Corporation (KOTEC

efforts, as Lach, Neeman, and Schankerman (2021) show. However, depending on whether the financial problem regarding information asymmetries centers on screening and identifying good projects from bad ones, or successful upgrading, the preferred policy should be an interest rate that is higher or lower than the market rate. This contrasts with many public programs that finance technology acquisition, which almost always provide a lower-than-market interest rate.

Credit guarantees provide a mechanism for lenders to mitigate risk and work as an insurance scheme to cover some portion of the losses to lenders associated with extending credit to firms investing in risky technologies. For instance, the Korea Technology Finance Corporation (KOTEC) provides an innovative policy instrument to finance technology (see box 7.4). It offers credit guarantees based on a technology appraisal to provide clear signaling to banks to finance the development and acquisition of new technologies. While the model has been exported to other countries, the capacities required to appraise the technologies suggest that this type of instrument is more likely to be effective in upper-middle-income and high-income countries.

Policy makers should keep in mind some key elements in implementing finance instruments (Cirera et al. 2020):

■ The need to leverage the broader commercial environment. While government loans are often justified in the context of a weak financial market, policy makers should bear in mind that the ultimate objective is to create a competitive financial market that finances technology. Before launching a loan scheme, policy makers need to consider the alternatives underpinned by commercial initiatives, and work with the financial sector to reduce information asymmetries and ensure future availability of finance from commercial banks for technology upgrading. ■ Complementary policy measures. Firms that face financing problems can also be subject to weaknesses such as low capacity to exploit technology. In such cases,

BOX 7.4 Credit Guarantees for Technology through the Korea Technology Finance Corporation (KOTEC)

KOTEC (also known as Kibo), a nonprofit financial institution established in 1989 in the Republic of Korea, facilitates technology financing for innovative small and medium enterprises (SMEs), mainly through provision of technology appraisal services and credit guarantees (figure B7.4.1). Target beneficiaries are technologically viable but collateral-constrained SMEs with limited access to credit from traditional financial institutions.

KOTEC’s Kibo Technology Rating System (KTRS) appraises the future values of the technologies retained by SMEs based on competency, marketability, and commercial viability of

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