Innovation is the main driving force of economic development for developing as well as developed economies. With their flexibility and responsiveness, Small and Medium Enterprises (SMEs) play a vital role in innovation. SMEs have to innovate to fill the opportunities created by the changing and globalizing marketplace.

However, in order to facilitate the innovative activities of SMEs, appropriate economic and policy environments are necessary. The Daegu Initiative on SME Innovation Action Plan is an opportunity for each economy to establish appropriate economic and policy environments, so that innovative SMEs can realize their potential, and increase the innovative capacity of the individual and regional economy.

2. INNOVATION AND THE ROLE OF APEC

While SME innovation drives economic growth, SME innovation depends on the economic and policy environments. Depending on the individual economy, there may be areas for improvements, to facilitate innovation. APEC can play a crucial role in helping economies identify the areas and elements which could be addressed, and thus make positive contributions to improving the environment for innovation. APEC is in a unique position in that APEC includes a diverse group of member economies with different strengths and weaknesses. Thus, APEC can recognize the diversity of difficulties that economies face, and share the wide-ranging experiences and abilities of its members in suggesting possible approaches and alternatives.

3. THE OBJECTIVE AND STRATEGY OF THE DAEGU INITIATIVE

The Daegu Initiative seeks to improve the economic and policy environments of all member economies, to make them more conducive to SME innovation. The objective of the Daegu Initiative is to help each APEC member economy identify those factors which can be improved to accelerate innovation. The Daegu Initiative is based on the spirit of voluntarism, consensus-building, combination of individual and collective actions, flexibility, comprehensiveness and open regionalism. The Daegu Initiative also complements "The APEC Integrated Action Plan for SME Development (SPAN)" by encouraging the member economies to take a more active and focused role in making their economies more friendly to innovative SMEs. The member economies will, through the Daegu Initiative, identify cooperative and efficient measures to facilitate SME innovation through preparing voluntary reviews, information sharing, and robust discussion among peers.

The Daegu Initiative will ask all members to consider submitting an Innovation Action Plan, based on a common Template. The Innovation Action Plan will be a set of activities which lists how the members will improve their environments for SME innovation by 2020.

Member economies will maintain discussions on specific areas of importance for innovation and on each member's progress, and in 2010, the members will carry out self-assessment on their progress. In 2010, the members may decide to proceed with the second five-year cycle of the Daegu Initiative, which would last until 2015. The members may then decide to proceed with the third cycle, where the final self assessments would take place in 2020.

4. THE MODALITY OF THE DAEGU INITIATIVE

The Daegu Initiative is intended as a long-term measure which will run in five year cycles. For each cycle, the SME Working Group will develop a common Template for "SME Innovation Action Plan" which each member economy will utilize. The Innovation Action Plan will ask each member to review its domestic economy and policies to examine specific elements deemed important for fostering SME innovation.

For the first cycle of the Daegu Initiative, the SME Working Group will determine, based on previous APEC-related research and discussions, what elements in the following areas are crucial for establishing an innovation-friendly economic environment, and list those elements in a common Template. These areas were identified as important for innovation by the SME Working Group and member economies:

a. Developing Human resources and technology through linkage between industry and educational and research institutions

Human resources and technology development are the raw material for innovation. Since educational institutions are responsible for human resource development, and research institutions are responsible for research and development of science and technology, it is important to facilitate cooperation between industry and educational and research institutions.

b. Accessing to specialist assistance and advice

SMEs face barriers in fully exploiting innovative opportunities due to size and capability constraints. Allowing them to gain easy and inexpensive access to specialist technical and managerial expertise should help them in getting their innovative products and services to market more quickly.

c. Enhancing availability of capital to innovative SMEs

Capital is the fuel for SMEs engaged in innovation. Thus, healthy SME innovation requires adequate availability of capital, both debt and equity, for credit-worthy enterprises.

d. Networking and clustering for innovative SMEs

Networking and clustering have been shown to have positive externalities. Further, networking and clustering accelerate innovation by gathering resources, for example, specialists and experts, and allowing them to share knowledge.

e. Establishing appropriate legal and regulatory structures

Robust legal and regulatory structures designed to establish and enforce intellectual property rights, competition policy, and facilitate the quick and inexpensive establishment of firms are vital to all SMEs and especially important in encouraging innovation among SMEs. The absence of such structures can stifle innovation while undermining the ability of SMEs to compete.

f. Establishing a market consistent economic environment

Under a market consistent economic environment, innovative, efficient SMEs will have the greatest opportunities to access the resources they merit and require while facilitating firms to freely enter and exit the market.

g. Developing methodologies for effectively measuring progress in the implementation of innovation programs for SMEs

The development of statistics and other methodologies for measuring progress concerning SMEs and innovation is required if further and more in-depth analyses of SMEs and innovation are to be made on a factual and scientific basis. In order to establish such statistics and measurements, APEC member economies may choose to develop mutually compatible definitions, so that data can be compared across members.

Members agree to implement a process for reporting progress, sharing best practices and knowledge of measures to enhance the environment for innovative SMEs that incorporate the following principles.

(1) A common template for designing Innovation Action Plan will be drafted; agreed and distributed to all member economies.

(2) Economies that wish to participate in this initiative will prepare, before the 2006 Ministerial meeting, an Innovation Action Plan setting out past achievements, short term plans and long term plans, for addressing each of the areas set out above. Long term plans should list plans to up to 2020, the target date for all members to achieve the Bogor Goal.

(3) Each year, for the first five years, at least one of the seven areas, in turn, will be a theme for reporting and in-depth discussion at the Working Group meetings.

(4) The areas should be used as a means for prioritizing SME Working Group projects.

(5) In 2010, member economies may submit a self-assessment report on the progress of the Innovation Action Plan. The self-assessment reports will examine whether and how much the member economies implemented the measures which they had reported in their SME Innovation Action Plan, and how successful those measures have been in dealing with those elements.

(6) Based on the self-assessments and the discussions in the SME Working Group, the Working Group may submit a report to the SME Ministers. This report will include the following:

• Guidelines for facilitating SME innovation in APEC member economies

• The best practices of member economies

• The possible collective actions that the members can take

(7) In 2010, the members will decide whether to proceed with the second round of the Daegu Initiative, and how that will be put into effect. Reviews based on the revised Innovation Action Plans will take place in 2015. If the members agree to proceed with the third cycle, the process will be repeated again with the final review to take place in 2020.

5. THE TIMEFRAME FOR THE FIRST CYCLE

SMEWG I - 2006
A Task Force of member economies will prepare a detailed Implementation Plan to give effect to these principles. The Term of Reference of the Task Force is attached as Attachment A. That Plan will be submitted for approval at the SMEWG I meeting in March 2006.

SME Ministerial Meeting 2006
Member economies, which decide to participate, will publish their Innovation Action Plan based on the agreed template for distribution at the meeting.

2007-2010
Each of the seven areas of the Initiative will be, in turn, a theme of discussion in SMEWG meetings.

SME Ministerial Meeting 2010
Participating member economies may choose to submit self-assessment on the status of their Innovation Action Plan.

• To prepare detailed Implementation Plan of the Daegu Initiative for report at SMEWG I of 2006.

• To prepare the Common Template for report.

• Two Co-chairs: Korea and Vietnam

• Members: Canada, China, New Zealand, U.S., Mexico

• Ex officio member: One APEC Secretariat staff

• General: The Task Force will work, in principle, through on-line. Nonetheless, the Task force would convene a physical meeting, if necessary.

• By Nov. 30, 2005: First draft of Implementation Plan

• By Dec. 30, 2005: Comments on the first draft from all member economies

• By Jan. 30, 2006: Second draft of Implementation Plan

• By Feb. 15, 2006: Comments on the second draft from all member economies

• By Feb. 28, 2006: Final draft