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 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

Outlines An Overview on SMEs in China Public Measures to Promote Innovation & Entrepreneurship Challenges still Facing Future Strategy

SMEs in China: Contributions to Economy and Innovation 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

SMEs in China: Difficulties and Constraints 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 一是中小企业自身的自有资金较少。二是中小企业自己融资的渠道狭窄。据人民银行统计，中国中小企业融资的98.7%来自银行的间接融资，仅有1.3%来自直接融资。三是中小企业获得银行信贷支持的比例低，仅占全部中小企业的10%左右。中小企业融资难的问题，既有中国资本市场发展滞后，银行体系尚未健全有关，也缺乏有效的信用担保体系和完善的中小企业支持体系有关，社会信誉体系不够健全，难以有效解决信息不对称的问题有关。中小企业融资难，不仅抑制了中小企业创新的活力，而且大大制约了中小企业的发展。

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

TBIs : Earlier Efforts to Promote Entrepreneurship and Innovation 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 m2 Tenant companies: 33,048 Accumulated graduates: 11,671

TBIs: Recent Development 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

Improvement in Overall Environment 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

Innofund: SBIR in China 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

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

Innofund: an Overview Birth: May, 1999 (www.innofund.gov.cn) Nature: Central Government Funding Major Statistics (1999-2005) Applications received: 30,623 Projects approved: 7,962 Total funding allocated: 5.2bn CNY ($ 650 M ) Average funding: 650,000 CNY ($ 81,250)

Innofund: Target Group 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

Innofund: Funding to Innovation (Million CNY)

Innofund: Technology Priorities

Innofund: Achievements 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 Innofund funding expanded by 17 times by investment from Employment Contribution 63 new jobs created by one project on average

Roadmap Scheme: Joint Efforts to Promote SME Innovation & Growth 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 tech-based SMEs at various stages via joint efforts from various aspects

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

Roadmap Scheme: Missions 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 Innofund funding 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 technology-oriented VC funds (SBIC?) Leading commercial loans to tech-based SMEs (SDB SME Loans) Promotion the establishment of a multi-layered capital market system

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

Challenges: Indigenous Innovation Capacity still Weaker 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 To keep the long-term monopoly, the multinationals tend to suppress the innovation activities of SMEs and emerging companies by restricting their innovation and development room through

Challenges: Patent Barrier

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

Future: An Innovation-oriented Country 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 Innovation has been highly considered by the top leadership and adopted as a national strategy

Future: Strategic Missions of Torch 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 强化以创新集群为核心的创新创业软环境建设，重点是依托各类高新技术产业化基地，通过公共政策的引导，培育和发展创新集群，充分发挥其在高新技术产业化中的作用，组织和引导社会资源来降低高新技术产业化的整体风险和成本 提高企业捕获外部创新资源的便利性、适用性，降低社会创新活动的信息成本、交易成本和组织成本，并将科技型中小企业无序的创新活动与国家发展意志（国家计划）、产业发展导向（主导产业）结合起来，逐步形成具有蓬勃生机的创新集群，形成体现国家竞争力的商业化、生态化创新森林组织

Future: “Growing Seedlings” 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 To create better conditions to facilitate the process of R-D-C and help the start-ups overcome the “death valley” and grow into market-competitive enterprises 设立孵化器专项资金 ，重点补贴以创新集群为基础、面向科技型中小企业的各类公共服务平台的建设经费，以及为技术创业企业提供服务的收入和运行经费的后补贴

Future: “Forestation” 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)

Final Words: Joint Innovation 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)

Future: “Growing Seedlings” Funding System Seedlings (Market) Sprouts (Products) Seeds (Idea) High Growth Innovative SMEs 围绕富有创新性和市场潜力的技术成果（良种），形成技术创新创业团队（新芽），帮助其度过死亡陷阱，形成产品走向市场，形成快速成长的科技型中小企业群体（小苗） Entrepreneurial Team Innovative Technologies with Good Market Potential Fostering System

Clusters: Hotbeds for Innovation (B. Klein & Rosenberg）

Future: Optimized Funding and Fostering System Mature Income Innofund & BAF Funding IPO/M&A CB High Growth & Expansion VC Prototype Idea Optimize the funding mechanism Focused on encouraging technological innovation and business development Strengthening the direct support from business incubators and Innofund to the innovation-based entrepreneurial activities To cultivate the BAN and promoting the incubation mode of entrepreneurial tutor combined with professional incubation Development Incubator & Angel Fostering FFF Time

Thank You ！ 感谢各位！ 32 32