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Investing in Ideas

March 31, 2015

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Leszek Grabarczyk, deputy director of the National Center for Research and Development (NCBR), a Warsaw-based government agency tasked with subsidizing scientific research in Poland, talks to Andrzej Jonas and Witold Żygulski.

The National Center for Research and Development (NCBR) was set up in 2007 under a law passed by parliament. What are its main responsibilities?

We are an institution that had no equivalent in Poland before. After our first three years, which means since 2010, our responsibilities and budget have increased nearly tenfold. You could say that our main task is to reconcile two sectors that for the last 25 years, after Poland regained independence in 1989, have been difficult to reconcile—the public domain and the private domain. When we discuss new technology, innovation, and research and development useful for commercial use and suitable for businesses, we need to clearly say that this cannot be done effectively, in a commercially profitable way, without good cooperation between these two sectors. If universities, technical universities and Polish Academy of Sciences institutes do not communicate with one another and work together with companies from the very beginning of specific research projects, it is impossible to achieve the desired objective—to bring about a situation in which the Polish economy will be based on knowledge to a much greater extent than it is now; based on knowledge and talent, and not on cheap labor.

We are generally considered to be an institution that finances scientific research and the development of technology in enterprises. In fact, however, the issue of financing—which means the selection of projects to be subsidized from public funds and operations related to this financing—is from our point of view far less important that the intellectual factor. The latter is essential for the appropriate use of public money, which is our main concern.

The projects we select must above all be original and not an attempt to imitate something that has already been invented somewhere else, for example in the United States. They must be the result of intellectual efforts by domestic talent. While it is easy to imitate ideas from Silicon Valley, it is much more difficult to create something competitive. Economically imitation may be profitable, but only in the short run. Return on investment in an original project will be many times higher than return on investment in a non-original project.

The NCBR’s experience from the last few years shows that providing money alone not only fails to solve problems, but creates them sometimes. Easy money causes laziness, a loss of energy that could be channeled into more ambitious projects, if less ambitious projects get public subsidies. It happens sometimes that all the effort is focused not on creating an original idea, but on writing a good application for funds. Therefore, the task of institutions such as the NCBR is becoming increasingly difficult. Our job is to look for and then finance innovations that stand a chance of becoming a breakthrough not only on the Polish market, but also internationally.

Our work also involves the issue of management. We try to enlist professionals with contacts on the largest and most promising sales markets to become part of the research and development teams tasked with carrying out the projects we finance.

Does this mean that a key task for the NCBR is to create conditions for the development and subsequently implementation of ideas?

Yes, but it’s worth noting that this is about the implementation of ideas not only at the initial of stage of scientific research, but along the whole road leading to the successful introduction of an invention, technology or innovation on the market. A smooth transition is needed from fundamental research to practical applications. Without this there can be no success in efforts to develop a knowledge-based economy. The strong position of the state of California and the Israeli and Finnish economies is determined by the fact that technological projects are brought to the market as quickly as possible there. There’s an efficient screening system at work there to filter out those ideas that have no chance of success on the market already at the stage of investing the money. At the same time, promising projects are covered by financial and organizational support throughout their entire duration until they start making headway commercially. Agencies that are the NCBR’s counterparts in the countries that I have listed pay less attention to formal aspects, such as the planned duration of a project. Support and co-financing continue if a project still has a chance of being successful on the market.

Presumably the NCBR’s work has to dovetail with the government’s economic policies?

Of course, but fortunately we work in an environment where this policy is not founded on the belief that the government is omniscient and knows best what area of the economy needs to be invested in at a given time. Such a belief was at work in the days of the Soviet bloc, and we all know what that meant for the economies involved. Today the economic “specializations” of individual countries are the result of an interplay of market forces. These specializations are determined by the companies themselves—business organizations whose survival depends on financial success.

Of course, in some cases, which means in countries such as the United States, Israel, Taiwan and South Korea, decisions on the thrust of economic development were also the result of geostrategic thinking, identifying the strategic needs of the state. From this point of view, it is possible to surmise, for example, that Poland will be investing heavily in energy technology in the coming years to ensure the full security of energy supplies, regardless of the geopolitical situation in Central Europe. It is therefore possible to predict that in the next five years or so Poland will begin specializing in technologies for more efficient use and generation of energy.

How much money did the NCBR spend in 2014?

5.5 billion zlotys. We will be able to spend as much this year if cooperation with the European Commission turns out the way we hope.

Business can be a difficult partner for science and vice versa. What methods does the NCBR use to marry the two up?

We want to bring about this marriage by using several basic tools. The first tool, used for a long time in the most developed countries in terms of innovation, is opening up opportunities to reduce the risk for companies in the case of individual technological projects by providing public funds to cover the costs of technological risk. Of course, unlike the United States or Israel, we are limited in this regard by the rules on state aid for enterprises in the European Union. But this is still handsome money.

From the beginning of this year, what the NCBR offers in this area will be even more encouraging. An entrepreneur will be able to apply to us at any time of year for public support for a R&D project to the tune of roughly 50 percent of the project’s costs. We guarantee a reply in just 60 days. We already tested the system in 2014. In addition, if the project fails and we decide that the failure resulted from the market situation or problems caused by technological risk rather than negligence on the part of the applicant, they will face no sanctions.

A second tool is targeted at large-scale research and development projects rather than projects by single companies. This is targeted at big companies. By Polish standards, that generally means businesses with substantial—20 to 50 percent—state ownership. What we offer involves the possibility of using public funds to co-finance projects designed to respond to the technological needs of specific companies or projects common to a specific industry as a whole. In the first case, these will be projects that will require the development of a technology demonstrator, which is the last, most expensive stage of research and development work. This is the last, ninth level of technology readiness, a large-scale investment that sometimes runs into tens of millions of zlotys. Our offering also implies that we are ready to incur both technological and market risk. Of course, all this must comply with the EU rules governing state aid, under which such aid has to range from 25 to 50 percent of the total cost of a project. The rest must be contributed by a given company on its own.

A third tool applies to cooperation not with entrepreneurs active in a specific industry, but with investors seeking the most promising research and development projects. The problem is these are usually very high-risk projects. It is estimated that from 5 to 10 percent of such projects are ultimately successful on the market. The biggest challenge for Poland now is to secure the know-how. We must learn to identify such projects, nurture them, which sometimes takes a decade, and bring them to a final successful conclusion, which means selling them to big corporate players or seeing them hit the stock exchange.

What level of involvement by private investors in research and development projects would you describe as satisfactory?

Public statistics show a steady increase in the level of interest from private entrepreneurs in investing in the search for new technologies, which is obviously a welcome trend for an agency like ours. The ideal level of involvement appears to be 65-70 percent. In Poland, this proportion has increased from 23-25 percent to 40 percent in the last few years. This is a good result, but the next stages, reaching first 50 percent and ultimately the 65-70 percent range, will be more and more difficult and take longer to achieve.

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