Methodological and Technological issues in Technology Transfer

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5.3.1 Private-Sector Finance: Criteria and Forms

Private financial institutions invest in businesses - or specific projects - which can generate a financial return. However, they have no particular interest in any individual business and can typically choose from a very wide range of investments available to them. In selecting investments most financiers will focus on the two criteria of risk and return - higher perceived risk results in higher expected return, with the level being primarily set by the market. Different financiers will have different preferences for risk and return. An impact of the emphasis on risk, and compensation for that risk through increased return, is that the private sector will find it most difficult to finance high risk, longer term projects. Many environmentally sound technologies are essentially of this nature with low operating costs and high up front expenditure.

In trying to alter the behaviour of the financial markets, governments can choose regulation or persuasion. Regulation is unpopular with financial institutions, particularly internationally. Persuasion is difficult to initiate, but can ultimately be more successful, offering major benefits for relatively small outlays and gives rise to opportunities for private-public partnerships (discussed in Section 5.6). In seeking to persuade the way the financial markets allocate capital, governments can focus on four key aspects: the perception of risk; the calculation of expected return; the structuring of the financial package; and the transaction costs associated with that investment. However, to be relevant these aspects have to be looked at in the context of an individual financing problem or type of finance.

Understanding the role of private finance in technology transfer necessitates some understanding of the detail of different forms of finance in technology transfer. There is a very wide range of types of finance which are potentially relevant in financing technology transfer. Their relevance depends on the specific opportunity under consideration. Key factors are the scale of the investment and whether the investment is a venture (a business intending to grow and develop) or a project (a stand-alone specific entity - e.g., a power plant). Scale can be roughly divided into large (roughly at least US$20 million), medium (over $500,000), small ($10,000 to $500,000), or micro (say less than $10,000, but mostly from $10 to $100), although the size is to some extent subjective and, for example, will depend on the level of economic development.

It is also important to note that in many cases there may be two stages of financing required: e.g., the financing to establish the business of manufacturing/distributing the technology, and the financing for the end-users of the technology to enable them to purchase the technology. For example, financing the establishment of a PV module factory in the developing world has different challenges from providing finance to households to enable them to purchase the solar home systems produced by the plant. Table 5.2 summarises the applicability of different forms of finance to different scales and types of business.