The Minister of Science and Technology Naledi Pandor wants business to increase its spending on research and development (R&D). Making it easier for firms to access the country’s R&D tax incentive might help. As can cutting other red tape.
Engineering News reported this week that Pandor told a symposium at the National Advisory Council on Innovation’s on Thursday that investment by businesses in R&D was R6.5-billion in 2013, falling back to levels invested in 2004.
She said this was a major concern as businesses had a bigger effect on exports and job creation than investment by universities and the government in R&D. However she said the latest survey from 2014 showed an improvement in business R&D.
Business (including state-owned enterprises) accounts for just 46% of all R&D spending. However from 2009/10 to 2013/14, business expenditure grew by only 5.7% compared to 21.4% from 2004/5 to 2008/9, the department said this week..
The government has set a target for gross expenditure on research and development(GERD) to reach 1,5% of GDP by 2019. However, the latest survey, released last month, shows that expenditure remained flat at 0,73% between 2011/12 and 2013/14.
Pandor said South Africa the National Treasury’s VC Company tax incentive scheme's could help to boost VC investment.
The challenge is that most VC companies that have been accredited by the National Treasury are more keen on investing in safe, ordinary run-of-the-mill small businesses, rather than risky start-ups with innovative ideas (see this earlier post).
In addition she says she wants the Technology Innovation Agency (TIA) to refer beneficiaries of its Technology Innovation Fund to international VC investors so they can access second-round funding. Just fixing the R&D incentive might help.
Fixing the incentive
Pandor's department is currently conducting a review of its R&D tax incentive, which she said earlier this year would likely be released in the middle of this year. The task team to assess the incentive was set up in November last year.
The approval of applications under the R&D tax incentive have turned to a crawl, after the government in October 2012 changed the application process – from one of company’s having to get pre-approval granted before they could take advantage of a generous deduction of 150% of R&D costs.
In February critics told Moneyweb that the pre-approval process is at fault as it requires officials to try to assess future R&D, which he said is “unrealistic” and that the process introduces long delays (some wait up to 180 days for a response, according to one consultant – way behind the department’s target of 90 days).
The department had since put specific measures in place to clear the backlog in the adjudication process, including weekly adjudication meetings and contracting technical experts to evaluate the applications.
Pandor told Public Sector Manager magazine in November last year that her department continues to receive and process applications for the R&D tax incentive and that by 30 June 2015, the department had received 905 applications since the introduction of the pre-approval process and 589 (65%) of those have been finalised.
The department has previously pointed out that the quality of the application forms received varied considerably, from well-completed ones to some in which almost no information was provided. This meant that the department had to request the required information from the companies in order to evaluate the applications.
The companies applying and the Adjudication and Monitoring Committee appeared to understand certain eligibility requirements differently, and this created the impression that the administrative processes for the Incentive were cumbersome. It was therefore necessary to amend the act to clarify the requirements for accessing the Incentive.
Pandor said there was a need to improve communication with applicants to ensure there was a better understanding of what information is required when completing an application. She added that officials at the department are available at request to assist applicants in this regard.
Figures presented by the department in Parliament in August 2014 revealed that up to February 2014, 810 companies had participated in the incentive from when it was launched in November 2006. About R44.1 billion in estimated R&D expenditure was reported by companies between November 2006 and February 2014.
The problem is most the applicants are large companies. An analysis by the department of the 240 companies that applied for preapproval in 2014/15 showed that 44.2% (106) of the applicants were companies with an annual turnover of R40 million and below.
Large companies constituted 49.6% (119) of the total and the remaining 6.3% (15) did not disclose their turnover size.
More funding, easier IP access
In addition the government could also spend more on funding innovation. A review of the
Technology and Human Resources for Industry Programme and another of the Support Programme for Industrial Innovation (SPII) last year, have found government wanting in its commitment to funding innovation, according to a report in October.
The Estimates for National Expenditure in the 2016 Budget for the department show that SPII will increase by only 5.8% per year over the next three years – from R60.9m to R67.6m.
The government along with universities and research institutions could also do more to make it easier for businesses to acquire intellectual property (IP) licenses from universities and technology housed by universities (such as this initiative).
It doesn't help that applications for the licensing or the sale of publically-funded IP have to be approved by Nipmo, a body set up in 2010 to encourage commercialisation of local IP. So far universities say officials process requests timeously, but the process still scares entrepreneurs off from seeking to acquire university IP.
One ray of light is a new initiative by business to set up a R1.6 billion SME fund which will provide venture capital through accredited investment vehicles. The government has promised to match the business sector's investment.
While Pandor has made some advances - such as adding a seed fund in recent years (see this post) - to encourage the emergence of more innovative entrepreneurs, the state can do more to make it easier to register and access IP, get further funding and carry out R&D.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a