CHINA TORCH PROGRAM Policy System on Promoting SME

CHINA TORCH PROGRAM Policy System on Promoting SME Innovation & Entrepreneurship in China Dr. LIANG Gui , Director General Torch High Technology Industry Development Center Ministry of Science and Technology, China

Torch Center : Nature, History & Position CHINA TORCH PROGRAM • Nature – A public entity as a director subsidiary under MOST • History – 1988: Established to implement Torch Program (www. ctp. gov. cn ) – 1999: In-house Innofund Administration Center set up (www. innofund. gov. cn ) – 2006: Integration with China Technology Market Administration Center (www. sinotechmart. org ) • Current Position – The sole agency commissioned by MOST to improve the overall environment for innovation and high-tech industry development 2

Outlines • • CHINA TORCH PROGRAM An Overview on SMEs in China Public Measures to Promote Innovation & Entrepreneurship Challenges still Facing Future Strategy • 3

SMEs in China: Contributions to Economy and Innovation CHINA TORCH PROGRAM – A rapid growth since 1978 • 99. 6% of all companies registered – Already an essential part of the national economy • 58. 5 % of GDP • 68% of import and export volume • 48. 2 % of tax revenue • 75% of urban employment – Technology-based SMEs • 140, 000 by end of 2004 – 92% are private – only 3% of all SMEs, but having created: • 66% patents • 75% technology innovations • 82% new products 4

SMEs in China: Difficulties and Constraints CHINA TORCH PROGRAM • Innovation and Development Restricted as a Result of Capital Scarcity – Limited own capital – Restricted external financing • Bank loan difficult due to scale and lack of guaranties – Only 10% can obtain bank credits • Commercial capitals risk-evasive (not for innovation) • Fund raising from capital market more difficult • Government funding mainly to research institutes as a legacy of the planned economy 5

Public Measures to Promote Innovation & Entrepreneurship • • CHINA TORCH PROGRAM Technology Business Incubators Improvement in Overall Environment Innovation Fund for Tech-based SMEs “Roadmap Scheme” 6

TBIs : Earlier Efforts to Promote Entrepreneurship and Innovation CHINA TORCH PROGRAM • A major content of China Torch Program (www. ctp. gov. cn ) • Missions: Nurturing of technopreneurs and technology-base startups • Statistics (2005): • • Total number: 510, (general and sector-specific) Incubating area: 15 million m 2 Tenant companies: 33, 048 Accumulated graduates: 11, 671 7

TBIs: Recent Development CHINA TORCH PROGRAM • Diversified forms – 58 university science parks – 45 innovation park for overseas returned scholars • Sector Specific Incubation – Biomedicine Incubator, Shanghai – Advanced Material Incubator, Beijing – Marine Technology Incubator, Tianjin • Multiple Ownership (gov. business. VC. Multinationals) • Networking at central and local levels 8

Improvement in Overall Environment CHINA TORCH PROGRAM • SMEs Promotion Law implemented in 2003 • SME board in Shenzhen Stock Exchange – launched in May, 2004 – 50 Companies listed currently • OTC Stock Trading System (Third Board) • Over 10 high-tech companies from Zhongguancun Science Park entered the system • A good demonstration of the government's continuing efforts to build a multi-level capital market • “Third Board” companies are expected to have easier access to SME Board or the Shenzhen and Shanghai Stock Exchanges • To be extended to more science parks 9

Innofund: SBIR in China CHINA TORCH PROGRAM • Supporting projects in early stage commercialization with – – – Innovative technology and Good market potential but Unattractive for commercial capital • Laying the foundation for industrial expansion and introduction of commercial funds – – – Targeting at “market failure” where government support is needed; Bridging the gap of capital market Incubating innovative start-ups 10

Innofund: Filling the Market Gap CHINA TORCH PROGRAM Income Mature Innofund CB IPO/M&A High Growth & Expansion Idea Development Prototype VC Death Valley FFF Time 11

Innofund: an Overview CHINA TORCH PROGRAM • Birth: May, 1999 (www. innofund. gov. cn) • Nature: Central Government Funding • Major Statistics (1999 -2005) – – Applications received: Projects approved: Total funding allocated: Average funding: 30, 623 7, 962 5. 2 bn CNY ($ 650 M ) 650, 000 CNY ($ 81, 250) 12

Innofund: Target Group CHINA TORCH PROGRAM • Applicant Qualifications – – – Independent business entity Involving in high-tech R&D, production/services R&D investment/sales > 5% Technological personnel/total employees > 30% Various ownership (Chinese equity 50% up) Less than 500 employees 13

Innofund: Funding to Innovation CHINA TORCH PROGRAM (Million CNY) 14

Innofund: Technology Priorities CHINA TORCH PROGRAM 15

Innofund: Achievements • • • CHINA TORCH PROGRAM Support to Early-stage Companies Emphasized – Start-up companies (<18 months): 31% – Companies with less than 100 people: 60% – Companies with less than 50 people: 41% Innovation Promoted – 17% projects holds IPR (4946 projects funded 1999 -2003) Transformation Facilitated – 15. 6% projects from National Key R&D Program and 863 Program Fund-raising Channels Broadened for Tech-based SMEs – Innofunding expanded by 17 times by investment from Employment Contribution – 63 new jobs created by one project on average 16

Roadmap Scheme: Joint Efforts to Promote SME Innovation & Growth CHINA TORCH PROGRAM • Roadmap Scheme for Growth of Tech-based SMEs – Initiated by Innofund in 2004 with sponsors including • • • Innofund Administration Center (Innofund) Shenzhen Stock Exchange (SSE) State Development Bank (SDB) National Incubator Association (Incubators) National VC Association (VCs) – Aim • To create a favorable environment for the development of techbased SMEs at various stages via joint efforts from various aspects 17

Roadmap Scheme: Total Solution for SME Growth CHINA TORCH PROGRAM Incubators Com. Banks SSE Services Loans Training, OTC, IPO Tech-based SMEs Tech-based SME Loans Exit Equity Grant Funding VCs Default Reserve SDB Fund of funds Innofund 18

Roadmap Scheme: Missions CHINA TORCH PROGRAM – Promotion of seed/early stage (Dead Valley) financing • Innofund “Investment Subsidy” to “Start-up” projects – Grant to tenant company innovation projects which has been invested by the selected incubators – Support to technological innovations by SMEs • Innofunding to be strengthened with more attention to cultivate innovative enterprises rather than only the projects – Establishment of Innovation Network • Incubators as the nodes – Equity investment by public funds to promote/guide VC development • Fund of funds to be set up with investment from Innofund to technologyoriented VC funds (SBIC? ) – Leading commercial loans to tech-based SMEs (SDB SME Loans) – Promotion the establishment of a multi-layered capital market system 19

Challenges: Lack of Core Technologies CHINA TORCH PROGRAM Note: All the nine DVD patents and ten of the 72 Color TV patents possessed by Chinese enterprises are not core technologies. 20

Challenges: Indigenous Innovation Capacity still Weaker CHINA TORCH PROGRAM • Patent Preemption and Patent Barrier – Advantage in technology monopoly by multinationals – High-priced patent fee thus charged • Independent Innovation Restricted – Market dominancy by large corporation and multinationals hinder the innovation and development of SMEs via • Acquisition • Branding (OEM) – “Market for Technology” strategy not ideally realized as expected • Reluctance of foreign-funded enterprises to disseminate technology • JVs mostly involved in license manufacturing rather than product development 21

Challenges: Patent Barrier CHINA TORCH PROGRAM 22

Challenges: the Recognition CHINA TORCH PROGRAM • There is still a lack of driving force and overall capacity for sustainable innovation in our current economic system and so… 23

Future: An Innovation-oriented Country CHINA TORCH PROGRAM • A Strategic Decision: Building up the innovation-oriented country – Strengthening the indigenous innovation capacity – Technological innovation system with enterprises as the core hub, and combine industry, university and research institution – Commercialized S&T intermediaries service system – Regional innovation system with specific characteristics and advantages 24

Future: Strategic Missions of Torch CHINA TORCH PROGRAM • Torch will play an important role to realize the national strategy – Creating innovation headstreams (“Growing Seedlings”) • To reinforce the development of tech-based SME community • To lower the individual risk and cost of the innovation activities undertaken by tech-based SMEs – Developing Innovation Clusters (“Forestation”) • To guide the random innovation activities of SMEs to follow the national development strategy so as to build up • the innovation ecosystems representing national competitiveness – Environment Building (“The soil”) • Capital • Technology • People 25

Future: “Growing Seedlings” CHINA TORCH PROGRAM • Addressing the “Death Valley” Problem – A socialized and multiply funding system • Enhancing the leveraging effect of public funding (Innofund) • Catalyzing the emergence of business angels and promoting the establishment of BANs • Drafting specific policies to promote the effective integration of business angels and technology business incubators – A coordinated integrate fostering system • Continuous implementation of the “Roadmap Scheme” • Promoting the incubation mode of entrepreneurial tutor (SCORE) combined with professional incubation 26

Future: “Forestation” CHINA TORCH PROGRAM • Developing Innovation Clusters – Fostering technology innovation alliances • To promote the networking, interaction and collaboration among key innovation players – Establishing innovation relay centers (CIRCs) • To make easier access for SMEs to applicable innovation resources so as • To lower the information cost, transaction cost and organizational cost of innovation activities – Encouraging the upgrading in the value chain • Technology-based Export Promotion Project – From OEM to ODM( Own Design and Manufacturing) &OBM (Own Brand Manufacturing） • COSEP (China Offshore Software Engineering Project) 27

Final Words: Joint Innovation CHINA TORCH PROGRAM • We promote joint innovation partnership between Chinese and foreign innovative SMEs via cooperation with counterpart innovation agencies in other countries: – – OESO anvar (France) CDTI (Spain) EDB (Singapore) INSME (International Network of SMEs) 28

Future: “Growing Seedlings” Funding System CHINA TORCH PROGRAM Seedlings (Market) Sprouts (Products) Seeds (Idea) High Growth Innovative SMEs Entrepreneurial Team Innovative Technologies with Good Market Potential Fostering System 29

Clusters: Hotbeds for Innovation CHINA TORCH PROGRAM (B. Klein & Rosenberg） 30

Future: Optimized Funding and Fostering System CHINA TORCH PROGRAM Mature Income Innofund & BAF Funding Idea Prototype CB IPO/M&A High Growth & Expansion VC Development FFF Incubator & Angel Fostering Time 31

CHINA TORCH PROGRAM Thank You ！ 感谢各位！ 32