Financing of Innovation in Ukraine

Professor Igor Yegorov,

Department Head, Department of Innovation Policy,

Economics, and Organization of High Technologies,

Institute of Economy and Forecasting, National

Academy of Sciences of Ukraine

E-mail: igor_yegorov1@ukr.net

9th session of the Team of Specialists on Innovation and

Competitiveness Policies, UNECE,

Geneva, 3-4 November 2016

General tendencies in innovation activities in

industry - 1

• Decline of R&D expenditures from 3% to less than 0.7%

of GDP in 1990-2014, including decline from 0.85% in

2013 to 0.66% in 2014

• Worsening situation with bank’s loans provision (more

than 85% of innovation expenditures are made from own

resources of companies) in 2012-2015

• No specialized VCs in Ukraine

• Decline of high tech production due to confrontation with

Russia and wrong economic policy

• Outflow of leading specialists to other sectors and

emigration

General tendencies in innovation activities in

industry- 2

- Decline of share of innovation enterprises in recent 20

years from18% (in late 1990s) to 12-14% (in 2013)

- Shrinking of high-tech sectors, the most innovative

sector on a number of parameters is food industry

- Small number of innovative SMEs

- Two peaks of growth of innovation activities; 2007 (due

to expansion of ‘cheap’ banking loans) and 2011 (due to

solar energy program)

Key parameters of R&D financing in 1989-2013,

calculated by Dr. Igor Bulkin

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0

500

1000

1500

2000

2500

3000

3500

4000

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

R&D expenditures, constant prices of 1995 mln. UAH

(left axis)

R&D expenditures in GDP, % (right axis)

Legislation in the innovation sphere

• The Law of Ukraine "On innovation activity";

• The Law of Ukraine “On special regime of

innovation activity of technological parks”;

• The Law of Ukraine “On Scientific Parks”;

• The Law of Ukraine “On the priority directions

of innovation”;

• The Law of Ukraine “On state regulation of

activity in the sphere of technology transfer”.

7

Key problems of innovation and S&T in Ukraine-1

• The key contradiction is that the government and business do not utilize existing S&T potential (which is shrinking every year), and does not create adequate conditions for transformation of research system to adjust it to new realities.

• Ukrainian legal system in R&D area is not harmonized, as some lobbying groups with the help of the Law on Budget could stop implementation of the most important clauses of the laws, which are aimed at support of innovations.

Key problems of innovation and S&T in Ukraine-2

• State agencies that have to support R&D, have overlapping functions, which are not clearly defined. The procedures of evaluation and selection of R&D projects are not transparent and fair for potential participants, some of them could receive substantial privileges thanks to their direct influence on the results of the competition.

• Support of specialized instruments and elements of R&D and innovation infrastructure are not very effective

• Low level of co-operation with foreign countries in R&D sphere

Structure of financing of innovation in industry in Ukraine,

2014

85%

4%

2%

9%

Sources of financing of innovation, %

Internal sources State budget Foreign investors Other sources

Financing of innovation from the state and local

budgets 2000-2014, %of the total financing of

innovation in industrial sector

year 2000 2005 2010 2014

% 2.4 0.8 1.2 5.0

Financing of innovation from the foreign sources in

2000-2014, %of the total financing of innovation in

industrial sector

year 2000 2010 2013 2014

% 12.4 30.0 13.2 2.0

Results of CIS-type surveys in Ukraine

• 3 surveys were made in 2008-2014 (results of two of

them are published)

• The shares of innovative companies in the Ukrainian

economy were between 18% and 25% in these years,

which was worse that the less the ‘weak’ innovators in

the EU demonstrated in the same period

• However, these figures correlate with all major indexes

of competitiveness for national economies, which are

used for international comparisons.

• ‘Paradox’: These figures are usually higher than figures

for the industrial sector. Reason: high share of ICT

services in the economy

EXAMPLE of problems

:Nanotechnologies and nanomaterials

Potential: 2008-2014: 70-74 organizations were involved in

corresponding activities every year

Ukraine has a number of national programs in nanotechnologies, however, the share of foreign financing was 40.7% (more than 150 research grants from abroad)

However:

- Low general level of financing

- Low involvement of private sector in innovation in high-tech sectors

- Very few specialists are trained on these disciplines in Ukrainian universities

Scoreboard Indicators for Ukraine – 2011-2015

Indicator

2011 2012 2013 2014 2015

1.1.1.

New doctorate graduates (ISCED 6)

per 1000 population aged 25-34 1,0 1,0 1,0 1,0 1,0

1.1.2.

Percentage population aged 30-34

having completed tertiary education - - - 47,3 50,3

1.1.3.

Percentage youth aged 20-24 having

attained at least upper secondary

level education - - - 58,0 61,7

1.3.2.

Venture capital investment as

percentage of GDP - - - - 0,002

Scoreboard Indicators for Ukraine – 2011-2015

Indicator 2011 2012 2013 2014 2015

2.1.2.

Non-R&D innovation expenditures

as percentage of turnover 0,8 0,6 0,9 0,7 0,5

2.2.1.

SMEs innovating in-house as

percentage of SMEs - - - 19,6 18,7

2.2.2.

Innovative SMEs collaborating with

others as percentage of SMEs - - - 1,7 1,5

2.3.1.

PCT patents applications per billion

GDP (in Purchasing Power Standard

€) 9,3 7,9 7,2 7,6 8,9

2.3.3.

Community trademarks per billion

GDP (in Purchasing Power Standard

€) 0,1 0,1 0,1 0,1 0,1

Summary innovation index for EU, Ukraine and

possible competitors 2014.

Ukraine among the countries surveyed by the indicator "Firm

investments" 2014.

0.417

0.952

0.655 0.650 0.621

0.599

0.545 0.543 0.537 0.493 0.485 0.477

0.451 0.413 0.398 0.389

0.360 0.354 0.343 0.334 0.314 0.311 0.292 0.274 0.268 0.239 0.237 0.237 0.232 0.227 0.220

0.194

0.133 0.128 0.105 0.093

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Piс. 5. Ukraine among the countries surveyed by the indicator

«Economic effects» 2014.

0.595

0.781 0.775

0.728

0.669 0.666 0.657 0.618

0.600 0.591 0.580 0.567 0.542

0.520 0.516 0.507 0.501 0.501 0.490 0.464 0.462 0.454 0.451 0.434

0.397 0.378 0.372

0.349 0.337 0.316 0.305

0.264 0.240 0.225 0.216

0.193

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0.800

0.900

Conclusions I

• The transformation of national innovation system with special attention to cooperation between enterprises, state research institutes and universities is critically important for the country.

• Ukraine needs much more institutions that would have potential to finance innovation sector. These institutions have to accept high level of risks for high potential profits and the same time, they will not require collateral, nor charge interest payments.

• It would be also important to provide not only short-term, but also long-term and at least medium term loans and to contribute to boost innovation activities.

Conclusions II

• It is evident, that at the current stage of development, it would

be extremely difficult to obtain financing for innovative

enterprises from private sources in Ukraine. That is why the

state has to play more active role in stimulating creation and

development of such cooperation within the national

innovation system in Ukraine.

• There is a plethora of different types of incentives, that

government could use, including financial and fiscal

incentives, direct lending programmes and so on.

• The problem lies in choosing right combination of these

incentives, as government involvement easily creates market

distortions, cause problems of moral hazard and adverse

selection.

Conclusions III

• Bearing in mind rapid changes in technology and markets and the

increasing focus on exports, banks, private venture funds and state

organizations have to develop specific expertise in project

evaluation. Existing domestic technologies and know –how could be

commercialized.

• At the same time, technology transfer from the foreign countries

could help to solve not purely economic, but also environmental and

social problems, from which Ukraine is suffering.

• Special attention has to be paid to the development of cooperation

with the EU states. This cooperation brings important expertise in

the most advanced areas, and it will help to compensate above-

mentioned shortcomings in innovation sphere in Ukraine.

Thank you for your attention!