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COMMISSION OFTHEEUROPEAN COMMUNITIES
COM(81)620final
Brussels,20OctoberI98I
APOLICYFORINDUSTRIAL INNOVATION -STRATEGIC LINESOF
ACOMMUNITY APPROACH
:V\
" ■-vX/Si' ''A
}yniS!>*
;^
(Communication fromtheCommisiontotheCouncil)
V.-
V
\A->'Vv;
C0M(8l)620final

-"W,
I Inits communication "Industrial Development and Innova­
tion " (1)/the Commission drew the attention ofthe Euro­
pean Council tothe urgent need toimprove -industr ial
innovation inEurope and tosome ofthe associated prob­
lems .Asaresult ofits discussions ,the Eurooean Council­
« 1
-considered that ,inthe necessary adjustment oftheir
industrial structures ,Community undertakings must aim
resolutely atapplying and developing activities based
onaninnovatory approach .This effort ,must beunder­
,taken inconjunction with both sides ofindustry as
anecessary component ofanactive policy onemployment ?
-hoped that the efforts made inthis direction bythe
Member States will bebetter coordinated inorder to *
improve thecompetitiveness ofEuropean products by
making the best use ofthe dimension afforded bythe
common market ;
-requested thecompetent authorities oftheCommunity
toexamine ways ofeliminating the fragmentation of
markets and improving incentives to -innovation and the
-- dissemination ofknowledge . ' :
,Inresponse ,the Commission ,inits report on .the 30May
r
mandate (2)and' inthe proposed 5thMedium-Term Economic
Policy Programme (3),has emphasized the introduction
ofaCommunity policy for technology and innovation based •
,ohthe internal market .
(1)COM (80)755final,' dated' 18 .November 1980
(2)COM (81)300' final .
(3KCOM (81)34.4 final

Reinforcing innovation and the technological strength
oftheCommunity should beone ofthe corner-stones of
alonger term oriented economic and social policy which
should set the basis for the creation ofsecure jobs based
onproductivity gain ,competitiveness and growth inour
economies .Itisthe innovation process that converts
potential technical progress into economic and social
fact .
Industrial innovation isdifficult toseize inorthcaox
economic tc^ius .Itprincipally means the introduction of
new products ,services ,production methods ormarketing
and management techniques throughout the economy .Radical
innovation creates new infant industries ,incremental
innovation revitalises traditional branches .Innovation
may beheavily research-based ,and/oritmay depend on
ingenuity inproduction and marketing .Itmay depend on
the spontaneity ofsmall entrepreneurial units orbebased
ontheeconomies ofscal'e available only inlarge organisa -
*
tions .
However ,beyond the specifics ofeconomic units and indus­
trial branches ,innovation iscarried bythe dynamics of
our market ,social and scientific systems .Itneeds as
essential inputs orelements ;enterprises capable ofinno­
vating ;anefficient research and education infrastructure ;
aneconomic and social climate which accepts and encourages
innovation
During the last decade ,industrial innovation has come
toshow atwofold pattern :
-ithas grown inimportance for all sectors ofindustry
and the economy .There are many hundreds ofthousands of

-3-
products onworld markets .Their average product life-
cycle isdeclining .Consequently the innovation pressure
isconstantly increasing .Because oEthemultitude of
management tasks involved ,itisobvious that coping
with the innovation process must beprimarily amatter
for the enterprises themselves .Only decentralized deci-
sion-making and efficient competition inthemarket can
yield the best economic and technical solutions ;
-certain technologies have come ,currently toplay akey
„role inthe -evolution ofour future industrial pattern
.and toact asvital sources ofinnovation ;most promin­
ently the new information technolog ies ,with the emerg­
ence ofthemicro-processor and ,more generally ,telemat­
ics (see "European Society faced with theChallenge of
New Information Technologies :aCommunity Response "(4));
and biotechnologies which will have their full impact in
the more distant future .The application ofthese new
technologies will contribute substantially toinnovation
inother sectors vital toour economies :energy techno­
logies inboth supply and use (see "Pursuit ofanEnergy
Strategy fortheCommunity "(5));food an<jjagricultural
technologies ;space technologies ;flexible manufacturing
systems .Beyond this ,all our more traditional branches
will bedeeply affected ..
(4)COM (79)650 final
(5)COM (81)540 final

-4-
Astrategy for industrial innovation therefore should
address both :the general factors which are vital for
market pull and the broad wave and diffusion ofinnova­
tions throughout our economies which weneed ;and the
-requirements for building astrong position inkey sec­
tors andproviding for technology push where requirec ,in
order toavoid thedevelopment ofanewdangerous depen­
dence onforeign sources . .
t ■
IV That innovation needs strengthening intheEuropean eco-
nomises isemphasized bynumerous indicators :
-decline inthe rates ofEuropean productivity increase
and growth ,ascompared with those inJapan and other
countries ;
-reduced competitiveness ofEuropean products because
ofgrowing technical and operational cost advantages
elsewhere ,with adangerous impact onthe Community 's
external balance ;
-adiminishing share ofthe world markets for advanced
technological products ,incontrast with thegrowing
shares ofour principal competitors (6).
((6)e.g. thespecialisation index characterising theCommunity 's
export position inadvanced technology prbducts isat0.9
(1979 ),compared to1for the average ofindustrialised coun­
tries ,ana toJapan and theUnited States ,each at1.4 ;see
statistics prepared for the 5thMedium-Term Economic Poli­
cyProgramme .

The introduction ofnew products and production techniques
isrequired toopen upnewmarkets and toinduce and justify
investment byour firms .Innovation will beessential to
revitalise our industries and our socio-economic struc­
tures . _
Europe needs acontinuous reinforcement ofits innovation
potential .What hasbeen done sofar ,isinsufficient .
r .
)- - • •
European economic recovery will quite clearly depend on
our capacity for innovation and creativity which must be
nurtured atall levels inthe working population -in
large and small companies ,innational and local adminis­
trations ,inthe trade unions and inthe teaching profes­
sion .The necessary spirit ofentrepreneur ship and imagina­
tion must come largely from within the education system of
the Member States and will require not simply agreater
emphasis ontechnology within thecurriculum ,but also a
greater commitment tomaking "aconsistent link between the
acquisition ofknowledge and skills and their application
bythe individual intheeconomic system .
There isthe fundamental problem ofsocial acceptability of
innovation and new technology which requires careful analy­
sis and discussion .
Negative orcautious attitudes about innovation centre
around the uncertainty ofitseffect onoverall employment
levels .This will depend inparticular onthe success of
innovation inrevitalizing European industry and thedegree
towhich itgives anewdynamism to ,demand intheCommunity
market and also inother markets .Whatever the direct and
indirect results foremployment ,however ,employment cannot
beconsidered the sole measure ofsocial progress .The
wider social consequences ofinnovation should also be

-6-
beneficial .Thoughtfully applied ,innovation can and must
make amajor contribution tothe improvement ofliving
and working conditions intheCommunity countries .Indeed ,
this isinitself animportant objective oftheprocess .
VI The innovation capacity ofour economies appears tobe
jeopardized bybottlenecks occurring atnumerous points
inthe long journey from theoriginal invention tothe
sale ofanew product ,especially atthe stage where the
capacity andwillingness ofthe entrepreneur toinvest
isconcerned
The detailed situation differs between Member States ,
regions and industrial branches .Inthis context ,itmay
berecalled that theCommission currently prepares areport
onthecompetitiveness ofEuropean industry .
Bottlenecks may be,amongst others :the research and de­
velopment potential may not befully exploited (hide-bound
structures ,lack offlexibility ,aging ofresearch staff ,
insufficient funds ,unsatisfactory management );contacts
between basic research ,applied research ,industrial firms ,
the social partners and thegeneral public may beinade­
quately organised ;access toresearch and development
results abroad may belacking ;investment activity of
firms may behampered bylack ofmanagement talent ,but
also bybureaucratic and time-consuming procedures ;availa­
bility ofrisk capital may be"inadequate ;fiscal systems
maydiscourage risk-taking ;investment may beinsufficient K
due tounfavourable general economic conditions ;anappro­
priately trained work force may beunavailable inthe
right place and atthe right time .
Bottlenecks must beeliminated where they are found ,and
appropriate policy choices made .

-7-
.VII The Community and theMember States must ensure that
Europe 'senterprises ,within theCommunity ,encounter
atleast asfavourable anenvironment for innovation as
that which has been created ,indifferent ways ,inthe
other two major market economies .
Ageneral requirement isthecreation ofmore favourable
economic framework conditions and ,above all ,the estab­
lishment ofatrue Community-wide internal market which
should act asthe solid home-market base for world-wide
strategies ofEuropean enterprises .
Needed are concerted efforts inthe key technology sec­
- tors onthe same scale asthe USand Japanese strategies
inthese fields .
Needed are sustained efforts tobuild astrong infrastruct­
ure ineducation and basic research atall levels for the
knowledge-based industries ofthe eighties :not only to
promote aclimate and attitudes favourable both toaccept­
ance and tostimulation ofinnovation ,but also toprovide
for the training ofaqualified and creative work force .
Needed isalso anintense promotion ofthe dialogue between
the social partners ,inappropriate bipartite and tripar­
tite frameworks and atits right timing ,and support for
the necessary transformations inthe working environment
and inworking skills .
VIII The major part ofthese tasks falls'to theMember States .
But ,given that a1,1Member States are facing these problems
and that coherence ofMember States' actions isessential ,
theCommunity can add substantially :
\

-8-
Firstly ,inpursuance ofits task ... topromote ....
aharmonious development ofeconomic activities ... and
closer relations between theStates belonging toit (art .
2oftheEEC Treaty ),byanalysing and discussing ,within
theCommunity framework ,the economic policy options which
should create astable basis for economic development and
the investment climate intheCommunity .
Secondly ,where thevigorous application oftheTreaty
and the further development ofthe regulatory framework
can contribute inadecisive way tothe innovation en­
vironment ;the rapid completion ofthe internal market and
aconstructive competition policy will exert amost signi­
ficant market pull oninnovation .
Further ,asregards technology development projects of
international size ,the Community alone isable toprovide
the strategy ,market and political framework which can
give tothese projects their full weight and impact on
the European innovation potential even if,incertain 1
cases ,they aredeveloped outside theCommunity framework .
The Community can play amore direct part where theEuro­
pean dimension allows more efficient new ways tostimulate ,
such asthepromotion ofmore European cooperation' group­
ings and joint ventures atenterprise level inkey sector
technologies ,orthepromotion ofnew technology-based
firms with aEuropean market perspective .
w
The Community should give support ,wljere national resources
are insufficient ,for reasons ofscale ,todevelop key
\technology programmes and where disadvantages forsmaller
Member States ,orregional imbalance ,must beavoided .

Atthis stage ,the Commission
issues and proposals :;•emphasizes tne following
Needed are policies which favour long-term investmen t,
risk-taking and entrepreneurial activity .Revived invest­
ment depends onthe control ofinflation :inflation creates
profound uncertainties which undermine theprospects of
economic stability inwhich soundly based demand can ex­
pand ;high nominal interest rates discourage investment .
Revived investment ,also depends onthe availability of
long-term capital ,and the willingness ofcompanies and
savers tochannel available funds into productive invest - .
ment and innovative activity ;"this means reviewing tax and
other systems which can unduly favour investment inproper­
tyorpublic bonds instead ofproductive inyestment .
The Commission proposes toundertake :
-acareful scrutiny ,together with the Member States ,of
financial and taxmeasures affecting investment toiden­
tify most effective techniques ;
-the development ofcommon criteria for innovation' incen -
,tives and their field ofapplication ,taking account of
Member States' experience ;innovation incentives must
.become more transparent ,more stable and leave more
flexibility forentrepreneurial decisions .They should
bemore efficiently oriented toserve coherent ends and
thus ,have greater impact atminimum cost ,infavouring
sound investment incompetitive activity .

-10-
With regard tothe Community 'slending instruments and
theRegional andSocial Fund ,itmust beensured that they
play the stimulating and incitatory role which falls to
them :both bymore coordinated use ,together with national
means ,and bygiving priority toinnovation within their
operations ;and bycombining the lending instruments and
budgetary means innew imaginative ways ,such asbudget
guarantees and flexible interest rebate schemes ,targeted
specifically upon strategic elements ofthe innovative
framework where aEuropean dimension isinvolved .
Inaddition tothis general role ,Community financial in­
struments can ofcourse make amore specific contribution
intheir particular fields ,inparticular the Social Fund
\
inthe realm oftraining .
Although the need tostrengthen innovation capacity applies
tofirms ofall sizes ,the particular opportunities and
problems ofsmall and medium-sized enterprises deserve
special attention .The great contribution they make inthe
United States and Japan toimproving innovation ,strength ,
drive and flexibility and toincreasing employment iswell
known .IntheCommunity this potential isuptonow exploit­
edtoavarying degree ;inparticular ,inspite ofspecial
measures insome Member States ,new research-intensive firms
often suffer from unsatisfactory access both toventure fi-
X
nance and topublic incentives .
Provision offinance tosmall and medium-sized new tech­
nology based ventures inEurope isinsufficient ,especial­
lyasregards the financial resources necessary tooperate

-11- v
»
on,and take advantage of,the whole Community market in
anearly stage ofthe life-cycle ofnew products .This
puts theCommunity 'snew small ventures atabasic cisad -
t .... • .-ivantage ascompared tothexr counterparts inthe United
States .and Japan .The Commission considers that the sources
ofventure finance ,and the channels through which it
flows ,must beencouraged intheMember States bydevelop­
ments which draw onthe best experience both within ana
-beyond theCommunity ;apossible role for theCommunity 's
own instruments should beinvestigated .
►
• ' ■. 1
Small andmedium-sized enterprises also suffer because they
donot have satisfactory access totechnical ,scientific
and market information ,and sometimes lack appropriate
management guidance .
Inthis field ,too ,there issubstantial scope forCom­
munity activity . .
XI The prospects ofinnovative enterprises depend ontheir
- ability topenetrate themarket .Initially ,they are depen­
dent ,for thfcir success ,onahome-market ofsufficient
.size which can only be>inEurope ,the "Community 'slapge
domestic market .'■, -
< _ "N
With this priority inmind ,the Commission trusts that
the increased effort demanded bytheEuropean Council
- for the establishment ofaEuropean internal market will
besuccessful (see recent communication tothe Council

-12-
onthe State ofthe Internal Market (7)).Proposals in
relevant fields such astechnical norms and standards ,
public markets ,intellectual property rights andcompany
law arepresently before theCouncil .Other proposals
will bebrought forward . v
TheCommission cannot ,however ,ignore thedanger result­
ing from theworkings ofnational industrial policies
geared topurely national aims inthe Member .States .Where
these industrial policies are supported bythe use of
State aids ,beitinthe field ofinnovation oranyother ,
they are subject tothe application ofart .92etseq .of
theEEC Treaty .The Commission examines thecompatibility
ofsuch aids with the Common Market from the point ofview
of.the common interest asexpressed inthederogations con
tained inart .92(3 )EEC Treaty .When examining proposed
aids for innovation ,the Commission will evaluate their
contribution -toCommunity objectives ,determine how the
project concerned relates toprogrammes of <pther Member
States and ofthe Community and give its agreement ,if
necessary ,under the condition ofappropriate coordination
with these other programmes . ,
XII The weakest point in ■theconstruction ofaEuropean intern
almarket ispublic purchase (some 10%ofGDP )and ,more
generally ,all procurement which isinfluenced bythe
Member States either directly orindirectly through the
institutions dependent onthem .Asthis tendency "increases
alarge part ofeconomic activity intheCommunity iswall
edoff inthis way ,with contracts placed essentially with
innational boundaries .
(7)COM (81)313 final

-13-
Infact ,public authorities are often inthe position of
dominant buyers asregards introduction ofnew technologies
(forexample ,inlarge areas oftelecommunications ,data ,
processing ,energy ,transport ,health andeducation ).
Given the effective fragmentation ofthese markets which
unfortunately persists inspite ofCommunity efforts ana -
directives ,the virtual exclusion ,inthis way ,ofintro­
ductory purchases ofnew technologies ,andespecially of
pre-production series ,from asingle Community-wide com­
petitive market isapainful andcrippling burden tothe
development ofinnovation .Itislikely ,unless conditions
are improved ,torender itimpossible tocatch upwith the
Japanese and American' lead insome key areas formany
years inmost ,ifhot allMember States .
;•• ''s '■ ■ ■ ■■
The Commission proposes toinvestigate 'means totake posi­
tive action inthis field *One possibility tobeconsidered
could bestimulating the formation ofadhoc groupings of
European firms inthese areas ,,bygiving preference in
i Community technology programmes tosuch groupings ,and by
providing special incentives ,inthe framework ofthe work­
ing oftheCommunity 'sfinancial instruments ,topublic
purchasers from such groupings .
XIII Inview ofpressures arising_from thedifficult state
ofpublic budgets intheMember States ,concerned ,atoo
nationally oriented defence procurement constitutes a
special problem .
Itleads toawaste ofscarce resources and ,asfar as
innovation isconcerned ,,toaloss ofthose benefits which
industry could otherwise derive from technological spin-
off s.

-14-
Asamatter offact ,itcannot beoverlooked that defence
technology isoften interwoven with civil applications as,
for example ,inaerospace .The economic cost which results
τfrom excessive fragmentation ofmarkets inthis area is
significant .This cost could bereduced bymore intense
and longer-term cooperation indefence procurement in
suitable bodies .Experience over thepast 25years suggests
that such anattempt need not beunsuccessful .
XIV Inrelation tointernational technology development pro­
jects outside theCommunity framework ,anarea ofcon-*
siderable importance totheCommunity 'sinnovatory poten­
tial ,both inits own right and through its spin-offs ,
isthecooperation ofMember States inspace technologies
inthe framework ofthe European Space Agency .
Regardless ofwhether ornot itwould beappropriate to
associate the activities ofESA with theCommunity 'sown
research efforts ,theCommunity can contribute ,incontact
with enterprises atEuropean level ,anew market and stra­
tegic perspective totechnology development inthis area .
Better coordination oftheEuropean partners ,both as
regards private enterprises and Member States' governments ,
would bedesirable insuch projects ,toprovide for afirm
political basis and forcoherent strategic objectives .
XV Developing consistent strategies for key sectors ofour
industrial structure will becentral toour innovation
potential ,additional tothe creation ofthe general frame­
work conditions . ~ -

-15-
Member States have recognized this and have initiated
national programmes .What isneeded inaddition *,given that
these technologies are often heavily research-based and
depend onlong lead-time development and economies of
scale ,ismore focus atthe European level ,matching in
aEuropean way the focus which isprovided ,indifferent
ways ,intheUnited States and Japan .The Community also
must assure that these new technologies are effectively
available toall Member States ,independent oftheir size .
.'• , ■' • ' 'V
The Community has already developed ,during the past ,
first elements ofthe strategies which are needed :
-byconsiderably streamlining and concentrating the Com­
munity 'sown research and its research coordination
activities onpriority areas (see recent bommunication
t
onScientific and Technical Research and the European
Community (8)); r
-bytheestablishment ofdemonstration project programmes
inthe energy and informatics field which should help
tobridge the gap between research and industrial appli­
cation ;
-.byimplementing exemplary public new technology projects
i
inthe telematics field ,such asEURONET and now the
planned INSIS and CADDIA networks .
The Commission develops this approach further inits
recent communication (8).Italso draws attention topro­
posals presently before the Council which will form im-
(8)COM (81)574

-16-
portant elements offuture strategy :the proposals concern
microelectronics and the opening ofthe telematics markets ,
energy demonstration projects ,and research onbiotechnolo­
gical engineering .
XVI Innovation isamarket-determined process and thechallenge
must betaken upfirst ofall atenterprise level .There­
fore ,newmechanisms involving cooperation ofenterprises
atEuropean level could help substantially inthe thinking
out ofstrategies inkey sectors .
•r
Tocreate aplatform "forEuropean industry inthe inform­
ation technology field ,theCommission has initiated a
"round table "ofrepresentatives ofindustry .Todevelop
the exchange ofviews further ,theCommission currently dis­
cusses with industry details ofajoint planning exercise
ininformation technologies which would define areas of
needed long lead-time precompetitive research indetail .
Cooperation groupings .and joint ventures ofenterprises
atEuropean level inareas oflong lead-time precompetitive
research ,set upinways compatible with competition rules ,
would considerably contribute tothecohesion ofthe in­
k ternal market andshould assemble theresources needed in
large scale long lead-time research .The Commission pro¬
poses that aCommunity role instimulating such cooperation
should beconsidered and thepossible useoftheCommuni­
ty'sinstruments toprovide incentives beinvestigated .
χ

-17-
^XVII 'TheCommunity andtheMember States must ,make determined
efforts tocreate abetter interface between research and
r ' industry European-wide and todevelop collective industrial
research systems further .,especially for innovative small
and medium-sized enterprises .The Commission will continue
towork for aEuropean orientation ofnational information ,
I
valorization and consultancy services and thus tostrength­
enthe transnational innovation infrastructure which is
essential for anefficient European market ininnovation .
ν* - - /^
XVIII Anarea demanding special attention and efforts atthe
Community level isthe need towork out asocial consensus
which would not belimited tothe acceptance ofinnovation /
but which would actively stimulate it.
Some oftheproblems and the possible scope for action at
theCommunity level are discussed inaforthcoming commu­
nication from theCommission totheStanding Committee
onEmployment onNew Information Technologies and Social
Change inthe areas ofemployment ,working conditions ,
education andvocational training .
TheCommission 'sapproach -rests onactive cooperation
( between the social partners inmanaging change tobring
about abalanced social andeconomic development and in
promoting asocial and educational climate favourable
ν
tocreativity .

-18-
■<The climate necessary tothe success ofthis programme
can only grow out ofactive discussions between those '
involved atall levels .The Commission will develop discus ¬
sions with the social partners and governments ofthe
Member States ataEuropean level onthe existing basis ,
while atthe same time encouraging extension ofthese
discussions tothe national level .
I
 The Community should develop the use ofthe Social Fund ,
inconjunction with its other funds and instruments ,par­
ticularly enhancing its role instimulating policy de­
velopment ,inthe search for solutions tosocial problems
and inpreparing the working population for actively coping
with change .TheMember States are called upon tomake use
ofexisting provisions byproposing suitably programmes .
i
XIX Needed is,finally ,ageneral awareness that ;wemust again
»
turn towards investment into our future ascompared to
consumption now .Wemust have the courage totake new
avenues tostimulate theentrepreneurial potential and the
social Strength ofour societies .Wemust evolve consistent
concepts for our industrial future and abandon passive
attitudes .Wemust set anew trend inmotion .Astart must
bemade now .
/