REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT on the implementation of the European Charter for Small Enterprises

TABLE OF CONTENTS

1. Key Messages

1.1. Creating the best possible environment for small businesses

1.2. Good progress made in implementing the Charter

1.3. Mutual learning and scope for more

1.4. Improving orchestration of small business policy

1.5. Future outlook

2. Progress by the Member States, Norway and the Commission in the Selected Priority Areas for this Reporting Period

2.1. Introduction

2.2. Financial matters

2.21.1. Recent developments

2.2.2. Conclusions and recommendations

2.3. Strengthen the technological capacity of small enterprises, including innovation

2.3.1. Recent developments

2.3.2. Conclusions and recommendations

2.4. Develop stronger, more effective representation of small enterprises' interests at Union and national level

2.4.1. Recent developments

2.4.2. Conclusions and recommendations

ANNEX - Summary of National Reports and Commission Activities in the other Charter Areas

1. Education and training for entrepreneurship

2. Cheaper and faster start-up

3. Better legislation and regulation

4. Availability of skills

5. Improving online access

6. More out of the Single Market

7. Taxation

8. Successful e-business models and top-class small business support

1. Key Messages

1.1. Creating the best possible environment for small businesses

Small businesses play a central role in the European economy. The average European enterprise employs no more than six people. In Europe, small businesses play a much more important role than in other parts of the world [1]. These small businesses are a key source of jobs, business dynamism and innovation.

[1] In Japan, for example, SMEs provide 33% of total private employment, the average Japanese company employing 10 people. In the United States, SMEs provide 46% of total private employment, the average American company employing 19 people. SMEs in Europe-19 (EEA plus Switzerland) provide 66% of total private employment, corresponding to over 80 million jobs. Figures concern non-primary private enterprises. Observatory of European SMEs 2002 / No 2, "SMEs in Europe, including a first glance at the candidate countries".

To allow small businesses to play their full role in meeting the Lisbon objective, to make sure that they can flourish under the best possible conditions, the Heads of State or Government endorsed the European Charter for Small Enterprises in Santa Maria da Feira in June 2000.

This is the fourth annual implementation report on the Charter [2]. It aims to provide a brief overview of the main measures undertaken by the Member States and the Commission to implement the Charter in the past year. As such, it seeks to identify strengths and weaknesses across the European Union, to highlight promising national measures and to issue recommendations for future action and thereby contribute to the strengthening of policy in support of small businesses and to maintain the momentum generated by Lisbon.

[2] First report COM(2001) 122 final, 7.3.2001; second report COM(2002) 68 final, 6.2.2002; third report COM(2003) 21 final, 21.1.2003.

The Charter recommendations are just as relevant to enterprises in other European countries. The endorsement of the Charter by the candidate countries in April 2002 in Maribor, was followed by endorsement by the countries of the Western Balkans [3] at the European Union - Western Balkans Summit of Thessaloniki in June 2003. 34 countries have now committed themselves to applying the "think small first" principle embodied in the Charter.

[3] Albania, Bosnia and Herzegovina, Croatia, former Yugoslav Republic of Macedonia, Serbia and Montenegro.

The Charter brings together all aspects of policy affecting small businesses at European and national level. In adopting this comprehensive approach, the Charter contributes to focus the attention of policy-makers at the highest level on the need for continuous improvement.

The Competitiveness Council in March 2003 held a public debate based on the Charter report and a number of other documents. In its conclusions on entrepreneurship and small firms [4], it further called upon Member States to listen to small businesses, to speed up the implementation of the Charter and to give strong consideration to good practices. It also invited both the Member States and the Commission to further integrate the use of voluntary quantitative and qualitative targets in the Charter implementation.

[4] Competitiveness Council Conclusions on entrepreneurship and small firms, 3 March 2003.

Shortly afterwards, also in March 2003, the Brussels European Council [5] gave renewed impetus to the Charter process. The European Council encouraged Member States to speed up implementation of the Charter in an innovative way to ensure more effective involvement and consultation of small businesses in the policy-making process. It also asked Member States to lend greater focus to the Charter, making full use of the possibilities offered by appropriate national targets and peer review.

[5] Presidency conclusions of the Brussels European Council, 20-21 March 2003, point 23.

The Conference of Ministers responsible for small and medium-sized enterprises, organised by the Greek Presidency in February 2003 in Thessaloniki, also greatly contributed to keeping up the momentum.

In connection with this Conference, Ministers had the opportunity to discuss progress with representatives of small businesses and to hear their concerns at first hand. It stands to reason that the participation of business organisations in the Charter process is indispensable. Clearly, initiatives that are carried out in the name of business need to be assessed by representatives of businesses, to help judge on their impact in practice. The great interest in the Charter shown by business organisations and their increased involvement in its implementation is highly appreciated.

The Commission welcomes the continued support of the European Parliament [6], the European Economic and Social Committee [7] and the Committee of the Regions [8] for improving the environment of small businesses and ensuring that the Charter is implemented in full.

[6] European Parliament resolution on "Entrepreneurship in Europe", PE 322.026, 23.10.2003.

[7] Opinions of the European Economic and Social Committee on "The role of micro and small enterprises in Europe's economic life and productive fabric", INT/174, 18.6.2003, and on the "Green Paper - Entrepreneurship in Europe", INT/178, 24.9.2003.

[8] Opinion of the Committee of the Regions of 9 October 2003 on the Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions on Industrial Policy in an Enlarged Europe, ECOS-017, 27.10.2003.

1.2. Good progress made in implementing the Charter

Three and a half years since the European Charter for Small Enterprises was endorsed, the Charter has become a symbol for many SME [9] organisations that public administrations - at EU, national and also regional and local level - take small businesses' concerns on board.

[9] Small and medium-sized enterprises.

Progress on the Charter recommendations has undoubtedly been made during this period. Individual measures taken may sometimes appear tiny but certainly contribute to the overall improvement of the environment for small businesses.

This year's report examines in more detail progress made in three selected priority areas: Consultation of small businesses, access to finance, in particular venture capital and micro-loans, and innovation and technology transfer.

Consultation of small businesses is an area where a dividing line has previously been found between those Member States that systematically consult small businesses and those that do not. While the number of new initiatives taken in this area is limited, some encouraging developments have nevertheless been observed in the last year. For example, the exchange programmes between public administration officials and SMEs in the Netherlands and in the United Kingdom introduce a new channel for listening to small businesses.

On the whole, it appears that a number of countries have well-established systems in place for consulting businesses. There is a wide array of consultation mechanisms and the structures vary from country to country according to national circumstances. An established practice, the Swedish Committees of Inquiry appointed by the Government to prepare legislation allow for involvement of stakeholders throughout the preparatory process. Other Member States could take inspiration from this approach.

Given the crucial importance of listening to small businesses to be able to think small, there still needs to be constant pressure for improving regular and systematic consultation of small businesses. "Listening to SMEs" is a key action of the Entrepreneurship Action Plan, and the Best Procedure project on the involvement of SMEs in national policymaking will provide Member States with further examples of good practices and policy recommendations.

Access to finance is fundamental to translate business ideas into reality. Although important progress has been made in this area since the Charter came into being, businesses still see lack of finance as a major constraint [10]. Among recent measures, the Finnish "DIILI" scheme to attract skilled personnel who participate in the company share capital appears to be an innovative example. In the UK, a new tax incentive encourages the flow of private capital to finance institutions providing microcredit to enterprises in disadvantaged areas. In France, local investment funds are being set up, making it possible for investors, also benefiting from a tax incentive, to contribute to the development of a region by investing in its businesses.

[10] Access to finance is the second most important obstacle for SMEs, after the lack of skilled labour, according to the ENSR Survey 2003 (reported in "Benchmarking Enterprise Policy: Results from the 2003 Scoreboard", SEC(2003) 1278, 4.11.2003).

To facilitate small businesses' access to finance, the focus should be geared towards early-stage finance and increasing equity. The Austrian seed financing model, limiting external intervention in operational business decisions, demonstrates an interesting approach to provision of public sector risk capital. Several other new instruments have been developed over the past year but further efforts are needed to provide sufficient microcredit instruments and guarantees. The longstanding Italian scheme "CONFIDI" is an example of a well-functioning system of mutual guarantee societies. Particular attention needs to be given to increasing the equity of small businesses.

Several new measures have been taken in the area of innovation and technology transfer. For example, the Dutch "TechnoParter" initiative, bringing together all instruments for innovative start-ups, and the Portuguese Innovation Agency, working to bring the entrepreneurial sector and the national scientific and technological system closer together, are a signal towards better coordination of innovation programmes. Yet many small enterprises in Europe still encounter significant problems when trying to improve their innovation performance. The majority of small businesses, precisely because of their small size, also lack the competence and resources needed to carry out their own research and development, to introduce new technology and train their employees.

Small enterprises depend very much on an environment that supports innovation. The development of suitable technology and knowledge-transfer initiatives is of paramount importance to most of them. The Danish service institutes for technologically-based knowledge, which have a special obligation to serve small enterprises, provide an interesting example of a structure well adapted to SMEs. Norway has amended the legislation concerning the right to employees' inventions so that the rights to a patent are now given to the university and not to the researcher. As a consequence, the Universities of Oslo and Bergen are setting up their own technology transfer offices. In Ireland, the Shannon Development Network brings business, education and innovation together. In Belgium, the booklet "100 Questions on Innovation" provides information and guidance to entrepreneurs looking for ways to change and innovate. Further efforts are needed to develop appropriate technology transfer mechanisms to strengthen the cooperation between science and the business community.

Inter-company networking and clusters are important tools to foster small businesses' innovation potential and to disseminate innovation. This kind of cooperation should also stretch beyond national borders. The new German and Austrian schemes to facilitate trans-national cooperation are promising examples but further initiatives to encourage cooperation among and between companies, also across borders, are needed.

In some Charter areas, progress has been quite dramatic since the Charter came into being. In the area of cheaper and faster start-up, for example, where there has been a lot of high-level political attention, where several Member States have set themselves targets and where a Best Procedure project [11] has made concrete recommendations for improvement, several Member States have succeeded in substantially reducing the time and costs of setting up a business. In some Member States, online registration systems have become operational during the last year.

[11] "Benchmarking the administration of business start-ups". The Best Procedure, under the open method of coordination, provides a framework to support Member States' efforts to identify and exchange best practices in a limited number of specific areas of particular importance for enterprises.

Most recently, Spain has made drastic reductions in the time needed for registering a company with its "Nueva Empresa" (New Enterprise) project, making it possible to set up a small business online in just 48 hours. The 48 hours includes all seven steps previously needed (such as registration with the tax authorities, the commercial register and the social security authorities), compared to the 30 to 60 days needed in the past [12]. This is an impressive achievement, far exceeding the target of 42 days set by Spain for 2006. The Nueva Empresa project also includes a simplified bookkeeping system, tax and financial advantages as well as support services, thus forming a comprehensive package to help the entrepreneur get a new business off the ground not only quickly but also more successfully.

[12] 30-60 days according to the Spanish national report of October 2003; 24 days according to the final report of the Best Procedure project of January 2002; 83 days according to the United States National Bureau of Research working paper of 2000.

Other areas where previous Charter reports have signalled progress and increased efforts include better regulation and education for entrepreneurship.

All governments are committed to improving and simplifying regulation and there is a growing awareness of the need to reduce administrative burdens on businesses. In addition, several Member States are in the process of revising their bankruptcy laws. However, while some Member States have been carrying out regulatory impact assessments for several years, a small number of Member States still do not seem to use regulatory impact assessments at all before adopting legislation. The Commission, for its part, is also putting a strong emphasis on improving the quality of legislation and on measuring the potential impact of legislation on small businesses, on the basis of its 2002 Better Regulation Action Plan.

As for education for entrepreneurship, Member States are increasingly aware of the need to promote entrepreneurship at all levels of education and have launched a considerable number of initiatives in this area. For example, France has recently set up the "Observatoire des Pratiques Pédagogiques en Entrepreneuriat" (Observatory of Educational Practices), which aims to stimulate exchange of good practices among teachers. The Best Procedure project on education and training for entrepreneurship has contributed to positive developments in this area, although the real impact of the measures is still difficult to assess, since there is obviously a time lag before visible results emerge.

On the whole, good progress in implementing the Charter has thus been made over the last few years. But Europe needs to get better and keep getting better. Improving the environment of small businesses is a continuous process. This is why it remains crucial that Member States continue to take action in line with the Charter recommendations. Member States need to make sure that initiatives and measures reach beyond the planning stage and see that they are properly implemented, evaluated and improved.

1.3. Mutual learning and scope for more

The Charter process has proved extremely effective in identifying areas where Member States have made progress in promoting small businesses. It also provides valuable information on those areas where more needs to be done. What is apparent is that even though Member States have made efforts to implement actions under all the areas of the Charter, they tend to have different specialities and areas of expertise. Taken together, this adds up to a very useful fund of knowledge for the future improvement of the small business environment throughout Europe, and it is the identification and dissemination of this knowledge, above all, that represents the real added value of the Charter process.

Again, an increasing number of Member States have reported that they have drawn inspiration from measures developed in other Member States and recommendations of the Best Procedure projects, thus benefiting from one another's strengths. The open method of coordination is yielding good results. Success is no longer kept within national boundaries. This is real progress and the best way to bridge performance gaps in the EU.

For example, several Member States have set targets to reduce administrative burdens and developed methods to measure progress towards the targets. Building on the experiences in Belgium, Denmark and the Netherlands, Sweden is currently developing a measurement method. Following the example of the Netherlands, Belgium has set up a contact point for contradictory regulations and administrative costs where individuals and companies can report contradictory regulations or regulations that cannot be easily applied.

In keeping with the impressive example set by Spain, Austria is further improving the infrastructure for notaries to accelerate registration of business start-ups, enabling this to be carried out within 48 hours while maintaining the same high level of legal certainty, through electronically certified legal acts.

In Denmark, business impact assessments have been strengthened in several areas complying with the recommendations of the Best Procedure project in this area.

Spain has taken particular care to make sure that the results of the Best Procedure projects get a practical response. The Directorate-General for SME Policy has compiled summary sheets for each project, which have been sent to Ministries, regions, business organisations and SME experts. Meetings have also been held with the Spanish experts who participated in the Best Procedure projects and other projects under the Multiannual Programme for Enterprise and Entrepreneurship [13], to make the experts aware of the need to publicise the results and to implement the projects' recommendations.

[13] Council Decision 2000/819/CE of 20 December 2000 on a multiannual programme for enterprise and entrepreneurship, and in particular for small and medium-sized enterprises (SMEs) (2001-2005), OJ L 333, 29.12.2000, p. 84.

The Commission is also taking inspiration from the Member States. Following the example set by the Netherlands and the United Kingdom, Commission officials working with enterprise-related issues will, on a pilot scale, get the opportunity to participate in externships of one to two weeks in a small or medium-sized business.

This process of learning from each other needs to be even further intensified. As a complement to the recommendations of the Charter itself, there is a wealth of information, recommendations and examples of good practices available in the Best Procedure project reports and the annual Charter reports, which are far from being fully exploited. The use of the open method of coordination has proved successful in this area, and its application is to be even further improved by better exploiting all the tools it has to offer.

For its part, the Commission will make further efforts to improve the dissemination of the good practices identified. The discussions initiated in 2003 with the Directors-General responsible for Industry and SMEs in the Member States and the acceding countries, at the regular meetings of the Enterprise Policy Group (EPG) [14], are a step in this direction and already provide a useful framework for joint examination of good practices [15].

[14] A group advising the Commission on enterprise policy issues. The members of the group are high-level experts from the enterprise community and representatives of the Member States.

[15] During 2003, good practices in the areas of education for entrepreneurship, transfer of businesses and microcredit have been on the agenda.

The Tallinn Charter Conference [16] in autumn 2003 also gave an opportunity for exchange of experiences, with a special focus on the candidate countries. Building on the success of the Tallinn and Maribor Conferences, the Commission will continue to organise annual conferences on the Charter, in order to stimulate exchange of experiences between Member States [17].

[16] Organised by the Commission in cooperation with the Estonian Ministry of Economic Affairs and Communications, 30 September-1 October 2003.

[17] This also corresponds to the request of the Competitiveness Council in March 2003.

A repository of all recommendations and good practices of previous Charter reports and completed Best Procedure projects is to be set up to make the existing information more accessible and user-friendly.

1.4. Improving orchestration of small business policy

The small business environment depends on a large number of factors. Improving it requires measures to be taken across a wide field of issues. This is why proper orchestration and coordination of all policies affecting small businesses is crucial. The Charter, with its ten lines for action, addresses these issues, going beyond enterprise policy in the strict sense. Its proper implementation calls for concrete action by many different actors.

In some countries, the Charter process itself seems to have contributed to improved internal coordination. The annual bilateral meetings between the Commission and the Member States, as well as the preparation of national reports, require contributions from various Ministries and authorities, thus encouraging increased cooperation and coordination.

Coordination between Ministries and authorities at national level can be assured in different ways. Several countries have developed umbrella initiatives or action plans in the fields of entrepreneurship or innovation.

Most recently, Norway set up a particularly ambitious inter-ministerial cooperation for the development of its Innovation Policy Plan, presented in October 2003. A group of five Ministers, chaired by the Minister for Trade and Industry, led the work, assisted by a working group with representatives of three Ministries and by 12 inter-ministerial groups on specific topics. External competence has also been feeding into the process. To ensure follow-up of the plan, an Innovation Panel, counting nine Ministers, has been set up. In addition, business representatives and other stakeholders will be invited to regular meetings to give their views on improved policy design and implementation.

Concluding political agreements between Ministries or Ministers is another way to join forces. In Italy, a memorandum of understanding has been signed between the Ministry of Productive Activities and the Department for Innovation and Technology, providing for a joint action plan to promote innovation among SMEs. In France, the Secretary of State for SMEs and the Minister for National Education have signed a protocol agreement, the first of its kind in France, aiming to improve the knowledge of teachers, pupils and students about enterprises and entrepreneurship.

The importance of orchestrating small business policy obviously applies to the Commission as well. Besides becoming a dynamic tool for the implementation of small business policy, the Charter also ties in with other Community policies, in particular the European Employment Strategy and the Internal Market Strategy, which have both just been reviewed, the Research Policy, the Cohesion Policy and the Broad Economic Policy Guidelines.

The Charter process has clearly led to improved cooperation and coordination between services involved in policies affecting small businesses. This has been further reinforced by the appointment of the SME Envoy and the recent creation of an SME network inside the Commission. This inter-service network has proved a useful tool to increase awareness of SME needs inside the Commission and to improve coordination on SME issues. The SME network is progressively becoming the main tool for coordination of SME policy in the Commission, and contributing to the development of an 'SME-friendly' approach for all relevant EU programmes and initiatives.

1.5. Future outlook

Building on the analysis of progress under the Charter and on the well-established Charter process, the Commission launched a wider debate on entrepreneurship in Europe with its Green Paper on entrepreneurship in January 2003 [18]. On the basis of the public consultation, the Commission is presenting an Action Plan [19], which provides a strategic framework and a number of key actions for boosting the European entrepreneurship agenda. Reports on the Action Plan will be integrated into the Charter reporting mechanism from 2005 onwards.

[18] Green Paper "Entrepreneurship in Europe", COM(2003) 27 final, 21.3.2003.

[19] "Action Plan: The European agenda for entrepreneurship", COM(2004) 70 final, 11.02.2004

2. Progress by the Member States, Norway and the Commission in the Selected Priority Areas for this Reporting Period

2.1. Introduction

This is the fourth annual implementation report on the Charter. It aims to provide a brief overview of the main measures undertaken by the Member States, Norway and the Commission to implement the Charter in the past year. Norway accepted an invitation from the Commission to take part in the Charter process. The other members of the European Economic Area, Iceland and Liechtenstein, have not expressed a desire to participate. Following the adoption of the Charter by all candidate countries in April 2002 and by the countries of the Western Balkans in June 2003, their progress is analysed in separate reports [20].

[20] "Report on the Implementation of the European Charter for Small Enterprises in Acceding and Candidate Countries," SEC(2004) xxxx, "Report on the Implementation of the European Charter for Small Enterprises in the countries of the Western Balkans", SEC(2004) 149.

The current report seeks to identify strengths and weaknesses across the European Union and Norway, to highlight promising national measures and to issue recommendations for future action and thereby contribute to the strengthening of policy in support of small businesses and to maintain the momentum generated by Lisbon.

The report also seeks to stimulate the exchange of experiences and good practice in Europe. Various definitions exist of what is a "good practice". For the purpose of this report, initiatives which seem to have been particularly beneficial in a national context and which could also be of interest to other countries have been highlighted [21]. Prompted by the emphasis put by the European Parliament [22] and the European Economic and Social Committee [23] on the importance of presenting the good practices identified in the Charter process in a user-friendly way, some more information is given on particularly interesting measures.

[21] A national initiative can only be considered a true "good practice" if it is entirely in conformity with relevant Community legislation, including competition and state aid rules. Identification of individual initiatives in this Report does not in itself imply that the measures concerned are compatible with the relevant provisions of the Treaty. Highlighted measures have been selected both from current and previous national reports.

[22] European Parliament resolution on "Entrepreneurship in Europe", PE 322.026, 23.10.2003, point 46.

[23] Opinion of the European Economic and Social Committee on "The role of micro and small enterprises in Europe's economic life and productive fabric", INT/174, 18.6.2003, point 4.1.1.

Nevertheless, for reasons related to its purpose and length, the report does not present an exhaustive or detailed list of measures. Detailed descriptions of national measures as well as contact details can be found in the national reports published on the Commission website [24].

[24] For the complete reports, see http://europa.eu.int/comm/enterprise/ enterprise_policy/charter/charter2004.htm

The environment in which small businesses operate is mostly determined under Member States' competence [25]. For this reason, the report draws conclusions mainly on Member States' progress, while also highlighting progress by the Commission. In addition, the Joint Employment Report [26] presents an overview, based on national reports, of Member States' response to the guideline on job creation and entrepreneurship.

[25] The European Parliament, in its Resolution of 20 March 2002 on the results of the Barcelona European Council, has stated that "the responsibility for implementing nearly all the action points in the Charter lies with the Member States".

[26] COM(2004) 24 final, 21.1.2003.

While it is difficult to assess progress in all the areas on an annual basis, the main trends are outlined below. The current overview represents the Commission's understanding of the situation based on information communicated by the Member States [27].

[27] Unless otherwise stated, the source of the information on measures in the Member States and Norway contained in the present report is the national reports or information received at bilateral meetings.

The analysis of progress in the Member States and Norway is based on detailed national reports and on bilateral meetings between the Commission and national authorities which took place in July-October 2003. Following the example set last year, national business organisations actively participated and expressed their views at all bilateral meetings. An Internet consultation on national reports was open to all interested parties and announced at a meeting with European business organisations in October 2003 and also by e-mail to some 30 European business organisations [28]. At Commission level, an inter-service group bringing together all services with activities for small and medium-sized enterprises has prepared the analysis on Commission progress.

[28] See consultation at http://europa.eu.int/comm/enterprise/ enterprise_policy/charter/charter2004.htm. The following business organisations provided comments, also published at this site: Zentralverband des Deutschen Handwerks, ZDH (The German Confederation of Skilled Crafts), Svenskt näringsliv (Confederation of Swedish Enterprise) and Företagarnas Riksorganisation (Federation of Private Enterprises in Sweden). On the basis of the German and Swedish national reports, respectively, the organisations gave their views on which measures work well and which measures could be improved. References to some of the specific comments are made in the current report in connection with the description of the measures concerned. On a more general level, the German Confederation of Skilled Crafts expressed the opinion that despite initiatives like "Pro Mittelstand" and the appointment of the authorised representative of the Federal Government for SMEs, insufficient attention is paid to SMEs' concerns in overall economic policy and in the preparation of legislation in Germany.

Most measures do not produce visible short-term results and progress in all areas cannot be fully assessed on a yearly basis. Nor should Member States strive to launch a great number of annual measures. Consolidation, evaluation and improvement of existing measures is equally important. Following the invitation of the Competitiveness Council in March 2003 to strengthen the review of national developments by prioritising a selected number of Charter areas each year, the current report examines in more detail progress in the areas of

- Access to finance, in particular venture capital and micro-loans;

- Innovation and technology transfer; and

- Consultation of small businesses.

European business organisations were invited to comment as to their main concerns in these areas at a meeting in June 2003 [29].

[29] Following this invitation, Eurochambres and the European Federation of Accountants (FEE) provided written comments on the Charter process in general and on the three priority areas.

The present report mainly covers the period autumn 2002 to autumn 2003 but given the long-term span of most measures, a certain overlap between annual reports is inevitable.

Considering the Charter's commitment to using "effective indicators to assess progress over time" and the request of the Competitiveness Council to "continue the work on a voluntary basis on quantitative and qualitative targets with the aim of further integrating their use in the implementation of the European Charter for Small Enterprises", the report attempts to describe quantitative progress on the basis of relevant indicators of the Enterprise Policy [30], Innovation [31] and Internal Market [32] Scoreboards. It also emphasises the relevant voluntary quantitative targets in enterprise policy declared by the Member States in 2002 and 2003 [33]. The voluntary national targets stem from Member States' agreement on enterprise policy indicators closely linked to the Charter recommendations.

[30] "Benchmarking Enterprise Policy: Results from the 2003 Scoreboard", SEC(2003) 1278, 4.11.2003. Unless otherwise stated, the Enterprise Policy Scoreboard is the source of the data on indicators contained in the present report.

[31] SEC(2003) 1255, 10.11.2003.

[32] Internal Market Scoreboard, No 12, May 2003; Press release IP/04/33, 12.1.2004.

[33] The Enterprise Policy Scoreboard is the source of all information on targets declared by the Member States contained in the present report.

The issue of indicators and targets in the context of the Charter was also discussed at the bilateral meetings. While for a majority of Member States there is agreement on the usefulness of appropriate targets, national administrations stressed the difficulties in defining relevant indicators, preferably reflecting the situation of small businesses only, due to constraints in data availability. To stimulate discussions, the Commission representatives informally suggested that, in the context of the Charter, setting a small number of ambitious but realistic common targets at EU level could help focus work. A majority of national administrations were basically supportive of this idea, although with certain reservations in some cases. Since there are still, however, diverging views among the Member States on whether such common targets would effectively contribute to improve Charter implementation, it is not likely that agreement will be found in the short term. Obviously any targets, in order to be meaningful, need to be accompanied by appropriate strategies and policy measures. As to indicators, there is a clear need for improved official statistics through the European Statistical System in the areas of the Charter.

While this report clearly identifies measures targeted specifically at micro-enterprises or small enterprises, many of the initiatives analysed have been designed to support both small and medium-sized enterprises. The Commission considers that, even if these measures do not exclusively target enterprises with fewer than fifty employees, this does not diminish their value or impact on small businesses. Both the Commission and the Member States have therefore adopted the approach of including in the current report all initiatives with an impact on small and medium-sized enterprises, while highlighting those measures that seem to have the strongest impact on small enterprises.

2.2. Financial matters

"Entrepreneurs need finance to translate ambitions into reality. In order to improve the access of small enterprises to financial services, we will:

Identify and remove barriers to the creation of a pan-European capital market and to the implementation of the Financial Services Action Plan and the Risk Capital Action Plan;

Improve the relationship between the banking system and small enterprises by creating appropriate access conditions to credit and to venture capital;

Improve the access to the structural funds and welcome initiatives by the European Investment Bank to increase funding available to start-ups and high-technology enterprises, including equity instruments."

Improving access to finance is an important aspect of fostering the development of small businesses in Europe. The conditions in the financial markets influence access to finance. The business cycle downturn has made external and internal small business financing more complicated, but the gradually improving growth will also improve financing opportunities for small businesses. External financing has been harder to get because many banks and venture capital funds have suffered losses in their SME portfolios and their risk aversion has increased. Banks assess the lending applications more carefully and demand more collateral.

Venture capital is an option for only a small minority of small businesses, that is those businesses that expect rapid growth. In the long-term, venture capital is expected to become more important, since the equity base in many SMEs needs to be reinforced.

Business angels, who are informal or formal individual investors, provide both financing and managerial experience. Business angel networks increase the efficiency of matching angels and entrepreneurs. Raising awareness about the benefits and services of business angels and angel networks is the first step in increasing their investments. Another important step is improving entrepreneurs' prospects of success in attracting business angel investment through increasing their investment readiness. This is important because entrepreneurs need to understand the differences between sources of finance and the specific role of business angels. Entrepreneurs' investment readiness and realistic business plans will facilitate the dialogue with business angels.

Most small enterprises are sole traders or partnerships, and microcredit - lending of small amounts of money, up to EUR25 000 - is in many cases an important source of finance for them. As banks often perceive microcredit as a high risk and low return activity due to the important failure rate and the high handling costs, there is a market gap in this area.

In order to bridge this market gap, at least partially, public support is available in all Member States. At national level, public promotional banks, when existing, are playing an active role and remain an efficient and effective vehicle for providing part of the credit and/or guarantee, in particular where large-scale operations are required. In addition, guarantee (co- and counter-guarantee) schemes and mutual guarantee societies make it easier for the credit institution to provide microcredit because its risk exposure is reduced and its capital requirement is mitigated. At European level, the microcredit guarantee window under the Multiannual Programme for Enterprise and Entrepreneurship (2001-2005), based on a risk-sharing principle and managed by the European Investment Fund, enables financial institutions to increase their microcredit exposure.

The last Charter report concluded that access to finance remains an important constraint to businesses across the EU and that the creation of flexible microcredit programmes by some Member States was encouraging. Member States were invited to further support financing institutions to improve small businesses' access to finance, in particular to microcredit, in accordance with their national environment. Member States were also urged to implement the necessary fiscal and structural reforms to promote investment in venture capital funds as recommended in the framework of the Financial Services Action Plan. The report further concluded that business angels constitute an increasingly important source of financing for small businesses and encouraged Member States to raise awareness about business angels, to promote a legal and fiscal environment favourable to risky investments in small businesses and to support local and regional business angels' networks.

The selected priority area for the current report is "Access to finance, in particular venture capital and micro loans". Nevertheless, all relevant measures which fall under the "Financial matters" Charter area have been included in this section of the report.

2.2.1. Recent developments

Indicators and targets

Three Member States have put in place quantitative targets in the area of access to finance. France aims to reach EUR1 billion investment per year in risk capital in 2010 and Ireland aims for venture capital investment corresponding to 0.80% of GDP by 2006. Another target for Ireland is 2-3 newly listed companies per year from 2006, and the Netherlands wants to increase the level of state guarantees granted annually (BBMKB) to EUR450 million, corresponding to 3 500 credits, of which 60% relating to start-ups.

Based on a number of indicators, the 2003 Enterprise Policy Scoreboard concluded that developments in the area of access to finance have been negative in recent quarters. SMEs report that access to finance remains a major constraint for their growth [34].

[34] Access to finance is the second most important obstacle for SMEs, after the lack of skilled labour, according to the ENSR Survey 2003 (reported in the 2003 Enterprise Policy Scoreboard).

In nearly all Member States new listings (IPOs) relative to existing firms continued to decline in 2002, but at a much slower pace.

Venture capital markets have also experienced serious strains, seeing falling capital investment in all Member States in 2002, Sweden, Finland, the Netherlands and the United Kingdom having the largest markets for venture capital in relation to GDP and Greece, Austria and Portugal having the smallest. A worrying trend has also been the weakening of the early stage and seed investments during the last three years in favour of later stage financing.

An encouraging development is the increase, albeit modest, in the number of business angel networks since 1999, notably in France, Germany, Sweden, Denmark, the United Kingdom, Spain and the Netherlands. Luxembourg has currently no business angel network, and Portugal, Austria and Finland only have one each.

Member States

Various new financial measures for start-ups have been developed.

Belgium has introduced a "loan 50+" for people aged over 50 who wish to become self-employed or start a business and a "BAN loan" to complement the financial support from business angels. It has also set up a new fund called "Starters Fund" which is a public sector initiative to mobilise private external funding for business start-ups and transfers. The investors will, under certain conditions, receive a tax reduction of the actual payments.

Denmark is launching a new DKK 500 million (ca EUR67 million) "entrepreneurship fund" in liaison with a number of private investors to close gaps in the capital finance market which commonly appear in the earliest stages. The Netherlands is reviewing its financial instruments for innovative start-ups.

Finland: Service to match work input for shareholding

The PreSeed services of Sitra (The Finnish National Fund for research and Development) aim at remedying the market failure pertaining to preseed financing for technologically oriented companies.

The "DIILI" service launched in April 2003 is the latest addition to Sitra's PreSeed family of services which also include "INTRO" and "LIKSA" [35]. The founding idea of Sitra PreSeed is to bring together entrepreneurs, market information providers, business angels and experienced sales and business professionals at the INTRO market place, which SITRA coordinates. Within this environment, the company undergoes a series of true value adding measures carried out at the right time. As a consequence, the company becomes increasingly attractive for initial private capital investments.

[35] LIKSA aims at targeting companies' own resources at acquiring, analysing and refining business information related to its commercialisation. It offers economic resources and experts for this task.

The rather limited sales and business competences of companies have been the most important reason for slowing down the operation of the well-functioning INTRO market place. The new DIILI service has brought forth a significant improvement to rectify this while encouraging and increasing entrepreneurship. Through the INTRO market place, DIILI allows business professionals to examine start-up companies as potential job opportunities at the same time as these companies are quoted as investment targets for business angels. Under the DIILI scheme, the expert taking on sales responsibilities in the company exchanges his competence against the company's shares. The expert joins the company with an entrepreneurial risk and, in the beginning, probably with limited pay. When this takes place at the right time in relation to the investment cycle, the sales competence brought in by the expert also acts as a trigger for initial investment into the company, thus correcting the market failure.

Regarding financial instruments for business transfers, the French trial scheme "Prêt à la Reprise d'Entreprise - PRE" (business purchase loans) in five regions was such a success that it will become generally available. The Austria Wirtschaftsservice has created a "Succession bonus" to support entrepreneurs and SMEs which are close to transferring the ownership of the business. Saved capital which is used for a new start-up or a take-over is eligible for a non-repayable state bonus of 14%.

Two new microcredit schemes have recently been developed.

France has introduced a specific legal framework that allows accredited non-profit associations to borrow from banks in order to provide micro loans. The first accredited association was ADIE, a dedicated mircocredit institution specialised in supporting the creation and development of businesses by the unemployed or those in receipt of the minimum wage. Before this new framework a non-profit association could only provide loans from its own equity.

United Kingdom: Tax incentive to encourage microcredit

In order to improve access to finance for enterprises from disadvantaged communities, both existing businesses and start-ups, the UK Government provides capital, revenue and loan guarantee support to around 40 Community Development Finance Institutions (CDFIs) through the Phoenix Fund. These are independent financial institutions, usually locally based and with strong links to business support providers and community organisations. They offer loans on commercial terms to businesses with viable plans but which are unable to access some or all of their requirements from conventional sources. CDFIs do not generally seek collateral and make their lending decisions based on the likely impact of the business on the community rather than conventional credit scoring techniques.

In order to encourage the flow of private capital through CDFIs the United Kingdom's Community Investment Tax Relief (CITR), which came into operation in March 2003, provides an incentive to investors providing patient capital to CDFIs. An individual or corporate investor willing to provide capital to a CDFI either as a loan or as share capital for at least five years will receive a tax relief of 5% of the amount invested in each of five successive tax years. CDFIs, which must be accredited by the UK government's Small Business Service to attract this investment, then lend to start-ups, existing enterprises and community projects. As of July 2003, 20 CDFIs have been accredited and between them these institutions intend to raise £88 million (ca EUR125 million) from investors for on-lending over the next three years.

To attract venture capital, Belgium has introduced a new type of collective investment organisation called "Private Pricaf". It encourages private investors to subscribe at least EUR250 000 in the capital of an unlisted company, without having to set-up and run the company. The Greek "New Economy Development Fund" (TANEO) has started its operations. It is a fund of funds with the aim of minority participation in investment schemes in innovative, preferably new economy, companies. Italy is developing a public-private measure to facilitate access to venture capital by SMEs in less-favoured regions and by new firms. It will make public funds available to banks and financial intermediaries for the purchase of short-term and minority shareholdings.

France: Investment funds to encourage local investments

The French Economic Initiative Act, adopted by Parliament in July 2003, includes the creation of local investment funds ("Fonds d'investissement de proximité", FIP). This measure primarily concerns regional SMEs, which frequently encounter difficulties in finding professional investors that correspond to their characteristics.

The purpose of FIPs is to collect savings from the public willing to invest in businesses established in a specific region. The viability of the investment is not, therefore, the investor's sole objective. The development of a region through the performance of the businesses located there may also be a deciding factor.

FIPs can intervene in a zone of maximum three adjacent regions - either French or in another EU Member State (special provisions are also laid down for overseas departments). The funds will be similar to venture capital mutual funds and must invest at least 60% of their assets in SMEs, 10% of which must be earmarked for business creation.

Relations between FIPs and local authorities, if the latter wish to provide support, will be laid down in agreements which may stipulate investment priorities in sectors of activity or types of business. Investment in FIPs will be made particularly attractive for private individuals by means of a significant tax incentive, which may amount to a reduction in income tax of 25% of the amount invested, up to a maximum of EUR12 000 for a single person and EUR24 000 for a couple.

At regional level, the Flemish Community in Belgium has set-up the "ARKimedes Fund" to attract venture capital from institutional and private investors to Flemish SMEs. Under this scheme, private individuals qualify for tax credits. In the United Kingdom, the "Bridges Community Development Venture Capital Fund", a £40 million (ca EUR57 million) fund capitalised 50:50 by the government and private sector investors, was launched to make equity investments in SMEs with growth potential which are located in the 25% most disadvantaged electoral wards in England. In addition, "Early Growth Funds" are being created in each English region of the United Kingdom to encourage the provision of risk capital to start-ups and other businesses in the early stages of growth. They also aim to demonstrate to private sector investors that commercial returns can be achieved by investing in early growth businesses.

Austria: A new model for public sector risk capital

Austria Wirtschaftsservice GmbH (AWS), a public financing intermediary set up in 2002, provides funds with risk capital character in the form of subordinated loans as equity substitute. The financing decision is taken following an extensive screening of the company, acceptance of its business plan and approval by an independent advisory body.

Based on the characteristics of the business plan, a pre-determined share of the company's profits is to be paid as a fee for the capital made available. This implies that, in the early years, there is no payment when the company incurs financial losses from its business operations. Equally, no reimbursements of the funds provided are due for such years. A representative of the AWS attends the board meetings of the company but does not normally interfere in operating decisions, except in case of major deviations from the business plan. However, high-level advice and coaching for the new entrepreneur is available at any time.

On the one hand, this model allows companies to be free from cash outflows and balance sheet charges in the early years of heavy investments, contrary to regular loans. On the other hand, the payment of a part of the profit in good times does not hamper the company's operation.

It thus provides a response to the fears - which are particularly common among small businesses - about too strong external intervention from venture capitalists.

As to guarantee mechanisms, the Austria Wirtschaftsservice provides guarantees for loans without collateral up to a maximum of EUR75 000. Three new regional Mutual Guarantee Societies have been set up in Portugal.

Italy: Nation-wide system of mutual guarantee societies

For more than 30 years, Italy has encouraged the creation of mutual guarantee societies, "CONFIDI", the primary role of which is to offset the difficulties that small businesses face in accessing credit. CONFIDI is a nation-wide mutual guarantee system that includes 680 private companies (each with its own legal and administrative autonomy), where almost 1 000 000 entrepreneurs are members.

These funds guarantee credit for SMEs, up to 80% of the loan for new businesses and 50% for existing businesses. The maximum amount guaranteed is EUR500 000, no personal collateral is required and the interest rates applied are those reserved by banks for their major clients. For the SME, this means a lower interest rate than if the loan application was not supported by a CONFIDI, which deposits 50% of the loan value in cash on a bank account.

For each euro guaranteed by the CONFIDI scheme, the multiplier effect is at least 10 of the loan awarded, depending on the individual CONFIDI involved. Each credit assessment is made by a local CONFIDI, not by the bank. The past results are excellent: 1.6% of default rate, instead of 8% for the craft sector in general.

Since 2000 it has been possible for CONFIDIs to receive the support of the SME Guarantee Fund, a counter-guarantee scheme set up by the Ministry of Productive Activities, resulting in an increase in guarantee operations benefiting businesses.

At regional level, the Flemish Community in Belgium has concluded framework agreements with private banks, which stipulate that credit applications by SMEs that fulfil certain criteria will be 75% guaranteed by the Flemish authorities. The Walloon region of Belgium is setting up a specific company "SOCAMUT S.A." whose task is to counter-guarantee 50% of the value of the guarantees issued by mutual guarantee associations in the region for business creation, growth and business transfer. The mechanism is aimed exclusively at micro enterprises. The "Guarantee Fund" of the Brussels-Capital region of Belgium is now providing entrepreneurs with the possibility to apply directly for guarantees without the intermediation of a bank. Having received the Fund's approval, the entrepreneur can shop around the various financial institutions to obtain the most favourable terms.

Greece is planning to set up its first business angel network and France adopted a specific legal status for business angels, the "Business Angel Sole Proprietorship" ("Société unipersonnelle d'investissement providentiel", SUIP). The aim of this scheme is to increase the number of business angels. The SUIP enjoys substantial tax benefits. Ireland has established a database of more than 50 high net worth business angels, with over EUR12.7 million available to invest in small and medium enterprises. To complement the existing private business angel networks, the Dutch government is currently considering supporting the creation of new networks at regional level. In Sweden, 17 organisations have already received grants to build regional business angel networks. Sweden also finances a project that searches for female business angels and prepares them for participating in other networks. In Portugal, business angel activity has been promoted in conferences and press articles. A specific Action Plan is envisaged in the future. Norway is planning to set up business angel networks in the fields of biotechnology and ICT. It also provides a 28% tax incentive for business angels investing in start-ups from the university research sector.

Several other financial measures have also been reported. Denmark is working to consolidate all provisions on financial institutions into the "Financial Business Act". This will contribute to increased simplification, efficiency and transparency in the financing of SMEs. In Germany, the merger of the KfW and the DtA promotional banks into KfW-Mittelstandsbank has brought more transparency to the financial instruments offered to SMEs, introduced some improvements to the products and simplified the processes. Ireland has commissioned a study to undertake a cross-country comparison of the financial assistance for start-ups available from both the state and the private sector in other EU countries and another study on the policy and supports available to micro-enterprises in Ireland. Austria has set up Austria Wirtschaftsservice Gesellschaft m.b.H as a one-stop-shop for all federal financial support for enterprises. It brings together several existing support organisations under one roof. Austria has also adopted an "Action Plan to strengthen the capital market" and Portugal has introduced a new financial programme "PRIME" to support investment and to modernise enterprises.

At regional level, the Walloon region in Belgium is providing various new mechanisms to facilitate funding of university based spin-offs. As a pilot project, the region is encouraging small enterprises requiring venture capital to hire an external administrator to their Board of Directors by contributing partly to the employment costs. In the United Kingdom, the Scottish Executive introduced a new "early-stage equity investment package" to address the gap for investments below £500 000 (ca EUR709 000). Moreover, an "Investment Readiness Programme" has been introduced to help growth businesses with the cost of developing proposals to a stage and quality at which they are likely to succeed in attracting equity investment, the programme offers up to 50% of this cost to a maximum of £10 000 (ca EUR14 200).

Commission

In November 2003, the Commission adopted its fifth and last progress report on the 1998 Risk Capital Action Plan (RCAP) [36]. This report noted that taking the RCAP period as a whole, considerable progress has been achieved and all political and many technical objectives have been attained. The European risk capital industry is now more mature and professional than in 1998. Enterprises' and public authorities' awareness about the strategic importance of this sector and the possibilities provided by this type of financing is now well enshrined in Europe. The RCAP has played a political role in supporting those directly or indirectly involved in risk capital activities. The philosophy behind the RCAP is already permeating other regional, national and Community policies and programmes. In order to keep up the momentum, the Commission will continue to follow the European risk capital markets closely.

[36] Communication from the Commission on implementation of the risk capital action plan (RCAP), COM(2003) 654 final, 4.11.2003. Based on the Communication from the Commission "Risk Capital: A key to Job Creation in the European Union", SEC(1998) 522, April 1998.

The Commission also published its eighth progress report on the Financial Services Action Plan (FSAP) [37], concluding that the overall financial outlook strengthens the political case for integrating financial services within the EU. Progress towards adopting the necessary legislative measures to create an integrated market remains on the right track and it is crucially important to complete all the remaining legislative measures.

[37] "Financial Services: Nine months left to deliver the FSAP", 3.6.2003; http://europa.eu.int/comm/internal_market/ en/finances/actionplan/index.htm

The 2002 annual report [38] on the three financial instruments under the Multiannual Programme for Enterprise and Entrepreneurship (2001-2005), the ETF Start-up Scheme, the SME Guarantee Facility and the Seed Capital Action [39], shows that mainly small enterprises with fewer than 10 employees have benefited from the SME Guarantee Facility. At the end of 2002, the number of SMEs benefiting from the Facility was 125 164, compared with 112 581 at the middle of 2002 and 92 408 at the end of 2001. Final beneficiaries with up to 10 employees made up 93% of the total number of SMEs and final beneficiaries with up to 50 employees made up 99% of the total number of SMEs [40]. This clearly demonstrates that the Facility is firmly focused on the target population of the Charter.

[38] Report from the Commission, "Growth and Employment Initiative: Measures on financial assistance for innovative and job creating Small and Medium-Sized Enterprises (SMEs)", COM(2003) 480 final of 5.8.2003.

[39] All managed by the European Investment Fund (EIF) and delivered via financial intermediaries.

[40] Data as at 30.6.2002.

In December 2003, the Commission adopted the Communication "Access to finance of small and medium-sized enterprises" [41], aiming to update the Council on progress in SME finance since the 2001 report "Enterprises' access to finance" [42] and to review the public policy framework in SME finance. The report concluded that to efficiently promote entrepreneurship in Europe, further European, national and regional public sector actions should be focused on improving the functioning of the financial markets, in particular in the new Member States, reducing the gap in early-stage financing, in particular guarantees and microcredit, and increasing equity in SME balance sheets.

[41] COM(2003) 713 final, 1.12.2003.

[42] SEC(2001)1667, 19.10.2001.

Also in November 2003, the Commission services published the report "Microcredit for small businesses and business creation: bridging a market gap" [43], which was drafted with a working group of experts from Member States, acceding and candidate countries. The report emphasised the diversity of actors in the field of microlending, such as public promotional banks, savings banks, co-operative banks and non-banks. The report noted that guarantee schemes often share the risk with microcredit institutions and highlighted the importance of business support services. The different practices were reflected in particular in setting the interest rates. The report indicated that the interest rate income from microcredit activities should allow an institution to cover all its costs and risks related to this activity so that it can become self-sustaining and independent of public subsidies.

[43] http://europa.eu.int/comm/enterprise/ entrepreneurship/financing/index.htm

In November 2003 the Commission published the yearly report on progress under the CREA Seed Capital Action. The Action, financed by the Third Multiannual Programme for SMEs (1997-2000) [44], supported recently created seed capital funds with at least EUR4 million of investment capital as a way of overcoming an early-stage financing gap. The 19 active funds selected in 1998-1999 have invested EUR150.9 million in 218 companies, creating 2 205 new jobs. The majority of these funds invest locally or regionally in new enterprises in information technology, communications, electronics and life sciences. Total divestments for the funds have been EUR47.6 million, of which 85% has been written off.

[44] Council Decision 97/15/EC of 9.12.1996 on a third Multiannual programme for small and medium-sized enterprises (SMEs) in the European Union (1997 to 2000).

In its conclusions of December 2001, the Industry Council invited the Commission to "draft a Code of Conduct between banks, finance providers and SMEs in order to improve their understanding of each other". After several meetings of a working group with representatives of European banking and SME organisations, a draft was agreed in autumn 2003 by Eurochambres, UEAPME [45], UNICE [46], and the European Group of Savings Banks, one of the main European provider of loans to SMEs. The European Association of Co-operative Banks and the Banking Federation of the European Union requested more time for the consultation of their national members.

[45] European Association of Craft, Small and Medium-sized Enterprises.

[46] Union of Industrial and Employers' Confederations of Europe.

The Commission published in June 2003 a guide on Credit insurance for European SMEs [47] which assesses the need to manage the risks inherent in providing trade credits to customers. If these risks are not covered, they might cause severe liquidity constraints and ultimately insolvency. Therefore, SMEs should carefully review different instruments for managing this risk, which include credit insurance, risk management by the SME itself, factoring, buying information from agencies, using collecting agencies and bank guarantees.

[47] http://europa.eu.int/comm/enterprise/ entrepreneurship/financing/index.htm

A study on factoring [48] conducted for the Commission focused on the role that factoring plays in financing SMEs across Europe. Factoring gives businesses access to finance based on their sales growth. The total volume of factoring across Europe has grown by 57% over the period 1998-2000, although the starting level was low, and increases were registered in each Member State. The report suggested that factoring is specifically targeted and suitable for smaller businesses. However, due to its high costs, factoring is only of interest to fast-growing companies and not an option for every small business.

[48] Factoring is a way to increase liquidity through advance payment against receivables; http://europa.eu.int/comm/enterprise/ entrepreneurship/financing/index.htm

In the framework of the Gate2Growth Initiative [49], a pan-European database of investment opportunities, a number of existing business planning tools for the innovative entrepreneur were gathered, including online tutorials which outline the different sources of finance exist, including venture capital, business angels, commercial banks and stock markets, what the expected investment criteria are and how to approach the investors. A pilot was launched to develop a business plan diagnostic methodology to provide feedback on investor-readiness and to apply and validate it in practice, which will allow for checking and scoring the completeness of a business plan against a number of pre-set criteria developed by investment experts. A network of 18 regional entry points has been established, composed of Business and Innovation Centres (BIC) and Innovation Relay Centres (IRC) (see heading 2.3.1) with specific expertise in financing innovation. The I-TecNet network of early stage technology venture capital investors was re-launched in 2003. The objective of this network is to enhance the capacity of European early-stage venture capital operators and similar professional private equity investors to invest in innovative companies and help these companies to realise their growth potential.

[49] http:// www.gate2growth.com

The results from technology rating pilot projects conducted in previous years were compiled for publication and dissemination [50]. The aim of these projects was to produce viable methods, tested and accepted at European level, enabling innovative SMEs in the process of developing technological projects to be rated by financial operators according to the risks, building on proven technology business appraisal techniques. The outcome could be usable by banks and other providers of early stage, small-scale financing to identify technology businesses with high growth potential.

[50] Publication foreseen in early 2004.

In the context of the MEDIA programme, the "Growth and Audiovisual: i2i Audiovisual" [51] experimental action aims to encourage banks and financial institutions to invest in the content industries. In particular, in the context of acting as a catalyst for support for the film and audiovisual industry, the European Investment Bank (EIB) makes credit lines [52] available to the specialised banking sector for the funding of SMEs in audiovisual creation, audiovisual technology or the performance of subcontracting in this sector.

[51] http://europa.eu.int/comm/avpolicy/media/ i2iav_en.html

[52] Global Loan and Risk Sharing Global Loan.

The Commission adopted in August 2003 the revised indicative guidelines for the mid-term review of Structural Fund Programmes [53], which is taking place end 2003 / beginning 2004. The Charter recommendations are reflected in these guidelines and SME issues in general will be reviewed in the course of the midterm review. A diversification of the range of public financing instruments for SMEs is encouraged. The Commission's initial guidelines for the period 2000-2006 [54] stressed the need to achieve the best leverage from operations funded from the Community budget by favouring support to private sources of financing, such as risk and venture capital, and public-private partnerships. The Commission Regulation on eligible expenditure [55], revised in June 2003, defines conditions and recommendations for the financing of risk and venture capital, loan funds and guarantee funds. A Guide to Risk Capital Financing in Regional Policy [56] has been published and should become a practical document for all involved, at regional and national level, in risk capital related activities. The programming of Structural Funds shows that the guidelines are being followed and that, as a result, the interventions in risk capital funds and guarantee funds will reach about EUR1,4 billion in the period 2000-2006 , i.e. more than double compared to the 1994-1999 period.

[53] COM (2003) 499 final, 25.8.2003.

[54] The Structural Funds and their coordination with the Cohesion Fund: Guidelines for programmes in the period 2000-2006, 1.7.1999,

[55] Commission Regulation (EC) No 1145/2003 of 27.6.2003 amending Regulation (EC) No 1685/2000 as regards the rules of eligibility for co-financing by the Structural Funds, OJ L 160, 28.6.2003, p. 48.

[56] www.europa.eu.int/comm/regional_policy/sources/docgener/guides/risk/risk_en.pdf

The Commission is closely following the progress achieved in the Basle Committee negotiations on the new Capital Adequacy Framework for banks. Following a request from the European Council [57], the Commission will publish a study on the impact of the new capital adequacy framework on the European economy, in particular SMEs, foreseen for early 2004.

[57] Barcelona European Council, 15-16 March 2002.

2.2.2. Conclusions and recommendations

The previous Charter reports have identified access to finance as a major constraint for enterprises while still signalling progress in this area. The developments over the past year show that several new measures to improve the situation have been taken. Yet, as shown above, access to finance still remains an important constraint to businesses across the EU.

Among the recent developments, the many new measures taken in Belgium, such as the Starters Fund, the Private Pricaf and the ARKimedes Fund to attract private investors, are worth highlighting. The British initiative to allow non-banks to offer micro credit, combined with a tax incentive and the French local investment funds are interesting examples of new ways of funding. The Finnish DIILI scheme to attract skilled personnel who participate in the share capital is another innovative example. A particularly encouraging signal is the development of the first business angel network in Greece.

Experiences from public sector actions aiming to improve small businesses' access to finance have shown that best results are achieved when the public sector works in close cooperation with financial markets and encourages their development. Public action should primarily focus on general framework conditions and act as a catalyst for private sector involvement. In particular, sector-specific targeted financing actions have proven to be inefficient as there is no objective way of anticipating market developments several years ahead.

To efficiently promote entrepreneurship and to facilitate enterprises' access to finance in Europe, further public sector actions at European, national and regional level need to be taken. The persistent gap in early stage finance makes it necessary that the public sector continues to work with the private sector to overcome it. As bank loans remain the main financing instrument for small businesses, the need for guarantees that share the risks between the private and the public sector is evident in order to facilitate SMEs' access to bank loans. In this regard, securitisation could be an interesting field to explore. Using national and local banks as intermediaries makes the guarantee mechanisms accessible for small businesses. The longstanding Italian scheme CONFIDI is an example of a well-functioning system of mutual guarantee societies.

An important tool to address early-stage finance is microcredit. Its scope and intensity differ considerably between countries. The public sector can facilitate the provision of micro credit through an enabling environment and tax incentives for investors supplying funds to microcredit retailers. Public support can also be offered by providing funds to specialised lenders, by sharing part of the risk with specialised guarantee societies and/or by promoting business support services. Microlending programmes should aim for sustainability so that public sector support could gradually decrease.

- To facilitate small businesses' access to finance, efforts should be geared towards early-stage finance, in particular guarantees and microcredit.

The needs of entrepreneurial growth companies and the mainstream European small businesses are different, but both need stronger balance sheets with enough equity. Retained earnings are the best form of financing growth and investment. The sources for additional equity are informal risk capital investors, venture capital funds and institutions providing quasi-equity instruments such as subordinated loans. The subordinated loans of Austria Wirtschaftsservice, limiting external intervention in operational business decisions, demonstrate an interesting approach to provision of public sector risk capital.

- Review of tax laws to examine whether they inhibit firm growth by taxing retained earnings more than distributed profits is recommended.

- The development of liquid and well-functioning venture capital markets is encouraged.

- Further promotion of the possibilities provided by business angels should be continued.

- Investments by informal risk capital investors should be promoted through tax breaks.

The Commission is engaged in many different initiatives to improve access to finance for small businesses. The Community financial instruments provide European leverage and support for SME financing. The completion of the Risk Capital Action Plan is a major achievement and completing the Financial Services Action Plan will lead to better availability of both bank lending and equity finance. Studies and projects to exchange good practices further contribute to improvements.

2.3. Strengthen the technological capacity of small enterprises, including innovation

"We will strengthen existing programmes aimed at promoting technology dissemination towards small enterprises as well as the capacity of small business to identify, select and adapt technologies.

We will foster technology cooperation and sharing among different company sizes and particularly between European small enterprises, develop more effective research programmes focussed on the commercial application of knowledge and technology, and develop and adapt quality and certification systems to small enterprises. It is important to ensure that a Community patent is available and easily accessible to small enterprises.

We will foster the involvement of small enterprises in inter-firm cooperation, at local, national, European and international levels as well as the cooperation between small enterprises and higher education and research institutions.

Actions at national and regional levels aimed at developing inter-firm clusters and networks should therefore be supported, pan-European cooperation between small enterprises using information technologies enhanced, best practice in co-operative agreements spread, and small enterprises cooperation supported to improve their capabilities to enter pan-European markets and to extend their activities in third country markets."

Efficiency and cost advantage, quality, speed and flexibility are critical for business success. However, these factors are no longer enough for long-term competitiveness. Enterprises must now constantly innovate to re-invent product and services and consequently evolve business strategies to respond to market demands, which in turn necessitate continual adaptation of organisational structures and processes.

Figures from the latest "Community Innovation Survey" [58] and the European "Innobarometer" [59] as well as analysis from the "European Trend Chart on Innovation" [60] confirm that many small enterprises in Europe still encounter significant problems with the improvement of their innovation performance.

[58] Eurostat.

[59] http://www.cordis.lu/innovation-policy/ studies/ca_study3.htm

[60] http://www.cordis.lu/innovation-policy/ studies/gen_study8.htm

Small businesses in Europe and their innovation needs are highly heterogeneous. This requires policy instruments that are equally differentiated and cover the regional, national and European level. It should be underlined that small businesses depend more than large firms on the optimisation of regional innovation systems. However, comprehensive and comparable information on regional innovation policies is particularly scarce.

To understand the innovation needs of small businesses, it is useful to differentiate the population of firms along the spectrum from new technology based start-ups to traditional small firms and crafts. Evidence from the above surveys shows that high-tech start-ups depend mainly on the availability of innovation finance, on intensive interaction with science institutions and on efficient systems for protection of intellectual property rights. More traditional small businesses, on the other hand, depend more on intensive interaction with innovative customers and technology providers, on their access to technology and market intelligence and on constantly upgrading their human resources.

The majority of small businesses lack the competence and resources needed to carry out their own research and development (R&D), to introduce new technology and train their employees. They may even have problems in recognising their own needs for technology or in the innovation process. Small enterprises depend very much on an environment that supports innovation. In this context, the development of technology and knowledge transfer initiatives is of paramount importance for most of them.

The broad definition of technology transfer covers the shift of ideas from the science base and their uptake by industry but also the transfer of knowledge between companies. There are a number of ways in which policy makers may influence the uptake of research results by industry for incorporation into improved products, processes and services.

More specifically, indirect methods include the modification of framework conditions and institutional structure to allow greater interaction between public sector research institutes and businesses. Examples of such measures that indirectly facilitate the promotion and diffusion of knowledge include: (1) Science parks, regional technology centres, liaison offices in academic and research organisations and other kinds of intermediaries; (2) Legal framework, including intellectual property considerations, facilitating the technology transfer; (3) Tax and financial incentives, such as financial support schemes providing high-risk loans to innovative businesses; and (4) Specific funds for research and technological development (RTD) generating new knowledge which will be subsequently transferred to the industry.

Direct methods promoting transfer of knowledge between organisations and individuals include: (1) Programmes for transfer and exploitation of results; (2) Schemes for mobility of personnel, encouraging individuals to work within other organisations bringing knowledge to their hosts and learning from them; (3) Information diffusion measures making organisations more aware of scientific and technological opportunities; and (4) Co-operative schemes with industry and demonstrator projects.

Technology transfer from science to traditional small business usually does not function through direct contact as the cultures at universities or large research organisations are too different from small enterprises. Thus, increased technology transfer to small enterprises requires intermediaries in the form of technology transfer organisations, of which there are a great variety in Europe.

More direct contacts exist between research organisations and high tech based start-ups, either in the form of university spin-offs, or start-ups fostered in technology parks or technology based incubators. Combinations of such measures supplemented by further support are increasingly applied in order to create clusters around specific technology fields. By agglomerating research and industrial developments, small businesses are profiting from the ready availability of knowledge and the possibilities to network with firms in their region.

Another form of cooperation between research and small businesses, which seems to be better adapted to the needs of these businesses, are co-operative research institutes. These institutes appear more appropriate for the dissemination of intermediate technologies rather than cutting edge technologies. Less spectacular as regards their innovativeness, this kind of technology transfer is, however, important as regards its short-term economic impact.

Last year's Charter report concluded that recent developments in promoting clusters and technology networks involving small and medium-sized enterprises were encouraging and that various promising initiatives had been launched. The report suggested however that there was still plenty of scope for exchange of good practice in areas such as promoting technology transfer from university to small businesses and supporting innovation both in technology-based small businesses and also in the more traditional sectors. Member States were invited to contribute actively to the Best Procedure project on improving technology transfer institutions and encouraged to further develop technology clusters and enterprise networks at national and regional level. Such measures should be implemented with a long-term perspective to ensure effective results.

The selected priority area for the current report is "Innovation and technology transfer", thus focusing on the specific issue of technology transfer and also explicitly including innovation. Nevertheless, all relevant measures which fall under the Charter area "Strengthen the technological capacity of small enterprises" have been included in the reporting.

2.3.1. Recent developments

Indicators and targets

Eight Member States have set quantitative targets in the area of R&D spending. Denmark, Germany and France have translated the Barcelona target to increase R&D investment in EU to 3% of GDP by 2010 directly into national targets, while Spain, Portugal, Austria, Ireland and Finland have chosen more intermediate targets [61].

[61] Member States have set the following targets on General Expenditure on R&D (GERD): Austria (2.5% in 2005), Denmark, Germany and France (all 3% in 2010), Ireland (2.8% in 2006), the Netherlands (among the leading EU Member States in 2010) and Portugal (1% in 2003). In addition, three Member States have set targets for increasing Business Expenditure on R&D (BERD): Denmark (2% in 2010), Spain (0.84% in 2003) and the Netherlands (EU average in 2005, among the leading EU MS in 2010). Finland had previously targeted GERD, but has recently changed this and instead set the target of EUR1 700 million governmental intramural expenditure on R&D in 2007, corresponding to 1% of GDP. "Benchmarking Enterprise Policy: Results from the 2003 Scoreboard", SEC(2003) 1278, 4.11.2003.

Spain, Ireland and the Netherlands have also set targets related to patents. Spain aims for 24.5 European patents per million people in 2006 and 40.7 European patents per million people in 2010, Ireland wants 350 patents applied for per million people in 2006 and 100 patents granted per million people in 2006, and the Netherlands aims to be in the leading group by 2010 as to share in EPO patents.

In addition, the Netherlands has set a number of targets related to R&D expenditure on ICT, high-tech start-ups and innovation: higher growth than in other technology areas for R&D expenditure on ICT by enterprises and research institutions; 50% increase in number of techno-starter enterprises in 2004 and in the leading group in 2010; to be among the leading EU Member States in 2010 for share of innovative enterprises, co-operating innovative enterprises and innovative enterprises co-operating in research; and, finally, to be in the leading group in 2010 as to profit from innovations.

A variety of indicators in the 2003 European Innovation [62] and Enterprise Policy Scoreboards show that the EU needs to improve its performance in the area of innovation and knowledge diffusion. However, there is substantial variation in performance between Member States.

[62] SEC(2003) 1255, 10.11.2003.

R&D expenditure as a percentage of GDP in the EU has not increased in 2001. R&D ratios of below or around 1% in Greece, Portugal, Spain, and Italy outweigh the 3% plus ratios of Sweden and Finland [63].

[63] Sweden: 3.8% in 1999 (latest year available); Finland: 3.7% in 2001 (latest year available).

The number of patents has been increasing from 2000 to 2001, including the number of high tech patents. Some Member States registered more patents relative to the population than the United States - Sweden, Finland, Germany, the Netherlands, Luxembourg and Denmark - but only Sweden, Finland and the Netherlands registered more high tech patents. The target of the Netherlands to get into 'the leading group' by 2010 as to the share of EPO patents seems to already have been met according to this data.

Member States

In the area of innovation, Germany has launched the "SME innovation initiative" which aims at the promotion of technology start-ups. The initiative will, inter alia, provide funding, tax relief for investments in these companies and encourage better links between SMEs and research institutions. In Italy, a memorandum of understanding was signed between the Ministry of Productive Activities and the Department for Innovation and Technology. This provides for a joint action plan for the development of initiatives designed to promote innovation among SMEs and will lead to joint regulatory and financial measures.

Germany and Austria: Schemes to encourage trans-national cooperation

Germany will grant, as from 2004, a special promotion bonus for trans-national cooperation under its PRO INNO scheme (Innovationskompetenz mittelständischer Unternehmen programme - Programme for Competence in Innovation among SMEs ). PRO INNO supports national and international research cooperation by SMEs with each other or with research institutions, as well as entry or re-entry of enterprises into research and development. Approximately 77% of the enterprises promoted have fewer than 50 employees. 40% of enterprises are under 5 years old and a further 35% are 6-10 years old. The widespread effect of PRO INNO is marked. Since 1999, roughly EUR1.3 billion has been spent on R&D in some 3 900 enterprises. The special bonus for trans-national cooperation aims to give SMEs stronger incentives to become part of international research networks.

In Austria, twelve projects were selected in April 2003 for promotion under the STRAPAMO pilot project (Bildung von strategischen F&T-Partnerschaften mit Mittel- und Osteuropa -Formation of strategic R&D partnerships with Central and Eastern Europe). These projects are intended to step up the creation of technological axes between Austrian technology parks, research skills centres, technology-oriented clusters and cooperative research institutes, and their counterparts in Central and Eastern Europe. Central to this is the creation of synergies between growth centres and with it the utilisation of 'win-win potential'. Each of the projects involves at least six enterprises, at least three of them from Austria. The main partner countries are Slovenia, Hungary and Slovakia.

The Netherlands is currently reviewing all policy measures for innovative start-ups with the view of bringing all instruments under one initiative called "TechnoPartner". This structure consists of three pillars: TechnoPartner Financing (provides risk capital in the pre-seed and the seed phase), TechnoPartner Contest (promotes entrepreneurship among researchers and potential techno start-ups) and TechnoPartner platform (informs techno start-ups on how to start the business, helps research institutions to become more entrepreneurial, organises and maintains an incubator network, monitors developments in relevant sectors and raises awareness through seminars and conferences).

To bring the entrepreneurial sector and the national scientific and technological system closer together, the Portuguese Innovation Agency (AdI) has taken over the management of the innovation programmes of the Ministry of Economic Affairs and the Ministry of Science and Higher Education. Portugal has also introduced the "NEST Programme" to support the creation of technology-based enterprises by participating in their capital. Norway has amended the legislation concerning the right to employees' inventions so that the rights to a patent are now given to the university and not to the researcher. As a consequence, the Universities of Oslo and Bergen are setting up their own technology transfer offices.

At regional level in the United Kingdom, the SMART scheme in England has been replaced by two new products. The "Grant for Research and Development" provides grants to help individuals and SMEs research and develop technologically innovative products and processes, following feedback from small businesses this eliminates the de minimis research project element that was present in the previous scheme. The "Grant for Investigating an Innovative Idea" provides grants to help fund consultancy costs for expert help on a range of issues, including technology, marketing and organisational factors that may be necessary to improve an SME's capability to innovate. Wales has launched its Innovation Action Plan "Wales for Innovation". This sets out the schemes and actions which will or already are helping small businesses to make the most of innovation, commercialisation of research activity and technology transfer from higher education and further education institutions into Welsh businesses.

Belgium: Innovation booklet to entrepreneurs - "100 Questions on Innovation"

The Flemish Community in Belgium in 2002 complied and distributed an updated edition of the "Innovatiezakboekje" (Innovation booklet, ). This free booklet, entitled "100 Questions on Innovation", is available in Dutch as well as in English. It is a practical information booklet and guide for entrepreneurs and company directors wishing to make changes and looking for ways to innovate. One hundred questions and answers provide a good overview with practical information to help on the way. In this way, the booklet contributes to making it is easier to transpose an idea into an innovative product or service or to transfer technology. It has been conceived to provide a stimulus and introduction to the different possibilities, angles and resources to innovate.

Several countries report on measures to promote technology transfer from universities to SMEs. Denmark is introducing an action plan to strengthen the cooperation between SMEs and Danish and foreign knowledge institutions. In order to encourage an open market for knowledge and technology, as a first step, Denmark has created a technology transfer office for biotechnology. The Netherlands is taking several actions to improve the interaction between universities and SMEs and the actors in the national innovation system. For example, it plans to set up an Innovation Platform based on the Finnish model. Austria has launched the "FH plus" programme to strengthen application-oriented research at universities in cooperation with the business community. This gives SMEs access to research results and enables them to improve their ability to innovate. Portugal has introduced the "IDEIA" programme (Applied Business Research and Development) to foster collaboration between enterprises and organisations on the National System for Science and Technology (SCTN). Norway is replacing its current "Technology Transfer from Research Institutes to SMEs" programme by a new R&D programme "KOMPMEG" which aims at promoting research based competence.

To support technology cooperation between companies, Greece has initiated the "Promoting SME networking programme". The programme aims at supporting actions with specific business results, e.g. the completion of a joint project or the creation of permanent joint ventures.

With regard to research programmes, Ireland has established a high-level steering group to assess the implications of the European Research Area policies and to prepare a national action plan for increasing R&D investment in Ireland. It has also established a "National Support and Information Service" with the objective of co-ordinating the promotion of participation, particularly by SMEs, in the Sixth Framework Programme for RTD. At regional level in Belgium, in order to encourage the participation of the SMEs in the Walloon region in the Sixth Framework Programme for RTD, the region grants a subsidy equal to 25% of the Community aid [64]. In addition, the financial body of the region counter-guarantees the bank guarantees to the European Commission for the remaining 75% of the eligible expenditure. In the United Kingdom, the "Scottish Proposal Assistance Fund" has been set up to increase Scottish industry participation in Sixth Framework Programme for RTD. Scotland is also seeing the establishment of three market-based "Intermediary Technology Institutes". They will focus on pre-competitive research in areas of high global market potential in order to deliver a change in cultural approach to commercialisation and business investment in R&D, and are designed to help increase business R&D spending, strengthen the capability of existing leading, technologically aware companies and help create new ones.

[64] The percentage can be reduced in order to respect the Community rules on state aid for R&D.

Sweden has launched the "VINNOVA incubator programme" which gives incubators a maximum of 50% grant in order to commercialise scientific-based business ideas. The United Kingdom is currently working to establish a set of nationally recognised standards and benchmarks for business incubation which will be capable of assessment and accreditation. At regional level, Northern Ireland in the United Kingdom is developing its first Science Park. The Science Park aims initially to cater for new spin-out companies from the universities and industry and seeks to attract research and development units from indigenous companies and inward investors.

Ireland: The Shannon Region Knowledge Network

The Knowledge Network in the Shannon Region, , was launched in 2001 by Shannon Development, a regional development agency. It comprises technology park and incubator infrastructure as well as linkage systems to the regions third level education sector. It is a unique initiative creating a network of key technology locations in the Shannon Region. Five locations - the National Technology Park Limerick, Kerry Technology Park, Tipperary Technology Park, Information Age Park Ennis, and Birr Technology Centre - singularly and collectively work to bring business, education and innovation together to create dynamic and exciting world-class locations for living and working in the knowledge age. Each location within the Shannon Development Knowledge Network has an Innovative Works facility - 'smart' buildings specifically focussed on 'bringing business to life'.

The network aims at stimulating new technology start-ups and attracting new mobile knowledge intensive enterprise. It also promotes technology transfer and research commercialisation as well as the knowledge economy in areas dominated by traditional sector activity.

Some new support services have been developed in this area since last year. Ireland has launched a "Technology Development Advisory Service" which assists companies to develop new processes and products and promotes networking amongst private sector actors with expertise in innovation. Finland has launched a project to develop and extend the business development and business incubator services directed at technology and know-how driven business start-ups. It also gives assistance in drafting a technology strategy to an enterprise or a research unit. The assistance comprises of a free strategy guide, a database of consultants and funding.

Denmark: Service institutes for technologically based knowledge

In Denmark, the eleven institutes making up the Approved Technological Service Institutes (GTS) network develop and communicate technologically based knowledge to private companies and public institutions. Knowledge provided by the GTS network include areas su