Methodological foundations for the effectiveness evaluating of innovative projects

plan

The effect evaluation in innovation management is an important component not only of the process itself, but also a necessary function that should be considered in more detail.
Nevertheless, in the modern theory and practice of innovation management there is still no single concept of evaluating the effectiveness of innovation.

The reason for this scientific and practical problem lies in the fundamental difference between innovation projects and investment projects, for which a single generally accepted system of evaluation based on profitability has been developed.
These differences are as follows:

First, the profitability of many innovations has a postponed strategic character. For example, managerial innovations, such as changes in the organizational structure of the company, takeovers and joint ventures, introduction of new methods of personnel management, transition to new quality management systems, etc., give their results in a large time interval in relation to the period of investment. The profitability of marketing innovations - entering new markets, repositioning of goods, changing the promotion strategy and many others - is rather unforeseeable and can often be evaluated only in the context of the growth of the overall competitiveness of the company.

Secondly, innovation activity is carried out under conditions of uncertainty and increased risk, as the process of project development and implementation is rather long, and the external environment changes very quickly. Therefore, it is difficult for specialists to predict and evaluate at the beginning stage the final result of the innovation.
Thus, it is wrong to project the methods of evaluating innovation and investment, and copy the methods of investment projects to evaluate the effectiveness of innovation.

First of all, it is necessary to find out the types of effect in innovation. No less important is the choice of indicators for calculating one or another type of effect.

Based on the fact that innovation is the most important element in the development of modern production, it is especially important to obtain various types of effect from the introduction of innovations. The evaluation of such an effect is important both for the level of an individual company (organization), and at higher levels of economic management.
Depending on the results and costs that are taken into account in innovation activities, the following types of effect are singled out:

-economic - takes into account all types of results and expenses as a result of innovation activity (profit from licensing, from the introduction of inventions, patents, know-how; increase in sales, increase in labor productivity, increase in stock return, increase in the speed of turnover of current assets, etc.);

- scientific and technical are characterized by novelty, easiness, usefulness, aesthetics, compactness (number of registered patents, increase in the coefficient of automation of production, labor and organizational level of production, increase in the competitiveness of raw materials and the company as a whole);

- financial, which is based on the results of financial indicators;


- resource - shows the impact of innovation on the production and consumption of a certain type of resource;

- social - takes into account the social results of innovation realization (increase in income of workers, increase in the degree of satisfaction of workers' needs, improvement of labor and recreation conditions, quality of life);

- ecological - takes into account the impact of innovations on the environment (noise, electromagnetic field, brightness, vibrations); it is shown in the decrease of emissions, reducing the volume of waste, increasing the environmental friendliness and ergonomics of goods;

-ethnic-cultural - takes into account the by-product of entering a new way of life, as a result of adaptation to rapid changes - new technologies that form the culture of future life, its system of values, new tastes, norms of behavior and attitudes.

In addition, innovation impact performance indicators can be divided along the following lines:
- place of obtaining - at the local (local) and national levels;
- by the purpose of determination - absolute and compared;
- by the degree of increase - one-time and multiplication;
- by the time of accounting of results and costs - estimated period and yearly.

The local effect characterizes the result of innovation activity at the level of the enterprise or other economic entities.
The national effect describes the overall effect in the field of production and use of innovations.

The absolute effect characterizes the overall result that the company receives from innovative measures in a certain period of time.
The compare effect characterizes the results of comparing possible alternatives of innovative measures and selecting the best of them.

One-time effect characterizes the overall result (primary) that the company receives from innovative activities.
Multiplier effect characterizes the results of innovation activity, which covers not only companies, but also other industries, as a result of whose activities the multiplier effect occurs, that is, its multiplication.

The duration of time, which is taken into account when calculating the innovation effect in the calculation period, depends on such factors as:
-term of innovation;
-the period of use of the object of innovation;
-the degree of certainty of the source of information;
-the requirements of investors.

The general principle of evaluating the effectiveness of innovation activity is to compare the effect (result) from the use of innovations and the costs of their development, production and consumption. The effect from the application of innovations can characterize the rate of profit, which, on the one hand, may consist of savings from cost reduction, and on the other hand - from the increase in prices as a result of the new quality of innovative products.
As noted above, indicators are selected to assess the effectiveness of innovation.
In general, the problem of determining the effectiveness and selection of the most advantageous options for the innovation realization requires, firstly, the excess of the final results from their use over the costs for the development, production and realization of innovation, and secondly, the comparison of the result obtained from this result with the results from the use of other similar options for innovation. Especially the need for rapid evaluation and proper selection of the innovation option is especially critical in companies using rapid amortization, for which it is required to significantly reduce the period of replacement of existing machinery and equipment with new ones.

2. The indicators of innovation's economic efficiency

The main indicators of economic efficiency of innovation projects are most often profit, payback period, net present value, index of profitability ("return on investment"), internal rate of return.

Profit norm - this coefficient is calculated as the ratio of the average yearly profit from innovation to one-time start-up capital, which is used to realize the innovation. This index in its economic nature is close to the following index - payback period.

Payback period is a term that characterizes the return of funds as a result of innovation implementation and the profit obtained. In addition, the payback period can be used to compare it with bank rates of interest as a macroeconomic criterion of the efficiency of investment resources allocation.

However, underestimation of the time factor makes these indicators (profit and payback) not rather exact, and their use gives mainly approximate estimates of the efficiency of the innovation product. Adding the results and costs to one point in time should be done because the cost of funds differs for different years, depending on the degree of distance of the estimated year, the effect for which is calculated.
The following indicators are used for this purpose.

Net present income (total economic effect, net present value) is defined as the present value of cash flows over the full life of the innovation, reduced by the present value of investment costs over the same period.

Profitability index (profitability index, profitability) is calculated as the ratio of the present value of profit for the period of the innovation project to the volume of investment in this project.
This project is effective if this index is more than 1.

Internal rate of return is the discount rate, according to which the net present value of the innovation is zero, that is, the discounted cash flows of investment costs and profits are the same.

The model of using this indicator in the selection of options for innovation projects is the following: the greater it is, the higher the efficiency of the project.

If the internal rate of return on an innovation project is greater than the accepted discount rate, such a project will be economically efficient and will provide a positive amount of net new revenues. In addition, the advantage of this index is the ability to establish a "safety margin" for an innovation project. The internal rate of return is defined as a percentage and compared to the maximum allowed. This index is often used as a first step in analyzing an investment. Innovative projects with a rate of return of at least 15-20% are selected for additional analysis.

In practice, absolute efficiency is measured by such indicators :
1. the coefficient of economic efficiency of capital expenditures:
Ep= P/K,
where
P is the increase in profit as a result of the realization of this measure, compared to the basic variant.
K is the total amount of investment.

The calculated value of the coefficient should be compared with the normative coefficient (En). It can be taken by analog, established earlier by the Ministry of Economy: 0.15 - at introduction of new technology, 0.12 - at construction and expansion of enterprises. Often its subjects of economic activity set it within the range from 0.06 to 0.25 depending on the type of the project, the period of its operation, the financial condition of the subject. The project is considered to be effective if Еp is greater than Еn.

2. payback period of capital investments (Tp) - a period of time, during which capital investments are paid back due to the received additional income (cost savings):
Tp = 1 /Ep.
The payback period is also compared with the normative (Tn). The project is considered effective if Tp is less than Tn.

3. annual economic effect from the project realization:
E = P - En * K.
The cost of investment is multiplied by the normative coefficient of economic efficiency to bring to the same size in time, because the profit is determined for one year, and investments pay off over several years. The normative coefficient shows what share of the investment should be recovered in one year.

To choose the best commercial solution in the process of realization of innovations, comparative economic efficiency indicators are used:
1. Presented costs:
Z=Ci+En*Ki ,
where Сi, Кi are yearly operating costs and investments for the i-th variant, accordingly. The condition for choosing the best option is the lowest cost value. The difference of the present costs of two variants characterizes the compared effect of introduction of the more effective one.

2. In the conditions of different production volume when choosing the best variant, the following is determined share of reduced costs ( that is, per unit of production Z1):
Z1=C1+En*K1,
where C1 - costs per unit of production.
K1 - share of capital investments.

A characteristic feature of modernity is the assessment of social results of innovation activity of the enterprise. This indicator is used directly in the calculation of economic efficiency of innovation projects. The social result of the innovative product, evaluated by the economic measure, acts as a phenomenon of social and economic at the same time because it meets both economic and social needs of society. In practice, the economic evaluation of social results related to the evaluation of the parameters of the human environment (industrial or natural). There are two ways of evaluating social outcomes:
the first - determine the losses from environmental pollution;
the second - comparing the costs associated with the realization of the variant of the innovation project that pollutes the environment and that does not pollute the environment.

Thus, in order to calculate the indicator of social and economic effect, taking into account losses from negative social results, it is necessary for the main indicators characterizing the efficiency of the innovative product to add the number of costs in the form of losses from pollution of the environment by industrial facilities. These can be one-time capital funds, additional investments or costs that affect the increase in the cost of production and, therefore, the reduction of the annual increase in profits from the introduced innovations.

3. The methods of estimation of innovation's economic efficiency

The concept of innovative projects' economic efficiency is one of the most questionable and problematic aspects of innovation management.
The need to evaluate the effectiveness of innovation projects appears in the following situations:

- when there are many innovative projects in different areas of the company's activity, different business units and there is a question about the priority of their financing;

- at the early stage of innovation project development, when the project-target group has several alternative projects for the realization of the innovation idea and the question appears about the choice of the most effective variant;

- at the final stage of the innovation project accepted for realization in order to analyze its efficiency.

The last situation is the most simple and understandable, since the analysis of the effectiveness of the implemented innovation is carried out by comparing planned and actual indicators. The project is considered to be effective if the set objectives are fully achieved and quantitative economic indicators are in line with the planned ones.

It is much more difficult to determine the system of criteria for selection and ranking of innovation projects at the initial stage of innovation activity.

The main criteria of innovation project efficiency include:

Commercial efficiency - takes into account the financial effects on the project participants.

National economic efficiency - reflects the effectiveness of the project from the point of view of the national economy as a whole and for regions and industries.

Budgetary efficiency - takes into account the impact of the project on budget expenses (revenues).

Commercial efficiency (financial justification) of the project is determined by the ratio of financial costs and results that provide the required rate of return.

Commercial efficiency can be calculated both for the project as a whole and for its separate parts, taking into account their inputs (obtained effects). In this case, the flow of real money acts as an effect at the t-th step.

Within each type of activity there is an inflow Pi(t) and an outflow Oi(t) of money. Let us denote the difference between them by Fi(t):
Fi(t) = Pi(t) - Oi(t) ,
where i = 1, 2, 3.... activities
Real money flow F(t) is the difference between cash inflows and outflows from investment and operating activities in each period of the project (at each calculation step):
F(t) = (P1(t) - O1(t)) + (P2(t) - O2(t))+...

Fiscal efficiency indicators reflect the impact of project results on revenues and expenses of the relevant budget at various levels of the economy.
The main indicator of budgetary efficiency used to provide justification for financial support measures at any level of the project is the budgetary effect.

Budgetary effect (Bt) for the t-th step of project realization is defined as the surplus of budget revenues (Dt) over expenses (Pt) in connection with the realization of the given project:
Bt = Dt - Pt

Indicators of national economic efficiency show the effectiveness of the project from the point of view of the interests of the national economy as a whole, as well as for the regions, industries, companies (organizations) involved in the realization of the project.

When calculating indicators of economic efficiency at the level of the national economy, the results of the project include:

- final production results ( revenues from sales in the domestic and foreign markets of all manufactured products). This also includes revenues from the sale of property and intellectual property (licenses for the right to use inventions, know-how, computer programs, etc.) created by participants in the process of project implementation;

- social and environmental results calculated on the basis of the joint impact of all project participants on public health, social and environmental situation in the regions;

- direct financial results;

- credits and loans from foreign countries, banks and firms, etc.

Social, environmental, political and other results that cannot be evaluated in terms of cost are considered as additional indicators of national economic efficiency and are taken into account when deciding on the realization and/or state support of projects.

The evaluation of future costs and results in determining the effectiveness of an innovation project is carried out within the estimated period, the duration of which is taken into account the duration of creation, operation and liquidation of the project, the average service life of the main technological equipment, and the investor's requirements.

Base, world and forecast prices are used for cost estimation of results and costs. The measure of economic efficiency in base prices is usually performed at the stage of technical and economic research of investment opportunities.

Various methods are used in the evaluation of innovation projects.

Static methods of evaluating the economic efficiency of innovation projects belong to simple methods that are used mainly for quick and close estimation of the economic attractiveness of projects.

They can be recommended for application at the early stages of innovative projects examination, as well as for projects with a relatively short investment period. Indicators for evaluating the economic efficiency of innovative projects include:
- total (or average yearly) profit obtained during the realization of the project;
- profitability of investments (simple rate of profit);
- payback period (return period) of investments.

Project profitability indicators characterize the amount of net profit that the project participants receive as a result of its implementation.

The total profit (TP) is defined as the difference between the total value results and costs resulting from the project realization:
SP = (Pt - Zt)
where Рt - the cost estimate of the results received by the project participant during the t-th time interval;
Zt - total costs made by the project participant during the t-th time interval;

Average yearly profit is a calculated indicator that determines the average amount of net profit received by the project participant during the year:
AP = 1/T* ( Pt - Zt)
where T is the duration of the investment period, years.

The project can be considered economically attractive if these indicators are positive, otherwise the project is unprofitable.

Profitability indicators can be calculated in relation to different economic subjects interested in participation in the project. For each of them, only the content and value of cost estimates of results and costs change. Thus, for a potential investor the economic results of the project realization are the expected income (for example, dividends) received by him during the period of the project realization. For the creditor, the economic results of the project are payments for the issued credit invested in the project.

Example.
Calculate the total and average yearly profit from the innovation project based on the following data:
- the innovation project is planned for 4 years;
- expected revenues from the project realization are 750; 1000; 800; 250 monetary units yearly.
- total costs: 1500; 240; 230; 800 monetary units.

Solution:
1. Total profit from the realization of the project:
P = (750 - 1500) + (1000 - 240) + (800 - 230) + (250 - 800) = 30 monetary units.
2. Average annual profit.
30: 4 = 7.5 monetary units.

Return on investment (ROI) allows not only to establish the fact of profitability of the project, but also to evaluate the degree of this profitability.
ROI (simple rate of return) is defined as the ratio of yearly profit to the investments made in the project:

ROI = P/I,
where P - profit from the project realization; I - start-up investments in the project.

ROI can be calculated on the data of one of the years of the project realization (usually the year corresponding to the realization of the project at full production capacity is chosen for this purpose), on separate years of the project realization at different degree of utilization of production capacities or on the average indicator of net profit.

The economic interpretation of the simple rate of return is to estimate what part of investment costs is returned in the form of profit during one interval of planning.


In this case, if the estimated value of return on investment is higher than the level of profitability on other alternative variants of capital investment, a potential investor can evaluate the usefulness of a more in-depth analysis of this investment project.

The investment payback period defines the period of time from the start of project investment to the moment when the net income from the project fully recoups the initial investment in the project.

A project is more attractive when its payback period is shorter and the start-up investment is quickly returned to the investor.

For projects characterized by a constant in value and evenly incoming net profit (Pc) and one-time capital investment in the project (Ic), the payback period (T) is determined by the formula:

T = Ic/Pc = 1/ ROI

Based on this formula, it is possible to estimate the payback period, using the ROI indicator for this purpose.

The disadvantage of the return period indicator is that this indicator does not take into account the financial results of the project beyond the payback period. Therefore, it cannot be used when comparing alternative investment options.

Dynamic indicators for evaluating the innovation project's economic efficiency are based on discounting cash flows.
They include:
- net discounted income,
- internal rate of return,
- modified internal rate of return,
-discounted payback period of investments.

The value of net discounted income (NDI) is calculated as the difference of discounted cash flows of income and expenses made in the process of realization of investments in the project for the projected period.

The essence of the criterion is to compare the present value of future cash receipts from the realization of the project with the investment costs necessary for its realization. Net discounted income (NDI or NPV) for a constant discount rate and one-time initial investment is determined by the following formula:

where
n - calculation period;
Pk - cash flows for the selected period of time;
i - discount rate;
IC - size of start-up investments.

A positive value of NPV indicates the practicability of making a decision to finance and realize the project, and when comparing alternative investment variants, the variant with the highest value of NPV is considered economically beneficial.

Example.
Determine the NPV of a project that, with an initial one-time investment of 1500 cash units, will generate the following cash flow of income: 100, 200, 1200, 1300 cash units.
The discount rate is 10%.

Decision:
NPV = -1500 + 100/(1+0.1) + 200/(1+0.1)^2 + 1200/(1+0.1)^3 + 1300/(1+0.1)^4 =
-1500 + 90.9 + 165.3 + 923.1 + 890.4 = 569.7 > 0

Conclusion:
This project should be accepted.

The return on investment (RI) index is calculated as the ratio of the net present value of cash inflows to the net present value of cash outflows (including start-up investments):
RI = St / I
where
I - investments of the enterprise at time 0.
St - cash flow of the enterprise at time t.

The rule for making decisions on the economic attractiveness of the project is the condition that if RI > 1, the project is considered economically profitable.

The internal rate of return (IRR) is understood as the value of the discount rate, at which the NPV of the project is equal to zero.

The meaning of calculating this coefficient when analyzing the effectiveness of planned investments is as follows: IRR shows the maximum allowable relative level of costs that can be associated with a given project.
For example, if the project is fully financed by a loan from a commercial bank, the IRR value shows the upper limit of the acceptable level of the bank interest rate, exceeding which makes the project unprofitable.

The discounted investment payback period DDP eliminates the disadvantage of the static method of investment payback period and takes into account the time value of money.

The assessment of economic efficiency of innovative projects involves their expertise.

Expert evaluation is formed on the basis of analyzing the scientific content of the innovation project, taking into account:
1) the clear presentation of the project concept;
2) clear definition of the project goal and research methods;
3) qualitative characteristics of the project;
4) actuality of the problem.

Expertise of innovation projects is an operation of systematic verification and control of the following indicators:

1) the quality of the system of normative-methodological, design and construction and other documents included in the project and the innovation management system;

2) professionalism of the project manager and his team;

3) scientific-technical and production potential, competitiveness of the project and the organization;

4) reliability of calculations made, the degree of risk and efficiency of the project;

5) the quality of the mechanism of project development and implementation, the possibility of achieving the set goals.

Task. Identify a list of investment risks of your innovative product. Give them an expert rating in terms of importance and possibility of realization. Fill the table in the document on the link.