Communication from the Commission - More research for Europe - Towards 3% of GDP
Date: 2002-09-11
Institutions: European Commission
Subjects: business policy, concerted economic action, economic policy, innovation, investment, public financing, research and development

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 11.9.2002
COM(2002) 499 final

COMMUNICATION FROM THE COMMISSION

MORE RESEARCH FOR EUROPE
Towards 3% of GDP

Table of Contents

Executive Summary ................................................................................................... 3

Introduction: Putting Europe in the Lead............................................................... 4

Europe’s deficit in R&D investment ........................................................................ 6

A massive, growing investment gap… ........................................................................ 6

…and lagging high tech performance .......................................................................... 6

Industrial structure and sectors..................................................................................... 7

Diversity of national and regional situations ............................................................... 7

Reversing the trend: Areas for concerted action .................................................... 8

1.

2.

2.1.

2.2.

2.3.

2.4.

3.

3.1.

More attractive framework conditions ......................................................................... 8

3.1.1.

Sufficient and high quality human resources ............................................................... 8

3.1.2.

A strong public research base with improved industry links ..................................... 10

3.1.3.

Entrepreneurship for, and through, R&D.................................................................. 11

3.1.4.

Effective adaptation and use of intellectual property rights systems......................... 12

3.1.5.

Research- and innovation-friendly regulations ......................................................... 13

3.1.6.

A competitive environment and supportive competition rules ................................... 15

3.1.7.

Supportive financial markets covering the various stages of development
of high-tech and other innovative companies ............................................................ 16

3.1.8. Macro-economic stability and favourable fiscal conditions...................................... 17

3.2.

More effective use of public financing for business R&D ........................................ 18

3.2.1. Direct support measures ............................................................................................ 18

3.2.2.

Fiscal incentives......................................................................................................... 18

3.2.3. Guarantee mechanisms .............................................................................................. 19

3.2.4.

Public support for risk capital ................................................................................... 19

3.2.5.

Improving the overall mix of instruments .................................................................. 20

3.3.

R&D and innovation in corporate strategies and management.................................. 21

4.

Conclusion: towards a concerted European way .................................................. 21

2

EXECUTIVE SUMMARY

In March 2000, at the Lisbon European Council, Heads of State and Government set
the Union the goal of becoming "the most competitive and dynamic knowledge-
based economy in the world, capable of sustainable economic growth with more
and  better  jobs  and  greater  social  cohesion"  by  2010.  Two  years  later  at  the
Barcelona European Council,  which  reviewed progress towards the  Lisbon  goal,
they agreed that research and technological development (R&D) investment in the
EU must be increased with the aim of approaching 3 % of GDP by 2010, up from
1.9 % in 2000. They also called for an increase of the level of business funding,
which  should  rise  from  its  current  level  of  56  %  to  two-thirds  of  total  R&D
investment,  a  proportion  already  achieved  in  the  US  and  in  some  European
countries. This twin objective is  ambitious but realistic: today, several European
countries  are  close  to  or  beyond  these  levels.  The  2002  Broad  Economic  Policy
Guidelines  of  the  Member  States  and  the  Community  acknowledge  the
importance of this goal and recommend to improve incentives for firms to invest
in R&D while preserving sound fiscal policies.

These  R&D  investment  objectives  set  at  Barcelona  arise  from  the  recognition  that
strengthening our R&D and innovation systems is essential in realising the Lisbon
strategic goal. Its achievement is put at risk by the large and growing gap in R&D
investment between the EU and the US. This gap reached more than €120 billion
in 2000, 80 % of which was due to lower R&D investment by business in Europe.

The role of R&D as a driving force for a competitive and dynamic knowledge-based
economy  is  linked  to  the  economy's  capacity  to  turn  new  knowledge  into
technological  innovation1.  Although  many  enterprises  recognise  the  increased
importance of investing in R&D, they will do so only to the extent that they can
exploit results effectively and expect sufficient returns to balance the risk inherent
in such investment.

The  present  Communication  aims  at  launching  a  debate  on  the  ways  and  means  of
reaching the objectives for R&D investment. It identifies the wide range of policy
areas which must be mobilised in a coherent manner. It sets out in each area the
main objectives to be pursued either by intensifying actions already underway in
the  context  of  the  Lisbon  strategy  and  the  European  Knowledge  Area  or  by
undertaking new initiatives.  Even  where  action  has  been  launched  and  agreed  at
European  level,  more  needs  to  be  done  to  ensure  that  it  is  delivering  results  at
national and local levels.  At  the  same  time,  it  is  recognised  that  the  diversity  of
situations  in  Member  States  and  Candidate  Countries  must  allow  for  a
differentiated policy response.

More attractive framework conditions are essential if Europe is to achieve the R&D
investment  objectives  it  has  set.  Among  the  most  important  in  this  regard  are  a
sufficient supply of highly qualified human resources, a strong public research base,
a dynamic entrepreneurship culture, adequate systems of intellectual property rights,
a  competitive  environment  with  research  and  innovation-friendly  regulations  and

1

Hereafter referred to in the text as “innovation”.

3

                                                
competition  rules,  supportive  financial  markets,  macro-economic  stability  and
favourable fiscal conditions.

There  is  also  a  case  for  a  more  effective  and  focused  use  of  public  financial
incentives  to  private  R&D  and  technology-based  innovation,  within  the  context  of
State  aid  rules  and  of  the  Stability  and  Growth  Pact,  which  imply  that  efforts  to
enhance public support for R&D must to a large extent come through restructuring of
public  expenditure.  In  this  regard,  public  authorities  have  a  range  of  financing
instruments at their disposal, in particular direct support measures, fiscal incentives,
guarantee schemes and public support for risk capital. A mix of these instruments is
required, as no single instrument is able to provide the full range of incentives.

Lastly, the place of R&D in the overall business strategy of companies as well as the
effectiveness  and  efficiency  of  their  R&D  activities  are  important  factors  to
consider.

The  commitment  of  all  actors  at  Member  State  and  European  levels  is  required  to

create a joint upward momentum for R&D investment throughout Europe.

On  the  basis  of  the  debate  initiated  by  this  Communication,  the  Commission  will

consider proposing a focused set of prioritised actions in Spring 2003.

1. 

INTRODUCTION: PUTTING EUROPE IN THE LEAD

In March 2000, at the Lisbon European Council, Heads of State and Government set
an  ambitious  goal  for  the Union: to become  "the  most competitive  and  dynamic
knowledge-based economy in the world, capable of sustainable economic growth
with more and better jobs and greater social cohesion" by 2010.

Creating  a  European  Area  of  Research  and  Innovation  within  the  European
Knowledge Area is one of the key steps in the Union's path towards achieving that
objective2.  Scientific  and  technological  progress  is  crucial  to  sustainable  growth
and quality employment in today's knowledge-based economy.

Considerable  progress  has  been  made  in  the  past  two  years  to  establish  the  policy
basis for more effective and integrated research and innovation systems in Europe.
While  these  efforts  need  to  be  sustained,  attention  should  be  paid  to  the  R&D
under-investment  in Europe, in particular the massive and  growing  gap  of  R&D
investment  between  the  European  Union  and  its  major  competitors,  first  and
foremost the United States. The yearly gap between the Union and the US was in
excess  of  €120  billion  in  2000 3.  This  is  reflected  in  the  relatively  weak
performance  of  the  European  economy.  It  is  such  an  analysis4  that  led  the
Barcelona European Council in March 2002 to set a new objective to help reach

2

3

4

European Commission, Towards a European Research Area, COM(2000)6, 18.01.2000
OECD and Eurostat data / Commission services estimates, current euro.
See the Commission services working paper annexed to the present communication for a more detailed
factual analysis. Moreover, a recent report on R&D, prepared by Member States and submitted to the
ECOFIN Council, analysed how R&D can contribute to achieving the Lisbon strategic goal and stressed
the need to improve R&D and innovation in the EU.

4

                                                
the Lisbon goal. On the recommendation of the European Commission5, Heads of
State  and  Government  agreed  that  R&D  investments  in  the  EU  should  be
increased,  with  the  aim  of  approaching  3 %  of  GDP  by  2010,  up  from  1.9 %  in
2000. Several recommendations to set such an objective had been put forward in
recent  years, notably by  the  European Parliament6 and the  Economic  and  Social
Committee7.  It  is  also  supported  by  quantitative  objectives  to  increase  R&D
investment that have recently been set in several Member States8. The 2002 Broad
Economic  Policy  Guidelines  of  the  Member  States  and  the  Community
acknowledge  the  importance  of  this  goal  and  recommend  to  improve  incentives
for firms to invest in R&D while preserving sound fiscal policies.

Approaching  3 %  of  GDP  for  R&D  expenditure  is  an  objective  for  the  European
Union  as  a  whole.  Current  and  future  Member  States  cannot  all  be  expected  to
meet this target individually by 2010 but they should all contribute to the effort.
They should  co-ordinate their efforts to create a joint dynamic  for the  growth of
R&D investments throughout the Union.

The  resources  and  policies  that  need  to  be  mobilised  encompass  much  more  than
government R&D spending. Indeed, more than 80 % of the R&D investment gap
with the United States lies with the funding levels of the business sector. This is
why the Barcelona European Council called for an increase in the level of private
sector funding, which should rise from its current level of 56 % to two-thirds of
total  R&D  investment,  a  proportion  already  achieved  in  the  US  and  in  some
European countries.

The main challenge for inducing higher private investment in R&D is thus to make
R&D  investment  more  attractive  and  profitable  to  business  in  the  European
Research Area. This calls for coherent mobilisation of a wide range of policies to
reinforce  a  virtuous  circle  whereby  increased  investment  in  knowledge  and
technology  is  transformed  in  new  products  and  services,  and  leads  to  improved
competitiveness growth and employment.

The  twin  objective  defined  at  the  European  Council  in  Barcelona  is  ambitious  but
necessary. The objective is also achievable. Sweden and Finland already meet the
3 % target and R&D spending in Germany is above 2.5 %. Moreover, the business
sector  already  provides  at  least  two-thirds  of  investment  in  R&D  in  Belgium,
Germany,  Finland  and  Sweden  and  Ireland  is  close  to  this  level.  The  present
Communication is intended to launch a debate on the ways and means to promote
R&D investment and innovation in Europe9. In doing so, it recognises that success
depends  both  on  Member  States  ensuring  that  the  policies  already  put  in  place
deliver  results  across  the  EU  as  a  whole,  and  on  shaping  new  action  which  can
take  the  Union  further  towards  its  goal.  What  is  at  stake  is  not  only  success  in

5

6

7

8

9

Communication  from  the  Commission  to  the  Spring  European  Council  in  Barcelona,  The  Lisbon
Strategy - Making Change Happen, COM(2002)14, 15.01.2002
“Report  on  the  communication  from  the  Commission  Towards  a  European  Research  Area”,  Session
document, European Parliament, A5-0131/2000, 9 May 2000
J.O. C 204, 18 July 2000, p. 70
In Austria, Denmark, Finland, Greece, Ireland, Luxembourg.
In this context, reference should also be made to COM(2002) 262 of 21.05.2002 “Productivity: the key
to competitiveness of European economies and enterprises” and to further Communications which the
Commission  intends  to  present  on  the  European  Research  Area,  the  role  of  universities  and  the
competitive position of innovative firms.

5

                                                
reaching the 3 % target, but, in so doing, realising the Lisbon commitment to high
levels of growth, employment and social cohesion.

2. 

EUROPE’S DEFICIT IN R&D INVESTMENT

2.1. 

A massive, growing investment gap…

Comparison  of  R&D  expenditure  in  the  EU  and  in  the  US  shows  a  massive  and
rapidly growing gap, both in value and as a share of GDP. The gap reached 124
billion current euro in 2000 and it has doubled at constant prices since 1994. R&D
intensity  in  the  EU,  measured  as  the  percentage  of  GDP  accounted  for  by  total
investment in R&D, stagnated at around 1.9% over the last ten years, while in the
US it grew continuously from 2.4 % in 1994 to 2.7 % in 2000.

The bulk of the R&D gap (more than 80 %), and most of its increase in recent years,
is due to lower funding by the EU business sector. In addition, the US government
devotes almost a third of its R&D funding to support business R&D, compared to
only  half that  share  (16  %)  provided by public  funding in  the  EU.  The  leverage
effect of this substantial and sustained government support in the US is one of the
factors contributing to the rise of business-funded R&D in the second half of the
1990s.

There is an even wider gap between the EU and Japan in terms of R&D intensity, as
Japan devotes 3 % of its GDP to R&D. Moreover, the business sector accounts for
72 % of R&D expenditure in Japan, compared to 56 % in Europe and 67 % in the
US. However, there are significant limitations to a comparison with Japan because
of the differences in the roles of the public and private sectors, and the problems
of  the  Japanese  financial  system,  which  have  weakened  Japan's  economic
performance and obscured the benefits of its high R&D intensity.

2.2.  …and lagging high tech performance

Output  indicators  suggest  that  Europe  is  under-performing  in  innovation.  Labour
productivity  gains,  which  are  partly  driven  by  innovation,  have  slowed  down  in
the  EU  during  the  second  half  of  the  1990s,  while  they  accelerated  in  the  US
during  the  same  period10.  Furthermore,  trends  in  international  trade  of  high-tech
products  point  to  European  weaknesses  in  the  competitiveness  of  some
technology-based segments of the economy. Indeed, the EU’s world market share
of high-tech products still lags far behind the share of the US at 18 % (excluding
intra-European trade) compared to 22 % for the US.

EU and national policies to reverse the trend should be based on a thorough analysis
of  the  causes  of  the  investment  gap  and  take  into  account  differences  between
industrial structures and sectors and between Member States.

10

European  Commission,  Productivity:  The  Key  to  Competitiveness  of  European  Economies  and
Enterprises, COM(2002)240, 14.05.2002

6

                                                
2.3. 

Industrial structure and sectors

The structure of industry in the US is considerably more specialised in high-tech and
research intensive sectors than is the case in the EU11. This situation explains part of
the  investment  gap.  A  large  part  of  the  difference  between  the  US  and  the  EU  is
coming  from  the  defence  industry  and  from  the  information  &  communication
technologies  sector  (ICTs).  However,  structural  effects  cannot  explain  fully  the
difference  in  R&D  investment  between  the  US  and  the  EU.  In  most  sectors,
including  medium  and  low-tech  manufacturing  as  well  as  the  services  sector,
European  firms  invest  less  in  R&D  as  a  proportion  of  sales  than  their  American
counterparts.  This  means  that  EU  enterprises  tend  to  specialise  in  less  technology-
intensive products and services. They therefore  risk losing competitiveness to more
innovation-intensive  rivals,  even in non-high-tech  sectors which  constitute  the  bulk
of the EU economy.

Therefore, the EU needs to promote a shift towards R&D intensive sectors with high
growth potential and, perhaps more importantly, also towards higher R&D efforts
in all sectors if it is to attain the objective set at the Lisbon European Council.

Multinational companies account for the greater share of business R&D expenditure.
Increasingly,  they  tend  to  invest  on  the  basis  of  a  global  analysis  of  possible
locations12.  A  worrying  trend  in  this  respect  is  the  growing  concentration  of
transnational  R&D  expenditure  in  the  US,  suggesting  a  decline  in  the  global
attractiveness of the EU as  a location for R&D  as  compared  to  the  US13. At the
same time, a growing proportion of SMEs and larger national companies are faced
with  international  competition  on  their  home  markets,  compelling  them  to  raise
their  innovation  capacity  through  either  in-house  or  outsourced  R&D.  Data
suggest that smaller companies in the EU invest relatively less in R&D than is the
case in the US14.

This is due to a range of barriers related for example to human resources, access to
external  sources  of  finance  and  appropriate  local  infrastructures,  diffusion  of
knowledge within the EU, and creation and expansion of technology-based firms.

2.4. 

Diversity of national and regional situations

EU countries and regions15 are starting from very different levels of R&D intensity,
from around 1 % of GDP or less in Southern Member States, to 3.4% in Finland
and  3.8  %  in  Sweden.  Differences  are  even  greater  between  regions  within
countries.  Trends  of  R&D  intensity  also  vary,  with  rapid  growth  in  the  Nordic
countries,  Ireland  and  Austria,  while  the  share  of  R&D  investment  in  GDP
decreased  in  France  and  the  UK.  Particular  attention  needs  to  be  given  to  inter-

11

12

13

14

15

See also Commission Staff Working Document, European Competitiveness Report 2001, 2001
“Assessing  the  Impact  of  Technology  and  Globalisation.  The  Effects  of  Growth  and  Employment”,
European Commission research project, 5th Framework Program (IHP), AITEG, 2000-2002
In 1991, both the US and the three larger EU countries (France, Germany and the UK) attracted around
45% of all cross-country business R&D investment in the OECD area. In 1998, those three European
countries  attracted  only  35%  of  cross-country  investments  whereas  the  US  share  had  soared  to  55%
(OECD, Measuring globalisation - The Role of Multinationals in OECD Economies, 2001)
European Commission, Third report on S&T indicators, to be published, 2002
Here "regions" refers to sub-national entities.

7

                                                
regional  evolutions  as  trends  at  regional  level  appear  to  have  diverged  in  recent
years.

The relative weights of government and business funding also vary widely between
EU countries, with business R&D above or close to two thirds of total expenditure
in Finland, Sweden, Germany, Belgium and Ireland, while it is less than 30% in
Greece and Portugal.

Overall, candidate countries' performance in R&D is now progressing. They have an
average  R&D  intensity  of  0.7  %  of  GDP,  similar  to  the  levels  of  Greece  and
Portugal, with the Czech Republic reaching 1.25 % and Slovenia 1.5 % of GDP.
However,  the  share  of  business  funding  remains  very  low  in  most  candidate
countries and its progress may require specific support.

The diversity of situations in Europe calls for differentiated but co-ordinated policies

to establish a common upwards momentum to reach the 3 % objective.

3. 

REVERSING THE TREND: AREAS FOR CONCERTED ACTION

A wide array of policy areas must be brought into play to reinforce the attractiveness
and profitability of R&D investment. They relate to the framework conditions for
R&D  in  Europe  and  to  governments'  financial  support  to  business  R&D.
Attractive  framework  conditions  are  a  prerequisite  for  increasing  the  R&D  and
innovation  performance  of  the  EU.  In  addition,  more  effective  government
support  can  have  a  considerable  leverage  effect  on  business  R&D  investment.
Many initiatives are already underway both at European level and in the Member
States in these areas. However, their individual and combined effectiveness needs
to  be  assessed  in  the  light  of  the  new  goal  for  R&D  investment,  with  particular
attention  to  identifying  areas  where  new  or  reinforced  measures  should  be
considered. The following sections identify the main policy areas  and objectives
on  which  a  focused  debate  must  be  conducted  with  all  stakeholders  in  order  to
carry out such an assessment.

3.1.  More attractive framework conditions

Firms will invest more in R&D to the extent that they can exploit results effectively
and  expect  to  reach  sufficient  returns  to  balance  the  risk  inherent  in  such
activities.  Increased  investment  in  R&D  requires  more  favourable  framework
conditions.  Business  must  have  access  to  a  sufficient  supply  of  quality  human
resources and to a strong public research base. Other framework conditions such
as  the  entrepreneurship  culture,  adequate  intellectual  property  rights  systems,  a
competitive  environment  with  research  and  innovation-friendly  regulations  and
competition  rules,  supportive  financial  markets,  a  favourable  fiscal  environment
and macro-economic stability are also essential.

3.1.1. 

Sufficient and high quality human resources

Community policies already recognise the importance  of  having sufficient numbers
of  research  scientists  and  engineers  with  appropriate  qualifications.  R&D  is
particularly labour intensive and available data show that lack of human resources
is a major constraint on the EU’s capacity to deliver on the 3 % objective.

8

This requires urgent consideration as the European labour market for  researchers is
already showing signs of tension in some areas. Although the proportion of people
attaining a tertiary education qualification has increased in all countries, globally,
human  resources  in  S&T  are  close  to  full  employment.  Even  at  current  R&D
levels, the recruitment of new researchers to replace those retiring will be difficult
in  some  EU  countries  due  to  their  relatively  older  S&T  workforce,  especially
considering  the  worrying  decline  in  the  attractiveness  of  some  natural  sciences,
engineering  and  technology  curricula  among  students16.  The  problem  will  be
aggravated  if  the  demand  for  researchers  outside  Europe  also  grows  and  the  net
outflow  of  S&T  human  resources  from  Europe  to  the  United  States  primarily17
continues. At their Joint Informal Meeting in Uppsala in March 2001, Ministers of
Research  and  Education  stated  that  this  situation  was  cause  for  "grave  concern"
for some countries.

Numerous  initiatives  have  been  taken  recently  aimed  at  improving  the  availability,
mobility and quality of human resources for R&D. The Commission has presented
a strategy to create a favourable environment for the mobility of researchers and
has set out a series of actions to build up R&D competence and excellence, while
taking  into  account  the  specific  situation  of  the  regions  lagging  behind18.  These
actions have also been taken forward in the Commission’s Action Plan for skills
and mobility19. At Council level, the detailed work programme on the  follow-up
of  the  objectives  for  education  and  training  systems  in  Europe  has  identified  a
number of actions in relation to recruitment to scientific and technical studies20.

The objective of increasing investment in R&D so that it approaches 3 % of GDP is
not only a challenge but also an opportunity to raise the profile of careers in S&T.
It is a powerful incentive for change in education, training and mobility conditions
in Europe.

Objectives to be pursued that require intensified effort or further initiatives include:

– 

Assessing and raising awareness of employment / skills needs and future career
opportunities in different S&T areas; assessing the capacity of the educational
and  training  system  to  respond  to  those  needs,  in  close  co-operation  with
private  and  public  sector  employers  and  suppliers  of  trained  scientists  and
engineers.

– 

Encouraging further women to enter S&T careers21.

16

17

18

19

20

21

See  European  Commission’s  “Action  Plan  on  Skills  and  Mobility  in  Europe”  COM(2002)72  of  13
February 2002 and the STRATA-ETAN expert working group, op. cit.
Although  this  will  require  further  study,  European  students  are  known  to  represent  36%  of  foreign
students in the US, 60% of whom are still present in the US five years after they moved. For a study of
trends in the late 1990s see S. Mahroum, "Europe and the challenge of the brain drain",  IPTS Report
n°29, Nov. 1998.
COM(2001) 331 of 20.06.2001
COM(2002) 72 of 13.02.2002
Official Journal C142 of 14.06.2002
According  to  the  STRATA-ETAN  expert  working  group,  Benchmarking  National  R&D  Policies  -
Human Resources in RTD, May 2002, women currently only represent between a quarter and third of
researchers in EU countries

9

                                                
– 

– 

– 

Encouraging  further  the  development  and  visibility  of  poles  and  networks  of
excellence  for  higher  education  and  R&D,  competitive  with  non-European
alternatives.

Encouraging the development and visibility of S&T careers in Europe, both in
enterprises  and  in  the  public  sector,  by  paying  greater  attention  to  financial
conditions,  career  paths  for  young  scientists,  research  equipment  and
availability of funds for research.

Facilitating  life-long  learning,  transfer  of  knowledge  and  career  development
through the mobility of researchers within Europe as well as the entry of third
country  researchers,  primarily  by  removing  national  obstacles  and  providing
adequate information and assistance at all levels.

3.1.2.  A strong public research base with improved industry links

The excellence and scale of Europe's science base, including long-term research, are
critical  for  the  dynamics  of  the  knowledge-based  economy.  Poles  of  scientific
excellence around public research institutions tend to have a powerful leverage effect
on  R&D  investment  by  all  kinds  of  enterprises  in  the  area,  including  enterprises
which  would  otherwise  not  invest  in  R&D.  However,  there  is  evidence  of  higher
intensity  of  science-industry  relations  in  the  US  than  in  Europe  and  of  wide
variations between European countries. This raises the question of the effectiveness
of public R&D in providing a strong science base for business in Europe.

Public policies have an important role to play in facilitating the development of poles
and  networks  of  excellence.  Regional  authorities  are  playing  an  increasing  role,
for example in attracting R&D related investment from abroad. As a consequence,
R&D  investment  exceeds  the  3  %  threshold  in  some  regions  which  have  put  a
strong  emphasis  on  research  and  innovation  and  achieved  an  effective  mix  of
public  and  private  partnerships.  At  Community  level,  the  Structural  Funds
contribute  substantially  to  the  development  of  R&D  infrastructures,  capabilities
and training at regional level, helping to reduce existing imbalances.

Policies  should  aim  at  encouraging  the  networking  of  public  and  private  research
regardless of location. With a budget of €17.5 billion, the Community Framework
Programme for R&D 2002-2006 will be a powerful instrument to support public-
private  partnerships  in  trans-European  networks  of  excellence  and  integrated
projects. However, its effect will be maximised only if its actions are relayed and
supported through a stronger co-ordination between European and national R&D
programmes, as well as among national programmes, which still represent  about
80 %22 of civil public R&D budgets in the EU.

Facilitating mobility of researchers between public research and the private sector is
also an important means of improving networking between public and private R&D
in the EU.

22

Community or intergovernmental  scientific cooperation  does  not  exceed  17%  of  the  total  civil  public
expenditure in the EU. The EU framework programme for research accounts for only 5.4% of the total
public effort. “Towards the European research Area”, COM(2000)6 Final, 18 January 2000.

10

                                                
Objectives to be pursued that require intensified effort or further initiatives include23:

–  Establishing  clearer  and  more  consistent  priorities  for  public  R&D,  with  more
systematic  participation  of  industry  to  their  definition  in  relevant  industrial  or
technological sectors.

–  Encouraging  further  the  development  of  public-private  R&D  partnerships  and
clusters leading to knowledge transfer and commercialisation of R&D results24.

–  Encouraging further initiatives to strengthen the public research base and its links
with  industry  in  the  context  of  EU  regional  and  cohesion  policies  and  of  the
financial instruments targeted at candidate countries.

–  Opening national R&D programmes more to transnational collaborations.

–  Removing obstacles to university-industry researcher mobility, addressing notably
the transferability of pension rights and the recognition  of  mobility  as  a  positive
element in career progression.

3.1.3.  Entrepreneurship for, and through, R&D

Increased  investment  in  R&D  will  be  achieved  through  increased  investment  by
existing  R&D  performers,  but  also  through  a  growing  number  of  firms,  in
particular  SMEs,  investing  in  R&D  (in-house  or  outsourced),  and  through  the
creation of new innovative R&D-based companies, provided that such enterprise
creation is supported by an appropriate culture of entrepreneurship.

Entrepreneurship  is  extremely  important  in  creating  high-growth  companies  that
create value from R&D investment and that are also new R&D performers. Spin-
off  companies  in  particular  have  been  a  key  route  for  exploiting  and  furthering
R&D both in the public and private sectors.

However,  Europeans  are  much  more  reserved  than  Americans  when  it  comes  to
creating  new  businesses25.  The  Commission  is  preparing  a  Green  Paper  on
entrepreneurship26 in order to address this shortcoming.

The successful promotion of spin-offs comes through a combination of many factors,
some related to the  endowments of specific regions and institutions and some to
management practices and regulatory situations.

Public collaborative R&D programmes are reported as having a major influence on
the  launch  of  spin-off  companies  and  on  their  early  growth  by  facilitating  the

23

24 

25

26

These  areas  for  action  should  also  be  considered  in  relation  to  public  financing  of  private  R&D  (see
3.2.1.)
Recent  examples  of  large  public-private  R&D  partnerships  include  the  joint  undertaking  for  the
European satellite navigation system Galileo. Examples of regional R&D clusters include, among many
others,  a  cluster  in  electronics  and  other  fields  developed  around  Oulu  University  in  Finland,
biotechnology clusters in the three German "BioRegios", and several clusters in the transports sector in
Andalusia.
See European Commission Flash Eurobarometers n° 107, November 2001, and n° 81, October 2000
This  will  consider  aspects  such  as  the  simplification  of  company  registration  procedures,  regulations
covering bankruptcy and the promotion of business education

11

                                                
establishment  of  strategic  links27.  Spin-offs  from  public  research  are  being
increasingly  encouraged  at  regional,  national  and  EU  levels,  by  supporting
training  activities28  in  addition  to  science  and  technology  parks  and  business
incubators.  Large  corporations  also  increasingly  encourage  spin-offs  to  exploit
research competence and results with long-term growth potential. There are still,
however, few success stories in European attempts to replicate the  achievements
of Silicon Valley.

On  the  demand  side,  R&D-based  entrepreneurship  is  favoured  by  a  high  level  of
scientific  and  technological  literacy  and  a  culture  of  trust  and  understanding  in  the
relations  between  science  and  society.  The  implementation  of  the  Commission's
Science and Society Action Plan29 will contribute in this regard.

Objectives to be pursued that require intensified effort or further initiatives include:

–  Promoting high technology ventures linked to public sector research through close
co-operation  with  the  risk  finance  community  and  development  of  management
skills  (especially  in  relation  to  intellectual  property  rights    and  technology
transfer).

–  Exploring appropriate measures to support spin-offs from larger firms.

3.1.4.  Effective adaptation and use of intellectual property rights systems

Intellectual  property  rights  (IPRs)  –  in  particular  patents,  copyright,  trade  secrets,
design  -  are  an  increasingly  important  factor  in  defining  rules  of  the  game  in
research  collaborations  and  technology  transfer  among  firms  and  between
industry  and  public  research  organisations.  They  are  also  important  in  scientific
and technological co-operation agreements between countries and in international
trade agreements.

Firms  in  many  sectors  would  not  invest  in  R&D  nor  be  able  to  generate  wealth  if
their  intellectual  property  could  be  freely  copied.  The  increasing  importance  of
intellectual  property  to  firms  can  be  seen  in  the  growth  of  patenting  activity  and
earnings gained from the licensing of technology. IPR systems are complex and are
evolving  rapidly  in  response  to  the  need  to  adapt  protection  to  new  technological
areas and to demand by intellectual property owners for legally safer, stronger, more
harmonised and better enforced international standards of protection. Improving IPR
systems and  their use requires  a  coherent  approach  across  research  and  innovation,
internal market, international trade and competition policies.

EU  legislation:  A  range  of  measures  have  been  adopted  or  proposed  to  establish  a
more effective and unified IPR framework in the EU. These include an affordable
and  legally  certain  Community  patent,  patent  protection  of  biotechnology  and
computer-implemented  inventions,  copyright  for  the  digital  age,  protection  of

27

28

29

Pietro  Moncada,  Alexander  Tübke,  Jeremy  Howells  and  Maria  Carbone:  "The  Impact  of  Corporate
Spin-Offs  on  Competitiveness  and  Employment  in  the  EU",  IPTS-Report,  n° 44,  May  2000;  Martin
Meyer, “Start-up support and company growth”, IPTS-Report, n° 51, February 2001.
Such as those supported under the European Social Fund
COM(2001)714 of 4 December 2001

12

                                                
databases  and  of  designs.  Any  delay  in  the  adoption  or  implementation  of  these
measures would be detrimental to the competitiveness of European industry.

International harmonisation and enforcement: The costs and legal uncertainties in the
field of IP protection can be an impediment to investment in R&D and innovation.
Harmonisation  of  IPR  legislation  at  European  level  must  be  pursued.  On  the
international 
the
implementation of the WTO TRIPS30 agreement and the WIPO31 conventionsare
critical  to  the  development  of  trade,  international  R&D  collaboration  and
technology transfer.

the  protection  and  enforcement  of  IPR 

through 

level, 

Technology transfer from public institutions and public/private R&D collaborations:
National  rules  governing  the  ownership  and  management  of  IPRs  arising  from
publicly  funded  R&D  and  IPR  arrangements  and  related  financial  aspects  in
university-industry  collaborations  vary  considerably  across  Europe  and  within
countries.  These  differences  are  an  impediment  to  the  effective  development  of
trans-national public/private collaborations and technology transfer.

Awareness,  training  and  support  services:  Effective  protection,  exploitation  and
transfer  of  knowledge  depend  not  only  on  having  appropriate  legal  and
enforcement tools but also on the capacity  of knowledge producers to  use  them.
This is not yet fully the case, in particular in SMEs, universities and other public
research organisations.

Objectives to be pursued that require intensified effort or further initiatives include:

–  Improving further the EU IPR legal framework where necessary in order to deal
with  the  evolution  of  technology  and  the  world-wide  harmonisation  process,
based  on  timely  evaluation  of  the  effects  of  existing  legislation  and  of  new  IPR
issues arising in particular from technological advances.

–  Pursuing actively progress in international harmonisation and enforcement of IPR
systems,  and  helping  least  developed  and  developing  countries  build  their  own
capability  and  promoting  mutually  beneficial  R&D  collaboration  in  areas  of
common interest.

–  Promoting  the  use  of  good  practices  regarding  IPR  aspects  in  publicly  funded

R&D and in industry-university collaborations.

–  Promoting  more  effective  management  of  IPRs  by  producers  and  users  of
knowledge  (awareness,  training  of  scientists  and  engineers,  development  and
professionalisation of innovation support services).

3.1.5.  Research- and innovation-friendly regulations

The sectoral regulation of markets has a bearing on R&D activities, both directly and
indirectly  through  the  ability  to  market  innovative  products  and  services.  Two

30

31

Trade Related Intellectual Property Agreement under the World Trade Organisation, which establishes
minimum standards for the protection and enforcement of IPRs
World Intellectual Property Organisation

13

                                                
horizontal  types  of  regulation  also  have  a  direct  and  considerable  influence,
namely the rules and practice of standardisation and of public procurement.

The regulation of product and service markets should aim to favour competition and
business development while securing a high level of protection for consumers and
for  the  environment,  as  well  as  a  level  playing  field  for  enterprises  (see  section
3.1.6.). These objectives may be convergent and even mutually beneficial. There
are  numerous  cases  where  the  imposition  of  safety  or  environmental  constraints
has  created  new  market  opportunities  for  high-tech  products  or  processes,  with
long-term  positive  effects  on  growth  and  productivity  which  prove  far  more
important than the short-term negative effects of the new constraints.

In other cases, however, inadequate or overly restrictive regulations prove harmful to
business and R&D development. A striking example is the slower development of
agro-biotechnologies  in  Europe  due  to  stringent  limitations  imposed  on  R&D,
while  the  sector  was  thriving  elsewhere  due  to  less  restrictive  regulation.  There
are  also  examples  where  regulations  make  it  difficult  for  newcomers  (e.g.
technology-based start-ups) to enter a market.

An  interesting  example  of  balanced  regulation  is  the  special  treatment  of  orphan
drugs  in  both  US  and  EU  law.  This  provided  incentives  for  spin-off  firms  to
develop  drugs  for  these  small  niche  markets.  The  R&D  stimulated  by  this
legislation  has  also  led  to  significant  technology  spillovers  in  other  areas  of  the
biotechnology sector.

The existence of a formal standards policy  and timely  adoption of standards play a
critical  role  in  the  commercialisation  of  new  technologies,  as  demonstrated  in  the
case  of  mobile  telephony.  Under  such  a  policy,  industry  can  determine  its  own
technical  solutions  for  standardisation  which  can  often  be  used  to  underpin
legislation at European level.

Public procurement related to public infrastructure is an important funding source for
some  industries  in  areas  such  as  transport,  communications  and  defence.
However,  EU  governments  tendency  to  request  established  technologies  in  their
tendering procedures discourages innovation. Moreover, continuing fragmentation
of  EU  procurement  markets  in  some  areas  reduces  rewards  for  innovative  risk-
takers in the EU vis-à-vis those in the US.

Changes  in  these  areas  could  have  a  substantial  impact  on  increasing  private  R&D
investment in the industries concerned and they should be explored in detail with the
European institutions, Member States and industry.

Objectives to be pursued that require intensified effort or further initiatives include:

–  Exploring the possibilities offered by European and national regulation of product
and  service  markets  to  encourage  R&D  and  innovation,  and  paying  particular
attention  to  the  effects  of  regulation  on  R&D  and  innovation  both  directly  and
through the ability to market new products and services. There may be a case for
focused regulatory reviews in this respect.

–  Where  appropriate,  and  in  close  co-operation  with  industry,  encouraging  more
systematic  development  and  use  of  common  European  standards.  This  could

14

notably  be  promoted  in  the  context  of  the  creation  of  technological  platforms
bringing  together  the  various  stakeholders  interested  in  the  development,  testing
and use of new technologies32.

–  Evolving  towards  more  innovation-friendly  public  procurement  rules  and
practices, improving opportunities for the participation of SMEs, notably through
the  adoption  and  implementation  of  the  legislative  proposals  modernizing  EU
public procurement law. This could provide European companies with a large user
group for their newest technologies and enable them to quickly achieve the market
penetration needed for global commercial success.

3.1.6.  A competitive environment and supportive competition rules

A  sufficient  degree  of  competition  is  fundamental  for  the  economy  to  achieve  the
optimum allocation of resources and the highest possible welfare. Competition in
product markets is essential to ensure that companies innovate to differentiate and
keep abreast of competitors.

Community  competition  policy  has  evolved  from  a  formal  approach  to  a  more
economic  and  effects-based  approach.  It  now  takes  into  account  the  dynamic
nature of markets and the specific characteristics of R&D  and  innovation.  Three
elements of Community competition policy have a more direct bearing on firms'
R&D  and  innovation  activities.  They  relate  to  R&D  co-operation  agreements,
technology transfer agreements and R&D State aids.

R&D  co-operation  between  firms  is  increasingly  necessary  to  take  advantage  of
economies of scale, sharing of knowledge and complementary technologies. Most
co-operation  agreements  are  not  problematic  for  competition  and  benefit  from
exemptions under article 81 (3) of the Treaty relating to efficiency considerations.
The new Block Exemption Regulation 2659/2000 on R&D agreements33 reduces
the regulatory burden for companies and gives them greater contractual freedom.

With  regard  to  technology  licensing  agreements,  the  current  Block  Exemption
Regulation34 will also be revised, following the same approach as for other Block
Exemptions.  The  aim  is  a  simpler  and  possibly  wider  block  exemption  for
technology licensing agreements, limiting competition policy scrutiny of licensing
agreements  to  situations  where  it  is  necessary,  and  providing  greater  legal
certainty.

As for state aids to R&D, the Commission recognises their legitimacy in addressing
market failures and their important role in the knowledge  economy.  In line with
the requests of the European Councils of Lisbon and Stockholm, the Commission
is also committed to encouraging the redirection of state  aids towards horizontal
objectives,  including  R&D.  In  the  light  of  the  Barcelona  3%  objective,  it  has
considered that the current Community Framework for State Aid for Research and

32 

33

34

Recent  examples  at  European  level  include  the  proposal  for  the  European  and  Developing  Countries
Clinical Trial Partnership, bringing together governments and industry for the development and testing
of new medicines and vaccines against HIV/AIDS, malaria and tuberculosis. This initiative is based for
the first time on article 169 of the EC Treaty.
OJ L 304 of 5.12.2000
Commission Regulation 240/96, OJ L 031, 9.12.1996.

15

                                                
Development, which allows for supportive R&D intensities, should be prolonged
until  200535.  In  the  context  of  the  next  revision  of  the  Block  Exemption
Regulation for SMEs, the Commission will consider extending it to state aids for
R&D.

In  competition  decisions,  a  permanent  challenge  is  to  understand  changes  in
industrial  R&D  and  innovation  processes  and  to  assess  their  effects  on  future
market  dynamics  and  competitive  conditions,  in  particular  in  highly  innovative
industries.  A  dynamic view  going beyond a  static appraisal  and  extrapolation  of
past behaviour is necessary, in particular in assessing market power.

Objectives to be pursued that require intensified effort or further initiatives include:

–  In  the  context  of  competition  decisions,  taking  due  account  of  market  dynamics
and  competitive  conditions  in  assessing  R&D  and  innovation  activities,  in
particular in highly innovative industries.

–  Monitoring  the  reorientation  of  State  aid  to  R&D  and  its  leveraging  effect  on
investment  and  pursuing  studies  on  possible  adaptation  of  the  Community
Framework in the context of its next revision in 2005.

3.1.7. 

Supportive financial markets covering the various stages of development of high-tech
and other innovative companies

Many  innovative  companies  require  access  to  equity  and/or  debt  financial  markets
for  investment  in  R&D  and  innovation  activities.  High  growth,  high  technology
companies  are  critically  dependent  on  access  to  equity  financing  at  different
stages  of  their  development:  risk  capital  in  early  (seed  and  start-up)  and
development  stages,  and  secondary  markets36  for  the  financing  of  Initial  Public
Offerings and subsequent expansion phases.

Full  implementation  of  the  Financial  Services  Action  Plan  (FSAP)  and  the  Risk
Capital  Action  Plan  (RCAP)  is  therefore  important  to  create  more  efficient  and
integrated financial markets in Europe, thereby improving access to and reducing
the  cost  of  external  finance.  This  is  even  more  necessary  given  the  severe
downturn in market conditions since 2000. Confidence in these markets needs to
be  restored  in  parallel  with  the  pursuit  of  their  rationalisation.  Large  firms  are
making  growing use  of European  Investment  Bank  (EIB)  loans  to  finance  R&D
and  innovation  activities.  This  is  an  indication  that  properly  designed  debt
instruments,  such  as  bonds  and  securitised  loans,  could  become  a  significant
source of finance for mid-size firms and other organisations investing in R&D and
innovation.

Objectives to be pursued that require intensified effort or further initiatives include:

–  In the context of the implementation and possible follow-up of the RCAP and the
FSAP,  identifying  measures  that  would  help  foster  debt  and  equity  market

35

36

Community Framework for State Aid for Research and Development, OJ 45, 17.2.1996.
Such as the German Neuer Markt, the French Nouveau Marché, the high tech segment of Euronext and
NASDAQ-Europe (formerly EASDAQ)

16

                                                
financing  of  R&D  and  innovation  in  companies  at  different  stages  of  their
development.

–  In the context of the follow up of the EIB's “Innovation 2000 Initiative”, putting

in place financial instruments contributing better to this objective.

3.1.8.  Macro-economic stability and favourable fiscal conditions

Public  policies  in  support  of  R&D  should  be  considered  in  the  context  of  the
Stability  and  Growth  Pact,  including  its  requirements  to  maintain  a  budgetary
position “close to balance or in surplus” over the economic cycle. Fiscal discipline
contributes  to  macro-economic  stability  and  to  the  creation  of  a  supportive
environment for R&D and innovation.

Sound public finances are beneficial to R&D investment  in several ways.  Low  real
interest  rates  reduce  the  cost  of  long-term  investments,  including  R&D.  Price
stability reduces uncertainty as to the rate of return for investors. This is especially
helpful for R&D, where returns often only materialise in the medium to long run.
A  more  binding  budget  constraint  with  clear  restrictions  on  deficit  financing
underlines  the  need  for  prudent  public  expenditure  policies.  Shifting  public
spending  towards  areas  such  as  R&D  and  technological  innovation  has  positive
spill-over  effects  on  private  investment.  However,  governments  need  to  ensure
that  public  R&D  spending  does  not  crowd-out  more  productive  private  sector
investment.

Efforts to redirect public expenditure should also be made in a framework of sound
fiscal  policies.  Therefore,  efforts  to  enhance  capital  accumulation,  including
public  support  for  R&D,  must  to  a  large  extent  come  through  restructuring  of
public expenditure37. A sound tax environment has positive  effects  on  R&D and
innovation.  For  enterprises  operating  across  borders  within  the  internal  market,
there is a need to create the appropriate direct tax  environment  so  that  decisions
on  investment  in  R&D  are  not  distorted  by  purely  tax-driven  decisions.  The
Commission’s  objective38  of  providing  companies  with  a  consolidated  corporate
tax  base  for  their  EU-wide  activities  would  remove  obstacles  to  the  efficient
allocation of investments, including business investment in R&D.

Furthermore,  certain  taxes,  such  as  VAT  and  some  local  taxes39,  are  payable
regardless  of  the  final  outcome  of  activities.  Such  forms  of  taxation  may
particularly discourage activities such as R&D that have uncertain or more long-
term returns to investment.

Objectives to be pursued that require intensified effort or further initiatives include:

37

38

39

Report  from  the  Commission  and  the  (ECOFIN)  Council  to  the  European  Council  (Stockhom,  23-24
March 2001), “The contribution of public finances to growth and employment: improving quality and
sustainability”, Doc. 6997/01
Put forward in the  Commission  Communication  “Towards  an  Internal  Market  without  tax  obstacles”,
COM(2001)582, 23.10.2001
For  example,  some  VAT  paid  when  assets  are  acquired  for  business  purposes  may  not  be  deductible
form  the  VAT  charged  to  final  customers  and  some  local  taxes  are  often  charged  simply  because  a
business activity is being undertaken. Taxes on labour (such as payroll taxes)  may also be significant
for entities carrying on R&D activities, since these can involve an above-average proportion of highly-
skilled employees.

17

                                                
–  Exploring  ways  that  Member  States  could  reform  their  tax  systems  to  reduce

existing disincentives to investment in R&D and innovation.

3.2.  More effective use of public financing for business R&D

In  the  context  of  the  3%  objective  and  in  accordance  with  State  aid  rules,  public
support  mechanisms  to  stimulate  private  investment  in  R&D  are  justified  if  the
private return is lower than the social return or to address systemic  failures40. In
this  regard,  public  authorities  have  a  range  of  financing  instruments  at  their
disposal,  in  particular  direct  support  measures,  fiscal  incentives,  guarantee
schemes  and  public  support  for  venture  capital.  Each  instrument  has  its  own
characteristics  and  merit  which  may  vary  depending  on  sectors  and  countries.
More effective design and implementation of these instruments, individually and
in  combination,  can  act  as  a  stimulus  to  increased  private  investment  and
contribute to the achievement of the 3% objective.

3.2.1.  Direct support measures

Direct  support  measures  are  particularly  appropriate  where  governments  want  to
retain  control  over  the  type  of  research  carried  out  and  orient  research  efforts
towards  public  policy  and  long-term  objectives.  They  are  the  predominant
mechanism for promoting private investment in research in most countries.

They  should  appropriately  be  directed  to  areas  in  which  the  private  sector  faces
significant obstacles to investment. In this regard, public-private partnerships can
play  an  important  role  in  boosting  private  investment  by  reducing  the  risk
associated with the investment.

There is a wide range of direct support programmes in operation across the Member
States aimed at collaboration between knowledge producers and users41 in specific
technological sectors, creating and developing science and technology  parks and
stimulating  networking  of  private  and  public  research  units.  Instruments  include
subsidies, competitive grants, procurement, grants repayable in case of successful
commercial exploitation and block funding of public institutions. Many countries
implement several types of scheme simultaneously.

3.2.2.  Fiscal incentives

Appropriately designed fiscal incentives encourage a flexible and responsive market
allocation  of  R&D  investment  between  competing  technologies  and  sectors  and
entail less interference in the market. They allow faster reallocation of  resources
between technologies in response to the increasing pace of technological  change
and  market  developments.  They  also  reduce  uncertainty:  enterprises  know  in
advance the level of incentive available.

On the other hand, fiscal incentives are more likely to lead to unintended windfalls
by rewarding investment that would have taken place without the incentive. Their

40

41

For example to enhance interactions between different parts of the research and innovation system.
This concerns also the growing number of firms which have little or no R&D capability but outsource
their R&D needs.

18

                                                
final  cost  and  impact  are  more  difficult  to  predict  because  of  the  wide  range  of
variables involved.

Fiscal  incentives  for  R&D  of  various  types  are  increasingly  used,  with  18  OECD
countries now employing them as against twelve in the mid-1990s42. Tax credits
for R&D expenditures are becoming more popular than tax allowances. A number
of  countries  either  target  R&D  tax  incentives  to  smaller  firms  or  provide  more
generous provisions to these firms than to large enterprises. Also, a number of tax
schemes  are  focused  on  wage  costs  and  others  are  aimed  at  encouraging
collaboration between industry and public research organisations.

Appropriate  design  of  fiscal  measures  strongly  influences  their  effectiveness  in
stimulating  increased  R&D  investment.  Member  States  should  co-ordinate  their
initiatives in this respect to avoid harmful tax practices within the EU.

3.2.3.  Guarantee mechanisms

Inadequate access to external finance (debt or equity) at reasonable cost is a common
problem for SMEs and notably for small  and  newly-established high technology
companies.  The  problem  is  even  more  acute  for  R&D  financing  because  of  the
risk  involved.  Given  this  situation,  guarantee  mechanisms  for  both  equity  and
loans can be attractive means of increasing the availability of capital and reducing
access  costs.  Equity  guarantees  are  typically  directed  to  prospective  investors  in
R&D.  Loan  guarantees  provide  a  direct  incentive  to  firms  to  raise  their  R&D
efforts. Guarantees provide a means of sharing risk, thus reducing the exposure of
borrowers/investors  and  companies.  In  general  and  when  applied  appropriately,
they can potentially exert leverage on private investment in R&D for a lower cost
than direct or fiscal measures.

Guarantee mechanisms vary depending on the type of company concerned. For high
technology start-ups, equity guarantees can stimulate investment by reducing the
level  of  risk  involved  and  increasing  the  rate  of  return.  Loan  guarantees  are
generally  more  appropriate  for  SMEs  in  traditional  sectors  because  of  their
preference  for  debt  financing.  They  can  also  be  attractive  for  young  high
technology  firms  once  these  are  sufficiently  mature  to  generate  stable  revenue
streams.

A  variety  of  loan  guarantee  schemes  are  currently  operated  at  Member  State  and
European levels but these are not generally designed specifically for R&D. Equity
guarantee schemes have only recently been introduced.

3.2.4.  Public support for risk capital

As  the  number  of  high  technology  companies  grows,  risk  capital,  which  is  their
major  source  of  capital  in  the  early  (seed  and  start-up)  and  development  stages,
contributes  increasingly  to  the  financing  of  R&D.  However,  these  firms  often
have difficulty raising finance in the early stages because of the risk involved and
the  small  scale  of  investment  required.  Despite  recent  growth  in  the  supply  of

42 

European countries are Austria, Belgium, Denmark, France, Italy, Netherlands, Portugal, Spain, United
Kingdom and Hungary. While a few countries have discontinued or are considering phasing out their
tax incentives for R&D, more have enhanced them in recent years or are studying ways to do so.

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early stage funding (until the 2000-2001 crisis), risk capital is still not playing as
full a role in Europe as in the US. In seeking to close this gap, the public sector is
playing a growing role at regional, national and European levels, not only through
guarantee mechanisms and fiscal incentives, but also through reimbursable grants,
subsidised loans and direct equity investments in risk capital funds.

Recently, a variety of schemes have been put in place in a number of Member States
to stimulate private investment in funds associated to incubators and science parks
or dedicated to funding R&D in high technology start-ups.

3.2.5. 

Improving the overall mix of instruments

A  mix  of  instruments  is  needed,  as  no  single  instrument  is  able  to  provide  the  full
range  of  incentives.  It  is  important  to  ensure  that  different  instruments  are  cost-
effective and avoid possible crowding out effects, both in their individual features
and in their interactions.

The optimal mix of instruments will  necessarily differ across  countries and  regions
and  may  evolve  over  time.  Financing  needs  vary  across  industry  segments  and
each  segment  contribute  differently  to  the  overall  private  investment  in  R&D.
Furthermore,  the  optimal  level  of  public  spending  on  R&D  and  its  allocation
between 
the
characteristics  of  a  country’s  R&D  system.  In  some  cases,  this  may  imply
changing the allocation between public and private R&D sectors and/or increasing
overall public spending.

industry  and  public  research 

institutions  also  depends  on 

The  use  of  consistent  criteria  for  the  design  and  impact  evaluation  of  individual
instruments  and  of  the  mix  of  instruments  would  facilitate  policy  making  and
mutual learning across countries.

At  Community  level,  several  programmes  and  initiatives  contribute  to  stimulate
private  investment  in  R&D  through  a  variety  of  financial  instruments  (grants,
loans, equity, and guarantees)43. Increased complementarity and synergy between
these  instruments  is  being  sought  to  ensure  maximum  overall  impact44.  These
Community  instruments  constitute  a  European  learning  platform  to  test  new
instruments  and  facilitate  exchanges  of  experience  between  the  various  national
financial institutions involved in the implementation of some of them.

Objectives to be pursued that require intensified effort or further initiatives include:

–  In the context of the benchmarking  of research policies,  and taking into  account
differences  in  national  contexts,  identifying  good  practices  and  innovative

43

44

In  addition  to  the  Community  Framework  Programme  for  R&D,  these  include  the  “Innovation  2000
Initiative” of the EIB Group and the Structural Funds (normal programmes and the Innovative Actions).
The guarantee and equity facilities of the Multiannual Programme for Enterprise and Entrepreneurship
can also be used to finance R&D and innovation activities
The  co-operation  agreement  between  the  Commission  and  the  EIB  in  the  field  of  R&D  is  aimed  in
particular at facilitating the complementary use of various instruments and taking better into account the
specificities of R&D in the design of EIB instruments. The establishment of a EIB loan facility for the
financing of European strategic R&D projects, which is being considered to facilitate the financing of
multi-partner projects, would also contribute to the development of synergies between the Framework
Programme and EUREKA.

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schemes to enhance the leverage effect of the various public support instruments
on private investment in R&D.

-  Making more effective use at regional, national and EU levels of these instruments,

considered individually and in combination, to enhance their overall impact

3.3. 

R&D and innovation in corporate strategies and management

A firm’s decision to invest in R&D is not only influenced by framework conditions
and  the  availability  of  public  support.  The  place  of  R&D  in  its  overall  business
strategy  and  the  efficiency  of  its  R&D  management  are  important  factors  that
merit greater attention.

There are a number of examples showing that firms which have integrated R&D and
innovation in their business strategy tend to perform better and to invest more in
R&D.  Many  firms,  however,  have  not  integrated  R&D  into  their  corporate
strategy and are not making full use of productivity-enhancing R&D management
methods  and  tools45.  This  concerns  not  only  high-tech  sectors,  but  also  medium
and  low-tech  sectors  which  are  becoming  more  knowledge-intensive  as  firms  in
these  sectors  increasingly  need  also  to  develop  their  capacity  to  acquire  and
absorb new technologies.

Another aspect relevant in this context is the recognition of the growing importance
of intellectual capital as a key asset of enterprises. In  their annual  reports, many
firms refer to their R&D activities merely as a footnote to their accounts, reducing
significantly their visibility to investors.

Objectives to be pursued that require intensified effort or further initiatives include:

–  Exploring  the  role  that  industrial  associations  at  national  and  European  levels
could  play  in  promoting  awareness  and  the  use  of  good  R&D  management
practices.

–  Encouraging  a  more  thorough  analysis  and  reporting  of  R&D  and  intellectual
property  assets,  which  would  help  both  firm  managers  and  the  investment
community to make better estimates of opportunities and risks.

4. 

CONCLUSION: TOWARDS A CONCERTED EUROPEAN WAY

The analyses contained in this communication confirm that it is necessary not only to
improve the effectiveness of the European R&D and innovation system, but also
to  address  the  EU's  under-investment  in  R&D.  The  current  trends  in  R&D
investment must be reversed urgently in order to approach 3 % of GDP by 2010,
with an increased share of business funding that should reach two thirds of total
R&D  expenditure.  Such  a  change  is  essential  to  reach  the  Lisbon  objective  of

45

It is expected that changes in industrial R&D processes and management will accelerate in the coming
years, increasing the scope for improving R&D productivity through more extensive use of information
and communication technologies (e.g. intelligence  gathering, knowledge  management,  simulation  and
prototyping, assessment of users’ needs).

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making Europe the leading knowledge economy in the world. It will require joint
efforts involving the European institutions, all Member States and the Candidate
Countries, as well as the enterprise sector.

A wide array of public policies must be mobilised in a coherent way to address both
framework  conditions  and  the  public  financing  mechanisms  for  R&D  and
innovation.

As a first step, the Commission will engage in discussions on the basis of the present
Communication with European institutions, Member States, regions and interested
parties,  including  notably  industry.  These  discussions  will  be  conducted  with  a
view  to identify actions that should be introduced or strengthened at the various
levels  to  encourage  in  more  effective,  systematic  and  coherent  ways  R&D
investment in Europe. Inputs from these discussions will allow the Commission to
propose  orientations  in  the  context  of  its  synthesis  report  to  the  2003  Spring
European  Council. After  the European  Council and depending on its results, the
Commission will consider proposing a focused set of prioritised actions supported
by a process of open co-ordination.

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