarters and 14 TACs, with 854 experts of various fields across the nation, commissioned as outside advisors. By doing so, KOTEC opened a new frontier of technology financing in the Korean financial markets. KOTEC's technology appraisal plays an important role for the public benefit by helping the government select right beneficiaries. It insures the efficient distribution of the limited financial resources, and thus enhance the quality and efficiency of government policies and financial system for supporting promising SMEs and venture enterprises. KOTEC introduced the Technology Appraisal Certification System in order for financial institutions to use it for their business concerning loans, investments, technology transactions or M&As. The certification contains evaluation of the technology using various approaches. The purpose of adopting the system is to reinvigorate technology financing to SMEs by providing financial institutions with rational information on business and technology rather than the financial situation. KOTEC also operate an on-line service where companies can carry out a self assessment, can apply for a technology evaluation and can access the results of the evaluation. In addition to the technology appraisal for the KOTEC guarantees (which accounts for approximately 40% of appraisals) the TACs also provide services for other reasons; Technology Value Appraisals : putting a value on a technology e.g. to set a price for tech. transfers, the value of a technology. Technology Appraisal Guarantees: TACs evaluate technologies and business prospects of applicant companies (including would-be start-ups) in relation to special funds established by government agencies and local governments, such as the SME and Venture Start-up Fund. Upon evaluation, TACs provide one-stop credit guarantee services to secure funding from various sources for the operations, facilities and technology development of venture start-ups. Evaluation on Behalf of Government Agencies: TACs assess technology value and business prospects under agreement with various government agencies and local government offices to help them select the beneficiaries of loans, investments or other assistance programs. Certification of Venture Enterprises: With KOTEC's designation as an official technology evaluation institution under the "Act on Special Measures for the Promotion of Venture Businesses," TACs also provide an objective evaluation of the technology and commercialization capability of venture firms applying for various kinds of assistance. PAGE 65

66 Evaluation for Angel Investment: In order to help promising start-ups attract equity investment and to offer new opportunities for individual investors seeking high-yield investments, TACs conduct evaluations of technologies and business prospects of start-up companies. Evaluation for KOSDAQ Listing: TACs facilitate the KOSDAQ listing of venture enterprises, which lack certain prerequisites and cannot otherwise meet listing criteria in such areas as business track record, sales or financial status, instead offering an alternative measure of their health by providing evaluations of their technology. Brokerage of Technology Transfers: TACs act as an intermediary in technology transfers between companies, institutions and individuals by introducing new technologies into the technology market in order to promote commercialization of technology. Technologies eligible for brokerage include patent rights, new design rights for practical use, technologies owned by research institutes, private companies, etc., and technologies that have been evaluated by the TAC. Selection Process (How are the beneficiaries/participants selected?, What assessment criteria are used?) Procedure for technology Guarantee PAGE 66

67 Procedure for Technology Appraisal PAGE 67

68 The Technology Rating Grades Technology Rating Grades(TRGs) are KTRS's appraisal results on the technological ability, marketability, business prospects and other business environments of a company with a technology or a technology itself. TRGs are used for technology financing like investments/loans, guarantees and technology transfers, and the feasibility appraisals for technology projects. The Technology Rating Grade is obtained through an integrated appraisal process by a matrix-wise combination of the technology level of a technology business project, namely the possibility of business success, and the risk level, namely the probability of default. - Technology Level is based on the appraisal points yielded by the weighted scoring model, and it reflects the technological ability, business prospects and marketability of a company or a technology itself. - Risk Level is based on the appraisal points yielded by the LOGIT model, and it reflects the risks in technology feasibility of a company or a technology itself. The process for arriving at the TRG is outlined in the following diagram; In this model the environmental variables include variables outside the control of the company such as interest rates, Korean stock index, exchange rates, and variables within the control of the company such as IPO, venture authentification, etc. The technology appraisal indicators include things such as CEO s management ability, technological ability, marketability, business and profit prospects. In total there are 45 indicators which a company are scored against (see appendix for the list of indicators). As a result of the analysis PAGE 68

69 TRG AAA AA A BBB BB B CCC CC C D Definition Technological ability is extremely superior. Risks in technology feasibility are extremely low Technological ability is superior. Risks in technology feasibility are very low enough not to be affected by the changes of business environments in the future. Technological ability is superior. Companies in this level could be somewhat affected by the changes of business environments in the future, but risks in technology feasibility are very low. Technological ability is superior. Companies in this level enough not to be affected by the changes of business environments in the future, but risks in technology feasibility are low. Technological ability is good. Companies in this level may experience some possible changes in business prospects, but overall risks in technology feasibility are a little low. Technological ability is normal. Companies in this level may experience some possible changes in business prospects, but the overall validity of their business projects is acceptable. Technological ability is normal. Companies in this level are short of a few necessary elements for their business projects, but the overall validity of their business projects is acceptable. Technological ability is normal. Companies in this level are short of necessary elements for their business projects, but if those elements are supplemented the overall validity of their business projects is acceptable. Companies in this level are short of both technological ability and necessary elements for their business projects, and their probability of business success are insufficient. Technological ability is fragile. The validity of their business projects is very insufficient. PAGE 69

70 Results & Impact Success of the Measure ( Is the measure considered successful?, What is the evidence for this?, Have there been any evaluations? What performance indicators are used to measure the results?) Since its foundation in 1989, KOTEC has provided a total of US$99.7 billion worth of guarantees. The following table gives the results for technology appraisals in terms of the distribution of the technology rating grades achieved, where it can be seen that the majority of appraisal result in grades in the BBB to B range. The default rates in terms of the various technology appraisal grades are given in the following table, where it can be seen that the overall default rates are low at 1.33%. PAGE 70

71 What are considered the strong points of the measure? The purpose of the system is to reinvigorate technology financing to SMEs by providing financial institutions with rational information on business and technology rather than just the financial situation. In order to implement a more fair and transparent guarantee examination, KOTEC launched Cyber Branch Office and developed a self-diagnosis service with which an enterprise can be evaluated and diagnosed of its credit status using the credit assessment simulation model, which is based on financial data that the client inputs on its own. After filing documents with KOTEC, the whole procedure from application to its final results is fully disclosed to all the applicants through the Internet. KOTEC has opened an online service in order to better accommodate the clients' need. This aroundthe-clock and client-oriented service is expected to enhance the accessibility, transparency and fairness of the KOTEC's technology appraisal service. Logging on the on-line service, KOTEC's clients can access various technology-related information, check out in advance the viability of their respective technology projects via Cyber Self-Diagnosis Service, and also apply for the technology appraisal services and get result on the application via Internet regardless of the location of their businesses. PAGE 71

72 Appendix E: Technology Rating Indicators The are 45 different indicators used in the scoring model. These are outlined in the table below. Large Category Medium Category small Category (Appraisal Items) Reviewing Points Technological Experience (Knowledge) - CEO's Technological Experience - Technology Management Strategy - Depth of Technological knowledge - Depth of Technological Understanding CEO's technological ability Technology Management Ability Business Management Ability - Management of Technology Human Resources - Ability of managing business Crises - Managerial Volition & Business Skills Human Constitution & Teamwork in the Management - Scholastic Achievements & Careers - Participation in capital-raising. - Relationship & Teamwork with CEO Promotion Ability in Technology Development - R&D-devoted Department/Organization - Percentage of Superior R&D Human Resources R&D Ability Track Records in Technology Development & Authentication - Present Situation in R&D Investment - Possession of Core Technologies - Percentage of R&D Investment Technological Ability Degree of Technological Innovation - Technological Differences - Difficulty in copying - Position in Technological Life-cycle Superiority of Technology / Product Technological Completeness - Technological Completeness - Technological Self-reliance - Correspondence with Business Strategy Degree in Technological Extension - Inner/Outer Ripple Effect - Possibility in Technological Application or Extension Marketability Marketability of Technology / Competitive Situation - Market Structure - Competitive Situation/Intensity in the same industry PAGE 72

73 Product - Market Entrance Market Formation Product Competitiveness - Market Size - Market Growth - Restrictions/Encouragements (ex. Laws or Regulations) - Product Recognition - Market Share - Comparative Advantage over substitutes Productivity of Technology/Product Capacity of transforming technology into products & Manufacturing Capacity - Easiness in acquiring manufacturing facilities - Easiness in recruiting manufacturing human resources - Easiness in acquiring materials & parts Business and Profit Prospects Operational Capacity Business Capacity of Technology/Product Operational Capacity Marketing Capacity - Capital-raising - Capacity of Creating Value added - Reasonableness of Investment Volume - Validity of Sales Plan - Customer Diversification & Loyalty - Marketing Human Resources Profit Prospects Capacity of Creating Profit Profit Prospect - Sales Growth - Ordinary Income to Sales - Return on Investment - Rate of Return on Investment PAGE 73

74 Model used to calculate the Technology Level PAGE 74

75 Model used to calculate the risk level PAGE 75

76 Technology Rating Grades relationship to risk and technology level. i Becoming a S&T Power Nation through the 577 Initiative, Science and technology Basic Plan of the Lee Myung Bak Administration, Koreans Ministry of Education, Science and Technology ii ERAWATCH Country Reports 2010, The Republic of Korea, ERAWATCH Network, Youngjoo Ko iii Innovation and Technology Finance Support for SMEs in Korea, Dr. Moonkyo Chung, (KOTEC) presentation given at the Forum on Innovation Support for SMEs Korea-EU, Nov 25 th, Busan, South Korea. iv OECD reviews of Innovation Policy: Korea 2009, OECD Publishing, DOI / en free on-line preview available at v KEIT 2011 Annual Report vi Korea technology Finance Corporation, Annual Report 2010, available from vii Are Public SME financing institutions still viable in a maturing economy KIBO case: Shifting its position to Market Partner, KyungJin Hyung, Kibo Technology Fund, South Korea, presented at the International Council for Small Business (ICSB) World Conference 2009, June 21 24, Seoul, Korea PAGE 76