During recent years, the term “innovation” has become ubiquitous. We define innovations as novelties rendering positive economic and social effects. Innovations can be technological (products or know-how) or managerial (business models or management styles). Innovations are an important contributor to a country’s competitiveness: they help increase economic growth and improve the standard of living, and also raise a country’s prestige in the international arena. That is why it is important to understand which factors spur innovations. Innovation is an invention that is commercialised and creates value added.
Does financial assistance from the state, for example subsidies, tax privileges, public contracts or direct investments, encourage innovation? This question is particularly important for Ukraine, with its limited state budget and ineffective government spending.
Innovation projects require heavy, long-term capital investments in research and development. It is important that the state provides financial resources for pioneering industries (especially in the early stages), when market mechanisms are not developed enough to provide long-term financing and there is low domestic demand for innovative products. Yet, in the future, after these enterprises have developed to a reasonable extent, they can freely compete on the international market. The case of rocket engineering in Dnepropetrovsk is an example of this. State investments will reap returns in the form of increased GDP, secured by a greater output of high value-added goods. Moreover, although it is possible to develop innovations exclusively without state intervention, this will take too long. As a result, many of Ukraine’s innovations will lose their applicability, and we will need to begin from scratch. Ukraine cannot afford to leave the important, highly technological industries, where it has retained considerable potential (e.g., aircraft engineering), to the uncertainties of time.

Today it is very difficult to attract long-term financial investments for risky innovation projects without state support. If we wait until the venture capital market is formed in Ukraine, the existing know-how may become outdated. The history of most centers of innovation (science cities, technology parks, etc.) reveals that a lot of them were developed thanks to government contracts or state programs of financial support. The development of the famous aeronautical and space centers, EADS, was possible largely due to public funding of scientific research and government contracts provided by EU institutions, which provided necessary demand for high-tech products. Currently, the Russian government is sponsoring the creation of a scientific and technological complex at Skolkovo—the biggest innovation project on former Soviet territory. International experience proves the successfulness of different types of state financial stimuli for innovation development.

To develop innovations, it is essential to create a competitive market and a favorable business climate which will attract foreign direct investments. Competition will urge enterprises to constantly improve their performance by introducing new and efficient technologies and modes of operation. Foreign companies will deliver breakthrough technologies along with a new corporate culture to Ukraine. Although in the short term this may not help secure investments in very specific high-tech areas, it would release the innovation potential of traditional industries, such as agriculture or construction, which are able to deliver much greater economic benefit. (During recent years, the share of enterprises introducing innovations in Ukraine has been consistently low at 10% to 11%).

To realize the majority of Ukraine’s innovation potential, it is enough to remove the existing barriers and let business do the rest. Innovation projects are, by nature, highly risky: it is very difficult to estimate the probability of their success in the early stages. In the case of the state, the choice of high-potential projects is further hampered by the fact that state bureaucracy lacks the necessary skills, motivation, and control for the job. As a result, the state often fails to select those projects that will benefit the public the most, and this in turn has a number of negative consequences. Firstly, state-sponsored projects do not provide return, which is a waste of limited resources. Secondly, high levels of subjectivity during the decision-making process lead to the distortion of economic stimuli, and it becomes more important to sell a project to the state rather than to create a product demanded by the market. Successful products can only be created by business in a competitive environment. For innovations to yield the maximum benefit, they have to be of a wide-scale and organic nature; subsidizing specific, hand-picked projects is unlikely to produce this effect. Budget financing distorts market mechanisms and wastes taxpayers’ money.
The motion as to whether state financial support is needed to encourage innovations will be discussed during the public debate organized by the Foundation for Effective Governance in partnership with Britain-based Intelligence Squared. The event is to be held in Kyiv on 16 September, 2010

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