TABLE OF CONTENT

1........... Introduction. 4

2........... Structural Change and the Competitiveness of EU Member States. 7

2.1........ Introduction. 7

2.2........ Structural change in the European Union. 8

2.3........ Summary of findings. 13

3........... Overview of progress by broad policy area. 15

3.1........ Towards an innovative industry. 15

3.2........ Towards a sustainable industry. 21

3.3........ The business environment 29

3.4........ Entrepreneurship and SME policy. 33

4........... Country chapters. 34

4.1........ Belgium.. 34

4.2........ Bulgaria. 34

4.3........ Czech Republic. 34

4.4........ Denmark. 34

4.5........ Germany. 34

4.6........ Estonia. 34

4.7........ Ireland. 34

4.8........ Greece. 34

4.9........ Spain. 34

4.10...... France. 34

4.11...... Italy. 34

4.12...... Cyprus. 34

4.13...... Latvia. 34

4.14...... Lithuania. 34

4.15...... Luxembourg. 34

4.16...... Hungary. 34

4.17...... Malta. 34

4.18...... The Netherlands. 34

4.19...... Austria. 34

4.20...... Poland. 34

4.21...... Portugal 34

4.22...... Romania. 34

4.23...... Slovenia. 34

4.24...... Slovakia. 34

4.25...... Finland. 34

4.26...... Sweden. 34

4.27...... United Kingdom.. 34

5........... Annex: Methodology and indicators used. 34

5.1........ Industry classifications and indicators used in section 2 and introductions of country chapters. 34

5.2........ Indicators used in section 3 and the introductory graph of country chapters. 228

5.3........ Data sets. 235

This report has been written by the staff of the Directorate-General for Enterprise and Industry, European Commission. Any comments are welcome to the following e-mail address: ENTR-MS-COMPETITIVENESS@ec.europa.eu

1 Introduction

The recovery of the EU industry from the crisis remains fragile. At the same time, many structural challenges need still to be addressed in order to safeguard its international competitiveness. These include weaknesses in the creation and exploitation of knowledge, improvement in the business environment, and raising the ability of industry to adjust to challenges such as demographic change, globalisation and climate change. A large part of the policy instruments which can improve industrial competitiveness are national, and the success of EU industry critically depends on national action. At the same time, important initiatives at the EU level are also necessary to complement national actions.

The competitiveness of European industry in international product and services markets is revealed by its rising global market share over the last decade and by some favourable dynamics regarding its trade specialisation, such as increasing reliance on exports by technology driven and capital intensive industries. Nevertheless, this encouraging performance masks a variety of developments at national level, many of which are not reassuring. Also, studies on the international competitiveness position of the Member States and their attractiveness as a location for foreign direct investment suggest that the international competitiveness of the EU may be eroding, a consequence of falling behind in the race for gaining market share through price and cost advantages, (see Figure 1 below), innovation and ultimately productivity growth.

Figure 1: Competitiveness Index (based on unit labour costs)

Source: DG Economic and Financial Affairs.

Over the period 2000-2007, the cost competitiveness of the 27 EU Member States eroded by more than 25%, largely due to the movements of the exchange rate of the euro against the currencies of the 36 partner countries under consideration. The drop in the exchange rate after 2007 has brought about an improvement in the EU position in terms of cost competitiveness. From an aggregate point of view, unit labour costs in EU 27 only grew slightly faster than for the 36 trading partners (+3% above them over 2000-2010). However, as presented in the individual country chapters of this report, the situation varies considerably across Member States, a few countries (including Germany, Austria, Poland, Sweden and the UK) having experienced a gain in external cost competitiveness[1].

Nations characterised by strong and sustained productivity growth are able to gain international market share and improve their standards of living; those nations experiencing comparatively poor productivity growth are unable to gain and sustain a competitive advantage internationally.

The present report focuses on the measures Member States have carried out to improve their competitiveness, and assesses their performance with respect to a number of key framework conditions. The main policy areas covered are industrial innovation, sustainability of industry, the business environment, entrepreneurship and SMEs. The report derives from Article 173 of the Treaty on industry and forms part of the Europe 2020 framework[2], specifically of the flagship initiative “An Industrial Policy for the Globalisation Era”[3]. Implementation of the flagship initiative is on track and the Commission has already adopted, notably, the commodities and raw materials strategy[4], the Small Business Act Review[5] and the Standardisation package[6]. The policy areas which are covered in this report are also ingredients of the Broad Economic Policy Guidelines[7] which, in the relevant parts, call for improving the business and consumer environment, and for modernising and developing the industrial base in order to improve the functioning of the internal market.

This report contains a horizontal part focusing on structural change (section 2) and an overview of progress by broad policy area (section 3), followed by country chapters presenting national performance and policy developments in the same policy areas. The Annex provides details on the indicators and industry classifications used as well as the data used in the preparation of the various graphs.

Box 1: The Implementation of the Industrial Policy Flagship The Europe 2020 flagship initiative on “An Integrated Industrial Policy for the Globalisation Era” is an ambitious action plan with more than 70 key actions. It has been well received by the EU institutions[8] and major stakeholders. In the first year following its adoption, the Commission has been vigorously pursuing implementation of the proposed actions. Here are some of the highlights of the progress achieved so far. The Competitiveness proofing process has been launched as a part of the impact assessment process to ensure a reinforced analysis of the impact on competitiveness of new policy proposals. Commission services have been working on the methodology to put this commitment into practice. Competitiveness is now increasingly taken into account in Commission impact assessments. This has notably been the case for the proposals on banks' capital requirements ("CRD IV") and their impact on access to credit for companies. The Small Business Act for Europe was reviewed in February 2011[9] and related follow-up actions, such as a new strategy to support internationalisation of SMEs should be adopted before the end of the year. An Action Plan for SME access to finance will also be adopted before the end of the year. SME Access to finance has been established as a major priority in the dedicated programme for industrial competitiveness and SMEs to be proposed by the Commission in the framework of the Multiannual Financial Framework for 2014-2020[10]. The Single Market Act was adopted in April 2011[11]. It contains twelve priority actions to relaunch the single market aiming at favouring the revival of a strong industrial economy in Europe. In the area of industrial innovation, the High-Level Group on Key Enabling Technologies presented its final report in June 2011 with concrete recommendations on development and deployment of these technologies[12]. The Commission has included a major increase in investments in current and future enabling and industrial technologies and services in its proposals for the future Horizon 2020 programme for research and innovation. The Commission also proposed in June a major modernisation of the European standardisation system[13]. On the global dimension of industrial policy, a new trade policy agenda was put in place in November 2010 and is currently being implemented. It ensures a more focused and incisive battle against trade and investment barriers in major partner economies to assure a global level playing-field for European companies.[14] On international dialogue, the Commission has made steps towards mutually beneficial cooperation with third countries, such as the Mediterranean neighbours, Latin American countries and the African Union to improve market access for European products. Concerning sector-specific initiatives, the Commission has presented a strategy for space policy[15], relaunched the CARS21 process[16] and continued its efforts to address concerns of energy-intensive industries, in particular through initiating the Sustainable Industry Low Carbon Scheme (SILC) and by promoting ultra-low carbon production technologies.

2 Structural Change and the Competitiveness of EU Member States 2.1 Introduction

Structural change is the long-term evolution of an economy stimulated by secular trends in income and wealth, technology, innovation and preferences or it can be initiated by changes in economic and other policies. Structural change is typically manifest by changes in the composition of national output over time. The key features of a structural change are the secular decline in the share of primary production (agriculture, fishing and mining); a rise and then stabilisation in the share of the manufacturing sector; and the increasing domination of modern industrial economies by services sectors. However, the nature of sector shifts and the secular transition to services-dominated economies reflect changes in competitiveness. As successful enterprises grow and take advantage of market opportunities, technology and innovation, it is inevitable that they will also experience changes in their domestic and international market shares over time.

This section highlights some of the shifts of production and trade shares between sectors based on a detailed study of structural change in the EU[17]. It analyses four country groupings based upon similarities in terms of industrial structure The criteria used for these groupings are GDP per capita, R&D intensity (including the R&D intensity of inputs) and a range of industry and trade specialisation indicators. These groups[18] are:

· Group 1: Countries with higher GDP/person than the EU average, with specialisation in technologically advanced sectors: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Netherlands, Sweden, United Kingdom.

· Group 2: Countries with higher GDP/person than the EU average, with specialisation in less technologically advanced sectors: Cyprus, Greece, Italy, Luxembourg, Portugal, Spain.

· Group 3: Countries with lower GDP/person than the EU average, with trade specialisation in technologically advanced sectors: Czech Republic, Hungary, Malta, Poland, Slovakia, Slovenia.

· Group 4: Countries with lower GDP/person than the EU average, with specialisation in less technologically advanced sectors: Bulgaria, Estonia, Latvia, Lithuania, Romania.

The four country groups display a hierarchy in terms of GDP per capita. Income levels correlate closely with economic structure. Shares of agriculture are lowest in group 1, the wealthier group, and highest in group 4, the less wealthy group; shares of manufacturing are lower in the higher income countries (group 1 and 2) than in the lower income countries (group 3 and 4), while for services, both market and (other) public services, shares are in reversed order, consistent with longstanding accounts of structural change as economies develop.

In this presentation, the focus is on indicators[19] of relative value added share (RVA) and revealed comparative advantage (RCA) for high-technology industries and high-education sectors, as well as indicators of world market share and international trade prices. High-technology industries and high-skill industries are important because they tend to have higher productivity growth. Moreover, they tend to be less exposed to international competition, since they face weaker price-based competition from the emerging economies than traditional labour intensive industries.

Since strong cyclical effect dominate the post-2007 data, for the analysis of structural change this report concentrates on data up to 2007.

2.2 Structural change in the European Union 2.2.1 Industry specialisation and structural change

Structural change is generally a slow process where substantial movements may take several decades to occur. Examining the changes in industrial structure in the period 1999-2007, industries have followed different paths towards higher technology or higher skills base. Changes in the production share of different sectors in national income may ultimately lead to sector specialisation and could also result in improving competitiveness. Similarly, firm-level specialisation and changes in the sector composition of output may also be a reflection of improving competitiveness, especially if firms upgrade their capabilities and intangibles by absorbing or developing new technologies or production routines, or if new, more innovative firms enter a sector. In general, a predominantly less advanced country might play a key role in the production of technologically advanced products as a result of specialisation and of the geographical disaggregation of production. The data should, therefore, be interpreted with caution when making judgements about industrial structure and the level of economic development.

Figure 2 compares the change and the level of relative valued added (RVA) in technology-driven industries. The 2007 level of the relative valued added on the horizontal axis and its change relative to 1999 on the vertical axis. Countries can be in one of four areas, as shown in Figure 2: i) high and improving – level and change values above the EU average, in the top right of the figure; ii) high and declining – levels above the EU average and changes below the EU average, in the bottom right of the figure; iii) weak and improving – meaning levels below the EU average and changes below the EU average, in the top left of the figure; and finally, iv) weak and declining – meaning level and change values below the EU average (bottom left of figure).

Group 1 is in the strong and improving area, which means that the share of technology driven industries is high and increasing. Countries in groups 3 and 4 are also improving, but from a weaker position, indicating a catching up path. On the other hand the share of technology-driven industries seems to be declining in group 2, from an already low level. The level of group 3 is above the one of groups 2 and 4. Finland and Germany have improved most and the Netherlands, Spain, Austria and Sweden have lost most.

For countries specialised in labour-intensive industries (as opposed to those specialised in more technology-driven industries), competitiveness can be improved by shifting towards higher skilled activities – typical examples include the manufacturing of machine tools, furniture, or electrical equipment.

Figure 2: Change (1999/2007) vs. level (2007) of relative value added in technology-driven industries

strong

weak

Note: Change in relative value added of Greece was cut to a half to improve the graphical representation. The intersection of the horizontal and the vertical line represents the EU average. Countries where data are incomplete are not shown (Estonia, Cyprus, Latvia, Lithuania, Luxembourg, Malta, and the United States). Source: Eurostat (SBS).

Figure 3 shows the value added shares of high education intensity sectors, including services sectors in addition to manufacturing. Classic service-oriented countries such as the United Kingdom excel here. Group 1 is characterised by a strong and improving level. Despite substantial differences in levels, most countries are increasing their share of value added arising from these sectors, again proving that the Member States are moving up the value chain. The progress towards high-education sectors in groups 3 and 4 is broadly similar to that of group 1. However, the development of high-education sectors is progressing on average more slowly in group 2. There thus appears to be room for countries in the lower part, including many countries in group 2, to further develop their high-skill sectors, particularly in service industries.

Figure 3: Change (1999/2007) vs. level (2007) of value added in high-education sectors

Note: Change in value added share of UK was reduced by a factor of 1.8 to improve the graphical representation. The intersection of the horizontal and the vertical line represents the EU-25.

Source: OECD (STAN), EU KLEMS databases.

2.2.2 Trade specialisation and structural change

Regarding trade performance, consider world export market shares in 2009 and their changes compared to 1999 for industry and to 2004 for services.[20]

In total manufacturing, the EU (27 Member States) increased its market share by 2.5 percentage points to 22.1% between 1999 and 2009, while the US and Japan both lost market share, by 6.6 and 4.3 percentage points to 12.2 and 7.6%, respectively. China increased its share of manufacturing exports by 11.2 percentage points to almost 17%, while the other BRIC countries showed slower growth. In terms of trade specialisation, the EU has gained more than 5 percentage points in its market share in exports by technology-driven industries, in which it is now specialised as compared to 1999. Like the US and Japan, the EU has a higher market share in technology-driven industries than in the total. Only mainstream manufacturing industries have an even higher market share, but the dynamics over the time period in question (1999-2009) are much less pronounced. The second-strongest growing area by market share is capital-intensive industries, where the EU is not specialised but might soon be if current trends continue. By contrast, the market share of labour-intensive industries is declining quickly, along with the market share of marketing-driven industries.

The performance of the EU in services sectors has been evaluated over a shorter period 2004-2009. It is less positive given a fall in market share by 1.8 percentage points between 2004 and 2009, as opposed to the moderate decrease observed in the US and in Japan over the same period. In comparison with the latter two countries, the fall in market share is most pronounced for insurance, financial and ICT services, in which the EU holds substantial world market shares.

Overall, the market share developments in services are much more stable than in manufacturing. The EU, the US and Japan have held up their export market shares much better in comparison with the BRIC. China has only 5.8%, with an increase of 1.5 percentage points (about as much as India’s market share gain to 4%). China achieved substantial market share only in construction, whereas India has a considerable 35.5% market share in computer services.

A more detailed example of trade shifts in technologically-driven industries using the country groupings can be provided using the revealed comparative advantage indicator[21]. Figure 4 positions countries and groups according to their revealed comparative advantage in technology-driven industries over the period 1999-2007[22].

The data show that, in contrast with relative value added, group 3 is improving specialisation in technology-driven industries, while group 1 in the positive and stable category; this relationship is mirrored by group 2 and 4, both in the weak area, with group 4 improving while group 2 is stable. Group 3 thus seems to be well integrated with the supply chains of advanced firms in group 1, as is well known for example in the automobile industry. Group 3 may thus be seen as a form of ”China“ of the EU. It remains to be seen whether trade specialisation is a predictor of future industry specialisation as measured by value added shares.

Figure 4: Change (1999/2007) and level (2007) of revealed comparative advantage in technology-driven industries

Note: The intersection of the horizontal and vertical line in the origin represents the EU average.

Source: Eurostat (Comext). Includes intra-EU exports.

2.2.3 Quality content of exports

To look at the quality content of export, prices are taken as a proxy for quality. Figure 5 illustrates the change (1999/2009) and the level (2009) of Member States’ share of exports in the low price segment compared to the EU average, on the grounds that this reflects a country performance in terms of its position on the quality ladder and in terms of upgrading over time.

A low or declining share in the low price segment may be regarded as an advantageous outcome. Therefore, countries in the bottom left area – level and change values below the EU average – can now be interpreted as being in a strong and improving position.

Figure 5 shows the shares of exports in low-skill and labour-intensive industries. Group 2 is in the strong area, mainly due to the good performance of Italy. Many more countries now display substantial changes in performance revealed by a decline in the share of exports in the low-price segment. This suggests that many countries react to rising competition in labour-intensive industries from low-wage countries by improving the quality of their products. The quality performance in labour-intensive industries also seems to explain how Italy is able to sustain exports in this industry type, and also how Italy achieves relatively high GDP per capita in industrial structures which are poorly associated with firm capabilities. Moreover, even in labour-intensive and low-skill industries, in which Italy is heavily specialised, it seems to be possible to defend competitive advantage in terms of product quality.

More generally, the data are in line with evolutionary theories of the firm, according to which technology or routines developed by firms to achieve product quality cannot be copied that easily by others. A high share of tacit knowledge involved in production – even e.g. in textiles – means that any diffusion of this knowledge is tied to learning by doing, which implies a learning process during production. Such processes usually take time, just like Italian firms have accumulated their routines and recipes for production over decades. Hence, while competitive pressure is certainly rising and the EU is losing market share in labour-intensive industries, the potential for upgrading by EU firms in a variety of sectors and the time it takes for firms from emerging countries to reach the same level of firm capabilities should not be underestimated. Competitiveness can be sustained in traditional structures, on the condition of high quality.

Figure 5: Change (1999/2009) and level (2009) of low price segments in low-skill labour-intensive industries

Note: Change is expressed in percentage points and level as percentage. The intersection of the horizontal and the vertical line represents the EU 27.

Source: Eurostat (Comext).

2.3 Summary of findings

Indicators of structural change, patterns of specialisation and sector upgrading shed light on firm capabilities, prospects for growth and on how to cope with adjustment pressure in the wake of rising competition.

Due to the high level of country heterogeneity within the EU, interpreting simple comparisons between individual countries and the EU average would not necessarily be particularly enlightening. Building country groups that share similar characteristics facilitates considerably the structuring and interpretation of the information in hand. The performance of the country groups is consistent across indicators and in line with theoretical and empirical research on drivers of country competitiveness.

The group of countries with higher GDP/person than the EU average, and with specialisation in technologically advanced sectors (group 1) consists of Belgium, Denmark, Germany, France, Ireland, Netherlands, Austria, Finland, Sweden and the United Kingdom. A key development is that for the years under review the specialisation of this group in technology-driven industries and high education intensity sectors increases further.

The group of countries with higher GDP/person than the EU average, and with specialisation in less technologically advanced sectors (group 2) consists of Greece, Spain, Italy, Cyprus, Luxembourg, and Portugal. A positive trend is a strengthening of its specialisation in sectors presenting high educational intensity (essentially services), albeit from a low level. However, the shift towards higher education sectors is still too slow relative to the other groups. Moreover, taken as a group, its specialisation in labour intensive industries and low education intensive sectors, its weakness with respect to gaining market share in fast growing emerging markets signal risks of relative decline, at least with respect to the first group of countries.

The group of countries with lower GDP/person than the EU average, and with trade specialisation in technologically-advanced sectors (group 3) consists of the Czech Republic, Hungary, Malta, Poland, Slovakia and Slovenia. This group is similar to group 1 regarding trade specialisation in technology-driven industries. In terms of change, group 3 shows a decline in trade specialisation in labour-intensive industries and similarly strong but opposite trends in technology-driven industries, both in terms of production and in trade. Thus Group 3 looks like shifting towards becoming an. assembly powerhouse for the more technologically advanced countries of group 1.

The group of countries with lower GDP/person than the EU average, and with specialisation in less technologically-advanced sectors (group 4) consists of Bulgaria, Estonia, Latvia, Lithuania and Romania. In terms of specialisation it is very similar to group 2, with which it also shares the strengthening of specialisation in sectors with high educational intensity. But group 4 experiences more positive changes than group 2 as regards industry and trade specialisation in technology-driven industries.

Qualifying to some extent the above considerations, the analysis shows that competitiveness can be sustained in very different industries or sectors; there is not only one industrial structure that is conducive to growth and the creation of more and better jobs. Ultimately, it is the successful transformation of different production factors into innovative or high-quality outputs that determines the competitiveness of firms in developed countries. These processes take time to be established and cannot be copied overnight. However, it is clear that in technologically less advanced industries the task of maintaining competitiveness is harder. Even though in some countries labour-intensive industries produce high product quality, the fact remains that these industries are clearly declining, both in terms of export market share and in terms of shares in national value added. Apart from firm capabilities, structures can also provide information about future growth prospects. These may be linked to knowledge spillover, but may simply arise from trade growth patterns, i.e. international demand for European exports. Technologically advanced industries feature much higher shares in exports to fast growing emerging countries than industries characterised by low innovative activity.

3 Overview of progress by broad policy area 3.1 Towards an innovative industry 3.1.1 R&D: there is margin for improvement

The EU has achieved research excellence while in terms of R&D intensity it is on the third place behind the US and Japan, largely because of lower private investment. Some of the recently industrialised countries have also increased their research and innovation investments. Within the EU, Denmark, Germany, Finland and Sweden are innovation leaders. This year's Innovation Union Scoreboard[23] concluded that while less innovative Member States grow faster and have been catching up with the more innovative countries, this convergence process seems to be slowing down.

Direct comparisons of R&D expenditures relative to GDP are heavily influenced by the industrial structure of each country and so give a distorted picture, especially business R&D expenditures (BERD). The decomposition of business R&D intensity into a sector effect and a country effect allows for appropriate assessments of the level and change of R&D intensity over time, both showing structural change between sectors and sector upgrading in terms of rising (or falling) R&D intensities.

R&D intensity in a given country is defined as the ratio of R&D expenditure to total value added. In the context of cross-country comparisons this ratio can be analysed as the result of two effects: a "structural" effect measuring aggregate innovation intensity if all business sectors, relative to their value-added, invested in R&D like the cross-country average, and a "country" effect taking account of deviations of country-specific R&D intensities to the cross-country average for all business sectors.

Figure 6 shows all EU countries, with the exception of Luxembourg, and a variety of non-EU countries relative to the size of their country and sector effect. Countries above the 45°-line show a positive country effect, meaning that the sum of their sector R&D intensities is above the sector R&D intensities averaged across a set of benchmark of 12 countries at the technology frontier: Japan, the US, Norway; and EU Member States Belgium, Denmark, Germany, France, the Netherlands, Austria, Finland, Sweden and the United Kingdom[24]. The size of the country effect corresponds to the vertical distance between the 45 degree line and the individual countries. If the country effect is below this line, it is negative, meaning that sector R&D intensities are below the average of the benchmark countries.

The sector effect (horizontal distance from the origin) reflects the industrial structures of countries. Group 1 is above the line, while group 2, 3 and 4 are below the line, in principle lending support to the view that structural specialisation is related to innovative ability or at least to the intensity of R&D investment.

At the country level, some countries specialised in knowledge-intensive structures, such as Ireland and Hungary, are well below the line, but some countries featuring less-knowledge intensive structures – e.g. within group 1, Denmark and Austria feature high R&D intensities. Some countries featuring high sector specialisation in technology driven industries do not seem to have yet reached full potential in R&D intensity (Germany). Again, as with quality indicators, this comes as a qualifier that while industrial structure is an important concept, it is advisable to complement it with indicators measuring structural change within industries, or sector upgrading. The ”within industry“ indicators provide important clues as to why countries with structures which are only poorly associated with advanced firm capabilities and the potential for future growth prospects are able to sustain high incomes per capita, and the other way around – why countries with structures which seem to indicate advanced firm capabilities have not reached a high level of income per capita, an indication that these countries work in less technology intensive value chain segments. Moreover, the Member States at the forefront of innovation, specialising in technology-driven sectors, such as Germany, Ireland or the Netherlands, may need to invest even more in research and innovation than they currently do to maintain their position.

Figure 6: R&D decomposition: country and sector effect 2007

Source: Eurostat, OECD.

The rest of the section focuses on recent innovation policy developments[25] with particular relevance to the business sector. Analysis on Member State performance regarding innovation and research can be found in recent publications of the European Commission and others[26].

3.1.2 Facilitating private research efforts

Research, development and innovation are key sources of economic and productivity growth with private research deemed orientated towards shorter term results. Many Member States have therefore enacted measures to promote business sector research, in particular tax incentives, grants and credits.

Concerning tax incentives, France has a comprehensive system to support innovation[27] including a tax credit[28] of up to 50% for first time applicants in the first year and 40% in the second year. Portugal has now one of the most competitive tax credit systems for R&D in the EU 27 in place and is expanding it further. Denmark provides tax deductions for R&D expenditures and subsidises R&D by SMEs. Italy has also tax credits for companies financing research projects in universities. Austria, Belgium and Ireland have extended their R&D tax incentives, while Finland and the Czech Republic are planning to introduce them. The Netherlands is cutting subsidies and transforming them into generic tax deductions, especially for R&D wages and R&D based profits. The United Kingdom is reviewing its R&D tax credit scheme.

All Member States are encouraging closer cooperation between academia and enterprises, with some new developments: Malta even plans to only fund projects involving at least one commercial actor. Sweden, Slovenia and Latvia have set up further competence centres to bridge the gap between companies and academic research. Innovation vouchers for enterprises to buy services from R&D providers are an increasingly popular policy measure. For instance Estonia, Slovenia, Portugal, Greece and Lithuania and two regions in the Czech Republic recently introduced them.

3.1.3 Promoting technology development and diffusion

Key enabling technologies, e.g. micro and nano-electronics, advanced materials, nanotechnology, industrial biotechnology, photonics and advanced manufacturing systems are the basis for future competitiveness of EU industry[29]. Several Member States are promoting such technologies explicitly, while others set up functionally similar programmes: Germany adopted a new high-tech strategy until 2020 while Estonia has set up a loan scheme. France invests heavily in digital infrastructures, while Sweden, Italy, Portugal and Slovenia promote high-tech projects. Lithuania incentivises technology investment by tax relief, Greece by grants but is moving towards tax reliefs as well. Going a step further, the United Kingdom adopted a new key technologies strategy.

Some countries pursue active cluster policies to promote regional links between academia, enterprises, banks and policy-makers, for instance Denmark, France, Germany, Poland, Sweden and all regions in Belgium. Lithuania has adopted an ambitious programme with significant funding while Malta aims for ”smart specialisation“. Italy promotes cooperation among companies and Greece has published a first call for expression of interest in clusters. But more could be done in line with the Innovation Union Communication[30]. The development of clusters and networks can be supported through smart specialisation strategies, with the assistance of the EU Regional Policy[31].

Eco-innovation programmes aimed at greening the economy are spreading quickly. For instance, Germany extended a sustainable energy research programme, Denmark set up a ”renewal fund“ for green technologies in SMEs, and Italy has introduced incentives for sustainable energy production. France and Belgium shifted considerable funding towards clusters for environmental technologies.

Several Member States have set up ambitious programmes to use public procurement better as a tool to promote innovation: The United Kingdom is extending its Small Business Innovation Research programme. Spain has recently adopted a package of measures in order to promote innovative public procurement. Pre-commercial procurement is being introduced in Cyprus, while Slovenia intends to use conventional public procurement better for innovation.

3.1.4 Unlocking the transformative power of service innovation

The boundaries between manufacturing and services are increasingly blurring and service innovation can have a transformative power to change value chain, sectors and markets. Service innovation is now recognised by an increasing number of Member States as element of innovation policy that reaches beyond manufacturing enterprises. Service innovation can contribute to smart, sustainable and inclusive growth with profound effects on industrial value chains. Examples include amongst others public-private partnerships for efficient logistics in Germany, real-time vessel fuel consumption optimisation services in Finland and initiatives to innovate tourism and hospitality service in the Czech Republic and Slovenia through bundling, support services and regional competitions.[32]

If service innovation escapes the logic of conventional R&D projects and rather occurs through experimental interaction with users and potential clients, policies to foster service innovation require such ‘experimentation environments’. It is recognised that the model regions for e-mobility in Germany and demonstrator projects for healthcare services in the UK integrate such aspects. It can therefore be observed that Member States have started to use service innovation to address societal challenges. However, the transformative power of service innovation is not yet exploited at a policy level in all Member States.

3.1.5 Improving skills for innovation

Technological and industrial changes are increasing demand for people with high and intermediate levels of skills[33]. Excellence in management, research, engineering and science needs to be accompanied by a broader skills base (including team work, creativity, and design). A better trained and more entrepreneurial workforce is crucial to ensure that enterprises can benefit from new technologies and develop innovative products, but also innovative process and work organisation.

Some Member States have started to experience skills gaps, partly related to a decrease in the working age population due to decreasing birth rates over the last decades and emigration of well-qualified persons . This issue is likely to become more important in the future. However, progress is slow. For instance, most Member States have a low share of graduates in science, technology and engineering (Figure 7), but only a few have taken ambitious action. The positive examples include Germany, which is rewarding the excellence of universities, the Czech Republic which will provide grants to attract more students to science, technology and engineering studies and Finland plans to extend a distinguished professor programme. Luxembourg liberalised immigration rules for researchers and provides grants for PhD and post-docs of all nationalities whereas Estonia has announced plans for tax deductions for work-related studies of enterprises' employees.

Figure 7: Tertiary graduates in science and technology per 1000 of population aged 20-29

Note: Latest available data for Greece and Italy are from 2008 instead of 2009. Source: Eurostat, 2011.

Innovation management has been identified as a further bottleneck for innovation in many enterprises. Some Member States have therefore set up advisory services. Ireland is stepping up cooperation between enterprises and higher education institutions to increase the managerial capacity. Malta plans to provide advice on innovation management. Innovation in workplace organisation is also receiving increased attention, but only few Member States have put an emphasis on it, for instance the Netherlands and Belgium.

3.1.6 Good governance in the area of innovation policy

Many Member States have improved the governance of their innovation system. However, further steps to better monitor and evaluate policy impacts are needed.

With regard to evaluation, a recent study concluded: «An evidence-based approach to informed agenda setting and policy adjustments is relatively weak in many EU countries. Evaluations, benchmarking, foresight studies, etc. are not as frequent and generalised as might be expected. One argument may be that there is reluctance to spend scarce resources on intelligence gathering, another that there is an inherent reluctance to be evaluated and a third is a belief that internal knowledge is sufficient.[34]

In fact, there is evidence that the practice of evaluation is progressing. Austria has evaluated its innovation system recently while Finland has performed an extensive international evaluation of its innovation system in 2009 and is planning further evaluations of its strategic centres for science, technology and innovation. France plans to evaluate of its clusters policy in 2012 and of its research tax credit programme in 2013. The Netherlands has performed several evaluations of its R&D wage tax deduction scheme and innovation vouchers. Italy has developed a national research programme which has a potential to improve evaluation and to simplify funding instruments. Poland has started to evaluate its innovation policies. Romania and Greece have committed under their Memoranda of Understanding to monitor and evaluate its innovation policy. Slovakia is planning an external audit on the institutional aspects of its innovation system and the Czech Republic is already in the process of an international audit.

Policy fragmentation due to overlapping programmes, unclear competences of public bodies and lack of an overall strategy to promote innovation has been identified as a challenge in many Member States over the last few years. However, there have been a number of positive steps taken to improve governance and overcome policy fragmentation. Denmark has adopted a new strategy in 2010 and had good results from reducing the number of funding programmes but increasing the funding level. Austria has adopted a new comprehensive innovation strategy in 2011. Spain has a new strategy for innovation in place and plans to revise its science and innovation law, putting the emphasis also on structural factors, not just on funding levels. Slovenia has adopted a new Research and Innovation Strategy in March 2011 for the next 10 years with an increase in public investments in R&D and an increased autonomy of scientific research institutions. Poland is planning to reform its innovation strategy on the basis of ongoing evaluations. Sweden is also planning a reform, to make its strategy more coherent and reduce overlaps and gaps between funding programmes. France has adopted a new national strategy for research and innovation. Lithuania has a new strategy 2010-2020 in place which seems to address the main challenges. Portugal has started preparations for a new comprehensive innovation strategy until 2020. Governance will also be addressed in the new strategy planned in Cyprus.

Some other countries are moving in a similar direction: Finland is reforming its rather fragmented innovation system and Hungary is reforming its innovation system further. Slovakia is merging institutes and promotes specialisation to rationalise the innovation system, but policy coordination is still a weakness.

Stakeholder involvement has been recognised as an important success factor in public and private innovation governance systems.[35] However, only for Austria, Portugal, Italy and Malta consultations have been explicitly mentioned.

In this context, there is some evidence that improving the business environment for start-ups, reduction of administrative burden, SME policy and entrepreneurship can be more useful for fostering innovation than fine-tuning innovation subsidies or increasing tax incentives for private R&D expenditure.[36] In this regard, it is interesting to note that Switzerland grants no specific innovation subsidies to profit-oriented enterprises, but scores very well according to the key innovation surveys. However, it provides an excellent business environment, a good education and research system and a well-functioning public administration.

Last year's report referred to the risk of a widening innovation gap between EU Member States due to the diverging way in which they have reacted to the financial and economic crisis, with innovation leaders addressing the challenges of the crisis proactively while innovation followers likely to cap or reduce their funding and support for R&D.

This year's Innovation Union Scoreboard came to a more differentiated conclusion: ”There continues to be a steady convergence, where less innovative Member States have – on average – been growing faster than the more innovative Member States. This convergence process however seems to be slowing down […]. While the Moderate and Modest innovators clearly catch-up to the higher performance level of both the Innovation leaders and Innovation followers, there is no convergence between the different Member States within these 2 lower performance groups”.[37] It should be noted, however, that the full impact of the crisis may still be underestimated because of a lag in data availability. The positive news is that, as evidenced in the previous section, individual governments can embark on ambitious policies regardless of their rank in the Innovation Scoreboard – if they have the political will.

3.2 Towards a sustainable industry

Decoupling economic growth from natural resources usage is a major societal challenge and the related policies – regulation and/or incentive schemes – have direct implications for the business sector, particularly industry. At the same time, change brings about opportunities and building up strongholds and first mover advantages in environmental as well as new and innovative goods and services is a strategic challenge, associated to the need for dealing with progressive scarcity of resources and resources' price volatility[38].

Overall, the path towards sustainable ways of production requires a stable policy framework, providing for short- and long-term incentives to encourage market creation, and addressing the whole value chain, including recycling.

3.2.1 Energy consumption

Particular emphasis in this context should be put to energy consumption as improvements in energy efficiency directly translate into widespread benefits for the whole economy and help in achieving ambitious climate and environmental goals. Energy savings means indeed energy-related costs savings; reduced CO2 and other greenhouse gas emissions; increased energy and resources security (by reducing import dependency); improved industrial competitiveness on a world-wide scale, therefore, ultimately it represents a fundamental way for delivering growth and jobs.

For the EU 27 as a whole, final energy consumption in industry (including construction)[39] decreased by more than 18 % between 1995 and 2009, compared to increases of about 22 %, 23 % and 5 % recorded over the same period in the transport (mainly pulled by road transport and aviation), services and residential sectors, respectively. As a consequence, the share of industry in total final energy consumption dropped from 30.7 % to 24.2 %, while transport, residential and the services sectors absorbed 33 %, 26.5 % and 12.6 %, respectively, of final energy demand in 2009. It must be noted, however, that the recent financial and economic crisis contributed decisively to this result.

3.2.2 Energy intensity

Energy intensity[40] in EU 27 industry decreased by 27.5 % between 1995 and 2009, indicating an absolute decoupling[41] as the result of absolute energy savings combined with an increase in value added. In this respect, it can be noted that the financial and economic crisis has only reinforced a positive trend, already operating before 2007. Over the last decades, industry in the EU has indeed clearly improved its overall energy performance, as the combination of positive results in most of the individual sectors, although some unexploited margins for further improvements persist, as well as the great variety of conditions at the level of Member States.

Figure 8 below illustrates the wide variety of Member State performance in terms of energy efficiency[42] in industry and energy. A striking development concerns the rapid convergence of the twelve Member States that joined in 2004 to the older Member States. Estonia, Romania, Poland, Bulgaria, Slovakia and Czech Republic have all reduced their energy intensity by more than 50 % over the period up to 2009 (64.5%, 63.3% and 62.5%, respectively for the first three countries), compared to a decrease of about 21 % for the 27 EU countries as a whole. Results well above the EU average were also registered for Ireland, Luxembourg, Sweden, Finland and France.

Figure 8: Energy intensity in industry and the energy sector

Notes: Includes construction and final non-energy consumption. Measured in kilogrammes of oil equivalents per euro gross value added (reference year 2000). Due to lack of data on gross value added, for Greece and Romania only the periods 2000-2009 and 1996-2009, respectively, could be covered by the analysis on energy intensity. No data were available for Malta.

Source: Calculations based on Eurostat data. Countries are sorted by the level of energy intensity in 2009.

Overall, all countries have attained improvements in their energy performance by reducing energy intensity over the period 1995-2009. Again, the recent crisis has certainly had an impact on results but mainly it has reinforced a positive trend already in place. By 2009, 17 Member States have achieved absolute decoupling[43], that is, an absolute decrease in energy consumption combined to an increase in activity levels, while the remaining ones have recorded relative decoupling.

A closer look at data for 2008 and 2009, indicates that for some countries (Belgium, Ireland, Latvia, Portugal and Slovakia) the decrease in activity levels brought about by the crisis has been decisive for the positive results in terms of absolute decoupling, although relative decoupling was already registered up to 2007. On the other hand, for four countries (Germany, Cyprus, Latvia and Sweden) a strong decrease in gross value added between 2007 and 2009 was associated to an increase in energy intensity.

In most cases, the assessment of recent policy developments in Member States in the field of industry's energy efficiency does not reveal major strategic changes, in line with the fact that national policy frameworks up to 2010 were already set under the first National Energy Efficiency Action Plans (NEEAPs). Rather, efforts at country level have mainly concerned the implementation of already planned measures as well as the assessment of results in view of the submission of NEEAPs 2011-2014.

Member States showed a different pace in the implementation of the highly differentiated set of actions which constitutes the core of their strategies, according to a great variety of national framework conditions and level of ambitions. Overall, although on a different scale and with wide-ranging results, almost all Member States have implemented some sort of grant and support schemes for improving sustainability and energy efficiency in industry, in most cases accompanied by energy audit schemes.

From a sector-wide perspective, the analysis of the responses provided by Member States to a specific questionnaire at the end of 2010[44], showed that most of the national measures so far implemented under the NEEAPs have targeted energy performance in buildings (public and private services as well as residential), energy services and the simultaneous generation of heat and power. At the same time, despite the fact that not all countries have focused on each of the remaining sectors (tertiary, industry and transport), measures oriented towards the promotion of energy efficiency and savings in industry (outside the scope of the EU Emissions Trading System) and industrial buildings have also been the focus of specific attention and implementation efforts (Figure 9).

Figure 9: Total number of energy efficiency measures in the Member States

Source: Commission Staff Working Paper, National Energy Efficiency Action Plans (NEEAPs): update on implementation, SEC (2011) 276 final.

With regards to industry, it is important to note that it has not been the object of any direct priority measures in the framework of the EU Energy Efficiency Action Plan 2006. In fact, many industrial installations (in particular, the most energy intensive ones) are already subject to provisions implemented under the EU Emissions Trading System, aiming at reducing carbon emissions. Therefore, besides the natural vocation of industry towards reducing costs and exploiting solutions for increasing competitiveness (including recourse to energy efficiency), the cap-and-trade system has introduced a market based mechanism for pursuing a reduced (more rational) use of energy sources.

Though industry is the part of the economy which has attained the biggest improvements in energy efficiency over the past decades, according to recent projections[45] a cost-effective potential for further increasing energy savings (estimated at 3 % of GDP) still remains unexploited and will not be reaped by 2020 if additional measures are not implemented on top of the current scenario represented by NEEAPs.

In particular, room for action is envisaged with regards to SMEs, for which lack of information, insufficient price signals and lack of financial resources and expertise all represent major obstacles to significant improvements in energy performance[46].

Overall, the positive developments attained so far by some Member States in defining and implementing a consistent legislative framework for stimulating energy efficiency and savings in the economy, contrast with clear difficulties experienced by others for which lack of experience and adequate administrative capacity proved to be major obstacles. Especially with regards to the latter group of countries, it is then evident the key role played by a consistent advancement in framework legislation at the EU level, providing for clear guidance and support. This holds particularly true when considering that for many Member States the submission of the first NEEAPs represented the very first attempt to define a strategy addressing energy efficiency in a comprehensive way.

In particular, a field of action which still needs specific attention and improvement is the implementation of consistent monitoring systems at national level, as a priority for assessing progresses towards commitments and inspire the adoption of effective solutions. In this respect, particular attention should be paid to limit the compliance burden on business and industry through minimising as much as possible enforcement and compliance costs arising from the regulatory framework.

3.2.3 Carbon intensity

In terms of carbon intensity[47], significant improvements have been achieved in all countries and, in particular, in most of the EU-12 Member States which, as already signalled for energy efficiency, have undergone a virtuous path towards progressive reduction of the gap with the EU-15 average, although the process is clearly not yet completed (Figure 10).

Over the period examined, almost all Member States have recorded absolute decoupling in industry, by reducing the total amount of CO2 emissions while experiencing a growth in the value added of industry and the energy sector. The remaining countries have however still recorded relative decoupling, either because of absolute CO2 emissions increasing at a lower pace than GVA (Spain and Austria) or due to CO2 emissions reduction well above the contraction registered in value added, (UK, Italy and Germany). The only exception is represented by Cyprus, for which CO2 intensity increased between 1995 and 2009.

Figure 10: CO2 intensity in industry (including construction, process emissions and solvent and other product use) and the energy sector, kg CO2 per euro gross value added (reference year 2000)

Note: Due to lack of data on gross value added, for Greece and Romania only the periods 2000-2009 and 1996-2009, respectively, could be covered by the analysis on CO2 intensity. No data was available for Malta.

Source: Calculations based on Eurostat data. Countries are sorted by the level of CO2 intensity in 2009.

3.2.4 Development of environmental industries

The development of eco-industries[48] inside the EU represents a key factor towards reaching the ambitious climate change and environmental targets set at the Union's level, by ensuring the availability of the wide range of goods and services needed for greening the economy while sustaining job creation and innovation. At the same time, it also implies great business opportunities and the possibility to strengthen the EU competitiveness on a world-wide scale.

All these aspects may be captured to a certain extent by the analysis of the share of environmental goods over the total flows of exports of goods. In 2010, such share for the EU 27[49] amounted to 0.76%, representing a significant increase compared to 2005 (0.28 %). The result can certainly be considered as extremely positive, although the situation remains highly differentiated at Member State level.

Figure 11 reports the composition of environmental goods exports in 2010, when the group "photosensitive semiconductor devices, incl. photovoltaic cells" represented almost half of the total value, compared to less than 25 % in 2005. This is in line with the leadership achieved by the EU (and some of its countries in particular) at world level. An important share of exports is then absorbed by the groups of "machinery" or "parts of machinery for filtering/purifying liquids, air and gases, which all registered sustained growth rates over the five years examined.

Figure 11: Composition of intra- and extra-EU 27 exports of environmental goods, 2010 (volumes)

Source: Eurostat COMEXT.

Measures in favour of the development of environmental industries take various forms. Financial support to green innovation and environmental industries has been actively pursued by several Member States, such as Germany, Denmark, Finland, Ireland, Sweden, France and Portugal.

Concrete measures of a more sectoral nature have been taken by Germany (‘Electro-Mobility’ initiative adopted in 2011), Estonia, Portugal (MOBLE programme) and Spain (in the framework of the recent 2010 Industrial Action Plan) in designing strategies for the development of the market for electrical vehicles and related infrastructures, accompanied by demand side measures and setting of specific targets. In the same field of electro-mobility, also Romania has started preliminary discussions at ministerial level for implementation of ad hoc interventions.

An interesting and innovative action has been announced by the UK for supporting access to finance for green projects: the establishment of a dedicated green investment banks is indeed planned, by 2012 and with a provision of £ 3 billion as initial funding.

Specific attention towards SMEs and the need to foster the integration of environmentally compatible solutions in their business models can be signalled in Ireland, Lithuania and Greece where financial support schemes have been put in place also via the use of structural funds. In Austria, more focus has been devoted instead to the provision of energy efficiency consulting services to SMEs.

Green public procurement is gaining in momentum throughout Europe. A majority of Member States (21) have adopted specific national action plan on green public procurement or sustainable public procurement, which outline a variety of national actions and support measures. Most have set targets for green public procurement, either in terms of overall procurement, for different levels of public procuring entities or for individual product/service groups. Although the use of green public procurement criteria between and within Member States has been uneven, significant progress was achieved in all Member States in the last three years. Denmark, Germany, the Netherlands, Austria, Finland, Sweden, and the UK stand out as front-runners on green public procurement, with reaching on average over 50% of green purchasing contracts in ten priority product groups and services. These Member States have well defined green public procurement schemes, have developed their own criteria and made proactive capacity-building efforts. Belgium, France, Cyprus, Portugal and in particular some regions in Italy and Spain are also fairly advanced, with well-established and elaborate approaches to green public procurement. Progress has been achieved also by the rest of the EU countries, although they appear to fall noticeably behind the front-runners in terms of the communication, levels of support, uptake and institutionalisation of green public procurement.

Finally, an important development in 2010 is certainly represented by the design and submission by Members States of National Renewable Energy Action Plans, according to provisions set out by the EU Renewable Energy Directive (2009/28/EC) and providing detailed indication of the path to be followed in order to meet the legally binding 2020 national targets.

Besides the essential contribution of an increased use of renewable energy sources towards reaching environmental and climate targets, the promotion of renewable energy sources and the encouragement of bio-based products positively imply targeted support in favour of eco-innovation and environmental industries, while also contributing to the objective of increased energy security. At the same time, provided that a great majority of Member States has already implemented concrete actions in this field (mainly by adopting feed-in tariffs and subsidies schemes), particular attention should be paid to the rationalisation of national energy markets and to avoid further distortions in energy prices, as they have been registered in a number of Member States in recent years and which negatively affect final consumers, particularly SMEs.

In 2011, Germany decided on far-reaching changes in its energy policy, including a gradual phasing-out of nuclear energy production until 2022; measures to accelerate grid expansion and a more market-based development of renewable energies. Such a major strategic change could certainly further stimulate the demand for environmental technologies and services. At the same time, possible side effects should be carefully analysed and properly anticipated in terms of the expected evolution in energy prices and availability, in particular for industry, not only in Germany but in all neighbouring countries.

3.3 The business environment

An open, efficient and competitive business environment provides opportunities and incentives to improve performance throughout an economy and across borders by reducing unnecessary costs for enterprises and promoting business activity. Also, studies on the effects of foreign direct investment suggest that its contribution is most significant when domestic capability is high[50]. Capability is understood as a function of human capital, of the state of infrastructure, and of the institutional framework in which enterprises operate in the market.

According to the Ernst & Young Survey of 2011[51], the EU remains the largest regional destination for foreign direct investment[52], with a quarter of all consumption and investment taking place within its expanding borders. This remains a formidable advantage, but the EU must continue investing in its potential to lead by innovation and entrepreneurship in an increasing competitive world. Despite progress made over the last decade in the EU business environment, further improvements can still be achieved in terms of the quality of infrastructure, quality of legislation and the modernisation of public administrations.

Indeed, the international rankings measuring the legal and regulatory framework for businesses like IMD competitiveness index, the World Economic Forum Global Competitiveness Report or World Bank Doing Business (see Figure 12 and Figure 13 below) show how half of the EU Member States included in the ranking have slid down since the previous year. This does not necessarily mean that the business environment has worsened in absolute terms in those Member States but rather that other countries in the world have progressed much faster in the improvement of theirs.

Figure 12: Changes in rank of the IMD competitiveness index 2010-2011.

Source IMD.

Figure 13: Changes in rank of ease of doing business 2010-2011

Source: World Bank.

3.3.1 Infrastructure

The quality and availability of both transport and energy infrastructure varies significantly across Member States. Effective transport systems are important for the EU companies' ability to compete inside the EU and in the world economy. Improvement of transport infrastructure is a major challenge in the new Member States and transport systems in rural areas is a general challenge throughout the whole EU. With the support of the Structural Funds, some of those Member States (e.g. Bulgaria, Estonia) have started important investments of modernisation. The Commission has outlined recently a plan with 40 initiatives to upgrade the EU transport sector until 2050[53].

EU's energy infrastructure is outdated and poorly interconnected as it has been pointed out in a recent Commission Communication[54], although the situation varies across the EU. Developing EU's energy infrastructure will not only enable the EU to deliver a properly functioning internal energy market, it will also enhance security of supply, enable the integration of renewable energy sources, increase energy efficiency and enable consumers to benefit from new technologies and intelligent energy use. Also, decentralisation of energy infrastructure would make it more adapted and flexible to smaller energy-generation plants and reduce transmission losses for electricity.

3.3.2 Reducing administrative burden and improving the quality of legislation

Regulation is important and necessary, but implementation can also entail costs. Some of these expenses are linked to legal obligations to provide information either to public or private parties. These are called administrative costs. The Commission introduced in 2006 a distinction between administrative costs and administrative burdens: the latter designate costs specifically linked to information that businesses would not collect and provide in the absence of a legal obligation. It started a large-scale operation to reduce administrative burden in the EU. The EU Action Programme for Administrative burden reduction fixed a target of 25 % by 2012 and invited MS to set similar targets at national level. By October 2009, all Member States had adopted national targets for reducing administrative burden by about 25 %, with the exception of ES and LT which adopted a target of 30 % and five Member States set targets below 20 %. However, not all Member States have effectively started to measure the current administrative burden which is needed as a baseline against which its reduction can be monitored. Only 16 Member States have carried out measurement work by June 2011. Progress in simplification has been achieved in all sectors but agriculture, public procurement and company law are the areas where progress has been greater.

Substantive progress has been made regarding the Single Market for services. However it is not yet delivering its full potential. Intra-EU services trade lacks dynamism since it still represents only one-fifth of total intra-EU trade, a share that is modest compared with the presence of services in the economy. Since 2004, trade in services between the EU and the rest of the world has been growing faster than inside the Single Market. The Services Directive (Directive 2006/123/EC) has been a crucial milestone in improving the functioning of the Single Market. It has done so by removing unjustified barriers, simplifying the regulatory framework and helping modernise public administrations. Member States have done important efforts in the implementation of the Services Directive but it is still under completion in some of them. Moreover, the recent mutual evaluation process[55] has identified a number of areas in which work remains to be done with a subsequent proposal of actions to improve it.

Use of impact assessment in preparing legislation can also be an important tool in limiting the increase of administrative burden for enterprises. In the last months, progress has been achieved in some countries regarding the developing and implementing impact assessment systems. Hungary has extended the areas to be examined in impact assessments, Slovakia has made it mandatory since July 2010 and the UK obliges an impact assessment for all policy proposals with potential policy or regulatory impacts as well as expressing costs and benefits in monetary values. Up to June 2011, impact assessments for new legislative proposals were mandatory in 18 Member States, although not all of them have a full coverage of all significant economic, social and environmental issues.

The early involvement of stakeholders in designing legislation is crucial for getting a significant impact on the quality of new legislation. Almost all Member States require a formal consultation of stakeholders for major policy proposals. There are diverse ways for these consultations. Some Member States have created institutionalised bodies (advisory boards) whereas others identify and then consult concerned parties. The minimum period of consultation also varies widely, from 10 days in Hungary and Lithuania, to at least 12 weeks in the United Kingdom.

3.3.3 Modernising public administration

A highly performing and innovative public sector, enabling the delivery of sustainable, modern and quality public services, is a prerequisite for economic competitiveness. The reform of public administration is high on the agenda of several Member States, and the area of e-government has taken special importance recently. E-government initiatives range from data centers and shared networks to unified service centers for the public.

Developing e-government could permit SMEs to spend less time on administrative procedures and to gain new business opportunities. In particular, a full switch-over to e-procurement, practical e-identification and e-authentication for cross-border services would open up numerous new business opportunities across borders. According to recent surveys[56] the e-government performance in the EU has greatly converged in geographic terms since the expansion of the EU in 2004 – there are both old and new Member States among the leading e-government nations. If we look at the different aspects of the service delivery by the public administrations, Ireland, Malta, Austria and Portugal are the top performing Member States in the EU, followed closely by Sweden, Germany and Italy.

Motivated by clear benefits of better efficiency and productivity, European administrations are accelerating their transition towards e-procurement. Indeed e-procurement is one of the high impact services representing a major portion of Europe’s economy – in 2009, total EU procurement accounted for some EUR 2.1 trillion of public administration expenditure. Increasing the use of trans-EU procurement services can make Europe more competitive for particularly SMEs, and offers substantial efficiency gains.

Another reform among Member States to modernise the public administration is the creation of one stop shops. Besides the obligations of the Services Directive regarding the "Points of Single Contact" to allow businesses to get all relevant information and complete procedures online, Member States have created one stop shops, either physical or virtual, to carry out many other integrated functions, like business registration, licensing, investment, completion of company taxes, etc. Creation of one stop shops does not necessarily require big spending or legal changes and entrepreneurs and citizens see immediate benefits. Single interfaces not only save time and money but they also increase transparency.

3.3.4 Market functioning and competition policy

A well functioning Internal Market results in increased opportunities for business and ultimately improves competitiveness of European industry. Recent initiatives like the proposed Regulation on European Standardisation[57] can help to boost EU companies’ export activities and competitiveness. Moreover, the contribution of information and communication technologies to this objective is not trivial. Lowering barriers to internet take-up and acceleration of the delivery of the Digital Single Market[58] will help kick-start GDP growth, enhance Europe's competitive edge and create new jobs and businesses.

In order to exploit the Internal Market's full potential the legislation needs to be timely and correctly transposed into national law and properly applied by all Member States. Despite the current economic difficulties, Member States have maintained a satisfactory rate of transposition of internal market directives into national law. The latest Internal Market Scoreboard, published in March 2011, shows that, at 0.9 %, the percentage of non-transposition of legislative texts for which the deadline has passed remains just beneath the 1 % limit set by the heads of state and government in 2007. Twenty Member States meet the 1 % deficit target, with Malta the top performer with only two directives awaiting transposition. A year ago, the Member States took an average of nine months to transpose EU directives. This has been brought down to 5.8 months, an improvement of nearly 40 %. Seven Member States - Austria, the Czech Republic, Estonia, Cyprus, Hungary, Poland and Italy - are still above the 1 % transposition target.

The number of infringement procedures related to the Internal Market still remains high but has decreased, with taxation and environment the biggest areas of infringements. In recent years, the Commission has introduced a number of alternative problem solving and complaint handling mechanisms that have had a considerable influence on the decrease. Belgium continues to account for the highest number of infringement proceedings, followed by Greece and Italy.

The level and quality of state aid granted by national governments has a significant impact on the functioning of the Internal Market. State aid should not distort competition and trade inside the Internal Market. To this end, Member States committed to reduce the general level of state aid and to shift the emphasis from supporting individual companies or sectors towards tackling horizontal objectives, environment, SMEs or training. The 2011 spring State Aid Scoreboard shows that state aid to support expenditure in research, development and innovation has steadily increased in the last 10 years to support job creation and increase Europe's competitiveness. R&D and innovation state aid stood at 0.09 % of GDP in 2009, the last year for which figures are available, against 0.05 % in 2005. In this period, more than half of the total EUR 46.5 billion of R&D and innovation aid was spent by two Member States: Germany (29 %) and France (22 %) while five other Member States accounted for another third of the total: Italy (11 %), Spain (9 %), the United Kingdom (7 %), Belgium (5 %) and The Netherlands (4 %). In 2009, EUR 13.2 billion of state aid was granted in the EU for environmental objectives, either as direct aid or through tax reductions and exemptions. Germany accounted for half of this. Regarding support exclusively for SMEs, the vast majority of support between 2004 and 2010 concerned risk capital measures, with Germany, the UK and Italy accounting for more than half of these measures.

3.4 Entrepreneurship and SME policy 3.4.1 Entrepreneurship in the EU

The Small Business Act for Europe (SBA) Fact Sheets 2010/2011[59] provide a detailed analysis of the structure of small and medium-sized enterprises (SMEs) and provide indications for both economic and societal environment for entrepreneurship in the EU. The results vary considerably among Member States and reveal different attitudes towards self-employment, different reasons for becoming an entrepreneur, but also different perceptions about the feasibility of starting a business under the current conditions.

The results indicate that on average about 45 % of the adult population in the EU generally preferred to be self-employed. In countries such as Cyprus (66 %), Greece (60 %), Romania (52 %), Portugal (51 %), Bulgaria, France or Italy (50 % each), this preference was pronounced even stronger than the EU average. However, in countries such as Belgium (30 %), Czech Republic, Denmark or Sweden (32 % each), as well as Malta (36 %) for example, respondents were more reluctant in this respect.

According to the survey, 11 % of the adult population in the EU had concrete intentions to start a business over the next three years. In countries such as Latvia (21 %), France or Hungary (14 % each) for example, this figure exceeded the EU average. However, in countries such as Italy (4 %), Austria or the UK (5 % each), Denmark, Finland, Germany, Ireland, the Netherlands or Spain (each 6 %), the intention to become an entrepreneur was less pronounced.

The results also illustrate very different reasons for becoming an entrepreneur. Opportunity-driven entrepreneurship (EU average 55 %) was more pronounced in countries such as Denmark (81 %), the Netherlands (78 %), Belgium (72 %), Finland (71 %) or Sweden (69 %) for example. By contrast, it was a less important factor in countries such as Estonia (36 %), Bulgaria (38 %), Greece (39 %), Latvia (41 %), Cyprus (42 %) for example. Hence, in these countries, a larger share of entrepreneurial activities was triggered by necessity and lack of other alternatives.

Also in respect to the perceived feasibility of starting a business, the results varied considerably across Member States. Overall, 28 % of the respondents in the EU believed it was feasible to become self-employed under the current circumstances. Becoming self-employment was perceived as being more difficult in countries such as Belgium (13 %), the Netherlands (15 %), Portugal (18 %), Hungary or Malta (19 % each) for example. By contrast, respondents were generally more optimistic in their assessment in countries such as Poland (36 %), Cyprus or the Czech Republic (37 % each), Finland (45 %) or Sweden (49 %).

3.4.2 Policy measures to promote entrepreneurship

Many Member States have made substantial progress over the last years in promoting the sense of initiative and entrepreneurship[60]. Some have introduced programmes aimed at raising awareness particularly among young people but also among adults by integrating the subject into school and university curricula as well as by organising targeted awareness-raising projects.

However, Member States have made variable progress in facilitating entrepreneurship education. Some countries (e.g. Belgium, Denmark, Finland, Lithuania, the Netherlands, Portugal, Sweden, the United Kingdom) have set up strategies dedicated to entrepreneurship education while others are planning to do so (e.g. Austria, Estonia, Ireland, Malta, Poland, Slovenia and Spain).[61]

The majority of Member States has launched initiatives aimed particularly to increase the share of female entrepreneurs, for example by supporting female entrepreneurship ambassadors and networks of women entrepreneurs. A number of Member States have also intensified support dedicated to entrepreneurship among migrants and ethnic minorities (e.g. Belgium and Denmark). Belgium has been particularly active in promoting entrepreneurial activity after having fallen considerably behind the EU average in this field. Examples include projects to enhance entrepreneurial education, support for the temporary replacement of entrepreneurs, the introduction of a platform to facilitate business transfers, the introduction of a specific company statute for business starters etc.

Finally, in order to stimulate the creation of micro and small enterprises, several governments have also permanently reduced or abolished the minimum capital requirements to set up a company (e.g. Belgium, Estonia, Germany, Netherlands, Latvia, Luxembourg). In France, the Independent Contractor Limited Liability Statute was adopted in January 2011, which allows individual entrepreneurs who own or who are starting a business in any sector of activity to separate the business assets from their personal assets regardless of the turnover, and thus ensure the protection of any personal assets.

3.4.3 Challenges faced by SMEs

SMEs perform a critical role in the European economy. Despite their small individual size, they are the most important source of employment in the EU. Some 23 million SMEs provide about 90 million jobs (or 67 %) within the private sector in the EU, thereof about 30 % deriving from micro enterprises, 20 % from small enterprises and 17 % from medium-sized enterprises. Until 2008, the number of jobs in SMEs increased by 1.9 % annually, while the number of jobs in large enterprises increased by 0.8 % annually. Moreover, among high-growth firms, as measured by employment expansion rates, small firms exhibit higher net job creation rates than larger ones.

SMEs account for nearly 59 % of the value added produced in the EU and they are also an important driver for innovation and economic growth. However, due to their smaller size and limited resources, SMEs face a number of particular challenges which can have a negative impact on their profitability. Figure 14 provides an overview of the most pressing problems reported by SMEs.

Figure 14: The most pressing problem faced by euro area SMEs (percentage of respondents)

Source: ECB, April 2011.

While some of the problems faced by SMEs are due to general market developments such as increasing competition and finding customers, which are beyond the scope of direct public intervention, other problems such as access to finance or the complexity of regulation can and should be addressed by EU and national authorities. Addressing these challenges will improve the growth prospects of all enterprises, whether industry, services or socially oriented. As it is the second most pressing problem, the issue of access to finance is explored in more detail in the following section.

3.4.4 Access to finance

Access to finance has become an important challenge for many SMEs since the beginning of the financial and economic crisis, as SMEs have been particularly affected by tightening credit conditions. As a response to the financial and economic crisis, most Member States have adopted measures to enhance SMEs’ access to finance, especially bank lending, through advantageous subordinated loans, loan guarantee schemes or microcredit programmes.[62] Member States also increasingly use parts of their EU Structural Funds to support SMEs' access to finance, including through financial instruments available under the 'Joint European Resources for Micro to Medium Enterprises' (JEREMIE) managed by the European Investment Fund. However, the use of financial instruments for SMEs could be further intensified, including in particular in the areas of innovation, business modernisation and energy efficiency.

With the gradual economic recovery, there have been signs of improvement compared to the previous year, when the effects of the crisis were still felt acutely and – with very few exceptions – conditions for bank loans to businesses remained tight. The following chart gives an overview of the significant decline in new corporate loans below and above EUR 1 million during the period 2004 – 2011 in the euro area.

Figure 15: Change in new loans to firms

Note: Year on year change; data up to July 2011. Source: ECB

The results of the latest ECB-Commission survey on access to finance of SMEs[63] indicate that access to external financing – and in particular bank loans – continued to improve, albeit moderately. However, there is considerable variance across the EU. SMEs in Spain, for example, have continued to report significantly lower success rates when applying for a bank loan (about 50 %, compared to 66 % in the euro area). By contrast, the success rate of German firms has increased substantially (from 69 % in the previous survey to 79 %). SMEs in Germany and Italy are generally expecting the availability of bank loans to improve, which is not the case in Spain or France. Despite improvements in several Member States, access to finance therefore remains an important obstacle for SMEs in many countries.

Moreover, SMEs still face more difficult financing conditions than large enterprises. 16 % of SMEs identified access to finances as their most pressing problem according to the ECB-Commission survey (Figure 14). By contrast, access to finance is considered as the most pressing issue by only 10 % of large enterprises. In the second half of 2010, SMEs assessed the availability of external financing still negatively, but the situation had improved since the first half of 2010. By contrast, large enterprises generally reported positive developments in the availability of external financing. About one quarter of SMEs applied for a bank loan between September 2010 and February 2011. In 63 % of the cases, the firms received the full amount they had applied for. The rejection rate for SMEs remained essentially unchanged at 11 %, compared with about 2 % for large enterprises. More than half of the SMEs reported increases in interest rates charged and other costs of financing (charges, fees and commissions) while there was a small improvement in the requirements related to collateral and loan covenants.

In line with the recovery in economic activity, SMEs increasingly need external sources of finance. Increases have been noted in particular regarding overdrafts and use of existing credit lines, trade credit, as well as leasing, hire-purchase or factoring (Figure 16).

Figure 16: Sources of external financing of euro area SMEs

Note: Over the preceding six months; percentage of respondents.

Source: ECB, Survey on the access to finance of SMEs in the euro area, April 2011.

Looking forward, SMEs expected the availability of internal funds to slowly improve, while the availability and conditions for bank loans and trade credit was still expected to further deteriorate. Larger enterprises, on the other hand, were clearly more positive in their assessment and expected an improvement for all sources of finance.[64]

The results of the SME survey also correspond with the latest ECB Bank Lending Survey[65], which confirmed a further slight tightening for loans to SMEs and a continued widening of margins on loans for SMEs compared to large enterprises. Looking forward, the Euro area banks expected a further moderate tightening of their credit conditions in 2011, primarily affecting long-term loans. They also expected a moderate increase in demand for corporate loans, relating to both SMEs and large firms.

The average payment time also has an important impact on the financing needs of SMEs. According to the 2011 European Payment Index, about 25 % of all bankruptcies in Europe are due to late or non-payment of outstanding invoices, and 28 % of companies stated that late payments posed a threat to their survival. Moreover, almost half considered that late payments were detrimental to their growth[66]. In 2010, the average payment delay for firms in the EU was 54 days. However, the differences across Member States are significant. Countries which considerably exceeded the EU average in 2010 included Cyprus (73 days), Portugal (97 days), Spain (104 days), Greece (107 days) and Latvia (117 days). By contrast, the situation was better in countries like Finland (23 days), Estonia (26 days), Germany (32 days), Ireland (33 days) or Sweden (33 days) for example.[67] Regarding the public sector, not much progress has been made to further reduce late payments and in some Member States, the situation has even deteriorated (including Czech Republic, Greece, Cyprus, Hungary, Austria and Slovakia). Figure 17 illustrates the average payment time in the public sector.

Figure 17: Payment times for public authorities

Source: European Payment Index 2011, Intrum Justitia.

By far the largest scope for improvement can be found in countries such as Italy (180 days), Greece (168 days), Spain (153 days) and Portugal (139 days). The late payment directive adopted by the Council in January 2011 requires payments by public authorities to be processed within 30 days. Meeting this objective will be a challenge for many Member States, but at the same time, a further reduction in late payments by public authorities could contribute significantly to easing the financing needs of enterprises and in particular those of SME.

3.4.5 Internationalisation of SMEs

According to a recent study on opportunities for the internationalisation of SMEs[68], about 29 % of SMEs in the EU 27 are engaged in importing and about 25 % are engaged in exporting, both referring to EU and non-EU markets. Hence, the business activities of the bulk of SMEs are concentrated on their domestic market. Moreover, the survey indicates that only 2 % are investing abroad and 7 % have technical cooperation with partners abroad. From those SMEs which are involved in international business activities, about 46 % are active only within Europe, 45 % are active both within and beyond Europe and 9 % are active only outside the EU. About 23 % of SMEs which are active abroad are engaged in key target markets including Brazil, China, India, Japan, Russia, South Korea and Ukraine. On average, however, internationalised European SMEs still generate only a relatively small percentage of their total turnover from international business activities (less than 20 % from other EU countries and about 10 % from third markets).

According to the study, payment risks, difficult bureaucratic procedures and lack of financing have been identified as the most important barriers to international business activities beyond the Internal Market.

Most Member States support the internationalisation of SMEs, both financially but also by providing information and support on market access and regulation or the organisation of trade fairs. During the crisis, many Member States intensified their efforts in this field, particularly regarding export credit, export insurance and bank loan guarantees. Interesting recent measures in this field include for example the launch of a mentoring scheme, whereby big companies support the internationalisation of SMEs, which is currently being piloted in France. Another interesting example is Estonia, which has launched a training program for potential export sales manager, which can benefit from training over a period of one year and which are matched with companies which intend to expand their international activities.

The study provides some surprising results regarding the awareness and the effectiveness of public support measures in this field. Only about 27 % of internationalised SMEs stated they were sufficiently aware of existing public support measures and only 7 % stated they actually used public support for their international business activities. This figure was slightly higher among the subgroup of enterprises with business activities in non-EU countries (12 %). Nevertheless, among those SMEs which used public support measures to develop their international business activities, nearly 60 % were quite positive about the effects (3 % stated the support increased their international business activities, 9 % reported they started their international business activities earlier because of the support, and 12 % stated they would not have engaged in international business activities without the public support). This discrepancy might be explained to some extent by the fact that the majority of entrepreneurs (60 %) consider it too difficult to get an overview of existing support for business activities in markets outside the EU. At the same time, an equally large share of SMEs thought that the existing support measures were not easily accessible.

In view of the general positive assessment by those enterprises which use public support to internationalise their business, the results seem to suggest that the awareness and accessibility of public support in this field could be further improved. The Commission will present in autumn 2011 a Communication for a coherent approach on supporting EU SMEs in their attempts to develop business internationally.

3.4.6 Implementing the Small Business Act (SBA)

The Small Business Act for Europe (SBA), adopted by the Heads of State and Government in 2008 and reviewed in 2011, recognises the important role of SMEs in the economy and aims to promote SMEs' growth by helping them tackle barriers that hamper their further development. The SBA consists of ten principles which should guide the conception and implementation of policies both at EU and national level. The aim is to create a level playing field for SMEs throughout the EU and to improve the administrative and legal environment so that these enterprises can realise their full potential.

The results of the SBA Performance Review, published in February 2011[69], recognise that considerable progress has been made in a number of areas. For example, a recent survey suggests that SMEs experience fewer administrative burdens when accessing public procurement and have better opportunities for joint bidding[70]. Another example includes the new SME Centre in China launched in November 2010, which helps SMEs accessing the Chinese markets. As part of the SBA Review, the Commission invited Member States to nominate a national SME Envoy to complement the role of the European Commission's SME Envoy. Together with representatives of SME business organisations, the Network of SME Envoys will make up an SBA advisory group.

Considerable progress has also been made over the last five years to reduce the average time and cost required to start a business (Figure 18).

Figure 18: Time needed to start a business (days)

Source: World Bank, Doing Business, 2011.

The average time to start-up a company was 15 days in 2010 according to the World Bank.[71] Recent good examples include Italy, where since April 2010 it has been possible to register a company in one day. The Companies Register in Italy submits the data also to other relevant bodies like tax and social security offices. Another good example is Greece, which has launched a new Commercial Electronic General Registry. This allows the registering of a business in one day and considerably reducing the related cost.

Despite noticeable progress in a number of areas, the results of the SBA Performance Review, published in February 2011 also point out that the approach taken and the results achieved vary considerably across Member States. For example, while most Member States have adopted national targets for reducing administrative burden, not all of them have effectively reduced it.

Several Member States have already integrated an SME Test into their national decision-making approach (including Austria, Denmark, France, Finland, Germany, Hungary, Latvia, Luxembourg, Netherlands, Romania, Sweden and the United Kingdom). Malta, Slovenia and the Slovak Republic are in the process of setting it up. Among those that apply the SME test there are, however, disparities in practical terms. Only half of those Member States systematically consult SME stakeholders as part of the SME test. Most of these countries target a mix of SME organisations, individual SMEs and public authorities working on SME-related issues in their consultations.

Some Member States have started to promote the European Code of Best Practices in order to facilitate SMEs’ access to public procurement (Austria, Cyprus, France, Germany, Hungary, Ireland, Lithuania, Poland, Portugal, Sweden and the United Kingdom). In the majority of Member States, SMEs’ access to public procurement is not subject to a specific strategy or policy. The most widespread SME-friendly measures in this area remain cutting tenders into lots, whenever possible, and facilitating access to information through centralised websites, interactive web pages, and other e-procurement developments.

Finally, there is still scope to further shorten the time needed to wind up a business in case of non-fraudulent bankruptcy. So far only five Member States (Belgium, Finland, Ireland, Spain and the UK) comply with the recommendation to complete all legal procedures to wind up a business in the case of non-fraudulent bankruptcy within a year.[72]

4 Country chapters 4.1 Belgium

Sectoral specialisation of manufacturing – Belgium (2009)

Note : n.e.c. (not elsewhere classified) Source: Eurostat

4.1.1 Introduction

Trade and industry specialisation

Manufacturing contributes 14 % to Belgium's total value added against 14.9 % for the EU in average (2009). At the detailed manufacturing industry level, Belgium is specialised in capital-intensive industries, such as iron processing, basic chemicals and man-made fibres. At the more aggregated sector level, Belgium is specialised in sectors featuring medium-high educational and innovation intensity, such as chemicals, coke and refined petroleum, but also textiles.

Belgium’s sectoral R&D and export quality performance are positive: R&D intensity is above the EU average given its industrial structure. The shares in the low price segments of exports are below the EU average, in high price segments above the EU average, indicating that Belgium is high up on the quality ladder.

Most prominent sectors in Belgium

Structural change

In terms of change, Belgium has considerably increased its specialisation in higher quality market segments. It has increased its sectoral R&D intensity and its relative share of value added in high education intensive sectors such as computers and business services, and the share of technology-driven industries in exports, such as pharmaceuticals and pesticides. It has decreased even further its share of labour intensive industries. Manufacturing production in Belgium has recovered relatively fast from the crisis, reaching in March 2011 its previous cyclical peak.

Nominal unit labour costs have increased in Belgium by 23% between 2000 and 2010, which is slightly higher than the average increase in the EU27 and the Euro area (14% and 20% respectively). Estimated labour productivity per hour worked has declined over the last decade, indicating a gradual loss in productivity as well as cost and price competitiveness. However, labour productivity is still about 34 percentage points above the EU27 average and about 20 percentage points above the Euro area average.

4.1.2 Towards an innovative industry

According to the Innovation Union Scoreboard 2010, Belgium is an innovation follower. It has a low share of new science and technology graduates and a low share of high-tech exports in total exports.

Business R&D is highly concentrated in a few large companies and m