General policy environment for business and access to finance

 

Ukraine’s state policies aim at strengthening the hardly effective interaction within the research sector itself (universities with public research organisations such as NASU institutes) and between the research sector and industries. Among all launched strategies (development of research infrastructures for common use by different research organisations, creation of special organisations to exploit research results for technology transfer, introduction of grants to promote R&D cooperation between universities and PROs etc.), the establishment of so-called “techno-parks” was considered to be the most successful. However, among the techno-parks solely two of them can be labelled as “innovative”. One is the Paton

 

Institute of Electric Welding, the other the Institute of Mono-crystals. Between 2000 and 2011 they together covered more than 95% of all innovative production triggered by Ukrainian techno-parks.²⁰⁵

 

Despite the fact that Ukraine has created and operates specific entities entitled to carry out innovation activities, the effectiveness of most of these entities (with the exceptions of the already mentioned two techno parks) remains rather low. To put it into numbers, over the course of the last years Ukraine has established 12 technology parks, 17 science parks, 28 business incubators, 25 innovation centres, 9 centres for science, innovation and information, several operating units on IP at higher education institutions and a dedicated Ukrainian institute of scientific and technical expertise and information.²⁰⁶ Even if the quantity of innovative institutions seems fairly sufficient, there is still much space for improvement on the performance level.

 

One of the drivers to stimulate innovation (innovative products, technologies, technical solutions etc.) is a vivid cooperation within the so-called “knowledge triangle” between universities – PROs – business. ²⁰⁷Simply said, the more these three sectors cooperate in exchanging both tangible (products,

205 Yegorov, ERAWATCH Country Reports 2012: Ukraine, 2013, p.22

 

206 Self-assessment report: Scientific and technological sphere of Ukraine, MESU, 2016, p.32

 

207 Yegorov, ERAWATCH Country Reports 2012: Ukraine, 2013, p.4

 

technologies, applications etc.) and intangible goods (knowledge, behaviour), the higher is the chance that somewhere in this circular flow innovation will happen. The exclusive focus of the Ukrainian government on state-owned entities within the knowledge triangle seems however problematic. The tradition to support only state-owned institutions is kept alive. Direct state support goes to the six national academies of sciences, state-owned companies and state-owned universities. It is evident that such policies have no or only minimal impact on Ukrainian private companies conducting R&D. Neither supported are multinational companies, which tend to bring innovative knowledge to the local Ukrainian market and with whose support innovation activities in Ukraine could be enhanced. The consequences in practice are that Ukrainian researchers are working for private foreign or domestic clients on contracts which are not officially registered by their employers.²⁰⁸

 

Regarding the policy environment for business and innovation, the main concern is the lack of coordination between research policies and economic promotion policy. Whereas research policies solely focus on the quality of (state-) academic research, economic policies until very recently targeted the Ukrainian market and localisation conditions only. A lack of coordination is also evident when looking at the interplay between Ukraine’s federal government and its regional bodies. At the regional level, no comprehensive governance system for R&D exists. While few of the regional governance bodies have created special departments for STI policies, the majority however is lagging behind in this aspect. No data, however, are available as regards the performance of the regional R&D support departments.²⁰⁹

 

Financial frictions are particularly detrimental for start-ups, SMEs and firms in the service sector, which face difficulties collateralizing investments and innovation activities.²¹⁰ These particularly affect domestically owned firms that depend on the domestic financial system. In Ukraine, around 40% of business founders report difficulties in accessing finance. While substantial, this is around half the level in Azerbaijan, Mongolia, Turkey, Georgia, Kazakhstan and Kyrgyzstan.²¹¹ The funding gap is even more pronounced for R&D performing companies in transition economies. In Ukraine, around 80% of companies surveyed said that inadequate own finances limited their innovation activities, while 54% identified inadequate state financial support.²¹²

 

In Ukraine, the majority of funds for innovation activities come from the enterprises’ own resources. In

 

2011, enterprises contributed 53% of innovation expenditures, although this was much lower than the 72% average over the period 1998-2011, and sharply down from a peak of 88% of innovation expenditures in 2005. The decline in the share of own resources for innovation activities was accompanied by increases in financing from foreign sources and banks. The average contribution of banks to innovation financing over 1998-2011 stood at 14% but has been highly variable – as high as 38% in 2011, but only 7.8% in 2010, for example. Foreign investors financed a substantial share of innovation expenditures in 2009 and 2010, corresponding to large investment inflows in the chemical sector. The low share of state and local budgets (around 1-2%) is remarkable by international standards, and shows very limited public support for innovation financing.

 

Despite the financial crisis which severely affected the banking system in Ukraine, there is evidence that finance is less of a constraint for enterprises compared to other features of the Ukrainian business environment (e.g. corruption, access to land, tax administration). Ukraine ranked in 23^rd position for

 

“Getting Credit” in the World Bank’s Doing Business survey in both 2012 and 2013.²¹³ However, this is at the aggregate level, and may mask significantly different conditions for start-ups and SMEs.

 

While the bulk of SME financing in Ukraine comes from banks, credit unions and pawnshops, there are government supported credit guarantee schemes in place targeting energy efficiency and competitiveness, which are open to SMEs. Specifically for SMEs are national programmes of support

 

208 Yegorov, ERAWATCH Country Reports 2012: Ukraine, 2013, p.23

 

209 Ibid., p.31

 

210 D. Czarnitzki and H.L. Binz (2008), R&D Investment and Financing Constraints of Small and Medium-Sized Firm, ZEW Discussion Papers 08-047, ZEW – Zentrum fьr Europдische Wirtschaftsforschung / Center for European Economic Research, Mannheim.

 

211 See E. Nikolova, F. Ricka, D. Simroth (2012), Entrepreneurship in the transition region: an analysis based on the Life in Transition Survey, EBRD Working Paper No. 141, London.

 

212 I. Yegorov, Innovation Policy and Problems of Creation and Development of the National Innovation System in Ukraine, Centre for S&T Potential and Science History Studies, National Academy of Sciences of Ukraine, paper presented to second session of the UNECE Team of Specialists on Innovation and Competitiveness Policies, Geneva, 14-15 February 2008, quoted from UNECE Innovation Performance Review Ukraine (2013).

 

213 http://www.doingbusiness.org/data/exploretopics/getting-credit: accessed on 2 May 2016.

 

implemented by the State Export-Import Bank of Ukraine (Ukreximbank), including preferential financial support provided by the Ukrainian Fund for Entrepreneurship Support (UFES). The Law on Mandatory State Social Unemployment Insurance provides a lump sum allowance for unemployed members of the workforce starting their own business.²¹⁴ At present (april 2016), however, there is no public institution with a specific mandate to support innovative enterprises or start-ups in Ukraine.²¹⁵ The absence of dedicated support to innovative SMEs can be explained by the ongoing fiscal consolidation drive, together with general reluctance to commit resources to this area given problems with past schemes (including corruption). The not anymore existing State Agency for Science, Innovation and Informatization was leading work to secure the authorized capital for a Fund to support small innovative businesses.²¹⁶

 

SMEs access to finance has been and continues to be an area of focus for major international financial institutions, including the International Finance Corporation (IFC), the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD). Typically, resources are provided to local banks for on-lending to SMEs under different programmes in areas of importance for Ukraine’s economic catch-up.²¹⁷

 

Based on various sources (data from official sources as well as from the Ukrainian Association of Investment Business (UAIB), specific survey and case studies), there are estimated to be around 700 venture funds in Ukraine.²¹⁸ Total assets in these funds were slightly less than Ђ2 billion in 2009.

 

Analysing the structure of target companies – mostly brokers, consultancies, construction, and trade – reveals that these venture capital funds (VCs) are overwhelmingly vehicles for acquiring or managing equity stakes in companies. However, closer analysis reveals some evidence of real venture capital flows,²¹⁹ although venture funds supporting innovation tend to be of foreign origin, with domestic funds predominantly focused on real estate and related areas. However, figures on investments are scarce, with detailed documentation and analysis even scarcer.

 

Development of the Ukrainian VC infrastructure is held back by an incomplete legal framework, for example in relation to taking minority stakes in businesses or the introduction of option schemes. Consequently, a number of funds and even enterprises that received VC investments are registered abroad. Besides these VC specific issues, more general difficulties of doing business in Ukraine increase the risk of failure for start-ups.²²⁰