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DIT SMEs Forumholding

V INSME Annual Meeting

Financing SMEs’ Innovation at times of global financial crisis

Salvatore Zecchini April 21, 2009

Jumeirah Emirates Towers, Dubai, United Arab Emirates

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• SMEs, especially innovatives ones, are hit harder by the current global financial crisis than other firms.

• More vulnerable, because they involve higher risk and weaker financial structures.

• Still they deserve special attention, because they are essential for long-term economic growth.

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Our focus:

- Scale of the financial problem for R&D and innovation

- Main stumbling blocks

- Solutions adopted in OECD countries

4Source, OECD-Eurostat Entrepreneurship Indicators Program, “Measuring Entrepreneurship: a digest of indicators”, 2008

5Source, OECD-Eurostat Entrepreneurship Indicators Program, “Measuring Entrepreneurship: a digest of indicators”, 2008

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Source : OECD, Main Science and Technology Indicators, October 2008.

Main Science and Technology Indicators

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• SMEs generally invest less than larger firms in R&D and innovation.

• R&D and Innovation expenditure is very sensitive to firms’ financial constraints and to business cycle.

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Cyclicality of innovation

Business funded R&D, patents (applications to the European Patent Office), trademarks (filed at the US Patent and Trademark Office) and GDP

(Annual growth rate for the total of OECD countries; divided by standard deviation)

Source: OECD, Patent database.

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Innovation expenditure growth in the Italian Enterprises

var % 2000-2006

-12,0

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

10-49 employers 50-249 employers > 250 employers

Source: “La ricerca e sviluppo in Italia”, ISTAT, 2008

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SMEs investing in in-house innovation (% of SMEs)

2002 2003 2004 2005 2006 2007 2008EU EU 30,67 30,67 30,67 30,35 30,02 29,70 29,38BE Belgium 42,90 42,90 42,90 41,86 40,81 39,80 38,80BG Bulgaria 15,14 15,14 15,14 15,14 15,14 15,14 15,14CZ Czech Republic 31,73 31,73 31,73 29,85 27,97 26,21 24,56DK Denmark 40,81 40,81 40,81 40,81 40,81 40,81 40,81DE Germany 46,15 46,15 46,15 46,22 46,29 46,36 46,43EE Estonia 40,35 40,35 40,35 38,70 37,05 35,48 33,97IE Ireland 47,72 47,72 47,72 43,24 38,76 34,74 31,14EL Greece 33,45 33,45 33,45 33,08 32,70 32,34 31,97ES Spain 26,47 26,47 26,47 25,52 24,57 23,65 22,77FR France 28,27 28,27 28,27 28,27 28,27 28,27 28,27IT Italy 28,07 28,07 28,07 28,07 28,07 28,07 28,07CY Cyprus 33,75 33,75 33,75 35,65 37,55 39,55 41,66LV Latvia -- -- -- -- -- -- --LT Lithuania 21,01 21,01 21,01 19,36 17,70 16,19 14,81LU Luxembourg -- -- -- -- -- -- --HU Hungary 13,20 13,20 13,20 13,21 13,23 13,25 13,27MT Malta -- -- -- -- -- -- --NL Netherlands 26,16 26,16 26,16 26,71 27,26 27,82 28,39AT Austria 42,32 42,32 42,32 41,69 41,05 40,43 39,81PL Poland 19,44 19,44 19,44 18,33 17,23 16,19 15,21PT Portugal 33,39 33,39 33,39 33,75 34,10 34,46 34,82RO Romania 16,16 16,16 16,16 17,04 17,93 18,86 19,83SI Slovenia -- -- -- -- -- -- --SK Slovakia 16,03 16,03 16,03 16,98 17,93 18,93 19,99FI Finland 33,96 33,96 33,96 37,42 40,89 44,67 48,81SE Sw eden 41,83 41,83 41,83 41,83 41,83 41,83 41,83UK United Kingdom -- -- -- -- -- -- --HR Croatia 24,41 24,41 24,41 24,41 24,41 24,41 24,41TR Turkey 28,18 28,18 28,18 28,18 28,18 28,18 28,18IS Iceland -- -- -- -- -- -- --NO Norw ay 28,10 28,10 28,10 27,01 25,92 24,88 23,88CH Sw itzerland 34,40 34,40 34,40 34,40 34,40 34,40 34,40

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Sources of financing difficulties:

- Cash-flow problem and profit squeeze

- Credit rationing

- Reduction in fundraising for equity capital, seed and VC investment, private equity

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Other consequences:

- Breakdown of supply chains

- Kowledge network disruption

- Redirection of R&D resources

Risk of more destruction than creation.

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Leverage of the Italian manufacturing enterprises

Source: “Rapporto sulle tendenze nel sistema produttivo italiano”, Bank of Italy, November 2008

low low-middle high-middle high1983 55,9 52,1 56,3 59,1 53,01984 57,2 54,5 58,3 60,0 52,41985 55,4 55,1 54,8 58,3 50,01986 53,0 52,5 52,8 55,7 47,01987 52,1 52,9 53,3 53,0 45,31988 53,1 53,4 54,3 54,8 45,11989 53,8 55,0 54,7 55,4 45,01990 54,5 56,2 54,9 55,4 47,91991 53,1 54,0 52,8 56,3 45,51992 56,7 56,5 57,7 60,2 47,11993 57,5 55,9 63,1 59,4 48,51994 55,4 56,1 62,2 53,3 47,41995 55,1 56,7 61,1 53,3 45,81996 54,1 55,6 57,8 51,7 49,31997 53,7 56,3 52,4 52,3 52,71998 54,2 57,6 53,6 51,7 52,11999 53,2 56,5 52,2 51,8 49,62000 51,1 54,2 51,3 49,6 45,72001 52,3 54,8 51,9 52,1 47,42002 51,8 54,7 52,4 49,2 49,12003 51,0 54,0 50,8 48,4 49,32004 49,4 54,2 48,6 46,2 45,92005 47,6 51,4 47,4 45,0 43,72006 48,1 51,6 49,5 44,7 43,2

year TotalInnovation intensity by enterprise

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Short term debt on total financial debt in the Italian enterprises

< 250 251 - 500 501 - 1000 > 10001983 42,2 65,5 56,8 61,7 28,21984 47,5 66,3 63,5 59,5 34,51985 47,7 67,0 62,7 62,9 31,91986 48,6 66,5 63,3 61,2 32,31987 49,1 67,2 62,2 62,2 32,01988 52,3 68,7 64,1 61,6 34,91989 54,5 69,6 66,9 62,0 37,11990 55,9 70,5 66,8 66,6 36,71991 50,7 68,7 66,7 63,7 30,71992 52,0 68,8 66,8 64,3 33,01993 58,5 71,6 67,4 67,7 44,01994 56,2 72,0 64,1 65,9 38,01995 56,6 73,1 59,7 66,2 39,31996 63,8 70,7 56,6 55,1 60,71997 66,6 69,5 65,7 65,7 64,31998 65,0 69,7 64,3 60,0 60,41999 64,1 66,6 63,0 63,4 61,22000 66,3 67,8 65,2 62,9 65,32001 64,9 67,5 65,5 63,1 62,02002 65,3 68,1 66,5 65,5 61,82003 61,9 67,1 62,2 59,3 57,22004 55,1 62,7 63,6 55,5 46,22005 54,0 60,9 60,1 54,9 46,52006 56,8 67,2 56,9 52,4 48,2

year TotalEnterprise size by employers

Source: “Rapporto sulle tendenze nel sistema produttivo italiano”, Bank of Italy, November 2008

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Banks with tighter lending conditions

Source: EcoWin, in “Denmark National Bank”, Monetary Review, 4th Quarter 2008.

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Global venture capital investment 2000-2008 in USD

0,00

1.000.000,00

2.000.000,00

3.000.000,00

4.000.000,00

5.000.000,00

6.000.000,00

7.000.000,00

8.000.000,00

2000 2001 2002 2003 2004 2005 2006 2007 2008

Mio

. US

$

Source: VentureXpert, 2009

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Recent investment trends in the US

Source: PricewaterhouseCoopers and National Venture Capital Association

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Impacts on SMEs (Cf. Table 1) SME demand for bank credit (Cf. Annex 2)

Demand Working capital & Payment

delays

Exits (Insolvencies and

bankruptcies)

Total Short-term

Long-term

OECD members Australia Inconclusive + Austria =

Belgium - - - + + = - - Canada - - + - +

Czech Republic = Denmark + + Finland - - + + + France + + - - -

Germany - = - - - Greece - - - + =

Hungary + - + - Ireland + + +

Italy - + + + - = - Japan - + Korea - + + -

Mexico - + Netherlands - + - -

New Zealand - - - + + - - Spain + + +

Switzerland = UK - - + + - - + - - -

USA - - - - - + - - - EC - - - - - - -

Non OECD members

Chile - Estonia =

Romania Russia

Slovenia = Thailand

Source: Country Reponses to the 14 January OECD WPSMEE Questionnaire on the Impact of the Global Crisis on SMEs and Entrepreneurship Financing and Credit reform Economic 2008/09.

Experienced or expected impacts of the crisis on SME and entrepreneurship financing

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Export facilitation

Alleviating working capital

shortage in the economy

Easing tax payments

Easing procurement

payment procedures

Creation and extension of

loan & guarantee schemes

Mediation and monitoring

Australia • •Austria • • • •Belgium MediatorCanada • •  •  •Czech Republic • • •Denmark •Finland • •France • • • • Mediator •Germany • •Greece •Hungary • • •Italy •  •  •  • Monitoring  •J apan • •Korea •Mexico • • • •Netherlands • • • • •New Zealand • • •Spain • • •Switzerland  • • •UK • • •USA • Monitoring •EC • •

Chile • • • •Estonia •Romania •Russia •Slovenia • • •Thailand •

EIB- IFI • •

OECD

Non-OECD

International Financial Institutions

A. Measures supporting sales, cashflows and working capital (Annex 5)

B. Enhancing SME access to liquidity, especially to bank lending

(Annex 6)

C.Strengthening pro-

investment measures (Annex 6)

D.Strengthening capital base and private

equity and venture capital

(Annex 7)

Source: Country Reponses to the OECD WPSMEE on the Impact of the Global Crisis on SMEs and Entrepreneurship Financing, Turin, 26-27 March 2009

Policy responses

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Government approachSupply-side measures:-loan guarantee and direct lending-tax incentives-public-private partnership in equity investment-investment subsidies -promotion of leasing and factoring

Demand-side measures:-macroeconomic demand support-public procurement-innovation-oriented restructuring-new funding for research

Regulations and Standard setting

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Private Equity & Venture Capital Markets Country

Austria 1 bn € to support small and medium sized companies:- Participation-Fund for SMEs: 40 million € pa for 2009 and 2010;

FinlandThe government will set up a risk capital fund that will act as a minority investor in Venture Capital or MBO –funds or directly in companies on equal

terms with private investors.

Hungary

A) The New Hungary Venture Capital Programme has been designed to improve the financial status of Hungarian SMEs by providing early-stage equity financing. The Hungarian capital market is relatively underdeveloped in this field; larger transactions are dominant – only a few market players are involved in financing SMEs in their seed and start-up stages. Under the Program, Venture Finance Hungary Plc. – as the fund manager of a Fund of Funds (FoF) – relays resources to venture capital funds. A total of HUF 35 billion is being allocated to the Program, 85% of which is going to be financed by the European Union. The partners of Venture Finance Hungary Plc. will be venture capital fund management firms, who are tasked with raising a fixed proportion of additional private funding to the resources committed by Venture Finance Hungary Plc. The abovementioned partners will be selected by open tender. The amount of the investment may have a transaction size of an annual EUR 1.5 million. Potential target enterprises: SMEs in the early (seed or start-up) or growth stage, which were founded no more than five years prior to the investment decision and have a net annual turnover not exceeding HUF 1.5 billion in any business year.

B) A Japanese-Hungarian Venture Capital Fund (SBI Europe Fund) has also been announced in December 2008 with effect from first quarter 2009. This is the first private equity fund established by a public bank and a private investor in the Central and Eastern European region, focusing on the SME sector. The Fund plans investments in the range between €1 million and €20 millions, of around €5 to €7 Million on average in exchange for majority if possible, but in exceptional cases, minority equity interest will be considered. ELAN SBI will be the Fund Manager for the SBI Europe Fund and will target investments in promising companies with high growth potential, with no sector preference. Ideal investment targets will be companies with established management teams, existing revenues and fast growing profits. The Fund will seek to realize exits within 3 to 4 years. The committed amount is EUR 100 million (60 % by the SBIH Group and 40% MFB)

MexicoCapital for Development Schemes seek to increase the supply of venture capital (Seed Capital Program and Fund of Productive and Infrastructural

Development Projects FOPRODE).

UKCapital for Enterprise Fund will provide £75 million of equity, made up of £50m of Government funds and an additional £25 million from Barclays,

HSBC, Lloyds TSB and RBS to provide equity and quasi equity of between £250,000 to £2 million for companies with a turnover of up to euro 50 million who have viable business models and growth potential in need of long term capital.

ChileCORFO Venture Capital for Innovative SMEs will contribute to investment funds that back the creation or expansion of SMEs with innovative projects

and high growth potential.

SloveniaThe first public venture capital company (PDTK) will start to operate in 2009 with a budget of 35 million EUR. PDTK will complement private

investments in “start-up" and innovative companies with the high-growth potential.

Source: Country Reponses to the OECD WPSMEE on the Impact of the Global Crisis on SMEs and Entrepreneurship Financing, Turin, 26-27 March 2009

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Other measures to be considered:

Dissemination platforms

Networking

Code of standards

Exit markets for VC

Innovative clusters

Innovative infrastructures

Financial tutoring

Infrastructure for dialogue and consultation

Monitoring of financial constraints

Subsidizing highly skilled workers

Addressing social consequences of t.p.

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R & D and innovation depend on an entire system of institutions, infrastructures and critical players.

No Government package of measures can alone substitute for a coherent effort by all the parties in such a system.

What’s at stake in innovation is the return to high and sustainable economic growth and to better our society and living standards.