Opinion of the Economic and Social Committee on the 'Impact on SMEs of the steady, widespread reduction in funds allocated to research and technological development in the EU (at Community and national level)` (97/C 355/08)

On 19 March 1997 the Economic and Social Committee decided, in pursuance of Rule 23(3) of its Rules of Procedure, to draw up an opinion on 'The impact on SMEs of the steady, widespread reduction in funds allocated to research and technological development in the EU (at Community and national level)`.

The Section for Energy, Nuclear Questions and Research, which was instructed by the Committee to prepare its work on this subject, drew up its opinion on 24 July 1997 (rapporteur: Mr Malosse).

The Economic and Social Committee adopted the following opinion at its 348th plenary session (meeting of 1 October 1997), with 95 votes in favour and one abstention.

1. Resolution

The Economic and Social Committee:

1.1. recognizing the crucial role which technical and financial back-up for industrial RTD plays in promoting growth and employment in Europe;

1.2. noting that the overwhelming majority of businesses in the EU are modest in size, frequently undercapitalized and lack the capacity to exploit their potential as regards innovation and research;

1.3. concerned about the steady, widespread reduction in both the human resources and funding allocated to RTD in the EU;

1.4. deploring the lack of a genuine EU market in the field of innovation, the main action taken by public bodies being confined to regional and national levels and having only a very slight impact beyond this context;

1.5. rejecting (a) a futile, ritualistic policy designed only to salve the conscience, (b) the lumping together, under the term 'SMEs`, of enterprises which are fundamentally different, and (c) the relegation of small enterprises to a secondary role, even though they provide more than two-thirds of the total number of jobs;

1.6. endorsing the intentions expressed at the European Summit in Amsterdam on 16 and 17 June 1997 with regard to employment, competitiveness and growth, in particular the establishment of a facility for the financing of high technology projects of SMEs;

calls for:

1.7. the adoption of a new approach which draws a distinction between (a) small technology-intensive enterprises, (b) enterprises which have unused applied research capacity, and (c) enterprises which simply make use of the 'final products` of RTD, this latter group representing the majority of enterprises;

1.8. the establishment of a method for optimizing public and private research funding;

1.9. the establishment of a genuine European market in the field of innovation in order to decompartmentalize national schemes;

1.10. steps to be taken to make enterprises more 'European-orientated` by strengthening the partnership machinery and introducing a financial instrument to promote the establishment of joint ventures in the EU;

1.11. the reactivating of 'dormant` innovation potential by, for example, seconding research engineers to enterprises and by organizing cooperative research;

1.12. giving priority, in the planning of EU programmes, to the needs of small technology-intensive enterprises;

1.13. gearing the structural funds to the above-mentioned approach, with a view to promoting economic and social cohesion.

2. Introduction

2.1. In excess of 99,8 % of EU enterprises - i.e. some 15 million - can be classified as SMEs since they meet the criteria in respect of size (employing less than 250 workers), turnover (less than ECU 40 million per year) and independence (less than 25 % of their capital or voting rights is held by a large enterprise or a group). SMEs account for two-thirds of the total number of jobs and economic activity in the EU ().

2.1.1. SMEs will have to innovate if they are to meet increased competition and to contend with the internationalization of business strategies, against the background of economic globalization. In addition to other requirements, SMEs must therefore have access to the new technologies or develop the technologies which meet their needs. This observation is equally valid in the case of enterprises operating in traditional sectors, where it is now recognized that the application of technology provides a decisive competitive edge.

2.2. The EU has always given prominence to its SME policy. This policy is based on the EC Treaty:

- Article 130 of the EC Treaty refers to industrial competitiveness and the development of measures aimed at 'encouraging an environment favourable to initiative and to the development of undertakings throughout the Community, particularly small and medium-sized undertakings`. This article also calls for measures aimed at 'fostering better exploitation of the industrial potential of policies of innovation, research and technological development`;

- Article 130(f)(2) states that the EU will support SMEs in their 'research and technological activities of high quality`;

- Title XIV of the EC Treaty makes explicit reference, in respect of the goal of achieving economic and social cohesion, to 'reducing disparities between the levels of development of the various regions and the backwardness of the less-favoured regions ...`.

2.3. The aim of the current EU research programmes is to promote the interests of citizens, employment and the competitiveness of the EU economy. In this regard, SMEs are key 'targets`. The access of SMEs to RTD programmes is vital to the very future of the EU programme. Despite having tried on a number of occasions, the Commission has not really managed satisfactorily to increase the level of participation of SMEs in EU RTD programmes. What is needed, therefore, if we are to achieve meaningful results, is to introduce a root and branch change in the planning of these programmes. This conclusion clearly emerges from the Report of the Independent Experts Panel on the five-year assessment of the EU RTD Framework programmes (). The independent experts pointed out that the participation of SMEs 'would be better facilitated if they had more help with all the financial and legal issues relating to exploiting research, particularly in the area of intellectual property`. The experts also regretted the fact that the EU lagged behind the US as regards business culture, as was shown by the discrepancy in the dissemination and transfer of technology.

2.4. In this own-initiative opinion, the ESC wishes to put forward proposals to the EU Institutions and the Member States and with a view to providing enterprises with conditions which are more conducive to the exploitation of research, access to innovation and achieving the common goals in respect of competitiveness, growth and employment.

3. Drop in the funding of R& D by the EU

3.1. According to figures provided by the Statistical Office of the European Communities (Eurostat), the drop in public funding for RTD in the EU of 15, expressed in constant prices, first became noticeable in 1991. By 1993 expenditure in this field represented only 0,9 % of GDP, as against 1 % in 1985. By way of comparison, public funding for RTD in Sweden and France corresponded to 1,30 % and 1,27 % of GDP respectively; at the bottom end of the scale, the figures for Ireland and Greece were 0,34 % and 0,21 % respectively.

3.1.1. Total EU expenditure on RTD (1,91 % of GDP in 1995) was more than a third less than the figures for the US (2,8 %) and Japan (3,1 %). Industrial research financed by business continues to be an area in which the EU is significantly lagging behind both the EU and Japan (in the EU such research represents 1 % of GDP, whereas the corresponding figures for the US and Japan are 1,6 % and 2,2 % respectively).

3.1.2. It should also be pointed out that the development of new products accounts for less than half of expenditure on RTD in Germany and France, whereas the figure for the US and Japan is in excess of 60 %. Furthermore, the number of staff working on RTD is continuously declining. Research workers account for only 0,42 % of the workforce; the corresponding figures for the US and Japan are easily twice as high. This figure is all the more telling since it means that proportionally there are three times more research workers working in enterprises in the US than there are in Europe, and the figure for Japan is four times greater than that for the EU.

3.1.3. This situation is further complicated by the fact that the recession in the EU is persisting and there has been a significant drop in national funding for RTD in the Member States since the beginning of the decade.

3.2. Many Member States, including some of the largest states, are experiencing a shortage of funding which is such that EU programme appear to represent the last chance for the survival of both public and private research teams and laboratories. This being the case, the hunt is on for EU funding, as a result of which, given the inexorable increase in the number of applicants and dossiers, leading to the introduction of ever more strict selection procedures, the success rate of applicants is regularly falling; there is a risk that this development will jeopardize the more ill-equipped applicants such as small and medium-sized enterprises.

3.2.1. Furthermore, increasing prominence is being given, in the selection of subjects for research funded by the public sector, to the interests of large industry. For instance, the task forces set up by the EC Commission have defined priorities which reflect the needs and expectations of the highly concentrated sectors. This is bound to aggravate the marginalization of small enterprises in EU RTD policy.

4. The specific problems facing SMEs in the EU

4.1. In view of the number of SMEs in the EU, the part they play in providing employment (66 % of jobs in the EU) and their contribution to net assets (65 % of the net assets of the EU), SMEs will play an ever more important role in the economy of the EU. SMEs are not, however, a homogenous group of enterprises and it is essential, for the purposes of this opinion, to classify SMEs in accordance with their RTD requirements and potential. A single definition of SMEs would be meaningless in this context and would make it impossible to set out practical conclusions.

4.2. The Committee proposes distinguishing three categories of enterprises:

4.2.1. Small enterprises having a high technological capacity

Enterprises in this category have a well-established RTD capacity and they supply or make use of technology. Such enterprises are in the minority. It is estimated that they account for less than 3 % of the total number of SMEs. A sizeable percentage of SMEs in this category are involved in research projects funded by the EU.

4.2.1.1. Enterprises in this category face a major handicap from the point of view of their size and their resources; they have difficulty in competing on an equal footing with international industrial groups.

4.2.2. 'Vanguard` enterprises having unused capacity for innovation

Enterprises in this category may be described as 'vanguard` enterprises, which, whilst lacking the characteristics of the first category of SMEs, are nonetheless able to develop new products with a technological input. We are talking here generally of the SMEs which are the most highly developed from a technological standpoint in their sectors; it is estimated that they make up less than 10 % of the total number of SMEs.

4.2.2.1. SMEs in this second category are able to define their RTD requirements but they have to outsource research work as they lack adequate RTD capacity.

4.2.2.2. This category of SMEs plays a crucial role in disseminating technological innovations to their fellow SMEs which have a smaller capacity and in adapting such innovations.

4.2.2.3. Even if enterprises in the second category frequently manage to find solutions (the provision of suitable aid at national and regional level), they are increasingly coming up against problems and technological requirements which cannot be dealt with by any local partner.

4.2.3. Enterprises which make use of the final products of RTD

Enterprises in this category merely make use of the products of technological research. These SMEs represent the vast majority of SMEs in the EU and are solely interested in the final products of RTD. Such enterprises do not invest in risky or long-term technological projects and they lack the means to identify their own technological requirements.

4.2.3.1. In the absence of intensive awareness-promotion, preparation and backup, these enterprises will never have access to the technological opportunities yielded by RTD programmes.

4.3. This classification, which is now standard, illustrates different requirements in respect of RTD and different levels of exposure to cuts in funding. This classification needs to be backed up by a further factor, namely the areas listed as 'priority objective` in the context of economic and social cohesion. Location in these areas does not only have implications as regards wealth levels; it also implies remoteness from technological and other resource hubs.

5. The integration of regional development and research policy

5.1. Diminution of economic and technological disparities has been a key objective of EU policies since the Treaty of Maastricht. RTD policy can play a predominant role in this process, as lasting growth clearly needs scientific bases.

5.2. It is, however, the case that very frequently the most disadvantaged countries and regions are tempted to focus on 'low-tech`, labour intensive sectors. We therefore need to help these regions to increase their scientific and technological capacity through participation in RTD.

5.3. SMEs have a fundamental role to play in this process; in these high priority countries and regions, SMEs need specific help to enable them to gain access to research work and technological innovation and they will all the more receptive to any form of support which helps them to improve their technological input.

6. The participation of SMEs in EU R and D programmes

6.1. In the period 1990 to 1994, 6 276 SMEs took part in RTD projects financed under the Third Framework Programme. The figure for 1995 alone stands at 4 625 (1995 was the first year of the Fourth Framework Programme).

6.2. In 1995 over a third of the participants in such RTD projects were enterprises (37 %), less than a third were universities and other higher education bodies (32 %), 22 % were research bodies and 6 % comprise miscellaneous bodies.

Three out of five (58 %) of the participating enterprises may be classified as SMEs, in accordance with the EU definition.

6.2.1. The rate of SME participation was particularly high in three specific programmes: industrial technologies and materials; telematics applications; and information technology.

6.3. This significant level of participation by SMEs in the recent framework programme is, however, tempered by the following facts:

6.3.1. the number of SMEs taking part in these projects is minimal when set against the total number of SMEs in the EU;

6.3.2. reference is made exclusively to the criteria used in the EU definition of SMEs; these criteria are particularly inappropriate in this context;

6.3.3. the EU definition does not take account of the sector of activity involved; to give an example, an enterprise employing 250 in the construction and public works sector may be described as 'average-sized`, whereas an enterprise employing the same number of staff in the diamond-cutting sector would be a multi-national enterprise;

6.3.4. in all the geographical areas of the EU which are classified as 'priority objective` areas, and are therefore affected by the recession, the median workforce of SMEs is at best between 30 and 50. Enterprises having in excess of 250 workers should be placed in a different category;

6.3.4.1. it is therefore a matter of regret that under the EU definition of SMEs it is impossible to draw a sufficiently fine distinction. This skews participation statistics;

6.3.5. participation by SMEs is generally on a modest level (involving feasibility payments and sub-contracting work on projects); the financial assistance provided does not generally exceed ECU 50 000 per project.

6.4. From a more qualitative point of view, however, the measures for providing technological stimuli for SMEs seem to be having a significant effect on SME participation in the framework programmes:

6.4.1. 'exploratory awards` provide SMEs with financial assistance for putting together projects (location of partners, market analyses and analysis of the opportunities for innovation, feasibility studies);

6.4.2. cooperation enables groups of SMEs which have little or no research capacity and which have common needs, to entrust RTD work to university laboratories or research centres;

6.4.2.1. such cooperative research can be a valuable feature of all programmes. There is a high level of participation by small SMEs (less than 50 employees), which have taken part in 48 % of the selected projects.

6.5. These results demonstrate, if proof were necessary:

6.5.1. the interest in RTD shown by small enterprises and their readiness to respond when the schemes match their specific requirements;

6.5.2. the need to develop a differentiated approach to industrial RTD. In this context it would not appear to be advisable to use the EU definition of SMEs for the implementation of programmes or measures to promote RTD.

6.6. Against this background the reduction in funding for research is a matter of vital importance since it primarily affects the most vulnerable SMEs, namely the SMEs which have an absolute need for specific assistance if they are to make use of RTD in their strategic planning. If no such assistance is forthcoming, there is a danger that research will be carried out but the results will not be put to good effect.

6.7. The cooperative research formula is particularly appropriate to the second category of SMEs, i.e. 'vanguard` enterprises - small enterprises with a 'dormant` technological capacity. A major part of the effort to involve industry in RTD should be concentrated on this category of SMEs. Only by adopting such an approach can progress be made in achieving the main objective, namely to make the EU economy more competitive and enhance its capacity for growth.

7. A major effort is required - the procedures to be followed

7.1. As part of the preparation of the Fifth Framework Programme, the EU's Scientific and Research Committee (CREST) adopted a report on the participation of SMEs in RTD activities. The report was based on an exhaustive examination of the operating procedures adopted in the third and fourth framework programmes and of the participation of SMEs in those programmes.

7.2. The key findings, which were set out in the report's recommendations, were that there was a need for:

- a bottom-up approach designed to meet the real needs of SMEs;

- calls for proposals to be organized on a continuous, not intermittent, basis;

- the use of two-stage procedures and preselections;

- ready access to information and to the assistance required in preparing proposals.

7.3. In drawing up their recommendations, the authors of the report paid particular attention to the difficulties facing SMEs in the field of technological innovation. It was clear that in the past SMEs had had to contend with many obstacles preventing them from participating in these programmes, namely:

- inadequate access to information;

- difficulties in finding partners;

- time constraints;

- the limited R& D resources of SMEs;

- an inability to define R& D requirements and projects.

7.4. The only way in which SMEs can overcome these difficulties is through the provision of targeted technical and financial support from the EU. SMEs, especially those located in the 'priority objective` areas, have a much clearer need for such support than do industrial groups. In view of the need to provide SMEs with EU assistance in this respect, concern is bound to be expressed over the reduction in the funds allocated to RTD by both the EU and the Member States.

7.5. Against the background of an unchanged budget - and even more so in a time of recession - there is therefore a need to find alternative measures with a view to introducing a horizontal RTD activity designed to help all categories of SMEs, thereby:

7.5.1. enabling them to benefit - in the light of their requirements and ability to participate - from EU research and to be really involved in the RTD programmes and projects of both the EU and the Member States;

7.5.2. enabling them - in the light of their respective capacity and potential - to take part in the innovation support networks and networks for locating potential non-EU RTD partners.

7.6. This horizontal activity must be targeted primarily at national RTD projects. At the present time, a single market in respect of innovation has yet to be established. National and regional RTD support programmes and innovation support programmes are compartmentalized and it is very rare for the results of these programmes to be exploited outside the national or regional context. The decompartmentalization of national programmes, particularly in respect of (a) the exploitation of the results of the programmes, and (b) demonstration activities, must therefore constitute a priority for the EU.

7.7. This horizontal activity must be based on a targeted 'grassroots` approach, i.e. it must address the expectations and needs of enterprises, in all their diversity, rather than being based on a pre-determined set of measures and then subsequently endeavouring, generally without success, to involve enterprises in such measures.

8. The ESC's proposals

8.1. Concrete measures

The Committee does not wish to engage in declarations - frequently of a symbolic nature - in support of the SMEs, nor does it wish to advocate highly specific measures which would lead to the establishment of 'segregated` programmes. It calls for concrete measures which take account of the specific needs of the various categories of enterprise.

8.2. Simplification of procedures

Enterprises wish to have programmes which are simple to use. In the case of the smallest enterprises, the requirement - as part of the EU procedures - to set up European partnerships represents a major obstacle in view of the attendant linguistic and cultural problems and administrative difficulties.

8.3. The first step is to assess the needs

There is a need to adopt a 'bottom-up` approach in identifying technological priorities. This involves listening to the needs expressed by enterprises - irrespective of their size - via representative institutions. At the level of the administration of EU programmes, this approach involves the establishment of SME-innovation units with a task of making sure that the main programmes are in tune with the requirements.

8.4. Legal and financial assistance measures

Specific measures to provide legal and financial assistance are required at all levels, from local level to EU level. The aim is to establish a financial, regulatory and legal environment conducive to innovation, on the basis of a typological approach, differentiating between the various categories of enterprises. The following steps should be taken:

- improving the protection afforded to intellectual property rights;

- reducing administrative procedures and red tape;

- facilitating access to sources of finance.

8.5. Aid which actually reaches enterprises

All too often, action hailed as designed to help SMEs in fact only serves to promote the development of intermediary institutions and bodies. The Committee, therefore, calls for measures to ensure that enterprises are indeed the final beneficiaries, even if recourse has to be made to intermediaries. Intermediaries should only be supported in the light of the assistance which they provide to enterprises.

8.6. First-stop shops and specialized information departments

Enterprises, in particular the smallest enterprises, which merely make use of the final products of RTD, need to be guided in order to enable them to find the right technological information and the channels of access to the various programmes. A distinction should be drawn in this respect between first-stop shops (such as those operated by Euro-Info-Centres) and specialized departments for disseminating technological information, such as the sectoral technical centres, which require specialized technical skills.

8.7. A European innovation market for users of final products of RTD

If we are to help make the EU economy more competitive, enterprises which use technology must be in a position to take advantage of the results of research carried out at national, EU and international level. There is therefore a need to establish a genuine network for the dissemination of scientific and technical information, either via direct access, including via Internet, or via scientific and technical agencies. The establishment of a table listing RTD activities and the most relevant exploitations of these activities will provide a valuable 'benchmarking` tool and an instrument for coordinating the programmes of the EU and the Member States. The EU must help to decompartmentalize national networks by promoting multilingualism and schemes on a European scale.

8.8. 'Europeanizing` enterprises

The vast majority of enterprises in the EU are not involved with the reality of the single market. This is, for example, because they are either too small or too little involved in international transactions. The EU can help bring about progress in this respect by promoting cooperation between small enterprises in the Community. Over and above the simple establishment of contacts, the Committee therefore proposes that a financial instrument be introduced, based on the external JOP and ECIIP (European Community International Investment Partners) programmes, which, with the support and guarantees provided by the banking networks, would help establish (e.g. through feasibility studies) joint ventures for developing new products.

8.9. Tapping the innovation potential of 'vanguard` enterprises

The financial cooperation instrument will provide significant assistance for 'vanguard` enterprises whose research and innovation capacity is inadequately exploited.

At the same time, cooperative research schemes, along the lines of the European Cooperative Research Action for Technology (Craft) (), will have to be strengthened. In this field, once EU provisions have been strengthened, the Member States would be called upon to promote the establishment of a 'Eureka` (European Research Coordination Agency) in respect of cooperative research. The Committee also proposes, with a view to mitigating the shortage of research staff in these enterprises and to making use of dormant technological projects, that the EU focus its programme for the training and mobility of research workers on secondment of research engineers to small and medium-sized enterprises having a technological capacity.

8.10. Measures to support small technology-intensive enterprises

If real priority is to be given to these enterprises, we must above all simplify and facilitate their access to the European programmes by removing the obligation to find EU partners in duly substantiated cases, where it is likely that findings will be disseminated at EU level. Priority should be given to the representation of these enterprises on 'panels` and planning units at the pre-programme stage. Finally, the EU should promote the capitalization of these enterprises by introducing benchmarking and pilot networking projects to back up venture-capital and capital-development initiatives.

8.11. Using the Structural Funds to promote this policy

Bearing in mind that economic and social cohesion lies at the heart of the EU venture, the Committee takes the view that a part of the EU's considerable funding should be used to promote this policy, through the intermediary of the Structural Funds. Without jeopardizing competitiveness, infrastructure should be established to promote the regions lagging furthest behind and to stimulate innovation and RTD: research centres, scientific and technical universities, laboratories, agencies for disseminating information, etc. In order to decompartmentalize EU regional development policies, the Commission should establish closer links between cohesion measures and RTD policy (e.g. by increasing the number of calls for joint projects).

Brussels, 1 October 1997.

The President of the Economic and Social Committee

Tom JENKINS

() Source: Enterprises in Europe, Fourth report, 1996 - Eurostat.

() COM(97) 151 final.

() Research on behalf of enterprises which is jointly entrusted to a third party: laboratory, research centre, third enterprise.