The funds have demonstrated their **flexibility** by adjusting to changing conditions. The _Fondo de Desarrollo e Innovación_ (FDI) is the best example of this. To apply for resources, the FDI uses open competitions, thematic and regional competitions, bid tenders for specific topics or one-stop windows. This flexibility is well received by clients because it permits a rapid response to their requests. However, some clients complain about the Fund’s operational variability. And, when new products are developed, the Fund tends not to close down older products with less demand. The result is “growth by aggregation,” leading to confusion among potential clients.

If the funds offer **relevant services,** the private sector responds with investment. Indeed, private sector contributions to the technology and innovation projects are impressive. Nevertheless, in the cases of pre-competitive projects, this contribution is relative, since many of the projects are financed through the universities and technology institutes. These institutions support the projects with existing equipment and installations and staff members. However, the result is that the researchers, not the private sector, control the R&D projects—practically without oversight.<sup>51</sup> One way to improve the **relevance and leveraging** of public programs would be to require larger copay from participating enterprises **.** However, this option is best when there is a larger private contribution and the project includes less risky technology, greater private appropriation of the results and less externality (and diminished social profitability). In addition, reducing the fund’s support as a proportion of the total project cost could result in limiting participation to larger firms. The only way to assess the effects of changes in the copay requirement would be to carry out an impact evaluation.

Public resources channeled through the funds generate a greater positive **social impact** than alternative projects. Evaluations of the impact of projects sponsored by FONTEC, FONDEF and _Fondo de Desarrollo e Innovación_ measure firm earnings and consumer surplus by the shifting of resources to other activities, which is the result of efficiency gains from innovation. Using conservative assumptions on the diffusion of innovation, and restricting the support of the funds exclusively to the innovation’s progress during the implementation period, the results of the evaluations are broadly positive, resulting in a high social benefit.<sup>52</sup> FONTEC provides direct support to projects that adopt or adapt innovation, more than precompetitive research and development. In these types of initiatives, it is more likely to observe private funds replacing public resources. On the other hand, one study of enterprises supported by FONTEC concludes that public resources provided the incentive to realize projects that would not otherwise have been done. Moreover, a study of databases of two surveys from 1995 and 1998 of innovations in applied technologies in more than 450 Chilean manufacturing enterprises identified crowding-in by public innovation subsidies. The study compared innovation between a base year (before using fund support) and later years and found that the businesses increased their spending on innovation more than the original public contribution. Firms that did not use the funds did not invest as much in innovation spending. The results showed that for every dollar supplied by FONTEC, the firms invested US$1.30 from its own funds.<sup>53</sup> Universities and technology institutes have also learned how to submit winning applications for grants from FONDEF and _Fondo de Desarrollo e Innovación_ . However, the true motive is to continue to finance their operations, rather than moving findings into business applications. This is consistent with the analysis that led to the World Bank-supported project with CONICYT, which includes strategies for private sector use of technology experts from technology centers and universities. The

> 51 See Mullin et al., (1999); Crespi and Rau (2000) and observations by an Inter-American Development Bank mission charged with evaluating advances science and technology in INVERTEC-IGT (1999).

> 52 Gerens (1996, a, b and c ). See Crespi y Rau (2000) for a detailed analysis of the methodology.

> 53 See: Wallsten, S.J. (2000): “The effects of government-industry R&D programs on private R&D.: the case of the small business innovation research program.” RAND Journal of Economics 31 (1); Lach, S. (2000): “Do R6D subsidies stimulate or displace private R&D. Evidence from Israel.” NBER Working Paper 7943. See also Benavente (2002) and ILADES (1998).

29