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11 October 2016

Innovations development systemacy: why it matters

Kostyantyn Grygoriev

 

Director of Ukrsoft Plus company

"I hope that the idea of creating Innovation Development Platform as an integrator of investment processes in the sector will create  conditions for attracting investments in perspective defense projects".

Republished from Liga: http://bit.ly/2mLJ9oW

The development of innovation in any country in the world is an evolutionary process that occurs in order to maintain competitiveness. Thus, business creates advantages in the market for itself, the state realizes its own political and economic interests.

Unfortunately, only individual companies are involved in the development of innovation in Ukraine, resulting in a very significant gap even within some sectors. Some businesses implement quite voluminous programs to modernize production, improve efficiency, while others do not have the resources to do so or are simply not willing to change. This gap is the sign non-systemacy, that is there is no single unifying driving factor that would push all participants for the development of innovation.

One of the solutions to the problem on how to encourage companies to implement innovation is attracting foreign market players. They bring new technological solutions in the system, stimulate competition, offer new opportunities.

However, many countries deliberately keep some sectors closed to ensure the survival of local players. Market participants lose a market incentive to introduce innovations, and all the benefits of the innovation process in the state are minimized. As a result, the economy loses efficiency, the cost of production does not decrease, the competitiveness of companies in international markets is poor. Ultimately, the consumer suffers obtaining the product of inferior quality.

One prominent theory is based on the assumption that customs and regulatory mechanisms help the state minimize the risks of businesses. In reality, this allows only increase the profit of the company or industry for a short period of time. However, this profit has nothing to do with the development of innovation. This is a proved practice.

For these reasons, the defence industry is a good example of a specific “closed” sector. It should be understood that, firstly, it will remain closed. Secondly, Ukraine has inherent limitations in export and in free market. In fact, free “defence” market does not exist at all. That is why it is a good example of areas in which it is impossible to engage in the development of innovation without systematic approach.

Science is moved by the teams

The hypothesis that the heritage of Soviet science remained in Ukraine is wrong. It has gone long ago. The vast majority of research and design teams who worked in Ukraine at the time have not exist anymore. Some individuals are still working, but these are not the teams. Science is made not by individuals but by teams and organizations. That is, before planning commercialization of national science, one must gather information about its actual state, and then make attempts towards commerce.

In Ukraine, there is almost no ecosystem of consuming innovation products

Investment come to the areas where risks are lower. Creating innovative products is a very risky step at all stages: starting from chances to complete the implementation of the idea (after created first prototype) and finishing with challenges related to product demand in the market.

There are less risks where there is an ecosystem of innovative products consumption. Take a look at the microelectronic industry of China. Direct consumers of Chinese innovative product are the Chinese themselves. Some items are made directly in China, some are imported from other countries. But successful introduction of innovation is possible through a similar ecosystem only. It is unfortunately absent in Ukraine.

Another way to reduce risks for investors is to trust in funds. Professional sectoral funds have the ability to adequately evaluate the projects and make their economic and investment expertise. In other words, the analysis of the attractiveness. That is, issue is not money, but the structure that can convert the money into money.

There are also direct investment of the so-called donors into specific sectors. It should be understood that the investors are mentioned businesses which fund innovation developments from their own budget. Are they investors? Yes, they are. Is it the only optimal type of investors for our economy? Probably not. However, these are highly specialized companies that can make the most effective investment in a particular sector. The only point is that such companies often do not have the relevant qualification to manage the investment process.

Is the defence sector “blind” for investors?

In Ukraine, the defence sector has not ceased to be consolidated around a single centre. More recently private companies began to appear with their products and narrow specialization. However, only the companies that operate in the market for ten or twenty years has full understanding of the infrastructure and projects, into the implementation of which the financial flows should be directed.

Given the fact that the defence industry has some export potential its market is not limited by internal needs, the prospects for the industry in terms of attracting investment are quite large. We know that many international customers show interest in Ukrainian defence products. So for investors, this area can seem closed at first glance. However, the existence of the right partner is a direct way to invest effectively.

Let's imitate the situation: based on the study of a foreign market there is a need for creating a particular product. Ideas of how this product can be created are available enough. However, there are no own funds to realize the concept. In addition, if access to the market is blocked, the investor ceases to invest in the project. A professional partner is required, and investors understand this. For this reason, the funds exist. Their function is to deeply understand the infrastructure and ecosystem of consumption of these products. The investor gets involved in the project not directly but through the fund: he trusts money to the managed fund that places money in a right secure manner.

The real picture in Ukraine now is that most investment in the defence sector comes from companies that has operated in the market not for a year of so. Nevertheless, there are no other conditions. I hope that the idea of creating Innovation Development Platform as an integrator of investment processes in the sector will create such conditions.