Opinion of the Committee of the Regions on the 'Proposal for a Council Decision on measures of financial assistance for innovative and job-creating small and medium-sized enterprises (SMEs) - The growth and employment initiative'
Date: 1998-05-14
Institutions: European Committee of the Regions
Subjects: European Investment Bank, European Investment Fund, aid to undertakings, innovation, job creation, small and medium-sized enterprises

10.8.98

EN

Official Journal of the European Communities

C 251/41

It points out that the period in question — two to three
decades — will probably witness the accession of new
Member States with a different demographic structure;
deems it sound government to anticipate this in the
policy areas concerned.

It invites the Commission to come forward with a more
detailed study of the demographic trends in the regions
of the EU, as well as in the accession countries; this
study will address issues like: urbanization, depopulation
of the countryside, the demographic effect on the labour
market and the relative competitiveness of the regions.

It is of the opinion that this must be an ongoing
issue on the political agenda; it therefore requests the
Commission to follow demographic developments in
the EU Member States and the accession countries very
closely, and to present its findings in an annual report.

It points to the need for special measures to improve the
match of supply and demand on the labour market;
underlines the role that European programmes and
funds can play in this area; is of the opinion that
pro-active use of the funds must be considered in areas
where demographic developments threaten to aggravate
economic decline.
It underlines the responsibilities of local and regional
authorities in some Member States in pension matters,
social security and health care.
It warns the Member States for the risks of short term
financial policies, social security and pension policies,
that will
leave the next generation with a dispro-
portionate financial burden, in particular in view of the
European Monetary Union.
Lastly, the Committee of the Regions calls on its
president to forward this resolution to the Commission,
the Council, the European Parliament and the Economic
and Social Committee.

Brussels, 14 May 1998.

The Chairman

of the Committee of the Regions

Manfred DAMMEYER

Opinion of the Committee of the Regions on the ‘Proposal for a Council Decision on
measures of financial assistance for innovative and job-creating small and medium-sized
enterprises (SMEs) — The growth and employment initiative’

(98/C 251/08)

THE COMMITTEE OF THE REGIONS,

having regard to the proposal for a Council Decision on measures of financial assistance for
innovative and job-creating small and medium-sized enterprises (SMEs) — The growth and
employment initiative (1);

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

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

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

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

C 251/42

EN

Official Journal of the European Communities

10.8.98

whereas the Committee of the Regions has already drawn attention to the role played by
SMEs in job creation and, in particular, to the risk financing requirements of innovative firms
in Europe in, for example, the following opinions: the proposal for a Council Decision on a
Third Multiannual Programme for small and medium-sized enterprises (SMEs) in the European
Union (1997-2000) (1); the Commission Communication on Community structural assistance
and employment (2); the Green Paper on Innovation (3); and the Communication from the
European Commission on the first action plan for innovation in Europe (4),

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

1.

Introduction: gist of the Commission document

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

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

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

— a guarantee facility, managed by the EIF, which is
designed to improve access to debt finance for small
innovative firms. It is intended to make use of
existing national or regional guarantee schemes,

(1) CdR 211/96 fin — OJ C 34, 3.2.1997, p. 34.
(2) CdR 306/96 fin — OJ C 42, 10.2.1997, p. 15.
(3) CdR 112/96 fin — OJ C 182, 24.6.1996, p. 1.
(4) CdR 68/97 fin — OJ C 244, 11.8.1997, p. 9.

whose risk-taking capacity could be increased by
means of this new facility. The basic aim of the
scheme is to improve the access to financing for
especially those innovative firms which find it
difficult to raise debt finance because of the risk
inherent in such lending. According to the proposal
this scheme will receive 40 % of the programme’s
total budgetary allocations. The budgetary allo-
cation will cover the full cost of the facility. The cost
of the facility will be capped at a prespecified level.

2. Reasons for the programme

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

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

10.8.98

EN

Official Journal of the European Communities

C 251/43

3. General comments

past performance and other special conditions, and
relate existing risk to collateral requirements. They are
also better able to respond to requests for small loans.

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

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

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

4. Specific comments

4.1. Objective of the programme

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

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

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

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

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

3.6. New innovative firms exploiting new tech-
nologies find it difficult to raise risk capital from
traditional sources. For this reason they need special
start-up and risk funds. Investments and provision of
advisory services by private investment funds also have
an important role to play. It is often the case, however,
that regional providers of finance are best able to take
account of the operating environment of the firm, its

4.2. Concept of innovation

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

A broad definition of innovation is therefore
4.2.2.
called for, like the one given in the Commission’s Green

C 251/44

EN

Official Journal of the European Communities

10.8.98

Paper on Innovation (1). Applying such a definition, a
business activity can be considered innovative whenever
it involves the introduction of new technology or the
deployment of new methods, in, for example, product
development or marketing, which, through their exam-
ple, can benefit other SME activity in the region
concerned. Thus, innovation would not be in terms of
technology alone, but other components of business
activity would be taken into account as well, from
management to product development and marketing,
and including management accounting, which can
improve a firm’s profitability and cost-effectiveness.

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

4.2.4. On the basis of the above, the Committee of
the Regions proposes the inclusion of a new recital in
the preamble to the Council Decision as follows:
‘Whereas the definition of innovation set out in Chapter 1
of the Commission Green Paper on Innovation (2) will
be applied in the implementation of this Decision;’.

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

4.3. Financial instruments

The Committee of the Regions endorses the
4.3.1.
European Commission’s proposal to establish three new
financial instruments to support innovative and growing
SMEs. The Committee would nevertheless like to draw
attention to a number of points which are crucial from

(1) ‘In brief, innovation is:

— the renewal and enlargement of the range of products

and services and the associated markets;

— the establishment of new methods of production,

supply and distribution;

— the introduction of changes in management, work
organization, and the working conditions and skills of
the workforce.’
(2) COM(95) 688 final.

the point of view of SMEs and which should be borne
in mind when implementing the programme.

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

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

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

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

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

4.3.7.
The Committee of the Regions therefore calls
on the Commission to consider complementing the
proposed scheme with a facility that would also make

10.8.98

EN

Official Journal of the European Communities

C 251/45

financing available to small firms which are expanding
their export trade and which, through their operations
requiring financing, could attain a level where the setting
up of joint ventures becomes feasible. In this connection,
the Committee of the Regions also wishes to highlight
the importance of the Europartenariat, Interprise and
BC-net initiatives because they help SMEs to network
and find business partners.

Commission is now proposing the introduction of three
separate facilities — one to be managed by itself, the
other two by the EIF — and, further, that it is intended
to implement all three facilities through intermediaries
operating regionally or focusing on specific industries
or technologies, it is extremely important from the point
of view of business that the one-stop shop principle
applies at least for the acquisition of information.

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

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

5. Conclusions

5.1.
Finally, the Committee of the Regions notes that
the need for increased risk financing was not the only
conclusion to be drawn from the debate on the Green
Paper on Innovation. It was judged equally important
to simplify the administrative and legal environment for
small businesses and make it conducive to innovation.
The First Action Plan for Innovation in Europe refers
directly to the ‘one-stop shop’ principle. Given that the

Brussels, 14 May 1998.

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

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

the funds and financial

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

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

The Chairman

of the Committee of the Regions

Manfred DAMMEYER