Any Government would be in favour of improving a country’s productivity. Improving productivity is the key to economic growth and development. But productivity itself a result, not something that you can act on. Sadly, Portugal’s new Government will not be able to push a button and improve productivity.
The country may blame its politicians, the IMF or the EU for the current crisis but the real cause seems to lie elsewhere. Innovation, technology and entrepreneurship are the real factors behind productivity improvements.
Innovation is not a theoretical concept. It’s about responding to novel customer needs, using new technology to improve a product line – it’s also common practice in many companies globally. The progressive decadence of some (or most) companies in Europe is related to their lack of innovation. Portugal is part of a trend, not an outlier.Technology-based businesses are rare in Portugal. Most companies are SMEs which offer low added value services or commodity products.
From my experience, I believe (although I have no quantitative data to back it up) that Portuguese companies are good at controlling costs. Cost cutting is a good principle in itself but will only get you that far when you are trying to enter into new markets or facing new customer needs. A company that thrives only be cutting costs will face a difficulty sooner or later when its markets change or when emerging economies start producing the same products at an even lower cost.
There are of course alternatives and solutions to foster innovation and increase productivity.
One of the first practical reforms which the new Government could undertake would be to restructure InovCapital, the state-owned venture capital fund. InovCapital has invested over 130 million Euros in the past years. The fund takes minority positions and has over 150 companies in its portfolio – there could be more as the exact number is not known.
One of the first odd facts about InovCapital is its investment policy in terms of sectors. A number of its investments are in industries such as textiles and the production of footwear. These are in general low added value industries which are under pressure from emerging markets competitors. Innovation takes many forms and there are innovative companies in mature industries. However, should textiles and footwear constitute investment priorities?
Seen from the outside, InovCapital’s structure hardly seems appropriate to its mission. It has about a dozen “analysts” and a five-man Board. That’s more than 15 companies per analyst. In fact, none of the analysts seem to be involved in the management of portfolio companies. Can anyone even understand and control 15 businesses without any support? I would say that InovCapital’s contribution to the development of its portfolio companies is probably limited.
So we have a Government-sponsored fund making equity investments into a large number of companies and then making limited contributions to their development… That sounds like subsidies. It would seem that InovCapital “invests” about 1 million Euros per company. This is a small amount in terms of supporting any company in its development.
One of the fund’s priorities should be to improve its investment policy: it should be more focused in terms of sectors, which would develop its own internal competencies and sector knowledge.
InovCapital should also consider making fewer bets of a larger size. This would improve the chances of the portfolio companies and would enable the fund to bring some value to the table and take part in portfolio company development.
InovCapital does not release any real information to the press about its investments. This opacity extends to its financial statements and the returns from its investments. Some of InovCapital’s projects are in fact innovative, for instance its investment into Principal Power and Vestas’ offshore test wind turbine off the coast of Portugal. However, no-one knows about the investments as the details are rarely disclosed.
In fact, one can question whether a Government-sponsored venture capital fund should exist at all.
Is it naïve to think that companies invest in breakthrough products? It would seem that, in the majority of cases, companies spend R&D money to enhance their product line. Most breakthrough products are developed by stand-alone entrepreneurs, as part of University research programmes or using funding from non-profit organisations. Clayton Christensen has the full explanation in his book “The Innovator’s Dilemma
From this perspective, Government should be funding Universities and non-profit organisations to foster innovation. This could be more productive than throwing disguised subsidies at companies that operate in traditional sectors with a history of low productivity.
Innovation Models 