1. 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

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

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

4. 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

5. 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。

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

7. TBIs : Earlier Efforts to Promote Entrepreneurship and Innovation
A major content of China Torch Program ( )
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

8. 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

9. 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

10. 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

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

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

13. 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

14. Innofund: Funding to Innovation
(Million CNY)

15. Innofund: Technology Priorities

16. Innofund: Achievements
Support to Early-stage Companies Emphasized
Start-up companies (<18 months): %
Companies with less than 100 people: 60%
Companies with less than 50 people: %
Innovation Promoted
17% projects holds IPR (4946 projects funded )
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

17. 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

18. 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

19. 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

20. 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.

21. 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

22. Challenges: Patent Barrier

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

24. 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

25. 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

26. 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

27. 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)

28. 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)

29. 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

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

31. 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

32. Thank You ！
感谢各位！ 32 32