The National Innovation Fund - an instrument for promotion of innovative SMEs Bulgarian SME Promotion Agency 1
1. Introduction In August 2004 the Council of Ministers adopted the Innovation Strategy of the Republic of Bulgaria and the measures for its implementation. Thereby the government of the Republic of Bulgaria aims to set up the framework for further actions to restore the connections between the science and the business. The efforts of the Bulgarian government are targeted to create conditions for introduction of innovations that are result of industrial research. The processes will be assisted by public funds and through attraction of private capitals for funding of market-oriented scientific research. The participation of the state in the management of the innovation processes is aimed at the establishment of favourable conditions and the development of mechanisms to motivate the entrepreneurs to undertake higher risk and invest in market oriented products. The objectives of the Innovation Strategy are: Encouragement of industrial research and cooperation among the research organizations, universities and companies; Improvement the financing of innovations and setting up mechanisms for attraction of private investment; Promotion the innovative activities and the technology transfer; Stimulation the creation of clusters of innovative companies; Assistance for inovative start-ups and spin-offs and strnghtening the innovative potential of SMEs; Establishment of mechanisms for foreign investment in industrial research and technology development. The Innovation Policy Why a Innovation Policy? There is a second economic transition, first from central planning to market economy, now to knowledge economy Knowledge is rapidly becoming today s key production factor Innovation is a sustainable competitive advantage; low cost is not Science and technology play a major role in innovation Science and technology sector need upgrading and focus Innovation policy is on the agenda of the EU Objectives of the Innovation Policy Improve the competitive position of companies through innovation Increase the focus and upgrade the quality of the science and technology sector Strengthen the link science - education - economy - society Keep young/good scientists and engineers in Bulgaria 2
The message Stimulating innovation and upgrading the S&T sector requires a cluster of interrelated measures Create a favourable environment for quality science and technology The measures required are responsibility of several ministries, the S&T institutions and the private sector This is illustrated by the concept of the National Innovation System and the Innovation Process The National Innovation System market demand consumers, producers, intermediaries large companies SMEs technostarters companies intermediaries consultancy firms branch organisations regional development agencies innovation centres others research and education systems education and training higher education research institutes infrastructure banks, venture capital firms, information systems, telecommunication infrastructure, innovation centres, norms and standards The Innovation Process new need needs of society and needs of the market place idea generation development prototype production manufac turing marketing and sales market place new technology state of the art in technology and production 3
General issues Need for action is urgent! Need for national strategy and a realistic implementation plan Need for good co-ordination of efforts by the government to ensure coherence in policy Need for good relationships between R&D institutions and industry Need for proper legislation Need for a policy body for the formulation of innovation policy and an executive body for its implementation Need for funds Specific issues Need for upgrading the R&D sector Need for upgrading existing companies Need for high tech start-ups Need for project financing Innovation policy in 16 actions: 1. Upgrade the R&D sector Focus, concentrate and re-arrange the R&D sector Replace input financing by output financing Stimulate co-operation between R&D institutions and the business sector Stimulate co-operation between universities and the Academy of Sciences Improve the administrative capacity of the R&D sector Include in this process: universities (general, technical and agricultural), Academy of Sciences, National Centre for Agricultural Sciences and other institutions 2. Bulgarian National Science Fund The fund defines priorities and finances research The assignment of funds is on the basis of quality and competition by research institutions The funding includes PhD research as well as post-phd research 3. The National Innovation Fund (NIF) NIF co-finance R&D projects implemented by the industry The company (consortium) takes part in the financing Assignment is on the basis of competition (quality and utilisation) The Innovation Fund has no priority areas of its own, it assigns only on the basis of quality of the proposed projects 4
4. Additional professors and senior scientists Good scientists/technologists (young) leave because there is not yet a place for their appointment into a senior position Finance early appointment After a period of time, the institute should convert the appointment into a regular job To be effected through amendment of the Act on High Education 5. Public/private research in Centres of competence Centre of competence = public research centre that accepts R&D projects from industry This brings extra funds to the research centre The resources of the national research institutes will be better exploited Create a number of such centres 6. Advisory Boards Create Advisory Boards at universities and R&D institutes The Advisory Board advise on education as well as research priorities and programmes Members can be local governors, directors of companies and external scientists To be effected through amendment of the Act on High Education 7. Subsidise graduates in SMEs For an SME hiring a graduate can be a risky and expensive endeavour Yet, such employment is essential for several reasons: It brings knowledge to the SME It brings relationships with external sources of knowledge Subsidise SMEs (< 100 employees) some 50% of the salary of a young scientist/ engineer for a limited period of time 8. Technology Transfer Institutions Innovation requires two-way transfers between R&D and companies Create Transfer Institutions aimed at specific areas These Institutions: Advise companies on innovation Transfer know how Organise demonstrations, events Identify know how gaps 9. Association of Innovating Companies Businessmen are easier persuaded by each other than by experts or politicians Networking is inexpensive and it can be very effective Such a network makes innovative companies visible, they can advise the government on policy issues 5
10. Stimulating foreign investment in R&D Foreign investment in R&D facilities in Bulgaria and/or in high tech production will have many spin-offs and will generate good employment Create incentives to attract foreign R&D projects or R&D institutes Attracting foreign R&D should be a task of the BIA (Bulgarian Investment Agency) BIA should have know how about Bulgarian R&D capabilities and innovative firms 11. Development of a Technology Parks The Technology Park is a mixture of (possibly) University of Technology, Entrepreneur s advisory centre, incubator, R&D facilities of foreign and domestic companies, high tech production, innovation services Such a park should offer favourable incentives for industry 12. Entrepreneurial units at Universities of Technology The idea is to help students or staff members to create their own company Create awareness, offer workshops and practical help 13. Credit facility for product development Entrepreneurs receive credits for innovation projects at favourable interest rates The fund shares the risk of failure Successful projects refund the loan Thus, a revolving fund is created 14. Public Awareness The success of Innovation policy depends on political support Political support depends on public support and understanding Therefore, start a publicity campaign aimed at several target groups including the public at large Create a structure through which future results are communicated to opinion leaders and the general public 15. National Council for Innovation The Innovation strategy is multi-departmental, so co-ordination is essential The National Council for Innovation is a policy defining body Authority and visibility are of prime importance Highly positioned 16. National Executive Body for implementation the Innovation Strategy 6
Create an Executive Body to act as project bureau for the implementation of strategy measures The Executive Body supports the National Council for Innovation Create one fund to finance all actions rather than fragment the implementation - National Innovation Fund (NIF) The Executive Body is responsible for the fund Publish an annual report which is an input for future innovation policy The task of the Executive Body is non-political Observations on the Innovation Strategy General observations Exceptional reception by all parties of the importance of the topic (e.g. innovation) Agreement on the market orientation of the science/ technology sector Agreement on the concept that the companies have their own responsibility for their competitiveness and the support role of government Co-ordination between MoE and MoES not sufficient/often competitive Many reports, little action Specific observations 1. Universities and Academia (BAS) 2. Existing companies 3. Techno starters 4. Observations about international R&D activities 5. Agro sector 6. SME sector 7. High tech parks 1. Universities and academia Role of universities is threefold: Education Research Transfer of knowledge Hence: Incentives to be worked out for each of these roles Academia: good parts and bad parts Hence: Offer incentives for market orientation The road from research to application should be seen as a chain. Balance between elements is essential 2. Observations existing companies Little use of science/ technology results due to: low absorption capacity of companies 7
lack of alignment of research programmes with company needs Hence: increase absorption capacity of firms give incentives to science/technology sector Possible measures: Development of a fund for industrial R&D projects Financial incentives for hiring of scientists/engineers by companies 3. Observations techno starters and incubators Observations: Insufficient knowledge, vision and action concerning the role of techno starters and incubators by universities and academia The Model of the Institute for Micro-electronics seems promising and should be considered to be copied in other sectors Little Venture Capital, although does not seem to be a bottle neck Therefore: More Responsibility for starters and incubators within universities and academia Incubators with support from experienced business people Workshops for potential starters 4. Observations international R&D activities Observations: Little contract research from international companies No investments in R&D from international companies Low BG participation in EU research projects Red tape Therefore: Increase marketing efforts (international companies, EU, co-operation with other institutes) 5. Observations on agriculture Strong interest for a balanced approach including research and extension of services There are potential clusters Therefore: A pilot project including research, extension of services, food production and food processing should be considered in a specific area 6. Observations SMEs SMEs are the subject of many (EU) support projects SMEs has low absorption capacity for R&D and awareness in the need of R&D Hence: Develop awareness Design special approach to increase absorption capacity 8
7. High tech parks There is potential for high tech parks These include: academic research and education incubators and workshops for starters (international) industrial R&D and contract R&D transfer centres, venture capital, etc. Start with one to obtain experience Make it a formality (red tape) free area Among the measures laid down for the implementation of the Innovation Strategy is the establishment of a National Innovation Fund (action 3). It is the instrument for ensuring financial resources for applied scientific research, innovation and technological development. The management and the administration of the Fund are assigned to the Agency of the SMEs promotion. 2. Main characteristics of the Innovation Fund Objective of the Innovation Fund The main objective of the Innovation Fund is to increase the competitiveness of the Bulgarian economy by stimulating R&D in innovative market-oriented products in any sector in Bulgaria. The Business R&D investments are stimulated through subsidizing a percentage of the total R&D investments in certain projects of companies. 1.1 Working principles The set-up of the Innovation Fund will be flexible, as simple as possible, transparent and neutral. The procedures and selection of the projects will be objective and non-bureaucratic. The Innovation Fund wants to support as many companies as possible. 1.2 Target group The basics principle is that the Innovation Fund is open for all companies registered in Bulgaria who are investing in R&D projects (see paragraph 1.4 for project specifications). The lead applicant is a company (not a university). To stimulate applications by SMEs and to stimulate co-operation between business and science additional subsidies are awarded for these specific situations. SMEs that apply for subsidy can get an additional 10% subsidy on their own costs. Also co-operation between companies and science will be rewarded with an additional 10% subsidy for the whole consortium. Cooperation with international partners is allowed, for example within the EUREKA framework. 9
A company 1 can only receive a maximum subsidy of BGN 500,000 per year. No priority is given to certain sectors. Agriculture and forestry sectors are excluded. 1.3 Eligible projects The Innovation Fund subsidizes Research and Development projects and feasibility studies. R&D projects: A R&D project is focused on technological development of new products, processes or services or on substantial improvement of existing products, services or processes. For every proposal it is important that the technological innovation is new in comparison with Bulgarian standards. R&D projects can be either research or development. Research is gaining new technological and scientific knowledge with the purpose of using this knowledge in the first phases of development. In Development research is converted into plans, schedules or drafts. This can be first prototype development, although the first prototype may not be used for commercial exploitation. Example: in case of development projects in ICT, entrepreneurs are allowed to develop test versions, as long as they are not usable or sellable on the commercial market. Within a development project a product, process or service may not be made ready for commercial exploitation. The project duration can be maximum 3 years. Feasibility studies SMEs get the opportunity to first examine the feasibility of a R&D project. The goal of the study is to diminish uncertainties in the field of technological innovations, economic viability and cooperation before starting the R&D project. The result of a feasibility study is a report with conclusions about the feasibility of a R&D project. Technical and economic feasibility always need to be part of the study. In some case the search for a project partner could be part of the feasibility study. The project duration can be maximum 1 year. 1.4 Principles of Subsidies The basic principle is that 50% of the costs of Research projects, 25% of the costs of Development projects and 50% of the costs of feasibility studies are subsidized. The Bulgarian government wants to stimulate SMEs 2 and universities to participate in R&D projects. Therefore an additional subsidy percentage (10%) is available when a SME or university is participating in the consortium. In case of a SME, this top-up percentage only counts for the SME s costs. In case of cooperation with a university the whole consortium gets a top-up of 10%. 1 If a company is part of a group of companies, the group can only receive a maximum subsidy of BGN 500,000 per year. 2 SME is a company with maximum 250 employees, see appendix 2 for definition of Small and Medium sized companies. 10
Project type Research project Development project Feasibility study Costs to be subsidized Wage expenditure Addition for general costs Materials Machines Subcontracting costs Wage expenditure Subcontracting costs Percentage subsidized of project costs 50% 25% Tabel 1. Overview of subsidized costs and budget Additional subsidy Max 20%: - 10% for SMEs only - 10% for cooperation with university Maximum subsidy 69% of total costs BGN 500,000 Project duration Max 3 years (research) Max 2 years (development) 50% No BGN 50,000 Max 1 year The total budget for 2005 is BGN 5,000,000, of which a part will be used for the Evaluation Committee. Per tender a budget will be defined. In 2006 BGN 8,000,000 will be spent on new products and technologies and in 2007 the sum is forecasted to come to BGN 13,000,000. 1.5 Application For R&D projects a tender procedure is introduced to allocate the Innovation Fund budget. Two times per year companies can submit proposals for R&D projects. For feasibility studies companies can submit proposals all year round. Both are submitted to the Agency. Companies can contact the Agency when they have an idea, but are unsure whether this is eligible for a subsidy. By phone or email they can get advice on a project idea. Furthermore, people are encouraged to submit early versions of their proposal for screening, advice etc, so that advice for improvement (if necessary) or an advice not to submit can be given before the deadline. 1. Application for a subsidy by filling in the application forms, appendixes and a project plan (format is predefined). Applications can be submitted for R&D projects 2 times per year. 2. When a formal application has been made the Agency first determines if all administrative requirements are met. A short period of 5 working days is available for the applicant to change any mistakes. The company receives a confirmation of receipt of the project proposal. 3. Analysis by the Agency (see also paragraph 1.7). 11
4. Evaluation by Evaluation Committee (preparation and meeting) and if necessary interview with company (see also paragraph 1.7). 5. Rewarding or rejection of the application and administrative settlement. The exact amount of subsidy needs to be determined. The proposals that are accepted receive a letter, in which is stated how much funding they will receive, what the conditions are, and what their obligations are. Proposals that are ranked too low to receive funding receive a letter with the motivation of the Evaluation Committee for ranking them at a certain place. An advice how the project can be improved for the next tender can be added. The evaluation of the R&D projects takes maximum 3 months (+/-12 weeks). Within this period the applicants get a decisive answer. Activity Time planning of Agency 1. Application for subsidy Deadline of tender 2. Administrative check by Agency, confirmation of 1 week receipt and possibility to change mistakes 3. Analysis by the Agency 4 weeks 4. Evaluation by Evaluation Committee (preparation 3 weeks and meeting) and if necessary interview with company 5. Rewarding or rejection of the application and 4 weeks administrative settlement. Table 2 Timetable The application procedure for feasibility studies is as follows: Submission of application form and budget. For feasibility studies these can be submitted all year round. Administrative check. Evaluation of the application (see paragraph 1.7) by the Agency. Rewarding or rejection of application. The Agency takes maximum 2 months to deal with the feasibility studies, within this period the applicant gets a decisive answer. It is possible to apply for a subsidy for a feasibility study until 2 months before the end of the year or until the budget is exhausted. 1.5.1 Application form Several categories of information, both on company and on project level that the applicant should supply can be distinguished: Administrative aspects as address, contact person, etc. A standard application form will be used; Financial information regarding budget and financial situation of applicant. A standard budget format will be used; Project plan (description of activities), a format for a project plan is provided. Agreement of participating partners with the proposal and confirmation that the contact person may act on behalf of the consortium. 12
All the forms are included in the manual that applicants can download from Internet or can be sent to companies by the Agency upon request. 1.6 Selection criteria & Evaluation The proposals have to fulfill the following pre-requisites: Competent staff Availability of necessary equipment Funding for the costs (minus subsidies) Commitment of the organization Both the Agency and the Evaluation Committee should assess these elements. 1.6.1 Selection criteria The Evaluation Committee ranks the projects based scoring the projects on the following selection criteria: Innovativeness Economic perspective Both criteria are equally important. Guidelines on how to use the criteria will be developed. These guidelines should reflect the priorities for the Bulgaria economy, for example: Innovativeness: Level technological breakthrough (in comparison with Bulgarian standards, international standards etc) Originality of approach Complexity of the problem solved. Possibility to acquire a patent. Economic perspective: Does the project fit in the strategy of the company Return on investment Market potential Growth of employment Export potential Availability of future follow-up investments Spin-off potential Applicability of the technology in other products, sectors. 13
Annex Small enterprises are the enterprises which: have an average annual number of up to 50 employees; have an annual turnover not exceeding BGL 5 000 000 or a fixed tangible assets value not exceeding BGL 1 000 000 and are not dependent. Medium-sized enterprises are the enterprises which: have an average annual number of up to 250 employees; have an annual turnover not exceeding BGL 15 000 000 or a fixed tangible assets value not exceeding BGL 8 000 000 and are not dependent. A R&D project is focused on technological development of new products, processes or services or on substantial improvement of existing products, services or processes. Research is gaining new technological and scientific knowledge with the purpose of using this knowledge in the first phases of development. In Development research is converted into plans, schedules or drafts. This can be first prototype development, although the first prototype may not be used for commercial exploitation.. 14