Opinion of the Committee of the Regions on the 'Proposal for a Council Decision on measures of financial assistance for innovative and job-creating small and medium-sized enterprises (SMEs) - The growth and employment initiative` (98/C 251/08)

THE COMMITTEE OF THE REGIONS,

having regard to the proposal for a Council Decision on measures of financial assistance for innovative and job-creating small and medium-sized enterprises (SMEs) - The growth and employment initiative ();

having regard to the decision taken by the Council on 16 March 1998, under the first paragraph of Article 198c of the Treaty establishing the European Community, to consult the Committee of the Regions on this matter;

having regard to its Bureau decision taken on 12 March 1998 to draw up an opinion on the subject and to direct Commission 6 - Employment, Economic Policy, Single Market, Industry, SMEs - to undertake the preparatory work;

having regard to the draft opinion (CdR 46/98 rev.) adopted by Commission 6 on 6 April 1998 (rapporteur: Mr Virtanen, co-rapporteur: Mr Keymer);

whereas the Committee of the Regions has already drawn attention to the role played by SMEs in job creation and, in particular, to the risk financing requirements of innovative firms in Europe in, for example, the following opinions: the proposal for a Council Decision on a Third Multiannual Programme for small and medium-sized enterprises (SMEs) in the European Union (1997-2000) (); the Commission Communication on Community structural assistance and employment (); the Green Paper on Innovation (); and the Communication from the European Commission on the first action plan for innovation in Europe (),

unanimously adopted the following opinion at its 23rd plenary session on 13 and 14 May 1998 (meeting of 14 May).

1. Introduction: gist of the Commission document

The European Commission proposes the setting-up of three new financial instruments for the support of innovative SMEs in their growth phase. The programme would run for three years (1998-2000) and receive budgetary allocations totalling ECU 420 million over this period. The three schemes proposed by the Commission are as follows:

- a risk capital facility for improving firms' access to equity capital and managed by the European Investment Fund (EIF). The EIF, however, will not provide financing to firms directly but through intermediary venture-capital funds specialized in SMEs, either funds operating regionally or funds focused on a specific industry or technology. According to the proposal this scheme will receive 40 % of the programme's total budgetary allocations;

- a scheme supporting the establishment of transnational joint-ventures whereby the Commission will help small firms establish a cross-border presence within the EU by providing financial contributions to cover part of the expenses associated with the setting-up of transnational joint ventures. The proposed maximum contribution is ECU 100,000 per project and could be used to cover up to 50 % of the expenses incurred in the conception and setting-up of a joint venture, such as those related to market research and drawing up legal documentation, and 10 % of investment in fixed assets. According to the proposal this scheme will receive 20 % of the programme's total budgetary allocations;

- a guarantee facility, managed by the EIF, which is designed to improve access to debt finance for small innovative firms. It is intended to make use of existing national or regional guarantee schemes, whose risk-taking capacity could be increased by means of this new facility. The basic aim of the scheme is to improve the access to financing for especially those innovative firms which find it difficult to raise debt finance because of the risk inherent in such lending. According to the proposal this scheme will receive 40 % of the programme's total budgetary allocations. The budgetary allocation will cover the full cost of the facility. The cost of the facility will be capped at a prespecified level.

2. Reasons for the programme

2.1. The Amsterdam summit gave greater priority to employment in Union policy. The Union was not, however, given specific competence in the sphere of employment policy. Rather, under the new Title on employment, the Union's role is essentially to coordinate national employment policies. It is therefore important in those policy areas where the Community does have competence to take prompt and purposeful action to foster employment.

2.2. It was agreed in Amsterdam to take measures at Community level to improve the development possibilities of innovative firms in the SME sector in particular. This approach was confirmed by the Luxembourg Jobs Summit. Prior to this, in the debate on innovation, it had been acknowledged that the relative paucity of risk financing was a major factor impeding innovation in Europe. The action plan put forward by the Commission in November 1996 recognized the need to increase the availability of risk financing at regional, national and Community level. The proposed programme represents the means developed by the Community to increase risk financing for innovative firms. The Committee of the Regions is pleased with the speed and fixity of purpose with which progress has been made in this area.

3. General comments

3.1. SMEs play a very important role in creating new employment. New jobs are generated when new firms are set up and when existing firms expand their workforce. The most crucial factors when setting up are the viability of the business idea, good management and availability of financing. Additional financing is needed in the start-up phase, and this is an area where in many cases firms may have encountered difficulties. Moreover, new firms have to complete various administrative formalities connected with obtaining authorisations etc., carry out market research and acquire information about the environment in which they will be operating.

3.2. Innovative SMEs are often set up on the strength of the good business ideas of their founders but they sometimes suffer from inadequate management skills. Lack of such skills can sometimes be a decisive risk factor, making a new firm unattractive to investors. On the other hand, a new investor may bring about changes in the management of a firm so that it is run in a more professional way than before.

3.3. Innovative firms are often very dynamic and therefore traditional financing arrangements often do not correspond to their needs. They may require funding on an irregular basis or unexpectedly. Maintaining market positions and product development may call for new rounds of investment at frequent intervals.

3.4. The prevailing economic and social climate and the treatment of entrepreneurs setting up business or planning to set up business are also important factors. If the operating environment is favourable to new entrepreneurs and business-friendly, there is a strong likelihood that SMEs will be set up that are innovative and prepared to expand their activities when the opportunity arises.

3.5. Banks financing decisions are closely tied to the availability of security in the form of deposits or fixed assets. The latter are often valued at unduly low levels in times of instability. Security also includes the personal assets of the firm's owners.

3.6. New innovative firms exploiting new technologies find it difficult to raise risk capital from traditional sources. For this reason they need special start-up and risk funds. Investments and provision of advisory services by private investment funds also have an important role to play. It is often the case, however, that regional providers of finance are best able to take account of the operating environment of the firm, its past performance and other special conditions, and relate existing risk to collateral requirements. They are also better able to respond to requests for small loans.

4. Specific comments

4.1. Objective of the programme

4.1.1. The objective of the programme is to unlock the job-creating potential of high-growth and small businesses, in particular those SMEs exploiting advances in technology, and to facilitate the establishment and growth of innovative companies by supporting their investment activity through increased availability of finance, thereby stimulating employment creation. The objective is sound. Similarly, the aim of the programme to foster job creation by facilitating the establishment and growth of SMEs through new funding facilities is worthy of support.

4.1.2. The Committee of the Regions would underline the employment-policy objectives of the programme. Experience shows that, with small inputs, job creation can be fostered through regional risk funds. Accordingly, the Committee of the Regions urges the Commission to ensure that an adequate share of the funding available under the programme is channelled to regional risk funds, both existing ones and those to be set up. Furthermore, the Committee of the Regions takes the view that priority should be given to small enterprises which can generate new jobs immediately.

4.1.3. The Committee of the Regions urges the Commission to ensure that SMEs in less-developed regions also have easy access to the programme. The central, more highly-developed regions of Europe are characterized by intensive networking between large technology-based companies, research centres and the SME sector. SMEs in less-developed and remote regions lack such networks.

4.2. Concept of innovation

4.2.1. The concept of innovation needs to be refined. In the implementation of the programme the term 'innovation` must not be understood to embrace only high-tech companies. Exploitation of new technology is an essential component of innovative business activity but by no means the only one. The definition of innovation must therefore be sufficiently broad so that decisions are applied in different regions in Europe in a balanced way.

4.2.2. A broad definition of innovation is therefore called for, like the one given in the Commission's Green Paper on Innovation (). Applying such a definition, a business activity can be considered innovative whenever it involves the introduction of new technology or the deployment of new methods, in, for example, product development or marketing, which, through their example, can benefit other SME activity in the region concerned. Thus, innovation would not be in terms of technology alone, but other components of business activity would be taken into account as well, from management to product development and marketing, and including management accounting, which can improve a firm's profitability and cost-effectiveness.

4.2.3. The Committee of the Regions would further point out that a business can also be regarded as innovative from the point of view of regional development if it represents a sector which differs from the region's traditional economic structure and seems to have potential for development in the region. It follows from the multifaceted character of innovation that in many cases the regional level would be the appropriate level for taking funding decisions since that is where there is the best knowledge of companies and their activities.

4.2.4. On the basis of the above, the Committee of the Regions proposes the inclusion of a new recital in the preamble to the Council Decision as follows: 'Whereas the definition of innovation set out in Chapter 1 of the Commission Green Paper on Innovation () will be applied in the implementation of this Decision;

() COM(95) 688 final.`.

4.2.5. The Committee of the Regions further proposes that the last sentence of point 1 ('Introduction`) in Annex I be changed to read as follows: 'The ETF start-up scheme will reinforce the European Technology Facility established by the EIB in cooperation with the EIF by adopting an investment policy involving a higher risk-profile, both as regards intermediary funds and their investment practices, and which is directed towards innovative companies in other sectors, as well as the technology sector.`

4.3. Financial instruments

4.3.1. The Committee of the Regions endorses the European Commission's proposal to establish three new financial instruments to support innovative and growing SMEs. The Committee would nevertheless like to draw attention to a number of points which are crucial from the point of view of SMEs and which should be borne in mind when implementing the programme.

4.3.2. First, the Committee of the Regions considers it important to draw on the expertise of regional/local intermediaries in the implementation of all three schemes. It is also essential, as regards provision of information on the schemes, to make sure that the authorities responsible for regional development are kept fully informed and are notified as to which funds and financial institutions are operating as intermediaries for the schemes in each region.

4.3.3. As regards the ETF start-up facility, the Committee endorses the Commission's aim to promote the creation and early development of innovative SMEs with high growth potential by improving access to equity capital for SMEs, by acting as a catalyst in attracting other investors to invest in such companies and by encouraging the development of venture-capital markets across the Union.

4.3.4. However, the scheme is only likely to work well in regions where there is a ready supply of investors and firms wishing to invest. The provision of risk financing should therefore be backed up by arrangements which would also enable companies in the peripheral regions of Europe to disseminate information on their activities more effectively to investors throughout the Union. This is not the case at present; rather, investors are often sought exclusively from the domestic market or, as in certain technological projects, from the USA, even though interested investors could be found in Europe.

4.3.5. As for the Joint European Venture (JEV), the Committee strongly endorses the stated aim to promote the creation of transnational joint ventures by SMEs within the European Union and thereby to help SMEs to benefit from the opportunities of the single market through better exploitation of their limited financial and human resources and greater proximity to clients.

4.3.6. The proposed scheme will certainly function relatively well, especially in regions where there is extensive cross-border cooperation, distances are short and there is a long tradition of economic cooperation. Regions which are a long way from Europe's main markets could pose a problem. Because of long distances, SMEs in these regions are traditionally heavily reliant on the home market. The threshold to going international and starting to export has always been, and still is, quite high. The problems are often more to do with factors such as inadequate language skills or lack of marketing know-how than any shortcomings on the material side.

4.3.7. The Committee of the Regions therefore calls on the Commission to consider complementing the proposed scheme with a facility that would also make financing available to small firms which are expanding their export trade and which, through their operations requiring financing, could attain a level where the setting up of joint ventures becomes feasible. In this connection, the Committee of the Regions also wishes to highlight the importance of the Europartenariat, Interprise and BC-net initiatives because they help SMEs to network and find business partners.

4.3.8. The Committee strongly endorses the proposed SME guarantee facility. It will improve the conditions for raising debt finance by SMEs across the European Union by increasing the volume of loans available, reducing lenders' collateral requirements and encouraging risk-taking by banks in their lending to SMEs.

4.3.9. In the view of the Committee of the Regions, attention needs to be paid not only to non-collateralized lending but to the interest rate applied to lending. In order to safeguard the job-creation capacity of SMEs in the best possible way, the Committee believes consideration should be given to the introduction, alongside the proposed guarantee facility, of a scheme whereby, in regions with major structural policy problems, it would be possible in separately defined situations to convert debt finance into a stake in the equity capital of the company concerned. This would be an appropriate arrangement in key sectors of vital importance for the development of a region where job creation has a positive impact on the development of the region as a whole.

5. Conclusions

5.1. Finally, the Committee of the Regions notes that the need for increased risk financing was not the only conclusion to be drawn from the debate on the Green Paper on Innovation. It was judged equally important to simplify the administrative and legal environment for small businesses and make it conducive to innovation. The First Action Plan for Innovation in Europe refers directly to the 'one-stop shop` principle. Given that the Commission is now proposing the introduction of three separate facilities - one to be managed by itself, the other two by the EIF - and, further, that it is intended to implement all three facilities through intermediaries operating regionally or focusing on specific industries or technologies, it is extremely important from the point of view of business that the one-stop shop principle applies at least for the acquisition of information.

5.2. Although different intermediaries are required for each of the facilities, it should be ensured that information and practical instructions concerning all three facilities can be obtained from the same regional coordinator. This is important because the administrative and legal environment associated with EU programmes may be as foreign to firms as the 'environment of another country` which the Joint European Venture scheme is designed to help firms become familiar with.

5.3. Innovative small enterprises play a key role in regional development. Since EU regional policy stresses the importance of a strategic approach, the authorities responsible for regional development strategies should be kept closely informed when it comes to allocating the resources available under this programme.

5.4. Accordingly, the Committee of the Regions proposes that the funds and financial institutions operating as intermediaries for the three schemes, as well as the national coordinators for the programme, be required to communicate with the relevant regional authorities.

5.5. Finally, the Committee of the Regions would point out that the effects of the programme should be evaluated in broader terms than just statistical data on the firms receiving funding. It must be possible to analyse to what extent the programme has helped to generate permanent jobs which otherwise would not have been created and which have not led to job losses in competing or partner firms. This kind of evaluation can best be done in collaboration with local and regional authorities.

Brussels, 14 May 1998.

The Chairman of the Committee of the Regions

Manfred DAMMEYER

() COM(98) 26 final - CNS/98/0024 - OJ C 108, 7.4.1998, p. 67.

() CdR 211/96 fin - OJ C 34, 3.2.1997, p. 34.

() CdR 306/96 fin - OJ C 42, 10.2.1997, p. 15.

() CdR 112/96 fin - OJ C 182, 24.6.1996, p. 1.

() CdR 68/97 fin - OJ C 244, 11.8.1997, p. 9.

() 'In brief, innovation is:

- the renewal and enlargement of the range of products and services and the associated markets;

- the establishment of new methods of production, supply and distribution;

- the introduction of changes in management, work organization, and the working conditions and skills of the workforce.`