Government-supported innovative business progressing poorly

Toomas Mattson | 10/14/2004 | 12:00 AM

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TALLINN, 14 October 2004 - The State Audit Office (SAO) has audited the outcome of the product development projects supported by the Enterprise Estonia Foundation (EEF) from 2001 to 2003 and has found that so far the businesses have failed to achieve the expected economic impact through the projects – the new products have not been sold in the predicted amounts in Estonia or on export markets.

This is a serious issue given that the government has been working towards supporting projects that are market eligible and actually producing added value. In respect of these projects, the added value should be reflected in higher turnover, increase in export sales and in the number of jobs, all of which must be forecast by businesses when applying for aid.

It was revealed that the difference between actual achievements and forecasts has been increasing from year to year. For instance, in 2003 the lag had amounted to EEK 93 million in terms of overall turnover and EEK 48 million in terms of export sales. Businesses are also falling short in terms of creating jobs.

The SAO considers that there are several reasons for current poor results, one of them being the utopian forecasts made by businesses. Implementation of forecasts has been hindered by longer time spent on completing projects, due to which 40 % of businesses, in their own estimation, have entered the market later than planned.

Failure to adhere to the project time schedule is mainly due to delays caused by partners and sub-contractors. According to business operators, another reason for the slow-down in projects is the administration in the EEF – operators see it as slow and bureaucratic.

The audit has shown that another obstacle to the successful marketing of products developed by means of aid has been the lack of necessary human resources and finances: the main marketing channels are personal contacts and the internet homepage. 35 % of supported businesses lacked employees who would exclusively work on marketing. This is a major problem especially in smaller businesses.

It may often occur that the executive manager must concurrently engage in development activity, corporate management and marketing, and that is why the quality of the said activities may be affected.

In order to contribute to the solution of marketing problems, the EEF has designed a number of additional support measures for businesses: export aid, trade show aid and international trade show aid.

To date, operating on the basis of the value chain, where an enterprise is helped to achieve good results by virtue of the co-effect of different support schemes, is not yet effective: the businesses that have received product development aid seldom resort to additional measures – approximately 60 % of businesses have not applied to any one of the said three.

Another obstacle to fast expansion of businesses and their entrance into foreign markets has been the shortage of the required venture capital in Estonia: although the product has been developed there are no resources to start its production, sales, etc.

The fact that the EEF has not been collecting information on the subsequent development of supported businesses poses a serious problem, in the SAO opinion. Hence, it is not known what becomes of the new or improved product after a year or two. Similarly, no information has been systematically gathered about the challenges which the businesses might have faced upon selling innovative products.

It has been impossible to rely on relevant information for improving the existing measures and envisaging the new ones, because there is no corresponding information available.

Because of the high risk rate of the innovation activity, it cannot be presumed that all projects meet the estimates of their economic benefit.

At the same time, according to the SAO, the situation where the government has not spelled out its expectations about the results to be achieved or defined how much the actual outcome could vary from the estimates, cannot be viewed as satisfactory. Therefore, it is impossible to assess the quality of the outcome already achieved.

The SAO points out that the funds from the state budget, as approved by the Parliament, allocated for R&D projects and allocated though the EEF, have not been utilized to the extent intended.

The unused funds – tens of millions of kroons – have been pooled to a reserve, from which resources are allocated for aid in the oncoming years. Since the remaining funds originally intended for R&D aid are not fully channelled back to the same field (the reserve may be used for other support schemes), then part of the resources allocated by the government to that end may remain unused.

Should the Parliament start a debate on the possible establishment of the venture capital fund, the parliament may consider, among other facts, that a material part of the funds appropriated for the R&D projects of the Enterprise Estonia Foundation are never used.

Although the support to R&D projects is just a small segment in the possible activity spectrum of the venture capital fund, the non-utilisation of allocated resources has certain implications and gives a lot of food for thought.

When planning the financial volume of the venture capital fund it would therefore be reasonable to carefully analyze the capability of the Estonian innovative businesses to put this money to good use. In other words – it must be determined whether the problem of Estonia is indeed the shortage of money or the lack of good and competitive concepts and projects.

In the period from 2001 to 2003, EEK 133.5 million were allocated for product development, whereof EEK 100.9 million were paid out. In these years, product development aid was sought through the EEF for 60 projects, of which 47 received a positive funding decision. Of these, the SAO audited 42 projects that were actually supported in the years 2001-2003.

Background information

As a member of the European Union, Estonia is also pursuing the Lisbon strategy goal to transform the European Union, by 2010, into the most dynamic and competitive knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion.

The attainment of the stated goal is a real challenge for Estonia, in the context where the added value produced by medium and high technology businesses as a proportion of GDP has been steadily falling over the recent years.

Estonia’s expenditures on R&D (0.7-0.8 % of GDP) are rather small compared with the average of the EU15 (1.9-2.1 % of GDP) and cooperation between businesses and research establishments is insufficient.

The biggest issue in the innovation potential of businesses as well as their export capacity and competitiveness is the very small investment of the private sector in R&D, fluctuating between 0.14 - 0.25 % of GDP in recent years and thus remain 5 to 6 times below the median of the European Union.

Toomas Mattson
Communication Manager of National Audit Office
Telephone: 6400 777
Mob: 51 34900
E-mail: [email protected]

  • Posted: 10/14/2004 12:00 AM
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