The need for environmental sustainability and the confrontation of other social challenges, such as population aging and the impacts of the climate transition, have been imposing on countries an ambitious agenda of technological development. This is even more acute as digital innovations reach degrees of maturity and complementarity with each other, paving the way for new products, services and business models and changing the demands of the labor market and the international competitive environment.

In this context, it is crucial to accelerate investments in research, development and innovation, which has motivated the relaunch of industrial development strategies worldwide, as the IEDI has been discussing in many of its publications. In several countries, development banks are prominent pieces of the institutional framework responsible for putting these strategies in practice. 

Today's Letter IEDI addresses a study recently released by the IDB, the Inter-American Development Bank, entitled “Implementing innovation policies: capabilities of national development banks for innovation financing”. The work analyzes and compares the contemporary experiences of a set of national development banks, including Brazil's BNDES, in financing “high-risk” innovation projects, that is, precisely the most ambitious and potentially most impactful projects.

The document was produced by internationally prominent economists such as Stephany Griffith-Jones, emeritus researcher at the Universities of Columbia and Sussex and advisor to the Central Bank of Chile, José Antonio Ocampo, professor at Columbia University and current Minister of Finance of Colombia, and researchers Marco Carreras, Jiajun Xu and Anne Henow. 

The selected cases include, in addition to BNDES, the Colombian Bank for Foreign Trade (Bancóldex), the Public Investment Bank of France (Bpifrance), China Development Bank (CDB), the Corporation for the Promotion of Production (CORFO) of Chile, Korea Development Bank (KDB) and the National Financial Authority (NAFINSA) of Mexico. Some of these banks have a long history, such as CORFO and NAFINSA, established in the 1930s; others are more recent, such as the Chinese CDB, created in 1994, and the French Bpifrance, from 2013.

Development banks, according to the study, consist of a way for the State to act in the financial system, with the objective of solving market failures and, what is important in the innovative process, of “incubating new markets.” 

According to the IDB researchers, in addition to having their own legal personality, dedicated personnel and financial accounts separate from those of the State, development banks are not constituted to achieve short-term objectives or to maximize private profits, which distinguishes them from other financial institutions. 

They have an official development mandate and are therefore closely related to government strategies. But, at the same time, they can maintain relative independence from governments, especially operationally, by adopting adequate governance models and raising funds in the capital market, not relying exclusively on budgetary resources. 

In financing innovation, development banks can have outstanding advantages over other means of government stimulus, such as tax credits and innovation agencies, which carry out concessional financing.

This is because they can leverage additional resources in financial markets, can make decisions based on the merits of innovation projects and withstand greater technological risks, if their accountability structure and internal procedures allow, and can make long-term investments oriented towards addressing social challenges, circumventing short-termism and political capture.

Currently present in almost all developed and developing countries, regardless of the depth of financial markets, according to the authors, national development banks are crucial agents for the financing of complex and long-term investments and for the promotion of major structural transformations in the economy, such as the innovations necessary for the transition to a low-carbon economy.

In order to examine the recent experiences of these banks in financing high-risk innovation projects and to identify what capacities are needed to enable the successful implementation of innovation-appropriate financing, the authors conducted interviews with current and former employees of the selected banks and other agents of the innovation systems. 

The following are some of the main findings of the study. 

Innovation funding can take place either through horizontal programs or via sector-specific programs. Banks that contemplate radical and incremental innovations combine both programs and set goals broadly (Bpifrance, BNDES, Bancóldex). 

There are also those that adopt a narrower definition of innovation and more specific goals, focusing on highly innovative investments and sectors. This is, at least more recently, the case of Chilean CORFO, Chinese CDB, South Korean KDB and Mexican NAFINSA.

All banks analyzed use various mechanisms to identify impediments to innovation, which include periodic evaluations and reviews by independent evaluators; formal links with the science and technology system; dialogues with national and local stakeholders; development of internal capabilities in the area of productive transformation, among others.

Political cycles influence the actions of banks, but some are able to adopt a more lasting strategy. In countries with recent success in their industrial development, such as China and South Korea, the mandate and activities of development banks are more stable, helping to give greater continuity to industrial and innovation policies. 

In contrast, all the Latin American development banks analyzed have gone through different phases in their long history, from leading financial institutions and active actors in the economy to more restricted roles, due to changes in the priorities of national governments.

For the authors of the study, the form of capitalization of development banks (DBs)—and, therefore, the availability of resources for the institution—is an important channel of influence of the different political cycles. 

They argue that the ability to raise funds in the market is fundamental to reduce government interference and radical changes in the banks' strategies and thus ensure greater continuity of the financial support offered to the economy over time. Currently, the creation of investment funds by DBs has proven to be a successful expedient for raising additional resources from public and private sources.

While the government almost always sets the overall strategy, some development banks proactively interact with their governments to adjust and enhance existing programs based on their practical experience. In this way, they also help formulate the policies they implement. This is the case of the DBs of Brazil, although this role has been reduced in recent years, China, Colombia, France and South Korea. 

But there are also cases where development banks lack autonomy and capacity to propose, only implementing programs defined in higher levels of government, as in the cases of Chilean CORFO and Mexican NAFINSA.

There is a wide variety of instruments developed by DBs: loans, guarantees, grants, equity participation, venture capital and risk lending, and insurance and securitization products. Some are better equipped with instruments, such as the BNDES, Bpifrance, the Chinese CDB and the Colombian Bancóldex.

Others work with a smaller range of instruments, such as CORFO and NAFINSA. The Chilean institution is the only case studied that currently offers only indirect lending (that is, no first-tier credit at all), limiting its “challenge-oriented” activity, as suggested by the authors.

A greater number of instruments available allows banks to support different types of companies and investments and broadens the geographical scope of their operations. 

In the vast majority of countries, these banks operate credit schemes with broad sectoral coverage and, increasingly, act in sectors/activities considered strategic for the economic development of their countries and for tackling contemporary social challenges. 

This is a recent trend, with Chilean CORFO and BNDES, after 2014, as the exceptions, the authors point out. Still, although CORFO has no defined strategic sectors, there is one important exception: a program in the nonconventional renewable energy sector.

Smaller companies receive particular attention, but there are many development banks that also operate in large public and private investment projects, such as China's CDB, South Korea's KDB, France's Bpifrance and Colombia's Bancóldex.

The following are some notes on the BNDES.

•  The bank's innovation division is relatively recent as it dates back to the 2000s, but several horizontal and vertical programs have been launched to support innovation activities since then. 

•  Initially, BNDES supported innovation through a direct channel and, more recently, mainly through intermediaries.

•  At the beginning of the 2000s, it adopted a more “challenge-oriented” approach, identifying specific obstacles to innovation in strategic sectors. Currently, its approach is more horizontal.

•  The bank offers a full range of financial instruments for innovative companies, including venture capital, covering all stages of investment projects and appropriate to the size of the company.

•  Partnerships and collaborations represent a fundamental aspect of BNDES' activity, with the bank constantly working with other participants in the national innovation system.

•  The size of the support offered by BNDES to innovation is relatively small compared to the bank's overall disbursement: only 2.9% of 2020 disbursements. 

•  This portion of 2.9% of disbursements was the lowest of all banks analyzed with available data. It approached only the Chinese CDB in percentage terms (3.8%), but fell far short in absolute terms (200 times lower).

It is worth stressing some theses long defended by the IEDI, such as in Letters n. 834 “BNDES of the future, a bank committed to development” and n. 873 “The future of BNDES and the capital market in Brazil”: BNDES should place more emphasis on innovation and modernization of the national productive park through financing lines that emphasize the diffusion of new technologies to all companies.

Finally, the authors of the IDB document also highlight that the legal status of development banks and their alignment with international regulatory structures, in particular with Basel III, may represent a constraint on financing innovation. In this sense, they consider it important to assess whether these institutions should be subject to specific regulations, applying the general rules only to private institutions.

The full text is available in Portuguese.