REVIEW OF BANK LENDING IN SCIENCE, TECHNOLOGY & INNOVATION CAPACITY BUILDING A Cross-Country Comparison Cesar Yammal and Ursula Casabonne December 8, 2005

2 Presentation Overview  Objective of the review and methodology  Frameworks to classify STI interventions  Country analysis India Korea Brazil Mexico  Cross-country comparison Commonalities Differences in content Differences in methodology

3 Objective of the review and methodology  Purpose: To “uncover” successful past interventions in STI capacity building that may be applicable to new projects (WB lending as a proxy indicator for sector development)  Choice of projects: Completed major STI projects Industrial upgrading projects Human resource development projects (as they relate to STI capacity- building) Excluded from the review: agricultural research and extension, fertilizer production, environmental, and industrial pollution projects  Choice of countries: Long-standing involvement of the Bank in these sectors Technology leaders in their regions  Desk-study: Revision of project appraisal reports, project completion reports and post- completion evaluation studies Validation of findings with experts (starting with this presentation)

4 Frameworks to classify STI interventions  Role of actors: STI users and producers.  Nature of government intervention: demand and supply-side intervention.  Types of deficiencies in the NIS that STI interventions seek to remedy: financial resources, incentives, capabilities, opportunities.  Breadth of interventions: vertical and horizontal.  Degrees of STI capacity: capacity to absorb and adapt existing techniques and capacity to innovate and generate STI knowledge.  Carl Dahlman’s K4D framework: Policy and institutional regime, education system, information infrastructure, innovation system.  Sanjaya Lall’s firm-centered STI framework: factor markets (skills, capital and information), supporting institutions (MSTQ system, SME support system, R&D system), incentives (macroeconomic environment, trade policy and industrial policy).  Tatyana Soubbotina’s national technology learning models: traditionalist slow learning, passive FDI-dependent, active FDI- dependent, autonomous, creative-isolated, and creative-cooperative.

5 Country analysis: India Industrial Credit and Investment Project (Projects 1-14) Industrial Import Project Series (Proj. 1-11) Petrochemical Project Series (1-2) Cement Industry Project & Cement Industry Restructuring Project (2 projects) Industrial Export (Engineering Products) Electronics Industry Development Project Industrial Finance and Technical Assistance Project Industrial Technology Development Project Vocational and Technical Education Project Series (1-3) Export Development Project

6 Country analysis: India Supporting selected industries to achieve higher value added. Financing of industrial subsector studies to improve the understanding of the problems facing the sector and contributing to the design of lending program in the industrial sector (cements, software, electronics, automotive). Absorption of imported technologies in selected industries (cement, petrochemicals, electronics). Technology learning component to projects: Electronics Industry Development Project ($302.5 m) included a component to train electronic technicians. Skills formation for STI absorption and adaptation: (Vocation and Technical Training projects, , $793 m). Funding for institutional development of Indian Institutes of Technology and Regional Engineering Colleges: Capacity expansion and modernization of laboratories: 1,100 institutions were built. Teacher training: foreign fellowships and establishment of teacher training centers. Development of curricula: establishment of curricula development centers. Focus on building linkages with industry through apprenticeship programs. Targeted to the poor: 50% of students were poor.

7 Country analysis: India Building institutional capabilities of financial intermediaries for technology investments in industry Supporting the Industrial Credit and Investment Corporation (ICICI) to build institutional capabilities (14 Industrial Credit and Investment Project loans, , $733m). Technical Development Fund (Industrial Technology Development Project , $360m) set up to provide resources for rapid import of embodied and disembodied technology (a one-stop shop for importing technologies). R&D Spread Fund (Industrial Technology Development Project , $360m) loans to promote industry-sponsored research at public R&D institutions and the Indian Institutes of Technology. The fund was managed by a technology-oriented unit of ICICI, which helped identifying technology institutions for the proposed projects  helped to overcome information and trust barriers between researchers and business. Financing industrial imports (e.g. 11 Industrial Imports projects, $1,330m). Loans to the private sector to finance imported raw materials & capital goods in vital sectors of the economy (agriculture, transportation, power).

8 Country analysis: Korea

9 Role of government as catalyst for industry growth. Korean Institute of Electronics Technology (KIET) built from scratch under the Electronics Technology Project ($29.0 m) for wafer fabrication, semiconductor research and training of private sector personnel. RD&E agenda set by KIET’s management in consultation with industry KIET demonstrated feasibility for semiconductor acquisition and development in Korea. In 1983, the private sector took over the semiconductor industry, rendering KIET obsolete; facility sold.

10 Country analysis: Korea Support of Technology Development Banking: (3-Technology Development Project + Financial Intermediation Project Series , $184 m). Financing and institutional strengthening (staff is key) of recently created Korea Technology Development Corporation (KTDC, later known as KT Banking Corporation and KT Banking Network). Evolved from joint ownership with industry and subsidized interest rates to a fully privatized entity in 1999 (50 private shareholders in 1996). Financial Products: loans, contingency loans, direct equity investment. Technical services: equipment leasing and factoring; brokerage of technology transfer and training management consultancy to SMIs Commercial criteria: technological feasibility, markets, profitability, management capabilities Spin-off of the Korea Technology Investment Corporation to finance technology start-ups 3,000 projects supported in first 10 years in three sectors (later expanded to eight): Machinery/ metal Electric/ electronics Chemicals SMI proportion of funding grew from 19% (1st project) to 88% (4th project).

11 Country analysis: Korea Relatively late but significant support to public R&D Centers: (3-Technology Advancement Project Series $108 m). Purchase of sophisticated equipment for general quality improvements of public research centers to: increase R&D activities, implement joint projects, provide quality services to industry and support MSTQ. improve graduate level teaching “11” Beneficiaries (mergers and spin-offs): Genetic Engineering Center; Industrial Technology Center (ITC); Advanced Institute of Science and Technology (KAIST); Electrotechnology Research Institute, Institute of Energy and Resources; Institute of Geology, Mining and Materials; Institute of Science and Technology; Institute of Technology; Basic Science Center; Standards Research Institute; National Institute of Industrial Research. Key “ingredients”: clear focus on SMIs (by this time large firms are conducting their own R&D). ITC designed new products for SMIs to manufacture, helped integration with large manufacturers Integration of support functions: design, manufacture, quality assurance, exports. industry brought into undergraduate and graduate education Part-time teachers drawn from industry Practical work of engineering student in laboratory and industry Over 20% of students at KAIST sponsored by industry quality improvements certified by foreign accreditation agencies.

12 Country analysis: Brazil Development Banking Project (Projects 1-3) Vocational Training Project Copesul Petrochemical Project Technical Training Project S&T Reform Support Project (PADCT I) S&T Research Training Project (PADCT II) S&T Reform Support Project (PADCT III) Brazil - Hydrocarbon Transport and Processing Project, Rain Forest Science Centers & Directed Research Project Higher Education Improvement Project

13 Country analysis: Brazil Skills development at the vocational, technical and higher education level (Vocational Training Project, Technical Training Projects, Higher Educational Improvement Project, and ). Financed the hardware (buildings, equipment and institutional materials and the software (staff training, fellowships, R&D). Assisted the institutional reform of technical training Provided access to student loans and reform of regulatory framework of higher education. Supporting STI (horizontal approach) (PADCT I, II, III, $304 m). PADCT I supported R&D in 6 fields: chemistry, chemical engineering, biotechnology, geosciences, mineral technology, instrumentation. (PADCT I is attributed to the takeoff of biotechnology in Brazil. Major weakness was the lack of linkages to industry. PADCT II emphasis was funding PhD and Masters students in predefined science areas. PADCT III placed greater emphasis on addressing the missing linkages between R&D institutions and firms. Technology platforms: establishment R&D consortia and partnerships to identify technology gaps in sectors. Matching funds granting facility Sectoral funds: Tax on specific industries to mobilize funds for R&D for those industries. Millennium Science Initiative: formation of research networks on strategic themes (17 Centers of Excellence). Transparent procedures for competition for awards.

14 Country analysis: Brazil Industrial upgrading in industry: Transfer of technology and technology know-how to petrochemical industrial through the provision of technical advisory services by foreign engineering firms (Copesul Petrochemical Project , $85 m). Supporting small and medium industries (SMIs): (Development Banking Projects , 605 million). Loans extended to Banco Nacional de Desenvolvimiento Economico e Social (BNDES) to support lending to small and medium industries through state and regional development banks.

15 Country analysis: Mexico

16 Country analysis: Mexico Multiple interventions for the generation, diffusion, and application of knowledge for innovation (Knowledge and Innovation Project , $300 m). Science and Technology Research Creation of a number of funds for research projects and graduate level scholarships co-financed by S&T Council and line ministries (sectoral funds) or states (mixed funds). Industry-University Linkages Restructuring of 28 public R&D Centers Equipment Emphasis on industry orientation, increased cost recovery Matching grants for joint industry-university projects Creation of 24 university technology services offices, cost effective ($20 K per university), self-sustainable, evolved into a peer to peer network Enterprise Technology Enhancement Technology Modernization Program for SMEs (across the board) Network of consultants, intermediary agents Catalytic effect of SME Technology Evaluations on self-developed projects Regional Technology Centers Pilot Venture Capital Fund Up to 20% public contribution, managed by NAFIN (a public development bank)

17 Cross-country comparison

18 Cross-country comparison Commonalities across World Bank projects  Long term involvement, continuity (no gaps)  Successful activities/ project design  Catalyst of new STI areas Software (India) Semiconductors (Korea) Biotechnology (Brazil)  STI Capacity “Building Blocks” Development of factor markets (technical skills and capital) Development of public R&D and general higher education system.  Governments drive the STI agenda  …but differences in: Content Methodology

19 Cross-country comparison Differences in Content of World Bank projects Brazil/ MexicoIndia/ Korea Human capital  Emphasis at the scientific Ph.D./ master’s level.  General tertiary education  Emphasis on technical, vocational level and engineering.  Mostly engineering at the tertiary level Public R&D system  Maintenance investment in public R&D infrastructure (almost no buildings)  Priority is in cutting edge research o Centers of excellence.  Expansive investment in R&D infrastructure (staff, building and equipment intensive).  Priority is on developing technical skills.  Support for technology diffusion (e.g. electronic projects in Korea and India). STI legal framework  Sparse STI legislation linked to WB projects.  Dynamic legal reform, institutionalized incentive structure. Breadth of Intervention  Mostly horizontal  Petrochemical (Brazil)  Vertical and horizontal  Electronics (India, Korea)  Petrochemical (India)  Machinery (Korea)  Cement (India), Software (India)  Pharmaceutical (India) Financial mechanisms  Predominant use of matching grants in more recent projects.  Very recent venture capital initiatives.  Private sector as passive beneficiary.  Industrial credit dispersed (in addition to banking reform, trade, export)  Targeted credit for import and absorption of technology  Early efforts on venture capital.  Private sector as co-investor and beneficiary.  Focus in providing credit to industries.

20 Cross-country comparison Differences in Methodology Brazil/ MexicoIndia/ Korea Size of projects  Fewer, larger projects (Mexico: 19, Brazil: 13)  More, smaller projects (India: 37, Korea: 29). Number of projects  Fewer repeater projects (back to back or with minor gaps within a project series)  4 loans for Industrial Equipment Fund (Mexico)  4 loans for Small and Medium Scale Industrial Development (Mexico)  3 loans for Comprehensive STI (Brazil)  3 loans for Development Banking (Brazil)  Many repeater projects, overlapping, ‘holding hand’ approach of Bank lending that enabled learning feedback.  11 loans supporting ICICI (India)  9 loans for Industrial import project (India)  4 loans for Technology Development (Korea)  3 loans for Technology Advancement (Korea)  5 loans for Technical Education (Korea) Focus  Comprehensive and multi- component (‘omnibus’ projects).  Sectoral budget-support.  Highly focused and single- component. Intensity  Low intensity: few concurrent projects  Brazil and Mexico 1980s: up to 4 concurrent projects.  High intensity: many concurrent projects.  India 1990s: up to 9 projects  Korea 1980s: up to 7 projects  Korea 1990s: up to 9 projects Priorities  R&D system-centered capacity building.  Firm-centered capacity building. Timing (start of continued involvement)  Mexico: 1972 (exc. 1950)  Brazil: 1976  India: 1955  Korea: 1969

21 T. Soubbotina’s national technology learning models  Crystal metaphor  Right environment (leadership)  Difficult, dynamic and slow growth process (seed, nucleus, cluster).  Dimensions of crystals: STI learning capacity & STI learning opportunities Human capability for STI learning Most accessible opportunities for learning from foreign sources created by capital goods imports and FDI More demanding opportunities for learning from domestic and foreign sources through domestic R&D Most demanding opportunities for learning through knowledge markets and international STI cooperation Success in using STI knowledge for improving technological structures of a country’s MVA and manufactured exports

22

23

24

25