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GENEVA: Funding of innovation is becoming increasingly uncertain, with high interest rates taking a toll on the amounts venture capitalists are willing and able to dish out, the UN said Wednesday.

In a fresh report, the UN’s World Intellectual Property Organization (WIPO) found that 2022 was marked by swelling government and company spending on research and development, especially in areas like artificial intelligence and biotech.

But at the same time, the global value of the venture capital (VC) funding that helps transform ideas and inspiration into products and services plunged 40 percent, and is continuing to fall.

“There has been a drop in the investment environment,” WIPO chief Daren Tang told reporters in a virtual briefing.

“Venture capital funding is becoming more and more scarce.”

The drop last year came after a dramatic surge in such funding in 2021, as the pandemic spurred spending in new areas and in regions that do not usually receive a large share of such investments.

But the funding levels have not just evened out. Sacha Wunsch-Vincent, co-author of the report, said the decline had continued, with a 47-percent drop seen in the first half of 2023 compared to 2022.

“This is only the tip of the iceberg,” he told reporters.

Pointing to “a harsher investment conditions”, including slow economic recoveries and geopolitical tensions, he warned the current high interest rates especially “endanger the future of innovation”.

“Borrowing isn’t free anymore. It’s really the end of cheap money.”

At the same time, WIPO stressed that the picture for innovation was mixed, with 2022 also marked by a significant rise in R&D spending by corporations, to a record high of $1.1 trillion.

And preliminary data indicated that global government R&D budgets increased in real terms last year.

Patents also continued to rise, and while the value of VC funding dropped, the number of VC deals actually swelled, the report showed.

That boom was fuelled in part by activities in the field of artificial intelligence, Wunsch-Vincent said.

Information communication technology companies “were already spending a lot of money, ... but are now almost in an arms race for more spending on AI”, he said, also highlighting spending in pharma, biotech and construction.

A number of sectors that cut spending during the pandemic had meanwhile seen spending bounce back, including automobiles.

Wednesday’s report also comprised the UN agency’s annual ranking of the world’s most innovative countries, with Switzerland topping the list for the 13th year running.

But the Global Innovation Index 2023 showed that the innovation economy, long heavily concentrated in North America and Western Europe, is diversifying.

“It is getting more diverse, there are more engines of innovation around the world,” Tang said.

The top 10 list still includes mainly Western countries, with the exception of Singapore in fifth position, and South Korea in tenth.

The United States slipped to third position, with Sweden now in second, and Britain remaining in fourth.

China meanwhile dipped slightly from 11th to 12th place, but from 35th a decade ago.

China figures among the middle-income countries that have climbed the ranking the fastest in the past decade, alongside the likes of Turkey, India and Iran.

Since the pandemic started four years ago, Mauritius, Indonesia, Saudi Arabia, Brazil and Pakistan have meanwhile risen most, WIPO said. While the value of VC funding shrank last year, Wunsch-Vincent meanwhile said it was positive that the investments remained spread out geographically, and had not shrunk back to simply focus on the traditional centres of innovation.

Africa was the only region that did not see a decline in the value of VC funding last year, he said.

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