Preface

The Innovation Fund for Small Technology-based Firms (Innofund) is a special government fund established on June 25th of 1999 with the approval of the State Council. With a definite purpose to support the technological innovation activities of the small technology-based firms and facilitate the transformation of R&D results, Innofund is distinguished from other nongovernmental fund or commercial venture capital by three main features. Firstly, it is policy-oriented, manifesting the macro policy guiding function of the government to promote the development of new and high-tech industries by encouraging the technological innovation activities of technology-based SMEs. Secondly, it serves as a “priming-pump”, running to attract more investment to technology-based SMEs from local governments, corporations and financial institutions. The objective is to promote the establishment of a new investment mechanism conforming to the objective laws of market economy for technological innovations of SMEs. Finally, Innofund is not aiming at profit-making for itself but taking revenue increase and job creations as the reward, therefore contributing to the restructuring and growth of the national economy.

By design, Innofound provides three forms of funding including grants, loan interest subsidy and equity investment according to the specific characteristics of the projects.

The year of 2002 is the fourth operational year of Innofund. As in the former years, Innofund continued to provide funding to new and high-tech projects with major innovations in terms of technology development, manufacturing technique or product performance. Supports were further strengthened to projects in the fields characterized by rapid technology updating such as ICT and biotechnology. Priorities were continuously given to those projects with proprietary intellectual properties, small businesses founded or led by entrepreneurs with scientific and technological background or returned overseas students. In the meantime, Innofund continued to provide greater support to the implementation of the Western Development Strategy and the construction of “Mianyang S&T City”.

For the past four years of the implementation of Innofund, the overall performance of the Innofund projects has been rather satisfactory. The effects on supporting innovations of small technology-based firms and facilitating venture establishments have already come into view. With the joint efforts from various circles concerned, the operational mechanism and management system of Innofund has been continually improved and perfected. The public image and popularity of Innofund has increased progressively. In the future, Innofund will continue to comply with the principle of “Market-oriented, supporting innovation, encouraging venture establishments and standardizing management”. In the meantime, Innofund will make efforts to extend its service scope, giving full play to its function so as to make contributions to the implementation of the strategy of “revitalizing the country with science & technology”, to the industrialization of new and high technologies and to the economic growth accordingly.

I. General Review of Innofund Financing

The central fiscal budget allocated for Innofund in 2002 was 500 million RMB Yuan.

During this year, 4816 applications were received (including 601 applications carried forward from the former year of 2001) and 3344 applications have been reviewed through the appraisal process. 1472 applications were carried forward to the next fiscal year of 2003 due to budget limitation. Via evaluation by the expert team or evaluation agencies, 780 projects were selected and approved jointly by the Ministry of Science & Technology and the Ministry of Finance as the 2002 Innofund Projects. The total fund awarded is 540 million RMB Yuan (including 40.2 million budget surplus carried forward from the year of 2001). Among these projects, 596 were awarded with grants (404 million RMB Yuan), accounting for 75% of the total amount of capital awarded, and the rest 184 projects obtained loan interest subsidies.

The key technology fields supported by Innofund in 2002 continued to be Electronics and Information Technology, Biotechnology and Medicine, Advanced Materials, Automation Technology, Environmental Resources as well as New Energy and Energy Saving. Projects in Electronics and Information Technology still ranked first, accounting for 37.3% of all the projects approved. The project distribution by technology field is illustrated in Figure-1.

The top six areas with most awarded projects ranked as Beijing (114, 14.6%), Jiangsu (90, 11.5%), Sichuan (73, 9.4%), Guangdong (65, 8.3%), Zhejiang (62, 7.9%) and Shaanxi (54, 6.9%), which altogether accounting for 58.7% of all the awarded projects of the year.

II. Main Characteristics of Innofund Projects

Supporting Technological Innovations 
Supporting innovation is the basic point of Innofund. It is required that the projects awarded should have major innovations or substantial improvements in terms of technology, manufacturing technique or product performance. The level of technology should be at least up to a national leading position. Support to projects in the technology fields such as ICT and biotechnology which is characterized by rapid technology updating has been strengthened. Priorities have also been given to those projects with proprietary intellectual properties. Of the 780 Innofund Projects funded in 2002, 29 %( 226) projects hold 570 various patents and all the 153 software projects (accounting for 19.6% of all the awarded projects) awarded posses independent intellectual property rights. The awarded projects also include 18 National First-Class New Medicines and 23 National Second-Class New Medicines.

Encouraging Venture Establishments 
Priorities have also been given to the start-up companies that are founded or led by the well-educated technological/engineering professionals or returned overseas students. The undertakers of 276(35.4%) projects are registered with a corporate representative possessing an education certificate of a master or higher degree. Of these, 85 enterprises are founded by PhDs or postdoctoral researchers and 72 by returned overseas students. Small firms with a track record of less than 18 months account for 31% (242) of all the funded enterprises.

Accelerating Commercialization of S&T Achievements
As it has been the case, Innofund continued to facilitate the transformation of advanced scientific R&D results with good market potentials into commercial products. Of all the awarded projects, 30.8%(240) are derived from the national S&T programs such as the National High-tech Research and Development (863) Program, the National Key Technology R&D Program and so on. 16 %( 125) projects are developed jointly by industry, universities and research institutions.

Guiding Investment
To implement the awarded projects, it is estimated that a total investment of 5.27 billion Yuan will be needed. Among this investment, Innofund will provide 540 million Yuan (accounting for 10.2% of the total investment) with an accompanying funding of 310 million from the local governments. In the mean time, 1.71 billion Yuan of loans will be provided by financial institutions and 2.71 billion Yuan will be raised by the project undertakers themselves.

Promoting Economic Growth
Upon the accomplishment, the estimated accumulative sales income brought by these projects will total 19.1 billion Yuan with a net profit of 3.4 billion and a tax revenue of 2.5 billion. In addition, 28,000 new jobs will have been created.

Assisting Western Development
Continued support has been provided to the implementation of the Western Development Strategy and the construction of “Mianyang S&T City”. In the year of 2002, Innofund gave greater preference to the projects submitted from western areas, including “Mianyang S&T City”. Among the 780 projects awarded, 192 are from the western areas, accounting for 24.6% of all the awarded projects. 29 projects from “Mianyang S&T City” were awarded with a total funding of 19.2 million Yuan.

III. Overall Performance of Innofund Projects

The latest result of the semiannual and annual Innofund Project Progress Report shows that the overall implementation of the projects is proceeding well and preliminary effects have already come into view. According to the statistics from the 1984 projects investigated, 1354(68.3%) has fulfilled the milestone objectives on schedule and 133(6.7%) in advance. In other words, 75% projects have accomplished the prescribed milestone objectives.

According to the investigation on the 1984 Innofund projects mentioned above, 20.74 billion Yuan has been injected into these projects by the end of 2002, accounting for 99.8% of the total planned investment. According to the investigation on the capital of 9 billion Yuan injected into these projects in the year 2002, 460 million was granted from Innofund, 342 million was provided by the accompanying funding from the local governments, 2.89 billion was commercial loans from financial institution, 4.75 billion was internal capital generated by the enterprises and 555 million was raised otherwise.

Among the 1984 projects investigated, 535 projects were in the phase of R&D when awarded, 1099 in pilot production and 350 in scale production. By the end of 2002, 384 projects had moved into the phase of pilot production and 224 from pilot production into scale production. Of the same projects, 1362 of them did not enter the market when awarded and did not make any income. After one to three year’s implementation, 908 out of these projects have brought products into market. Altogether products from 1530(77.1%) projects have entered market and begun to make incomes for the undertakers. The overall improvement in project stage is shown in Figure-2.

As it is shown above, Innofund financing has directly facilitated the implementation of the Innofund Projects. In the meantime, Innofund has provided significant support to the innovation activities of the project undertakers, with both the economic and social benefits of the enterprises being continuously improved.

When awarded, the annual sales income of these 1984 projects totaled 4.77 billion Yuan. With the support from Innofund, this figure reached 26.6 billion at the end of 2002, increasing by 457%. The total tax revenue realized was 2.78 billion, increasing by 543%. The net profit reached 3.69 billion by 480% increase and the foreign exchange earned was up to 396 million dollars by 509% increase. The number of people participated in these projects moved up to 100,791, increasing by 86.5%. The overall economic growth of these projects is shown in Figure-3.

In terms of enterprise development, the total annual income of the undertakers of these 1984 projects amounted to 79.67 billion Yuan at the end of 2002, increasing by 95% compared with 40.89 billion at the time when the projects were awarded. The total tax revenues from these enterprises reached 6.66 billion, increasing by 128%. The net profit increased by 64% to a total of 7.53 billion and the foreign exchange increased to 925 million dollars by 98%。The total number of employees amounted to 293,411 with a growth of 30%. The overall development of project undertakers is shown in Figure-4.