『Financing the Technology Innovation of SME i K

H J K (Ph D)

SMEs in Korea 』

Hong Jae-Keun (Ph.D)

CONTENTS

Ⅰ. Why SME Technology Financing Matters?Ⅰ. Why SME Technology Financing Matters?

Ⅱ. How Korean SMEs Finance for R&D?Ⅱ. How Korean SMEs Finance for R&D?

Ⅲ. Sophisticated Technology Financing InfrastructureⅢ. Sophisticated Technology Financing Infrastructure

Ⅳ. Less Accessibility & Availability of the InfrastructureⅣ. Less Accessibility & Availability of the Infrastructure

Ⅴ. Conclusion and SuggestionsⅤ. Conclusion and Suggestions

2

I. Why SME Technology I. Why SME Technology Financing Matters? g

3

Why SME Technology Financing is important? Ⅰ. Why SME Technology Financing Matters?

More balanced and sustainable growth is needed

• A strong and innovative SME sector is the key for the balanced and sustainable growth

• From factor-input to innovation led economy development paradigm

Innovation-led competitive paradigm for SMEs prevails

Due to the information asymmetry of SMEs’ technology innovation

Market failure is needed to be fixed

• Due to the information asymmetry of SMEs’ technology innovation, bridging the gap between financial market and intangible future asset is getting important

• The social rate of return of technology financing exceeds the private

A ripple effect on the national economy

4

The social rate of return of technology financing exceeds the privaterate of return

Ⅰ. Why SME Technology Financing Matters?European paradox? Now, Korean paradox in SME R&D

The success rate of government-granted R&D project exceeds 90%,

but the rate of commercialization of the R&D output lies at about 40%

-Small and Medium Business Administration-

5

Further evidences of Korean paradox in SME R&D Ⅰ. Why SME Technology Financing Matters?

80%↓

���� �� �� 75.8%74.6%

74.7%74.9%

2005 2007 2009 2011

���������������� ����

������

[unit : million won]

15,064

2005 2007 2009 2011

[unit : %, LEs = 100]

[unit : million won]

9,803 10,464

12,244 12,90426.6 28.1 26.58

30.7 32.428.8

sales

added value

「�������������������」� ������ �����!���

2007 2009 2009 2010 2011

2008 2009 2010

��������� �����������"#��������� ��$ ����

%&''()30.6%

70.0% 69.3%

54.1%

6

&''()

KOREA UK USA JAPAN

Financing gap results in the paradox Ⅰ. Why SME Technology Financing Matters?

Hurdles against The most required policy forHurdles against R&D commercialization of SMEs

Lack of funds

The most required policy for R&D commercialization of SMEs

Technology appraisal based financial support

High price of product

Difficulty in sourcing

Preferential public procurement of new technology product

Consulting support as market analysis

Emergence of similar product

Immature market

The most necessary policy for

the R&D commercialization of SME

Human resource support for production

Human resource support for marketing

S t f hibiti

Incomplete product

Others

Support for exhibition and overseas exploitation

Support for domestic and global standardization

Others

7

Source: Survey on SME technology and R&D 2011 (SMBA).

『Technology Financing』to bridge the financing gap Ⅰ. Why SME Technology Financing Matters?

In a broad sense, ‘Technology Financing’ is a high risk enterprise financing,

that covers life-cycle of‘start-up’,‘R&D’,‘R&D output commercialization’

by means of technology appraisal

In a narrow sense, ‘Technology Financing’means loan or investment executed

after the opinion of technology appraisal institution, not depending on the

collateralcollateral

8

The Paradigm shift in SME policy also influenced on the emergence of Technology Financing

Ⅰ. Why SME Technology Financing Matters?

influenced on the emergence of Technology Financing

Before currency crisis After currency crisis

• Protection & Growth• Protection & Growth • Competitiveness• Competitiveness

The Paradigm ShiftThe Paradigm Shift Requires Change in

Business Strategy of SMEs

9

New business strategy requires a new financial instrument Ⅰ. Why SME Technology Financing Matters?

C t T h l l d

Business StrategySME

Technology Strategy

Costor

Differentiation

Technology leaderor

Fast Technology follower

Technology Financing

Traditional SME Financing

10

g

II. How Korean SMEs Finance II. How Korean SMEs Finance for R&D?

11

High R&D intensity of Korean SMEs Ⅱ. How Korean SMEs Finance for R&D?

<R&D Intensity of Top 1,000 R&D Enterprises by Firm Size>

(unit: %)

4.62 4.84

4 06

5.00

6.00

2.50 2.51 2.77

4.06

3.00

4.00

1.00

2.00

0.00

1.00

2008 2009 2010

12

source: Korea Institute of Advanced Technology (2012).

LEs SMEs

Government is a key source of external R&D financing Ⅱ. How Korean SMEs Finance for R&D?

government

loan

10%others

5%

government

loan, 1.8%

others,

0.2%

[Manufacturing sector] [Business service sector]

5%

private

investment

12%

private loanGovernment

grant

private

investment,

3.8%

Government

grant, 6.8%

external

p a e oa

9%grant

64%

External

private

loan, 1.7%

external

finance,

17.5%

External

finance,

14.2%

Internal

finance,

82.5%

Internal

finance

, 85.8%

13

Source: Survey on SME Technology & R&D 2011(SMBA)

Small Portion of Technology Financing Ⅱ. How Korean SMEs Finance for R&D?

2010 20112010 2011

Government direct loan 8,657 8,897

Technology guarantee * 151,181 151,914

Private finance 1,018 554

Venture capital 16,028 20,309

Total (a) 176,884 hundred million 181,674 hundred million

Bank SME loan (b) 429.7 trillion 441.0 trillion

a/b 4.09% 4.10%

*: public loan guarantee by technology appraisal

14

Boosting the loan guarantee by technology appraisal Ⅱ. How Korean SMEs Finance for R&D?

KOTEC has rearranged all the branches into technology appraisal centersKOTEC has rearranged all the branches into technology appraisal centers

to guarantee the loan by KTRS(Kibo Technology Rating System) since 2008

[Portion of technology guarantee in outstanding guarantee of KOTEC]

54.0%

91.4% 93.4%

15.4%

15

2004 2007 2011 2012. 10

Evolution of technology financing: public loan guarantee Ⅱ. How Korean SMEs Finance for R&D?

In respond to the global innovation trend of technology convergence

Amount of guarantee approval is calculated in reference with the expected

future cash flow of the patented technologyfuture cash flow of the patented technology

- Currently, expected sales in 1yr has been used to calculate the guarantee amount

Estimate the required fund during the life-cycle phase of R&D and set the

maximum guarantee amount for the whole life cyclemaximum guarantee amount for the whole life-cycle

Provide the guarantee at each phase of life-cycle

�"#� *� ����� �� ������� � �� ������

16

Provide the guarantee at each phase of life cycle

- 100 billion in 12yr

Evolution of technology financing: private sector Ⅱ. How Korean SMEs Finance for R&D?

To redeem the collateral based underwriting practice and weak technology

screening capability of private financial institutes

- KOTEC and KIPA issue 『technology appraisal certificate』 to the innovative SMEs

- The contracted banks approve loan in reference with the certificate

(loan approval rate of '11 : 93.8%)

17

Evolution of technology financing: venture capital Ⅱ. How Korean SMEs Finance for R&D?

[annual Investment amount]

(Unit: hundred million won)New investment

Outstanding

(Year)

18

Source: Korean Venture Capital Association (2013).

( )

III. Sophisticated Technology III. Sophisticated Technology Financing Infrastructureg

19

Kibo Technology Rating System Ⅲ. Sophisticated Technology Financing Infrastructure

KTRS provides the grade of technology or the enterprise holding the technology

through the appraisal of the technological level marketability profitabilitythrough the appraisal of the technological level, marketability, profitability,

environmental condition

20

System Models of KTRS Ⅲ. Sophisticated Technology Financing Infrastructure

Level of technology

business

KTRS technology appraisal system

Business organizational capability

Technology

Marketability

Technology appraisal index

(34)

Future Marketability of Technology

Risk in Commercialization Matrix

Evaluation

grade of

KTRS

Profitability

Economic

environmental factor

Risk in Commercialization

Environmental risk Risk level

MatrixTechnology

Business

KTRS-Startup technology appraisal system

Technology

Level of technology business Evaluation

KTRS

Future Marketability of Technology

C appraisal index

(23)Risk in Commercialization Risk level

Matrix grade of

Technology

Business

KTRSStart-Up

21

Brief performance of KTRS Ⅲ. Sophisticated Technology Financing Infrastructure

60 8% f KTRS b fi i i

Guarantee default rate:

KTRS (133%)＜Financialmodel (214%)

60.8% of KTRS beneficiaries

could have been

rejected the guarantee approval60 8% 1 33%KTRS (1.33%) ＜Financial model (2.14%)

('05. 7 ~ '09. 5)

rejected the guarantee approval

by the financial information

based rating system

60.8% 1.33%

Several BM patents

KTRS had been nominated as a

candidate for the Edelman Prize Patents

prize(06.12)

22

Institutional infrastructure for technology financing Ⅲ. Sophisticated Technology Financing Infrastructure

Government has appointed 9 institutes such as KOTEC, SBC as technology

appraisal institutions and apprehensively supported the cultivation of

technology appraisal manpower and linked various commercialization supporttechnology appraisal manpower and linked various commercialization support

process

23

Link with other SME financing infrastructures Ⅲ. Sophisticated Technology Financing Infrastructure

Technology appraisal certificate based loan is added into the regionalTechnology appraisal certificate based loan is added into the regional

headquarters ceiling(C2) of aggregate credit ceiling loan(BOK) ('11.12)

Performance of technology appraisal certificate based loan approval is takenPerformance of technology appraisal certificate based loan approval is taken

into account to allocate the on-lending fund to the banks ('11. 5)

24

IV. Less accessibility & IV. Less accessibility & availability of the y

Infrastructure

25

Voice of stakeholders Ⅳ. Less accessibility & availability of the Infrastructure

“Technology appraisal institutions estimate the value of the technology

too conservatively”

“Technology Financing is generally available only at the start-up stage,

since collateral is still required during the whole commercialization process”

“The unpredictable risk is so big that the technology appraisal resultThe unpredictable risk is so big that the technology appraisal result

is not fully reliable without the loss sharing scheme”

26

Deterioration of financial access of Korean enterprises Ⅳ. Less accessibility & availability of the Infrastructure

'

&'

Ranking

&'

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Source: The Global Competitiveness Report 2008-2013 (World Economic Forum)

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27

Unbalanced status in Korean SME finance Ⅳ. Less accessibility & availability of the Infrastructure

According to the 『Financial Development Index 2012』 by WEF, Korea has been ranked at

15/62 in total.

But, in regarding to the financial access of enterprises, Korea has been ranked at 58/62.

15/62

58/62

28

SMEs use too small portion of equity finance Ⅳ. Less accessibility & availability of the Infrastructure

(Unit: %)(Unit %)

'08yr '09yr '10yr '11yr

All 100.0 100.0 100.0 100.0

LE 90.5 91.0 93.3 96.7

SME 9.5 9.0 6.7 3.3

Equity 100.0 100.0 100.0 100.0 Equity

LE 43.6 60.9 69.9 86.1

SME 56.4 39.1 30.1 13.9

Corporate bond 100.0 100.0 100.0 100.0

LE 99.1 98.3 98.6 98.9

SME 0.9 1.7 1.4 1.1

29

Source: Financial Supervisory Service.

Reliability as a infrastructure is still far to go Ⅳ. Less accessibility & availability of the Infrastructure

Though ‘standard technology appraisal model’ has been developedThough standard technology appraisal model has been developed

by SMBA, KOTEC and KDB in 2005, the diffusion has been failed

- Currently, each institute uses their own appraisal model

Positive response on the reliability of technology appraisal result (%)

: (SMEs)48, (Bank)60, (VC)14

30

Less reliability harms the availability of the infrastructure Ⅳ. Less accessibility & availability of the Infrastructure

According to the audit result by the Board of Audit and Inspection in May

2012, all the 6 banks don't have any preferential regulation to the

‘certificate of technology appraisal’and most loans seems to have been

approved not using the certificate.

31

V. Conclusion and SuggestionsV. Conclusion and Suggestions

32

Recommended Direction of Technology Financing Ⅴ. Conclusion and suggestions

MoreMore

More

Accessibility

More

Direct financing

More

Efficient

Infrastructure

Innovative

Technology

Of EnterpriseOf Enterprise

33

Technology Financing in Crowd funding Ⅴ. Conclusion and suggestions

Small

investment

Creative

idea

investment

Social

participation

Crowd

funding

Crowd funding is a well-fitted financing technique for the creative ideas

Creative Economyfor the creative ideas

Crowd funding allows creative entrepreneurs easily access

y

Direct Financing

But, in technology based project, an information asymmetry between investors and entrepreneurs shall hampers

to the direct financingDirect Financing

Information Asymmetry

34

between investors and entrepreneurs shall hampers the facilitation of crowd funding

Information Asymmetry

Technology appraisal certificate to facilitate Crowd funding Ⅴ. Conclusion and suggestions

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Crowd funding model with Technology Appraisal Certificate

Project 1

�� �������������

Project 1

Project 2Project 6

j

Project 3Project 5

Project 2

Project 4

Project 3

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35

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Technology Financing in KONEX Ⅴ. Conclusion and suggestions

Globally, the success of SME specialized stock market is not easily attainable.

For the success of KONEX*, the efficient and active knowledge channel

inside the market is necessary.

Especially, the information on the value of technology is very sticky and hard to get.

Thus, in KONEX, the 『technology appraisal certificate』 could meet

the knowledge demand of NOMAD** and Investors for the value of technology.

36

* : Korea New Exchange for SMEs** : Nominated Advisor

Thank youThank you