“Cashing in” on innovations

Innovations have a major impact on a country’s competitiveness. They make the economy more efficient, improve living standards, and increase the country’s prestige on the international arena. National officials are planning to lavish these virtues on Ukraine by means of a new tax code that envisages privileges for innovative projects. Moreover, Ukraine’s State Agency for Investments and Development has announced a competition for innovative and investment projects to be financed by the Stabilization Fund.

But can governmental financial support really give an impulse to creativity if state budget resources are limited and used ineffectively?

This problem was discussed in Kyiv’s Teacher’s House during the hearings held by the Effective Ma-nagement Foundation and the British company Intelligence Squared.

According to the foundation’s director Natalia Izosimova, no innovation breakthrough is possible without government support in the conditions of an underdeveloped financial market. But if bureaucrats themselves begin to choose projects for implementation, there will be a danger of substantial funds being squandered. “Maybe, all the state has to do is lay down equal and encouraging rules of the game for business, and the latter will be able to launch innovative processes in this country on its own,” Izosimova suggests. In the meantime, she says, a World Economic Forum survey ranked Ukraine 63rd out of 139 countries in terms of innovation. Incidentally, we are ahead of such countries as Russia, Portugal, Hungary, Poland, and Latvia. According to the Effective Management director, this mirrors our country’s great innovative potential.

But this potential is still to be realized. For example, according to the Civic Board of Ukraine’s Technological Parks (which lost all economic incentives in 2005), the number of innovation sector employees in Ukraine has dropped by 3.3 times in the 18 years of independence, 642 academics have moved abroad, and the share of active innovative industrial businesses has shrunk by five times.

INVESTMENTS IN INNOVATIONS AS A GOVERNMENTAL DUTY

Those who defend a strong role of the state in the realization of this country’s innovative potential are certain that we need long-term investments in research and development.

“Profit and pure interest are the forces behind business and research. It is only at the state level that we can unite different societal interests into a single viable system and create national long-term strategic priorities. But state funding is a synonym for dependence on the state. Innovations should turn in the course of time into a necessity for every economic entity,” Volodymyr Semynozhenko, full member of the National Academy of Sciences of Ukraine and chair of the State Committee for Science, Innovations and Informatization, emphasized in his speech during the debate. “Innovations are crucial for Ukraine’s success, they are our duty. As US President John Kennedy used to say, the US spends a lot of funds on research not because it is rich: it is rich because it spends a lot of money on research. Ukraine must also understand this.”

The Microsoft Ukraine general manager Dmytro Shymkiv shares this opinion. “The state can and must invest in research and development by creating favorable conditions and laws, as well as by becoming a fully-fledged participant in domestic high-tech markets. This can be achieved by carrying out large-scale national projects in the sphere of technologies and innovations, thus stimulating the domestic market and creating jobs,” he said.

Shymkiv also considers it necessary to develop education and research, as well as to create mechanisms of intellectual property protection. “Given these preconditions, our country will be able to realize its enormous innovative potential and make the national economy more competitive,” he said.

Existing innovation projects have to rely on themselves to overcome endless obstacles, the Microsoft Ukraine general manager pointed out. “Take, for example, the development of Stalker, a well-known Ukrainian computer game,” Shymkiv says. “Pirated versions of this product account for 70 percent. The guys cannot even break even! So who is supposed to protect such start-ups? Only the state.”

Foreign experience also shows that various forms of financial incentives for innovations are successful. For example, the history of innovation centers shows that a considerable part of them were set up thanks to state financial support programs or state orders. The freshest example is the Russian research and technology complex now under construction in Skolkovo. This is the largest innovation development project in the post-Soviet space.

“They created exceptional conditions there: a mere 15 percent aggregate tax. But the main thing is the milieu,” says Sergei Nedoroslev, chairman of the board of directors of Kaskol, a conglomerate of Russian aerospace businesses. “They have attracted interesting people from all places, who constantly mingle and discuss things. They discuss future technologies. This is what a good environment can do. And as for misappropriations, this may happen, of course. But if a tap leaks somewhere, it does not mean we must cut off water in the entire building.”

INNOVATIONS ARE “RAW MATERIALS” FOR BUSINESS

Yet arguments against the state as a “nurse for innovations” are no less weighty. For example, in spite of their nature, innovative projects carry a lot of risk: it is extremely difficult to assess the likelihood of their success at an early stage. What also makes it difficult for the state to select the most promising projects is that the bureaucratic machine does not have proper investment-related skills, systems of motivation and controls.

For this reason, those who oppose governmental support of innovations are sure that, to realize the greater part of the Ukrainian innovative potential, it is enough to lift barriers to business, and the latter will do the rest on their own.

Besides, according to Anatolii Hirshfeld, honorary president of the UPEK joint-stock company, member of the 4th convocation of the Verkhovna Rada of Ukraine, Ukraine will simply be unable to sufficiently fund innovations, as only the most developed countries are capable of doing so.

“The main function of the state in an innovational process is to create legislative levers of encouragement and mechanisms for supporting and developing the market of innovations. In this case, being interested in its higher competitiveness, business will invest much more actively in innovations, which will actuate the mechanism of high-tech product development,” Hirshfeld says, offering his own version of innovative development.

Oleksii Skrypnyk, general manager of the Lviv-based Elex IT company, would not use budget money either. In his view, it will be much more effective if the state invests this money in education. The businessman-cum-academic is convinced that bureaucrats do not know how to choose innovation investment projects. He says that special managers are needed for a successful selection of projects, but Ukraine has an acute shortage of them.

Experts warn that the main risk is that the high degree of subjectivity in making a decision on funding a project results in the distortion of economic incentives: it becomes to be more important to sell the project to the state than to make a marketable product. “I once asked an official, who dealt with governmental funding of research, whether he would invest his own money in a project now being funded by the state,” Skrypnyk gives an example. “He stared at me and said: ‘Am I an idiot?’ In other words, he invested state money in a project to which he would have never contributed his own money.”

“I know the way the US Silicon Valley works,” Skrypnyk continues, “but I don’t understand the way innovations work in Ukraine. Nor do my American colleagues. One of them keeps saying: ‘Ukraine has as many possibilities as it has government idiots.’”

Here is Skrypnyk’s recipe: remove corruption from the innovation process, streamline research, gradually set up technological parks, and build a research laboratory. “Otherwise, there will be no result,” he says convincingly.

One who is taking a similar attitude is Oleksandr Kardakov, chairman of the supervisory board of Oktava Kapital, founder of Incom and Datagroup. He pointed out in his speech that investing public money in concrete innovation projects will not necessarily produce a positive result. “Innovations are considered a commodity,” the businessman explains. “Innovative ideas as such will not increase the GDP. Only by implementing them via industry and business can we produce a commodity that will cost some money. In other words, if you have no business, you won’t be able to cash in on innovations. As long as Ukraine has unsuccessful business periodically stifled by, among other things, ‘a promising Tax Code,’ we will need no innovations at all.”

The debate showed that the arguments of those who oppose direct government funding of innovation projects proved to be more convincing for the audience. Yet the number of those who favor this process is still larger. According to a poll conducted before the debate, 76 percent of the audience supported the idea of public funding of innovations, 13 percent were against it, and 11 percent hesitated. A different poll showed that 54 percent were for, 37 percent against, and nine percent did not know.