Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions - Industrial Policy in an Enlarged Europe
Date: 2002-12-11
Institutions: European Commission
Subjects: EU industrial policy, competitiveness, economic policy, enlargement of the Union, entrepreneurship, sustainable development

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 11.12.2002
COM(2002) 714 final

COMMUNICATION FROM THE COMMISSION
TO THE COUNCIL, THE EUROPEAN PARLIAMENT, THE ECONOMIC AND
SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

Industrial Policy in an Enlarged Europe

EXECUTIVE SUMMARY

Competitiveness – the ability of the economy to provide its population with high and rising
standards of living and high rates of employment on a sustainable basis – is at the very heart
of  the  ambitious  goals  set  for  the  European  Union  at  the  Lisbon  meeting  of  the  European
Council in spring 2000.

Achieving  this  depends  on  the  ability  of  the  European  Union  to  maintain  and  develop  the
competitiveness  of  its  manufacturing  industry.  Industry’s  interdependence  with  services
cannot  be  ignored  and  the  progressive  outsourcing  of  business  services  has  reduced  the
apparent scale of manufacturing industry.

Yet the vibrancy and dynamism of industry is essential for Europe to be able to sustain and
increase  its  prosperity  while  meeting  its  wider  social,  environmental  and  international
ambitions.

European  industry  is  modern  and,  in  many  respects,  successful.  Yet  its  slow  productivity
growth  is  a  serious  cause  for  concern.  That  is  why,  on  the  eve  of  enlargement,  this
Communication examines the EU’s industrial policy established in 1990, to ensure that it is
being applied to the best advantage. If this can be ensured, then the EU will be able to reap
the benefits of its industrial potential in the years to come and to progress towards its wider
goals.

Enlargement will be a major source of opportunities for industry in new and existing Member
States alike. It should make a positive contribution to overall industrial competitiveness.

The  competitiveness  of  manufacturing  industry  is  a  cornerstone  of  the  EU’s  sustainable
development strategy. Sustainability has three pillars – economic, social and  environmental.
Progress  towards  meeting  the  sustainability  objective  implies  that  the  EU  advances  in  a
balanced manner with regard to each pillar. Neglecting one of the pillars could only result in
the overall objective being missed. Therefore, competitiveness is a necessary ingredient in the
success of the sustainability strategy.

Three  key  factors  of  industrial  competitiveness  deserve  particular  attention:  knowledge,
innovation and entrepreneurship.

(cid:1)  Europe needs to be at the cutting edge of knowledge. The need for more and better efforts
in  education,  vocational  training  and  research,  to  put  this  knowledge  at  the  disposal  of
industry, have been signalled repeatedly. New technologies, including ICT, biotechnology
and nanotechnology, have to be developed, as do the skills and know-how to use them.

(cid:1)  European industry also needs to become more innovative. Every sector and activity needs
to be constantly initiating, refining and improving its products, services and processes. The
conditions to stimulate vigorous innovation have to be in place.

(cid:1)  Europe  must  also  develop  its  entrepreneurial  capacity  to  take  risks  and  grow  new  and
bigger  businesses.  Europeans  seem  too  reluctant  to  bear  entrepreneurial  risk,  too  readily
satisfied  with  limited growth  of  businesses  and  too  reluctant  to  acknowledge  and  reward
the social contribution of risk-takers.

2

Industrial policy is horizontal in nature and aims at securing framework conditions favourable
to  industrial  competitiveness.  Its  instruments,  which  are  those  of  enterprise  policy,  aim  to
provide  the  framework  conditions  in  which  entrepreneurs  and  business  can  take  initiatives,
exploit their ideas and build on their opportunities.

However,  it  needs  to  take  into  account  the  specific  needs  and  characteristics  of  individual
sectors.  It  therefore  needs  to  be  applied  differently,  according  to  the  sector.  For  example,
many  products,  such  as  pharmaceuticals,  chemicals,  automobiles,  are  subject  to  detailed
sector-specific regulations dependent on their inherent characteristics or use.

Industrial  policy  therefore  inevitably  brings  together  a  horizontal  basis  and  sectoral
applications.

To ensure that industrial policy responds to constantly changing challenges, the Commission
should also carry out in-depth analyses and regular monitoring of the competitive situation of
these  sectors.  These  ‘reality  checks’  would  enable  it  to  assess  the  appropriateness  of  the
policy mix.

Industrial  policy  also  has  to  ensure  that  other  policies  contribute  to  the  competitiveness  of
Europe’s industry. It therefore covers a very wide field, while many of its instruments are the
instruments  of  other  policy  fields.  Industrial  competitiveness  depends  on  policies  such  as
competition, the internal market, research and development, education, trade and sustainable
development.

What is needed above all is that these instruments are balanced as to their different objectives,
taking  careful  account  of  their  industrial  consequences.  Industrial  policy  therefore  needs  a
rigorous working method to maximise the dynamic interactions between these policies.

Instruments such as impact assessment and cost-benefit analysis, already part of Commission
policy,  are  being  developed  and  refined  in  practice,  to  ensure  that  policy  interventions  are
well adjusted to needs and are predictable as to their results. Industrial policy itself has to be
innovative, for example in developing new and less intrusive regulatory instruments, focused
on  the  results  rather  than  the  means  to  be  used,  leaving  scope  to  industry  to  find  its  own
technical solutions and engaging the commitment of industry itself. Public consultation needs
to promote the widest possible understanding of issues and policies.

This  Communication  sets  out  issues  and  points  the  way  towards  balanced,  integrated
solutions. Finding those solutions in particular circumstances and ensuring that they are well
applied, requires continuing vigilance, analysis and discussion.

The Communication is intended by the Commission as the start of a process of examination
of the appropriateness and balance with which its industrial policy is applied.

(cid:1)  In  the  first  place,  it  invites  the  other  Community  institutions  to  discuss  the  approach

described in the Communication and to react to it.

(cid:1)  Second,  it  intends  to  screen  the  way  in  which  its  own  main  policies  interface  with  the

competitiveness of industry.

(cid:1)  Third, recalling that most industrial policy is not carried out at the EU level, but under the
competence of the Member States, the Commission invites the Member States to examine
their  own  industrial  policy  in  the  light  of  the  communication.  The  open  method  of  co-

3

ordination,  set  up  by  the  Lisbon  European  Council,  offers  a  context  in  which  national
policy performance could be discussed, developed and improved.

The Commission invites interested parties to contribute to this process. It intends to report, by
the end of 2003, on the results it has achieved and may launch further initiatives.

4

COMMUNICATION FROM THE COMMISSION
TO THE COUNCIL, THE EUROPEAN PARLIAMENT, THE ECONOMIC AND
SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

Industrial Policy in an Enlarged Europe

Table of content

I.

II.

II.1

II.2

INTRODUCTION ....................................................................................................... 7

THE COMPETITIVENESS OF EU INDUSTRY....................................................... 8

Industry as the source of Europe’s wealth ................................................................... 8

A snapshot of European industry: some trends, strengths and weaknesses................. 9

II.2.1. European industry is modern and competitive in many respects................................. 9

II.2.2.

...but displays slow productivity growth .................................................................... 10

II.2.3

SMEs, progressively integrated in clusters and production networks, play a central
role ............................................................................................................................. 12

III.

IMPLICATIONS OF ENLARGEMENT FOR INDUSTRY .................................... 13

III.1.

Significant – but unequal – progress has already been achieved ............................... 13

III.2.

Some areas will still need specific attention .............................................................. 13

III.3.

Enlargement offers new opportunities for competitive reorganisation...................... 14

IV.

CHALLENGES FOR INDUSTRIAL POLICY IN AN ENLARGED EUROPE ..... 14

IV.1.

The challenge of globalisation ................................................................................... 14

IV.2

IV.3

Technological and organisational change .................................................................. 15

The key role of innovation and entrepreneurship ...................................................... 16

IV.4.

Sustainability and new societal demands................................................................... 17

V.

V.1

THE WAY FORWARD ............................................................................................ 18

Cross-cutting factors underpinning competitiveness and growth .............................. 18

V.1.1

Promoting innovation and knowledge ....................................................................... 19

V.1.2

Entrepreneurship ........................................................................................................ 20

V.1.3. Promoting a sustainable structure of industrial production........................................ 20

V.2.

Revisiting the EU approach to industrial policy ........................................................ 21

V.2.1. The key importance of framework conditions ........................................................... 21

V.2.2. A more systematic EU approach for improving framework conditions .................... 23

5

V.2.3.

Improving the integration of EU policies with an impact on industrial
competitiveness .......................................................................................................... 25

V.2.4. Responding to the specific needs of candidate country industry ............................... 28

V.2.5. Striving for improved global governance .................................................................. 29

V.2.6. The sectoral relevance of the revisited approach ....................................................... 30

VI.

CONCLUSION.......................................................................................................... 31

ANNEX:................................................................................................................................... 32

6

I.

INTRODUCTION

The broad principles of the EU’s current industrial policy  were set out in a Communication
adopted  in  19901.  This  approach  aimed  at  creating  framework  conditions  for  enterprise  to
improve its competitiveness and which would compensate where necessary for market failure.
It was to use the instruments provided by various other Community policies.

Since  then,  the  political  context  has  changed.  The  European  Community  has  become  the
European  Union,  formed  of  15  Member  States,  with  10  more  about  to  join.  An  effective
internal market has been consolidated by the single  currency  and  expanded  to  the  European
Economic Area (EEA) and to the candidate countries. The Uruguay Round greatly extended
the rules of the world trading system.

Successive Communications over the last twelve years have developed the policy adopted in
19902. Thus the approach has been refined over time, in particular to underline the key role of
knowledge and innovation in a global economy, although the basic parameters have remained
the same.

Earlier  this  year,  another  Communication3  drew  attention  to  the  slowdown  in  productivity
growth in the EU and warned that this may jeopardise the goal set at the Lisbon European
Council  in  2000  of  making  the  EU,  by  2010,  ‘the  most  competitive  and  dynamic
knowledge-based  economy  in  the  world,  capable  of  sustainable  growth  with  more  and
better  jobs  and  greater  social  cohesion’.  The  importance  of  competitiveness  and  the
increased need for synergy among industrial policy, R&D policy and the single market have
been  further  underlined  by  the  decision,  taken  by  Heads  of  State  and  Governments  at  the
Seville  European  Council,  to  set  up  a  new  Council  formation  that  will  address  all
competitiveness-related issues.

As wealth increases, issues such as sustainability and safety become ever more important to
European  citizens.  This  was  reflected  in  the  adoption,  at  the  Gothenburg  European
Council in 2001, of the EU’s sustainable development strategy, aiming at the simultaneous
pursuit  of  objectives  under  the  three  pillars  –  economic,  social  and  environmental  –  which
underpin  this  strategy.  The  effective  application  of  the  strategy  requires  full  coherence
between the policies of the respective pillars.

Industrial  policy  has  a  key  role  to  play  in  helping  the  EU  meet  the  Lisbon  and
Gothenburg objectives. On the eve of an  enlargement  that  will  bring  important  changes in
the  industrial  landscape  of  Europe  and  specific  problems  affecting  industry  in  the  new
Member States, a review of this policy is timely, so as to ensure that the EU has the tools with
which  to  respond  to  the  needs  of  an  enlarged  Europe.  This  review  should  contribute  to  the

1

2

3

‘Industrial Policy in a competitive and open environment: guidelines for a Community approach’ (COM
(90) 556 final)
The 1993 White Paper on Growth, Employment and Competitiveness stressed the importance of SMEs,
infrastructure and new technologies. In the 1994 Communication (‘An industrial competitiveness policy
for  the  European  Union’  (COM  (94)  319  final),  the  onus  was  put  on  intangibles  and  industrial  co-
operation. The issue of globalisation was addressed in the 1999 Communication (‘The competitiveness
of European enterprises in the face of globalisation – How it can be encouraged’ (COM (98) 718 final).
‘Productivity:  the  key  to  competitiveness  of  European  economies  and  enterprises’  (COM  (2002)  262
final)

7

                                                
development  of  synergies  between  industrial  policy  and  the  other  policies  geared  towards
achieving the objectives of the Lisbon strategy.

Developing  the  growth  potential  of  the  European  Union  must  remain  central  to  the
objectives  of  industrial  policy.  It  aims  at  reinforcing  the  Union’s  ability  to  achieve  higher
growth rates and to generate high living standards and numerous and lasting jobs.

In order to reach this objective, the Union’s industrial basis must be consolidated through
specific policies. As a matter of fact, a buoyant industry generates positive externalities on the
economy as a whole, increasing the growth potential and the vibrancy of the economic fabric,
fostering innovation and training as a result of increased demand for skills. In this perspective,
industrial policy plays a key role by concentrating on strategies, the creation of a favourable
environment and clear support to key investments that can generate growth. On the basis of
the  horizontal  approach  aimed  at  creating  adequate  framework  conditions,  a  number  of
priorities should be identified with a view to facilitating the development of domains with a
strong potential. This approach must be  closely  coordinated  with  other  EU  policies  that can
also foster or accompany the development of the Union’s industrial base.

Enterprises,  for  their  part,  will  retain  the  prime  responsibility  for  achieving
competitiveness. They also contribute to EU environmental and social priorities, by  putting
corporate responsibility into action on a wider scale.

This  Communication  marks  the  start  of  a  process  in  the  broader  context  of  the  Lisbon  and
Gothenburg agendas. The Commission’s wish is that it will trigger a broad debate on how to
improve industrial policy’s  contribution to the competitiveness of  industry  and  to  refine  the
integration  between  the  various  EU  policy  instruments  that  have  an  impact  on  industrial
competitiveness.

II.

THE COMPETITIVENESS OF EU INDUSTRY4

II.1

Industry as the source of Europe’s wealth

A  vibrant,  competitive  industry  is  essential  for Europe  to sustain and increase  its  prosperity
while meeting its wider social, environmental and international ambitions.

In recent years, the structure of production in Europe has been experiencing marked changes.
The  share  of  the  services  sector  in  EU  output  has  increased  from  52%  in  1970  to  71%  in
2001, while that of manufacturing has decreased from 30% to 18% in the same period5. As a
result of this “tertiarisation”, policy makers’ attention has not maintained a sufficiently strong
focus on manufacturing, comforted by the widespread, but erroneous, assumption that in
the  knowledge  economy  and  the  information  and  service  societies  manufacturing
industry no longer plays a key role. This statistical trend reflects the impact of two forces:
first, high productivity growth in the manufacturing sector relative to services, and second, the
associated increase in wealth, which has resulted in more than proportionate increases in the

4

5

The  analysis  in  this  section  is  complemented  by  a  separate  statistical  annex  SEC(2002)  1340,  which
contains the tables and graphs referred in the text.
The  ‘services  sector’  comprises:  wholesale  and  retail  trade;  restaurants  and  hotels;  transport  and
storage;  communication;  finance;  insurance;  real  state;  business  services;  and,  community,  social  and
personal  services.  The  last  item  includes  public  administration,  health,  education,  defence,  as  well  as
“other community, social and personal services”.

8

                                                
demand for household-oriented or personal services6. In parallel, thanks to productivity gains
the relative price of manufactured products has been declining over time.

The  interdependence  between  the  service  and  the  manufacturing  sectors  has  also
increased  over  time,  as  input-output  data  show.  The  aggregate  national  accounts  statistics
hide the fact that manufacturing companies have been outsourcing activities regarded as not
central  to  their  line  of  business,  which  were  earlier  accounted  for  as  part  of  manufacturing.
Increased  demand  of  services  from  manufacturing  has  contributed  to  the  rise  in  output  of
business services, which in 2000 accounted for 48.3% of the EU15 GDP (see graph 1.3)7.

These developments are related to  the  importance  of  the  quality  and  quantity  of  knowledge
that economic activities rely upon. Knowledge and the economy’s ability to transform it into
technological  and  commercial  applications  are  at  the  root  of  productivity  increases  and  the
associated competitiveness challenge. The available stock and rate of accumulation of human
capital  play  a  crucial  role.  The  growing  complexity  of  knowledge  has  led  to  increased
industry specialisation and lies behind the outsourcing trend, particularly  of  ICT-related
and  other  knowledge-intensive  services,  which  act  as  sources  of  innovation  and  product
differentiation, contributing to productivity growth.

But  the  intertwining  of  manufacturing  and  services  goes  far  beyond  outsourcing.  A
whole  array  of  services  associated  or  bundled  with  products  has  developed.  These  services,
mostly  carried  out  by  specialised  service  companies,  are  dependent  on  manufacturing.
Manufacturing innovations have also opened the way for totally new service concepts, as with
telecommunications  and  information  technologies.  In  turn,  industrial  competitiveness  relies
on  the  quality  and  cost-effectiveness  of  transport,  financial  and  business  services.
Nevertheless,  it  is  finally  in  manufacturing  that  most  new  technological  applications  are
introduced  and  result  in  economic  value.  Also,  knowledge-based,  scientific  breakthroughs
only lead to new products if a solid and efficient manufacturing base exists to produce them.

Given  the  importance  of  these  developments,  the  scope  of  this  Communication  reflects  the
interdependence between manufacturing and services.

II.2

A snapshot of European industry: some trends, strengths and weaknesses

II.2.1. European industry is modern and competitive in many respects

In the  face  of increased  global competition, most European industrial  sectors  have  made
substantial efforts to upgrade their production infrastructures and integrate new forms
of  organisation.  Through  investments  in  capital  equipment,  in-house  research,  or  contacts
with  the  science  base,  state-of-the  art  knowledge  has  permeated  much  of  the  textile,  food-
processing,  furniture,  farming  and  fishing,  retail,  engineering  and  chemical  industries.  All
these  sectors,  labelled  as  medium  or  low-tech,  now  use  innovative  and  technology-based
processes in their production.

This  process  has  led  to  an  upgrading  of  the  skill  content  of  jobs  which,  more  than  the
growing share of high-technology sectors in total production, accounts for the rising demand
of highly-skilled labour. The industry’s shift in demand towards higher levels of educational

6

7

As  incomes  increase,  the  demand  for  services  grows  more  than  proportionally  (in  other  words,  the
income elasticity of the demand for services is greater than one).
This  broad  definition  of  business  services  includes  all  the  ‘services  sector’  except  community,  social
and personal services.

9

                                                
attainment,  which  means  that  industry’s  competitiveness  will  increasingly  depend  on  the
qualitative  level  of  human  capital,  has  been  matched  by  a  continuous  rise  in  the  average
duration of education of the working population in the EU. However, at 87% and 90% of the
US and Japan levels respectively, the EU still underperforms its main competitors (see graph
6.1). Public spending in education and training as a percentage of GDP, albeit at a relatively
high level, has also been declining steadily from 5.7% in 1990 to 5% in 2001. This is at odds
with the Lisbon goals of ‘a substantial increase in per capita investment in human resources’.
The level of private investment in education, lifelong learning and scientific investigation is
also much lower than that achieved by our main trading partners. In addition, the efficiency of
investments in education and training also raises concerns.

Substantial  investments  in  environmental  protection8,  clean  technologies  and  environment-
friendly production processes have also enabled the European  industry to take on board
the  sustainable  development  dimension,  breaking  the  link  between  production  and
emissions of airborne pollutants9.

Partly in response to the growing importance of the internal market and to the introduction of
the  euro,  but  also  reflecting  world-wide  trends  of  consolidation  and  restructuring,  the  EU
industry experienced significant mergers and acquisitions (M&A) activity in the second half
of the 1990s. The services sector saw a surge in M&A activity with an EU target in the post-
1995 period while it was less intensive in the rest of the economy. The key reasons for this
have been the late liberalisation of the services sector (compared to the rest of the economy)
and also the lessening of constraints in the operation of state monopolies. M&A activity in the
EU  peaked  at  16,750  operations  in  2000,  but  eased  back  since.  As  the  dispersion  of
shareholdings widens it is possible that M&A activity may rise again in the future10.

European industry remains a dominant force in international trade. The greater presence
of  new  trading  partners  in  world  markets  has  eroded  the  share  of  the  EU  in  world  exports.
However, this trend is less marked for the EU than for the US and Japan. The EU’s share fell
from an average of 19.3% over the 1991/95 period to 18.4% in 2002. Over the same period,
the US share went down from 15.1% to 12.1%, and Japan’s share from 12.2% to 8.2% (see
table 2.1 and graph 2.3). Furthermore, in some key sectors such as automobiles, aeronautics
or  some  categories  of  telecommunications  equipment,  EU  companies  have  achieved  global
leadership. The trade balance for goods – which has been in surplus by between 1 and 2% of
GDP in 9 of the last 10 years – and the upward trend of the export ratio for goods in EU GDP
confirm the solid competitive position of the EU industry in global trade (see graphs 2.1 and
2.2).

II.2.2.

...but displays slow productivity growth

In  the  1990s,  even  if  some  small  EU  countries  have  recorded  outstanding  productivity
improvements,  productivity  growth  in  the  European  manufacturing  industry  has  been
below the US levels (see table 4.2). A wide gap has emerged in the second half of the decade,
with the EU displaying a rate of 3.2% compared to 5.5% for the US for the period 1996/2000.
Despite possible difficulties about the accuracy of productivity measurements, the data reflect
an acceleration of the US rate of labour productivity growth, particularly when compared to

8
9

10

Total spending related to environmental protection has risen to 2% of total industrial value-added
For instance, despite a 30% increase in industrial production since 1985, emissions of carbon dioxide
have fallen by 11% and emissions of acidifying gases by some 50% over the same period. (Commission
Competitiveness Report 2002)
See “Mergers and Acquisitions” European Economy, Supplement A, No. 12, December 2001.

10

                                                
the  situation  in  the  second  half  of  the  1980s.  For  the  whole  EU  economy  the  rate  of
productivity  growth  is  lower  than  for  manufacturing  alone,  reflecting  the  relative  weaker
performance of the service sector, and displays a marked slowdown from an average of 1.9%
in the first half of the 1990s to 1.2% in 1995-2001. Overall, these figures entail a dangerous
deterioration of the growth potential of the EU and an obvious risk for the competitiveness
of  its  industry.  The  Commission’s  Competitiveness  Reports  of  2001  and  2002  identified
insufficient  innovative  activity  and  weak  diffusion  of  ICT  as  key  determinants  of  Europe’s
under-performance in productivity growth.

The link between ICT adoption and productivity growth is now widely accepted. The EU rate
of ICT expenditure has been gradually rising over the last years, from 5,4% of GDP in 1996
to  7.1%  of  GDP  in  2001,  almost  narrowing  the  gap  with  the  US  figures  which  suffered  a
marked decline in 2001. However, the increase in ICT spending of the last few years has
yet to translate into productivity gains.

On the other hand, although some EU companies are world-class innovators, a low share of
European patent and R&D activity vis-à-vis the EU’s main competitors indicates that, overall,
the European innovative performance remains too weak.  The 2001  European  Innovation
Scoreboard shows that, while the best performing countries in the EU exhibit advances over
the  USA  and  Japan,  the  EU  as  a  whole  is  lagging  behind  for  most  of  the  17  innovation
indicators. Research investment in the EU,  at 1.9% of GDP  in 2000,  as against 2.7%  in  the
USA and 3% of Japan, is still far too low, and the gap is even greater if private sector research
alone is taken into account (the private sector alone accounts for 84% of the gap between the
EU and the US).  This  gap is  reflected  in  the  number  of  European  high-tech  patents,  28  per
million inhabitants, which is particularly telling compared to the most  performing European
countries  like  Finland  (138),  Sweden  (95)  or  the  Netherlands  (58).  Another  significant
indicator is the number of researchers11.

These facts lie behind the less encouraging competitiveness performance of the EU in some of
the highest value added segments of the economy. The “Electronics” and “Office machinery
and computer industries” are two striking examples of knowledge intensive sectors where the
EU should improve its performance.  In 2000 the EU  share in  total OECD  exports  for  these
sectors was 16.4 and 12.3% respectively, compared to 23.7  and 24% for the US12.  Different
measures of comparative advantage reveal that the EU tends to specialise in medium-high-
technology and mature capital-intensive industries (see section 2). If it is essential to keep
the  strengths  in  these  sectors  which  represent  a  higher  share  of  total  output  and
employment, the EU should seek to reinforce its position in enabling technologies such as
ICT, electronics, biotechnology or nanotechnology, where it is often lagging behind its main
competitors.  Technology  driven  industries  are  not  only  a  source  of  knowledge  and
technological  spill-overs  throughout  the  economy  but  they  are  also  the  ones  which  exhibit
greater  productivity  growth  (see  graph  4.1).  The  European  industry’s  relative  weakness  in
these  fields  as  well  as  their  low  share  in  the  economy  weigh  on  the  overall  growth  and
productivity  performance  of  the  EU.  In  addition,  the  relatively  slow  pace  of  change  of  the

11

12

The share of researchers in the total workforce is 5.1 per thousand in the EU. The corresponding figures
are 7.4 in the US and 8.9 in Japan. With regard to private sector researchers only, the figures are 2.5 per
thousand in the EU, 7.0 in the US and 6.3 in Japan.
OECD Main Science and Technology Indicators.

11

                                                
European productive structure has hampered a rapid redeployment of resources to new market
opportunities.13

Finally,  Europe’s  weak  productivity  growth,  as  well  as  the  relatively  low  employment
rate,  may  also  be  related  to  remaining  structural  problems.  These  include  the
fragmentation  of  certain  service  and  product  markets  and  –  despite  the  progress  registered
over  the  1990s  –  remaining  obstacles  to  geographical  mobility  and  pervasive  skill  gaps  for
many categories of workers.

II.2.3

SMEs, progressively integrated  in clusters and production networks, play  a central
role

SMEs are the backbone of European industry (see table 7.1)  14. They account for about two
thirds of employment and 60% of total value added. They stimulate the competitive dynamics
of  the  economy,  forcing  large  companies  to  increase  efficiency  and  innovate.  Furthermore,
many European SMEs  are world players in  niche markets. Their  exports  amount  to  13%  of
their turnover.

New  organisational  patterns,  under  which  large  firms  often  operate  through  EU-wide
production and subcontracting networks have also  enhanced  the  importance  of  SMEs.
ICT  allow  big  companies  to  manage  far-flung  supplier  webs  that  can  integrate  hundreds  of
SMEs. The performance of large  firms depends increasingly on the competitiveness of their
small and medium suppliers, which in turn depend on the economic situation of these larger
partners.

Innovative  clusters,  while  relying  on  regional  sources  for  their  competitiveness,  are  also
increasingly  involved  in  supranational  knowledge  and  production  networks.  Companies  in
such  clusters,  mostly  SMEs,  are  becoming  the  dynamic  part  of  Europe’s  industrial
landscape  and  a  source  of  innovative  ideas.  Some  European  clusters,  such  as  in
biotechnology in the Munich and Stockholm areas – where participating firms are often spin-
offs from Universities – or in textile in Northern Italy, are world class.15

Expanded supplier networks have amplified the linkages between apparently unrelated
sectors of the economy, as well as between different regions and countries of the EU. For
example, engineering companies in landlocked Central European countries – including SMEs
– are dependent on demand for  engines and other components from shipbuilding companies
located elsewhere. Similarly, SMEs in the clothing sector rely on the quality, availability and
cost of synthetic fibres produced by fibre manufacturers using raw materials developed by the
chemical industry.

Greater  outsourcing  and  downsizing  by  large  firms,  even  though  they  can  cause  temporary
adjustment  problems,  have  also  created  new  opportunities  and  incentives  for  self-
employment. However, still too few Europeans wish to be self-employed (see graph 7.3). In
addition,  relatively  few  small  and  micro  companies  in  Europe  grow  to  the  necessary

13

14

15

Structural  change  relates  to  the  economy’s  capacity  to  re-deploy  resources  rapidly  in  pursuit  of  new
opportunities while exploiting its strengths. The Commission’s 1999 Competitiveness Report identified
a link between speed of structural change and output and export growth.
Observatory  of  European  SMEs  2002  /  No  2.  The  data  correspond  to  a  broad  definition  of  SMEs,
including micro companies.
Regional clusters in Europe have been analysed in the Observatory of European SMEs 2002, No.3

12

                                                
critical  size  to  compete  effectively  with  large  dominant  incumbents  or  to  enter  foreign
markets.

III.

IMPLICATIONS OF ENLARGEMENT FOR INDUSTRY16

III.1.

Significant – but unequal – progress has already been achieved

Candidate countries have made considerable efforts aimed at structural reform, achieving
a  high  degree  of  macroeconomic  stability  and  economic  integration  with  the  EU.  At  the
microeconomic  level,  market  liberalisation  and  privatisation  have  been  accompanied  by
significant  industrial  restructuring.  They  have  also  modernised  their  institutional,  legal  and
administrative environment.

Nevertheless, sizeable differences  still exist between  the  structure  of  the  manufacturing
industry in existing and in future Member States. In the latter, industry is less specialised
and still more centred on low-technology sectors including food and beverages, textiles, wood
products  and  basic  metal  industries.  But  this  is  changing.  In  the  more  advanced  countries
production  is  shifting  markedly  towards  more  sophisticated  sectors.  Labour  productivity,
albeit in all cases still around or below 50% of the EU average, is also growing quickly. With
increased foreign investment and public  financial  transfers  in  the  form  of  pre-accession aid,
all  candidate  countries  have  benefited  from  important  technological  and  organisational
knowledge transfers  as  well  as  institutional  learning.  In  2001,  cumulated  inflows  of  foreign
direct investment alone ranged from € 521 pe r capita in Slovakia to € 2.284 per capita in the
Czech Republic17. These trends have been reflected in growing evidence of catching up and
gradual convergence with the industrial patterns prevailing in the EU.

In  the  current  Member  States  industry  has  also  largely  benefited  from  the  prospect  of
enlargement,  taking  advantage  of  enhanced  investment  opportunities  in  the  candidate
countries and of the possibility of tapping into pools of highly skilled labour at relatively low
cost.  At  the  same  time,  the  liberalisation  of  trade  in  industrial  products  under  the  Europe
Agreements  and the progressive implementation of the Community  ‘acquis’  in  most  sectors
have  provided  the  EU  industry  with  a  large  additional  customer  base  (approximately  110
million with Bulgaria and Romania).

III.2.

Some areas will still need specific attention

Although  industry  in  the  future  Member  States  is  broadly  ready  to  compete  in  an
enlarged  EU,  deeper  integration  will  inevitably  entail  some  localised  problems.  Further
restructuring  will  be  necessary,  particularly  in  the  steel  sector  where  over-capacity
problems remain. In other traditional sectors, large firms that have not yet been privatised are
finding it difficult to deal with increased  competition. Furthermore, in a number of  areas or
sectors,  the  cost  of  complying  with  the  Community  ‘acquis’,  especially  environment
legislation,  may  in  the  short  term  have  negative  implications  for  the  cost  structure  of
businesses,  although  transition  periods  should  help  alleviate  this  problem  and  candidate
countries will more easily access sustainable technologies from current Member States.

16

17

The impact of enlargement for industry is further analysed in a forthcoming document to be issued by
the Commission services.
Source: Eurostat from national sources. Romania and Bulgaria not included. Data for Malta, Cyprus and
Turkey is not available.

13

                                                
Entrepreneurship and SMEs have developed slowly in the candidate countries. Amongst
the causes of this situation are the lack of managerial, organisational and technological know-
how,  difficult  access  to  finance,  insufficient  supporting  institutions  and  difficulties  to
integrate in production networks. In some countries, the business environment still makes life
too difficult for smaller businesses. Support in particular to SMEs in meeting the challenges
of contemporary societal and environmental demands would be crucial in ensuring that they
too  can  fully  benefit  from  the  advantages  of  a  stable,  accepted  and  predictable  business
environment.

In the existing Member States risks for businesses are likely to be concentrated among SMEs
in  border  regions,  especially  in  labour  intensive  sectors  that  may  be  faced  with  wage
competition. However, with the exception of a few sectors such as textiles, industrial products
from the candidate countries have already enjoyed virtually free access to the EU since 1995
and therefore most of the expected adjustments have already taken place. In addition, it is
also companies in bordering regions that will enjoy the largest new opportunities as in many
industry and service sectors they still retain significant comparative advantages vis-à-vis the
candidate countries.

III.3.

Enlargement offers new opportunities for competitive reorganisation

Given the increased heterogeneity of wage structures and technological skills in the enlarged
EU,  industry  will  have  enhanced  opportunities  for  competitive  reorganisation.  During  the
transition period the candidate countries have tended to specialise in low-cost production – a
move  reflected  in  limited  transfers  of  production  from  the  current  Member  States  to  the
candidate countries, which made it possible to retain in Europe activities that might otherwise
have been re-located outside Europe.

However,  many  companies  have  embarked  on  a  strategy  going  beyond  the  outward
processing  of  low-cost  production,  reshuffling  their  value  chains  and  integrating
companies  from  the  candidate  countries  on  the  basis  of  local  technological  inputs  and
skills. As local suppliers and subsidiaries move up in the value chain they benefit in turn from
higher technological knowledge spill-overs. The automobile industry is a case in point.

Overall, enlargement is already a reality for industry and has opened up many opportunities.
The challenge in the candidate countries is to develop the skills as well as the institutional and
business  framework  that  will  enhance  the  possibilities  for  local  companies  to  successfully
integrate  in  international  production  networks.  Industrial  policy  should  seek  to  foster  and
facilitate such developments in order to release the full potential for economic convergence of
the  new  Member  States.  At  the  same  time,  the  industrial  policy  tools  will  also  have  to  be
applied in a way that takes the specific needs of candidate countries into account.

IV.

CHALLENGES FOR INDUSTRIAL POLICY IN AN ENLARGED EUROPE

IV.1.

The challenge of globalisation

In 1990, globalisation was only starting to emerge as a policy issue. It is now recognised as
one  of  the  key  change  factors  in  contemporary  economic  systems  and  societies.  The

14

Commission  has  already  analysed 
opportunities, challenges and policy responses18.

its 

impact  on  EU  competitiveness, 

identifying

Most  of  the  world,  including  China  and  Russia,  is  now  taking  part  in  the  market-based
international  economy.  This  opens  up  new  markets  for  EU  products  and  services:  as
highlighted  above  EU  companies  are  selling  a  growing  share  of  their  production  in  foreign
markets. At the same time it increases competition from imports and can lead to re-location of
productive activities to countries with lower factor costs. As Europe cannot compete on cost
alone,  knowledge  has  a  central  role  to  play  in  helping  industry  adjust  to  the  pressures  of
globalisation,  in  all  sectors  –  whether  high  technology  or  not.  In  this  context,  fostering
innovation  and  retaining,  developing  and/or  attracting  highly  skilled  human  capital  are
essential if the enlarged EU is to keep high-value added knowledge-based activities within its
borders. Paradoxically, in a globalised economy location remains a crucial factor for research
and  innovation19.  Therefore,  developing  the  attractiveness  of  the  EU  as  a  productive
location is as important as ever. In this respect, the EU should examine whether factors such
as  the  cost  of  production  factors  such  as  energy  do  not  influence  its  attractiveness
unfavourably. Similarly, in an increasingly networked economy, the formation of innovative
clusters is a key priority.

In  addition,  in  a  more  integrated  world,  instability  can  spread  fast,  as  demonstrated  for
example  by  the  rapid  spread  of  successive  financial  crises  amongst  emerging  economies  in
recent  years.  Globalisation  therefore  requires  industrial  policy  to  be  able  to  respond
quickly to unforeseen developments.

Even  though  globalisation  calls  for  increased  convergence  on  regulatory  issues,
differences  of  approach between  the EU  and  its  competitors  can  make this  challenging.  For
example,  the  EU  generally  handles  the  risks  associated  with  industrial  products  (such  as
environmental, safety and health issues) pro-actively, for example through regulation. In the
United  States,  such  risks  are  often  handled  by  private  sector  action  based  on  the  results  of
litigation  –  essentially  an  ex-post  approach.  The  challenge  lies  in  establishing  cooperation
between systems  based  on public  requirements and those based on litigation.  Standards  and
technical  regulations  are  other  areas  where  differences  of  approach  can  be  difficult  to
reconcile.

IV.2

Technological and organisational change

Globalisation has been accompanied and reinforced by technological change, most notably in
information and communication technologies. ICT is a general purpose technology. It can
help raise productivity in all industries and influence the design, production, distribution and
marketing  of  most  products  and  services.  It  has  also  facilitated  new  forms  of  organisation
such as outsourcing  and the tight inter-linkage between  industry  and  services  underlined  by
the above analysis. It affects growth far beyond the ICT-producing sector.

It  is  the  combination  of  ICT,  new  managerial  and  organisational  techniques  and  a
skilled  labour  force  that  gives  rise  to  significant  competitiveness  improvements.
Technological  and  organisational  change  must  therefore  be  accompanied  by  constant
upgrading  of  the  skills  of  the  labour  force  –  including  in  positions  that  are  traditionally

18

19

See footnote number 2.
This is because of the importance of “tacit knowledge”, which as opposed to information, or “codified
knowledge”, is not formalised and can only be transmitted through  social interaction. This distinction
was made by R.Nelson and S.G.Winter (1982), “An evolutionary theory of economic change”.

15

                                                
regarded  as  low-skill  –  hence  the  importance  of  life-long  learning.  In  fact,  the  whole  work
organisation needs to be geared to a positive management of change, including the existence
of sufficient incentives for the labour force to adjust to new demands.

A key challenge for the EU is to ensure widespread adoption and efficient use of ICT in
all industries, including those regarded as traditional. The Lisbon strategy aims to improve the
conditions for ICT diffusion. That is why it is so important that key issues addressed by the
Lisbon process be resolved.

Technological  change  does  not  stop  at  ICT.  Other  promising  technologies  are  emerging,
with  a  huge  potential  to  improve  industrial  competitiveness.  They  include  biotechnology,
nanotechnology,  and  clean  energy  technologies,  and  there  have  been  breakthroughs  in  the
area of new materials. New market opportunities are therefore emerging, but these will only
be exploited if EU industry improves its adaptability, so that resources can be shifted swiftly
in response to new technological developments.

IV.3

The key role of innovation and entrepreneurship

A  distinctive  feature  of  advanced  economies  is  the  critical  role  of  entrepreneurship  and
innovation as central drivers of growth.

Motivated  entrepreneurs,  ready  to  take  risks,  create  new  firms  which  are  a  major  source  of
jobs. Particularly in times  of  rapid  technological  progress,  the  continuous  creation  of  new
firms, and the growth of existing ones, is key for adjusting to new market opportunities
and achieving innovation and productivity growth.

Competitiveness and economic growth are also increasingly based on innovation, that is,
on the development and economic exploitation of new or improved products and services, and
the optimisation of business processes. Innovation continuously redefines markets and opens
up new sectors of economic and social activity. It concerns every industrial sector, both old
and new.

Knowledge is the core ingredient of innovative activity. Innovation is mostly the result of
complex  and  interactive  processes,  through  which  companies  tap  on  complementary
knowledge from  other organisations and institutions.  In  addition, innovations are very  often
founded  on  new  management  and  organisational  methods  based  on  ICT  and  investment  in
new  equipment  and  skills.  Other  forms  of  innovation  related  to  commercialisation  and
marketing techniques (presentational innovation) have also gained importance in the creation
of economic value.

The  Commission  has  recently  pointed  out  the  fact  that  Europe  is  spending  less  on  R&D
relative  to  GDP  than  its  main  competitors20.  Fragmentation  of  the  R&D  effort,  closed  and
isolated national research systems, insufficient links between industry and the research base
and  disparities  amongst  legal  and  administrative  regimes  are  taking  their  toll  on  R&D
investment  and  knowledge  creation.  In  addition,  the  ‘productivity’  of  European  research
investment  is  low:  the  EU  innovation  system  has  an  insufficient  capacity  to  turn  new
knowledge into value-creating new or improved products, services and processes.

20

In its Communication “More research for Europe – Towards 3% of GDP” (COM (2002) 499 final)

16

                                                
IV.4.

Sustainability and new societal demands

Rising  material  living  standards  in  Europe  have  brought  with  them  mounting  demands  for
environmental protection, quality of work,  corporate social responsibility and  consumer  and
public health protection.

Public  institutions  have  a  responsibility  to  respond  to  society’s  concerns.  This  has  been
reflected in the decision at the Gothenburg European Council in 2001 to establish sustainable
development as a key policy objective. Sustainable development has three pillars, economic,
social  and  environmental.  This  challenges  industrial  policy  to  respond  to  increasing  social
and  environmental  demands.  Business,  too,  has  a  part  to  play  in  responding  to  these
demands. This is at the core of the debate on corporate social responsibility.

The  encouraging  progress  already  achieved  towards  decoupling  the  trends  in  EU  industrial
output  and  some  polluting  emissions  has  shown  that  higher  competitiveness  and
environmental  protection  can  be  achieved  by  industry  with  the  support  of  an
appropriate policy mix.

The growing demand for safety, health, consumer and social protection in part reflects public
concerns  about  the  environmental,  public  health,  or  ethical  implications  of  some  new
technologies. It may also reflect fears that globalisation will lead to loss of cultural identity,
increased competition from low cost countries, or the undermining of economic structures. It
reflects a legitimate public choice regarding the use of increased prosperity. As to the demand
for corporate social responsibility, it reflects the need to review the way in which companies
are directed, controlled and managed.

These  demands  from  society  can  also  create  new  business  opportunities.  Thus  the  focus  on
environmental  protection  has  given  EU  companies  a  leading  edge  in  environmental
technologies  and  encouraged  them  to  develop  sustainable  production  based  on  lifecycle
analysis.  Demand  for  improved  quality  of  life  has  opened  up  leisure-related  markets.
Attention  to  consumer  concerns,  and  especially  to  food  quality  and  safety  issues,  has  also
created new market niches. However, new demands can also generate additional opportunity
costs.

Policy must therefore strike the  right  balance, so  that  the ambitious  Lisbon and  Gothenburg
goals  can  be  met.  Strong  economic  growth  provides  the  resources  to  meet  rising
environmental and social demands, particularly when the ageing of the European population
is creating major additional social demands.

Some of these issues can only be solved properly in a global institutional framework. Such
structures  and  rules  are  largely  in  place  for  trade  in  goods.  In  other  areas,  for  example
international
competition,  substantial  progress  has  been  made  in  strengthening 
cooperation  in  the  formulation  and  application  of  substantive  and  procedural  rules.  But  for
environmental and social issues, there are still serious  gaps in the  global framework. Global
governance often lacks effective enforcement, or is undermined by non-participation of major
players. Progress in this respect could help prevent EU companies from being subjected to
costs or other constraints that are not imposed on key competitors, at the same time as
making  a  positive  contribution  to  the  achievement  of  key  EU  policy  objectives  and
allowing  industry  to  compete  while  meeting  the  societal  and  political  requirements  of  the
European marketplace.

the 

17

V.

THE WAY FORWARD

Industrial policy will  continue  to  rely  on  a  number  of  factors  underpinning  competitiveness
and  growth.  In  addition  to  traditional  assets  such  as  a  stable  macro-economic  environment,
the key importance of innovation and knowledge, entrepreneurship and sustainability must be
underlined.

On this basis, this chapter revisits the EU approach to industrial policy.

V.1

Cross-cutting factors underpinning competitiveness and growth

Europe possesses a number of assets that underpin the competitive development and growth
of its enterprises. These include in particular:

–  A  stable  political  and  macroeconomic  environment  with  a  well-established  rule  of  law,

which allows enterprises to plan better for the future, to invest and grow;

–  A single market;

–  A  high  level  of  social  cohesion  and  a  well-trained,  highly  educated  and  adaptable
workforce,  which,  even  though  it  needs  constant  improvement,  in  particular  through
lifelong learning and retraining, is a core aspect of the knowledge economy;

–  A  long  established  practice  of  dialogue  at  all  levels  between  the  social  partners,  which

aims at modernisation in accordance with the concerns of employers and employees;

–  Services  of  general  interest  that  contribute  to  the  competitiveness  of  user  industries  by
providing  secure  quality  services,  while  guaranteeing  universal  service  at  competitive
prices. The Green Paper on services of general interest to be presented in early 2003 will
foster  a  debate  on  how  to  improve  their  responsiveness  to  business  needs  in  terms  of
infrastructure, education or training;

–  Highly-developed  energy, 

industries.
Infrastructure  will  however  need  to  be  significant  strengthening21,,  especially  in  the  new
Member States.

telecommunications  network 

transport  and 

Even if attention must remain focused on continuously maintaining and improving these key
underlying factors, a solid base is already in place.

A  stronger  policy  focus,  in  line  with  the  Lisbon  strategy,  should  also  be  put  on  the  direct
drivers of growth and productivity of European industry. Along with the widespread diffusion
of ICT, recent work from the OECD and the Commission22 has emphasised the core role of
innovation  and  entrepreneurship  as  the  key  drivers  of  growth  and  productivity.  More  and
more, sustainable development is also becoming a driver of  growth and  productivity  for the
EU  economy.  Industrial  policy  will  have  to  pay  particular  attention  to  nurturing  these
strengths.

21

22

Enhanced  availability  of  broadband  telecommunication  infastructures  and  the  development  of  Trans-
European Networks are key priorities in this respect.
In particular the OECD Growth project, 2001; or the Commission’s Competitiveness Reports.

18

                                                
V.1.1

Promoting innovation, knowledge and research

The  EU  should  devote  particular  attention  to  improving  its  innovative  performance  by
tackling some critical factors of innovation that are not yet sufficiently developed.

Following the goal set at the Barcelona European Council that R&D investments in the EU
should be increased, with the aim of approaching 3% of GDP by 2010, the Commission, in a
recent Communication23, has emphasised the need to establish framework conditions that are
more  conducive  to  private  investment  in  R&D,  as  well  as  to  ensure  a  better  use  of  public
financing  of  industrial  research.  It  has  also  launched  the  European  Research  Area  (ERA)
initiative with a view to overcoming the fragmentation of research activities in Europe24.

R&D  policy  is  a  key  instrument  for  increasing  the  EU’s  growth  potential.  Knowledge  and
innovation are the basis on which high value added industries such as ICT, biotechnology and
nanotechnologies  can  develop.  Likewise,  industrial  policy  and  R&D  policy  must  create  the
right conditions for stimulating innovation, in line with the Action Plan on R&D which will
be put forward before the Spring European Council.

Technological platforms could be considered to foster marketplaces for cooperation among
stakeholders  and  work  out  a  long-term  strategic  plan  for  R&D  for  specific  technologies
involving  major  economic  or  societal  challenges,  such  as  the  advent  of  hydrogen  as  a  new
source  of  energy.  They  would  ensure  synergy  among  public  authorities,  users,  regulators,
industry,  consumers,  and  poles  of  excellence  viewed  as  places  where  basic  research  and
technology transfer are closely linked. There is a need for coherence between research, which
can  create  new  opportunities,  and  the  downstream  regulatory  framework  in  which  these
technologies can be developed and marketed.

In addition, investment in intangible assets and human capital should be stimulated to make
the  most  efficient  use  of  existing  knowledge  and  maximise  its  diffusion.  Taking  better
account of the needs of knowledge-intensive service sectors may also contribute to this goal25.
Finally, encouraging and facilitating the emergence of innovative clusters and networks will
be  another  key  priority  26.  In  this  respect,  the  Commission  has  already  recognised  the
usefulness of redirecting public expenditure towards human capital accumulation and research
and development, in line with the requirements of the Lisbon strategy27.

Policies  that  shape  the  regulatory  framework  for  firms  (competition,  IPR);  the  fiscal
incentives  (favourable  tax  treatment  of  innovation-related  expenditure);  and  the  funding
possibilities  (research,  financial  services,  regional  policy)  can  all  be  mobilised  to  foster
innovation. Synergies between all these areas of policy action should be reinforced in order to
maximise their contribution to growth-enhancing innovation. The central role of innovation in
the knowledge-based economy calls for determined action by the EU and the Member States.
The  Commission  will  examine  the  basis  for  European  innovation  policy  and  outline  an
innovation strategy in a forthcoming communication.

23

24

25

26

27

Communication “More research for Europe – Towards 3% of GDP” (COM (2002) 499 final)
In its Communication “The European Research Area” (Com (2002) 565 final)
The OECD (Innovation and productivity in services, 2001), has also developed the role of knowledge-
intensive services in innovation and growth.
Current  research  emphasises  the  importance  of  linking  the  various  actors  in  innovation  systems,
including new actors such as research entrepreneurs, incubators, innovation centres, etc.
Communication “Public finances in EMU – 2002” (COM (2002) 209 final)

19

                                                
Defence industries play  a  specific role in this respect.  Among their specific features  are the
fact that that their vibrancy depends on orders from the State and their high record in terms of
research  and  innovation.  The  innovative  effects  of  investments  in  these  industries
subsequently  spill  over  the  economy  as  a  whole,  as  demonstrated  by  the  US  example.  It  is
essential that the EU carry out a reflection on defence industries following the achievements
in areas such as the aircraft industry or satellites.

V.1.2

Entrepreneurship

The  business  environment  should  be  conducive  to  the  creation,  growth  and  development  of
SMEs  and  to  entrepreneurial  activity  in  general.  Limited  access  to  finance  at  early  and
intermediate  stages of  the lifecycle,  lack  of  skills  and  regulatory  and  a  relatively  higher  tax
burden all constrain SME growth (see graph 7.1). The innovative activity of SMEs could also
be further enhanced by better co-operation and interaction across Member States, as well as
improved  access  to  research  programs,  which  would  allow  young  companies  to  draw  on
complementary  know-how  and  develop  the  necessary  competencies  to  come  up  with  new
products  and  services.  Finally,  the  entrepreneurial  spirit  should  be  further  promoted  in
education and training programmes starting from school.

Entrepreneurship  is  a  cross-cutting  objective,  which,  as  innovation  policy,  requires  a
concerted  effort  across  a  number  of  policy  areas  such  as  education,  internal  market,
financial  services,  training  or  fiscal  policy.  Fostering  a  business-friendly  environment  for
starting up and developing new businesses is part of the Lisbon strategy and was the subject
of  the  European  Charter  for  Small  Enterprises  (adopted  at  the  Feira  European  Council  in
2000).  The  forthcoming  Green  Paper  on  Entrepreneurship  will  relaunch  the  debate  on
achieving a more entrepreneurial Europe.

V.1.3. Promoting a sustainable structure of industrial production

The need  for  EU industry  to  achieve  a more  sustainable  production structure  is  becoming  a
driver  of  growth  and  productivity,  as  reflected  in  the  outcome  of  the  World  Summit  on
Sustainable  Development  in  Johannesburg.  Forward-looking  firms,  not  least  SMEs,  can
obtain profits and “sustainable value” through the use of design and innovation to create more
environmentally-friendly  products  and  the  new  markets  that  are  increasingly  demanded  by
regulators and consumers.

The EU needs to develop and further strengthen its sustainable production policy to meet its
Johannesburg  Summit  commitments  on  sustainable  production  and  consumption  patterns.
This strengthening will build upon existing initiatives and be consistent with them. It will also
be developed in full consultation with industry and other stakeholders in order to ensure their
full commitment and encourage voluntary actions. Key elements of such a strengthening may
include:

–  encouraging  a  more  widespread  adoption  of  best-practices  to  improve  eco-efficiency  in

resource use and to increase the use of renewable resources;

–  promoting a commercially viable recycling industry and the adoption of best practices;

–  implementing  a  life  cycle  approach  to  integrated  product  policy  through  voluntary

agreements and environmental product standards and declarations;

–  encouraging  the  development  and  diffusion  of  clean  technologies  by  tackling  barriers  to

their uptake and encouraging public-private interaction in R&D;

20

–  extending  the  use  of  environmental  management  schemes,  taking  account  of  the  specific

features of SMEs, and further promoting corporate responsibility.

In  addition,  promoting  a  sustainable  structure  of  industrial  production  would  also  imply
developing the capacity to promote, master and anticipate change in the organisation of work.

V.2.

Revisiting the EU approach to industrial policy

This  section  first  underlines  the  importance  of  the  framework  conditions  that  constitute  the
environment in which businesses develop. It then looks at the tools that are available to assess
the  impact  of  these  conditions  on  competitiveness  and  to  detect  possible  further
improvements. In the framework of the Lisbon strategy, the section then explores the way to
create  a  virtuous  circle  between  the  various  policies  that  contribute  to  industrial
competitiveness and thereby to achieving sustainable development from an economic, social
and  environmental  viewpoint.  Special  attention  is  also  paid  to  the  policy  needs  of  the  new
Member States and to the need to foster global governance. Finally, this section looks at how
to  assess  whether  industrial  policy  is  relevant  to  the  specific  issues  and  characteristics  of
individual industry sectors.

V.2.1.

The key importance of framework conditions

European firms compete in an increasingly global economy, but the business conditions they
face  in  the  internal  market  are  key  determinants  of  their  competitiveness,  growth  and
employment performance. Many aspects of the framework within which businesses operate in
the internal market depend on institutions and structures, which may be public, semi-public or
even  private.  The  framework  services  all  these  elements  provide  and  the  efficiency  of  the
“system”  they  form,  and  in  which  businesses  are  embedded,  deeply  influence  their
performance.  Focusing  on  system  failures  has  been  identified  as  a  means  of  greatly
increasing  the  efficiency  of  industrial  policy28.  The  EU  should  develop  such  a  system-
oriented approach, responding as far as possible to industry’s identified needs.

One  can  distinguish  between  four  main  categories  of  framework  conditions  that  are
relevant from an industrial policy perspective:

–  Rules29 that set the general market framework (such as company law, general principles of
contract  law30,  competition  and  internal  market  rules,  social  rules,  intellectual  property
rights,  fiscal  and  labour  rules,  investment regulations, international trade  rules,  consumer
policy);

28

29

30

Systemic failures can take  many  forms. Examples are  weak  links  between  industrial  research  and  the
science base, IPR systems that provide insufficient incentives to commercialise and diffuse the findings
of public research, difficult access by SMEs to new technologies, or lack of finance at certain specific
stages of a company’s lifecycle.
Rules as understood here may result from legislative or regulatory instruments, but also from alternative
instruments  such  as  negotiated  agreements  between  stakeholders,  for  example  the  social  partners  or
producers and consumers.
The  consultation  triggered  by  the  2001  Communication  on  European  contract  law  (COM  (2001)  398
final)  revealed  that  there  are  a  large  number  of  obstacles  and  disincentives  to  cross-border  contracts,
increasing transaction costs and thereby affecting the competitiveness of businesses, particularly SMEs.
The  Commission  will  propose  measures  to  remedy  these  problems  in  an  Action  Plan  to  be  issued  in
2003.

21

                                                
–  Rules that address specific categories of products and services directly (such as regulations
on placing products on the market, associated with issues such as safety, interoperability,
standardisation, or product-specific trade measures such as customs tariffs or anti-dumping
measures);  sector-specific  regulations  can  also  have  an  impact  on  the  competitiveness  of
other sectors, for example if they affect the price or availability of key inputs;

–  Institutions  that  enable  the  market  to  operate,  which  may  be  public  (such  as  courts,
company registers,  competition  authorities  or  patent offices),  semi-public or  even  private
(such  as  technology  transfer  institutions,  standardisation  and  conformity  assessment
bodies).

–  Broader conditions, whose direct impact is usually more difficult to assess and which are
often  less  easy  to  influence  in  the  short  term  –  such  as  the  macro-economic  framework,
societal values influencing entrepreneurship or the political stability of a country.

Since the  adoption  of  the  1990  Commission  Communication  on  industrial  policy,  European
industry  has  benefited  from  a  number  of  significant  policy  achievements  in  improving
framework conditions. Above all, the monetary Union is now a reality and the internal market
has now been established in many areas. The internal market has brought about the structural
reforms needed to create new business opportunities, increase productivity and expand market
size  for  enterprises  selling  or  buying  goods  and  services.  The  advent  of  a  single  currency
enhances transparency, reduces transaction costs and multiplies the economic potential of the
internal market.

Significant  progress  has  also  been  made  in  liberalising  sectors  such  as  telecommunications,
energy, and transport, improving the competitive situation of user industries. This will need to
be further pursued  and refined, especially in  order  to  reinforce  the  competitiveness  of  users
while preserving the viability of universal service.

There are still areas of shortfall, however. Regulatory barriers and technical barriers to trade
and establishment in some sectors hamper the smooth functioning of the internal market. The
financial  environment  of  business,  and  SMEs  in  particular,  could  benefit  significantly  from
deeper,  more  liquid,  efficient  and  integrated  financial  markets.  In  the  internal  market  in
services there is a huge gap between the vision of an integrated European  economy and the
reality  as  experienced  by  providers  and  users  of  services31.  In  addition,  shortcomings  in
intellectual  property  protection  undermine  competitiveness.  The  Community  patent  would
provide  clear  gains  for  the  competitiveness  of  European  industry,  innovation  and  research.
Nonetheless, Member States continue to put vested national interests first and one year after
the Lisbon deadline of December 2001, little progress has been made. Differences in indirect
taxation  may  distort  internal  trade  and  fragment  the  market  for  goods  and  services.  The
complexities  of  the  15  national  corporate  tax  systems  create  obstacles  to  cross-border
activities and to the realisation of the benefits of the internal market. The slow progress that
has been made in a number of areas, such as the public procurement markets, is not consistent
with the Lisbon goal either. Uneven implementation of commitments reduces the benefits of
economic integration.

Recent  corporate  failures  have  led  to  massive  destruction  of  wealth  and  public  distrust  in
market integrity. A sound corporate governance framework is widely recognised as one of the

31

See the Commission’s “Report on the state of the internal market  for services”, COM (2002) 441, 30
July 2002.

22

                                                
key prerequisites for the efficient and sustainable development of competitive businesses. A
proper definition of the roles and responsibilities of the different company organs leads to the
best possible assessment and development of available business opportunities, which in turn
promotes growth, innovation and employment. Adequate protection of public interest, without
discouraging risk taking and reliance on sound business judgement, enhances trust in financial
markets,  which  results  in  improved  access  to  cheaper  finance.  A  balanced  approach  to
corporate  governance  finally  fosters  a  greater  attention  to  stakeholders  issues  and  corporate
social  responsibility.  With  the  increasing  globalisation  of  the  economy,  actions  at  national
the  recently  published
level  may  no 
recommendations  of  the  High  Level  Group  of  Company  Law  Experts32,  the  Commission
intends to present an Action  Plan  on  Company  Law  (including  Corporate  Governance)  in  a
Communication to be issued in the first quarter of 2003.

longer  be  sufficient.  Taking 

into  account 

A number of important framework conditions are defined directly at EU level, where despite
the achievements, there is still significant scope for further action, in particular regarding the
regulatory framework. In other areas, it is the Member States (or their constituent entities)
which  play  the  key  role  in  setting  framework  conditions.  Direct  taxation  and  social
regulations  are  clear  examples.  Even  in  areas  falling  within  EU  competence,  lack  of
transposition of  legislation or its  uneven implementation of  rules at national or sub-national
level  may  sometimes  negatively  affect  framework  conditions.  Work  should  continue  on
exploring  how  the  EU  can  strive  to  improve  framework  conditions  in  spite  of  this  peculiar
institutional set-up.

V.2.2. A more systematic EU approach for improving framework conditions

The  issue  of  the  tools  of  industrial  policy  is  closely  related  to  its  main  aim,  improving  the
environment  in  which  companies  operate.  In  this  respect,  industrial  policy  cannot  be
distinguished  from  enterprise  policy  as  defined  in  the  Commission  Staff  Working  Paper
‘Towards  Enterprise  Europe:  Work  programme  for  enterprise  policy  2000-2005’33.  This
document  defines  enterprise  policy  as  a  policy  that  ‘needs  to  address  the  entire  business
environment to enable enterprises, whatever their size, legal form, sector or location to grow
and develop. In Enterprise Europe, anyone with a commercially feasible idea should be able
to realise it, with access to the best technology, and then deliver it, by the best possible means,
to the appropriate market’. Industrial policy can therefore be defined as the application of
enterprise policy instruments to the industry sector.

The EU has developed a number of approaches to improve the framework conditions in which
companies operate. Efforts have gone into two main directions.

At EU level, it has striven to develop new approaches to regulation that aim to make it less
burdensome for businesses. Key developments in this area include:

32

33

The  High  Level  Group  of  Company  Law  Experts,  set  up  by  the  Commission  in  September  2001  in
order  to  provide  recommendations  for  a  modern  regulatory  European  company  law  framework,
presented  its  recommendations  in  their  final  report  on  4  November  2002.  This  report  contains  an
important  chapter  on  corporate  governance,  and  presents  detailed  recommendations  on  the  following
issues: disclosure by companies of their corporate governance structures and practices, reinforcement of
shareholders rights, role  of  (independent)  non-executive  or  supervisory  directors,  quality  of  corporate
reporting and reliability and integrity of external audits, co-ordination of Member States efforts in the
area of corporate governance.
SEC (2000) 771.

23

                                                
–  The  New  Approach  to  product  policy,  which  limits  regulation  to  essential  requirements
linked  to  product  safety  or  interoperability.  Manufacturers  are  free  to  choose  the
technological  solutions  which  ensure  that  essential  requirements  are  met.  This  fosters
innovation, competition and manufacturer responsibility. Voluntary harmonised standards
play  a  key  role,  as  they  provide  the  most  convenient  way  to  comply  with  the  essential
requirements;

–  The Global Approach to conformity assessment, which is linked to the New Approach and
aims,  wherever  possible,  to  offer  manufacturers  a  choice  between  alternative  conformity
assessment  procedures,  including  in  many  cases  self  declaration  of  conformity  with  the
essential  requirements.  This  approach  is  less  prescriptive  and  has  the  advantage  of
increasing manufacturers’ sense of responsibility;

–  Incentives to the standards organisation bodies to continue developing European standards,
as  well  as  new  standardisation  products  that  can  be  elaborated  very  rapidly.  This  is
important in areas where technical progress is very fast, as it ensures that standards reflect
the technological state-of-the-art;

More generally, the Commission launched in June 2002 a broad Action Plan on “simplifying
and  improving  the  regulatory  environment”34,  in  line  with  the  invitation  of  the  Lisbon
European  Council.  This  action  plan  sets  out  a  series  of  general  measures  to  improve  the
preparation of EU action (impact assessment of legislative and political initiatives to measure
the likely effects of policy options on various categories of stakeholders, including industry,
principles and minimum standards for public consultation), to simplify and reduce the volume
of  the Community  acquis35,  to  facilitate  the  choice  of  appropriate  and  efficient  instruments,
including so-called “alternative” instruments such as co-regulation and self-regulation, and to
improve the respect of EU rules. A substantial part of the proposed measures are currently the
subject  of  negotiations  aimed  at  concluding  an  inter-institutional  agreement  on  “better
regulation” before the end of 2002, in line with the invitation of the Seville European Council.

On this basis, and within the limits of the Treaty and while respecting the prerogatives of the
European  Parliament  and  the  Council,  the  EU  should  develop  and  make  further  use  of  its
experience  of  better  regulation  in  a  number  of  areas  that  are  still  covered  by  detailed
directives and where legislation could be simplified.

The  Action  Plan  will,  among  other  things,  facilitate  consideration  of  alternatives  to
traditional legislation or regulations where appropriate. Within the framework to be agreed
with  the  other  institutions,  the  Commission  could  promote,  for  example,  co-regulation  and
self-regulation, relying on agreements between stakeholders36 or voluntary undertakings (such
as  codes  of  conduct),  by  manufacturers  or  service  providers.  Such  voluntary  instruments
could  be  promoted,  in  particular  in  areas  characterised  by  rapid  technical  progress.  The
European approach to standardisation could also be further used in areas such as services.

34

35

36

COM(2002) 278
The action plan confirms the Commission objective of reducing the volume of the Community acquis
by at least 25% by end-2004 and announces a Commission initiative  for a simplification programme,
building  on  the  experience  of  e.g.  the  SLIM  (Simpler  Legislation  for  the  Internal  Market)  exercise,
aimed at streamlining internal market legislation.
The  area  of  industry  relations  offers  examples  of  such  agreements  in  the  framework  of  the  social
dialogue. The Commission’s proposals in the context of the Green Paper on consumer protection and its
follow-up Communication follow a similar line of innovative regulatory proposals.

24

                                                
Another  key  element  in  ensuring  that  regulations  do  not  create  unnecessary  burdens  for
business is predictability, which has two components. First, businesses need sufficient lead
time to comply with the new rules so that the costs of adjusting their products and processes
are not unbearable. Second, rules need to be stable and should not be amended too frequently,
especially where they imply significant compliance costs37.

In  areas where competence  lies  mostly with  the  Member  States,  the  EU  has  also  developed
novel  approaches  with  a  view  to  measuring  and  comparing  the  competitive  impact  of
individual  framework  conditions  and  to  fostering  improvements  thereof.  Since  the  Lisbon
European Council this approach has been known as the open method of coordination. It has
enabled the EU to play  a positive role in fostering competitive improvements in such areas.
The instruments that can be used in this respect include:

–  In-depth analyses of the situation, supported by appropriate measurements, with regard to
individual framework conditions identified as particularly relevant. This takes the form of
scoreboards, such as the enterprise policy scoreboard or the innovation scoreboard, as well
as  the  competitiveness  reports  or  the  composite  indicators  on  the  knowledge  society  in
areas related to R&D and human capital;

–  Comparisons  between  the  respective  performance  of  individual  Member  States  (and
selected  third  countries)  with  a  view  to  conducting  benchmarking  exercises,  with  an
appropriate follow up;

–  Identification, exchange and implementation of best practices;

–  In addition, increasing use will be made in the future of quantitative targets38. Such targets,
to  be  set  by  the  Member  States,  can  be  used  as  yardsticks  for  monitoring  competitive
improvements when accompanied by corresponding measurements.

These  approaches  have  already  been  developed  with  regard  to  a  number  of  critical
competitiveness  factors,  especially  from  the  point  of  view  of  SMEs,  for  example  start-up
procedures, access to finance, business support services, business incubators, transmission of
businesses,  innovation  and  research  and  development  or  human  resources.  These  policy
instruments are still under development,  however,  and  the EU could use  this  methodology
much more broadly, in order to cover a wider array of relevant competitiveness factors.
In a number of instances, further use of these tools will also imply the increased availability
of adequate, reliable statistical material.

V.2.3.

the 
Improving 
competitiveness

integration  of  EU  policies  with  an 

impact  on 

industrial

As a wide variety of conditions and factors determine competitiveness, all policies that affect
these  factors  also  influence  competitiveness.  The  EU  should  therefore  ensure  that  their
potential  for  improving  competitiveness  is  fully  tapped.  In  addition,  industrial  policy  must

37

38

The use of voluntary approaches combined with an appropriate level of government regulation is part of
an  approach  that  aims  both  at  achieving  a  high  level  of  protection  of  legitimate  interests  such  as
consumer protection and at increasing the transparency and predictability of the regulatory environment
for business.
As indicated in the Commission Communication on a Better Environment for Enterprises (COM (2002)
610 final).

25

                                                
aim  to  anticipate  and  facilitate  adjustment  of  productive  systems,  ensuring  that  its
consequences can be managed.

Article  157  of  the  EC  Treaty  provides  that  ‘the  Community  shall  contribute  to  the
achievement  of  the  objectives  [of  industrial  policy]  through  the  policies  and  activities  it
pursues under  other provisions of  this  Treaty’, in  addition to specific  measures  aimed at
supporting the actions carried out at Member State level.

Therefore,  it  is  essential  to  ensure  appropriate  integration  between  all  EU  policies  that  can
contribute to meeting these objectives. This has become even more important in the context of
the  sustainability  strategy,  as  a  proper  balance  between  its  three  dimensions  –  economic,
social and environmental – must be found.

There  are  a  number  of  policies  whose  integration  with  industrial  policy  is  already  well
developed:

(cid:1)  Trade policy has among its main objectives improving the openness of the world trading
system and, more specifically, opening up protected third country markets to EU producers
and service suppliers. At the same time, by giving EU producers cheaper access to foreign
inputs while subjecting them to increased competition from third countries, it both enables
and forces them to improve their competitiveness.

(cid:1)  Single market-related policies also have a broadly positive impact on competitiveness, as
discussed above, in particular by fostering liberalisation of markets and harmonisation of
rules,  even  though  the  pace  of  progress  has  been  uneven,  with  progress  still  needed  in  a
number of areas.

(cid:1)  The same can generally be said of the closely related energy and transport policies.

(cid:1)  R&D  policy,  by  reinforcing  the  knowledge  base  and  focusing  on  key  enabling
technologies,  is  also  a  major  contributor  to  EU  industry’s  competitiveness.  It  could  be
further  mobilised  to  provide  specific  support  to  projects  of  European  interest  –  such  as
Galileo  –  while  taking  advantage  of  the  specific  competition  rules  on  collaborative
research.

(cid:1)  Competition  policy  also  reinforces  industrial  competitiveness.  Through  its  regulatory
framework,  it  induces  firms  to  enhance  their  efficiency  and  thus  enables  them  to  better
survive in their markets. It also prepares EU companies for the challenge of third country
markets.  In  this  context,  the  increasingly  global  dimension  of  many  markets  needs  to  be
taken into account. The nature and the practical  application of competition and industrial
policy  have  each  its  own  emphasis  that  need  to  be  balanced  in  the  decision-making
process39.

(cid:1)  As in the past, the potential offered by regional policy will need to be fully tapped in order
to accompany the restructuring that will inevitably continue to occur in a number of sectors
as a result of shifts in demand and increased global competition. It will also play a key role

39

The  Commission  Communication  “Productivity:  The  key  to  competitiveness  of  European  economies
and enterprises”, COM(2002) 262, (particularly chapter seven) points to a number of challenging areas
for work.

26

                                                
in supporting the efforts which future Member States will have to make in order to close
the competitiveness gap, as well as to alleviate their social consequences.

(cid:1)  The  coherence  between  macroeconomic  policy  and  structural  policies  is  ensured  by  the

Broad Economic Policy Guidelines.

Other policy areas, which often correspond to new demands from society, reflect more recent
challenges. As a result, their interface with industrial policy could be further improved. This
interface  must  take  full  account  of  the  EU’s  sustainability  strategy,  which  implies  the
simultaneous pursuit of objectives under its  three constituent pillars –  economic, social
and  environmental.  While  the  objectives  pursued  by  policies  under  these  three  pillars  may
prima facie appear difficult to reconcile, the sustainability objective is in fact a positive sum
game, provided that a number of conditions are respected. First, full account has to be taken
of  the  dynamic  interactions  between  policies.  Second,  there  must  be  a  ‘reality  check’  to
ensure that one pillar of sustainability is not developing to the detriment of the others. In other
words,  constant  monitoring  is  needed  to  ensure  that  the  three  dimensions  are  progressing
simultaneously and in a way which fosters competitiveness.

(cid:1)  Social and employment policies, including vocational training policy, have a key role in
ensuring that the promotion of competitiveness is part of the balanced implementation of
the Lisbon strategy. By helping constantly upgrade the skills of workers and thus fostering
quality in work, they contribute to meeting demand on the labour market and make a key
contribution  to  the  knowledge-based  economy.  In  addition,  they  can  help  facilitate  the
acceptance  of  necessary  industrial  restructuring  by  mitigating  its  adverse  social
consequences.  Investment  in  human  capital  by  individuals,  enterprises  and  public
authorities is essential for the management of  change  and combining flexibility with new
forms of security for employees.

(cid:1)  Consumer  protection  and  public  health  policy  are  an  essential  precondition  for
consumer confidence, which in turn is the basis for stable and growing demand. Of course,
these policy may also include strict regulatory requirements. However, they can also create
opportunities  for  growth  by  providing  a  predictable  framework  to  companies.  They  can
also  play  an  important  role  in  fostering  public  acceptance  of  certain  technologies  or
commercial  techniques  against  the  background  of  increasingly  demanding  consumer
markets.

(cid:1)  Environmental  Protection may need  to  restrict  or  even  ban  the  use  of  certain  inputs  or
technologies,  which  can  raise  production  costs  in  the  short  term.  In  the  longer  term,
however, it can help EU companies gain a competitive edge at the global level and creates
new markets for clean products and technologies.

(cid:1)  The  growing  demand  for  corporate  social  responsibility,  while  creating  challenges  for
businesses  and  policy-makers  alike,  may  ultimately  make  a  positive  contribution  to  the
competitiveness of European business  by  reinforcing  the  consensus  around  the  European
social and economic model.

In  all  these  cases,  one  of  the  key  issues  is  ensuring  that  the  means  used  to  achieve  these
legitimate  objectives  are  as  cost  effective  as  possible  and  that  industry  retains  its
competitiveness and  is  in  a  position  to  contribute  actively  to  the  further  pursuit  of  societies
ambitions.

27

The  EU  must  therefore  ensure  that  the  right  balance  is  struck  between  measures  under  the
various policies. Member States should do the same in their respective areas of competence.
Evidence of an unbalanced policy mix should lead to appropriate corrective action.

There is no miracle solution for finding the right balance in individual cases. However, the
EU has started to develop a variety of tools that could be used depending on the nature of the
situation. These tools are addressed in the framework of the Action Plan on better regulation
(see section V.2.2. above). In addition, the following considerations must be borne in mind:

–  The  combination  of  adequate  policy  instruments  can  help  reconcile  the  objectives  of
apparently  inconsistent  policies.  For  example,  the  EU’s  business-friendly  approach  to
product  regulation  also  offers  effective  guarantees  to  consumers  and  users  thanks  to
effective  market  surveillance  mechanisms,  as  provided  under  the  revised  Directive  on
General Product Safety.

–  New  approaches  to  and  strengthened  monitoring  and  enforcement  of  regulation  can  help

ensure a level playing field.

On the basis of these elements, the EU will continue to refine its methodology.

Lastly, an even newer policy area, justice and home affairs, is expected to have a positive
impact  on  competitiveness  and  entrepreneurship.  In  the  context  of  the  common  policy  on
immigration. The Commission has put forward proposals that will help address the shortage
of skilled labour by facilitating the mobility of long-term resident third country nationals and
the admission of third country nationals for employment and self-employment.

V.2.4. Responding to the specific needs of candidate country industry

Enlargement  offers  new  opportunities  and  competitiveness  gains  for  industry.  Experience
already gained in improving the framework conditions for business activity can help stimulate
these developments in the candidate countries. Analytical  and benchmarking tools can point
to improvements in infrastructure, skills and local institutions.

Some  industrial  policy  instruments  may  have  to  be  adapted  to  respond  effectively  to
specific  needs  of  candidate  countries.  Policy  actions  aimed  at  creating  an  environment
conducive to entrepreneurship, skills upgrading and SME development could be implemented
with particular intensity in candidate countries. In April 2002, candidate countries signed up
to the principles of the European Charter for Small Enterprises as the basis for policy action in
the  field.  Their  progress  has  been  actively  monitored  by  the  Commission40.  The  actual
balancing between the pillars of the sustainable development strategy will also have to ensure
that at all times simultaneous progress is made in the path towards social, environmental and
economic  objectives.  Other  areas  that  may  require  special  attention  include  supporting  the
development  of  business  services,  promoting  the  culture  of  inter-firm  cooperation  and
enhancing the development  of  innovative  clusters.  Support  from  the  structural  funds  should
also contribute to achieving industrial policy priorities.

Finally, the Commission is already pursuing a number of actions to assist those specific cases
where restructuring is still under way, notably in the steel sector. Moreover, as underlined by

40

Report  on  the  Candidate  Countries'  Measures  to  Promote  Entrepreneurship  and  Competitiveness.
Commission Staff Working Paper, SEC(2001) 2054.

28

                                                
the Strategy Paper on the progress towards accession of candidate countries41, until the date of
accession  the  Commission  will  also  continue  to  monitor  closely  how  they  are  meeting  their
commitments.

V.2.5.

Striving for improved global governance

The effectiveness of EU policies on competitiveness depends partly on success in improving
global governance. In some areas, such as competition policy, substantial progress has been
made  in  this  respect42.  In  other  areas,  such  as  environment  protection,  consumer  safety  and
social and labour standards, the development of globally accepted principles will need to be
further  pursued.  Such  progress  should  enable  the  EU  to  better  address  at  the  global  level
issues  that  call  for  global  solutions,  raising  global  standards  world-wide,  while  helping
issues  are  not  borne
ensure  that  the  costs 
disproportionately by EU businesses.

in  dealing  with  global 

involved 

EU  policy,  while  continuing  to  pursue  actively  such  legitimate  public  policy  goals,  should
have  the  clear  objective  of  building  international  frameworks  that  ensure  that  commitments
are  being  undertaken  on  a  broader  basis.  The  negotiations  currently  underway  in  the
framework  of  the  Doha  Development  Agenda  (DDA)  will  allow  the  EU  to  make  important
contributions to this debate.

Other policy instruments can also be mobilised to this end. Dialogues between EU regulatory
authorities and their counterparts in key third countries can play a useful role in progressing
towards  a  more  level  global  playing  field,  whereas  dialogues  involving  representatives  of
business communities43 can put decision-makers under pressure to deliver a simpler and more
transparent environment for trade and investment.

In addition, as mentioned earlier, the EU has made substantial achievements in a number of
areas, such as the  creation  of  successful,  business-friendly  approaches  to  product  regulation
and  to  better  regulation  in  general,  or  pioneering  attempts  to  reconcile  industrial
competitiveness  and  environmental  protection.  It  should  continue  to  actively  promote  these
achievements internationally, as its contribution to improving global governance.

More  specifically,  the  EU  should  lend  renewed  support  to  initiatives  that  could  lead  to
extending its regulatory approaches to countries in its immediate neighbourhood, beyond the
enlarged EU and the European Economic Area (EEA). The planned establishment of a Euro-
Mediterranean Free Trade Area by 2010, as well as Stabilisation and Association Agreements
with  countries  from  the  Western  Balkans  and  increasingly  close  relations  with  Russia  and
other Eastern European countries could offer interesting opportunities in this respect.

41

42

43

“Towards the Enlarged Union: strategy paper and report of the European Commission on the progress
towards accession by each candidate country”, COM (2002) 700 final
In addition to the establishment of cooperation mechanisms on competition matters on a bilateral basis
with  third  countries,  the  EU  has  for  example  actively  participated  in  the  creation  of  the  International
Competition  Network,  a  project-oriented  and  consensus-based  organisation  of  more  than  70  antitrust
authorities.
Key examples of such dialogues include the Trans-Atlantic Business Dialogue (TABD), the EU-Japan
Business  Dialogue  Round  Table,  the  EU-Russia  Round  Table  of  Industrialists  and  the  Mercosur-EU
Business Forum (MEBF).

29

                                                
V.2.6.

The sectoral relevance of the revisited approach

EU  industrial  policy  will  continue  to  follow  a  horizontal  approach.  This  is  reflected  for
instance  in  policy  actions  to  foster  entrepreneurship  or  innovation,  which  benefit  all
businesses.  Further,  policy  action  to  ensure  free  movement  of  industrial  products  has  a
horizontal  objective.  However,  its  application  depends  on  sectoral  characteristics.  For
instance,  products  from  the  pharmaceutical  or  automotive  industry  are  subject  to  detailed
regulations,  because  of  their  inherent  characteristics  or  use.  Thus  a  horizontal  policy  is
applied  differently,  according  to  the  sector.  Similarly,  supporting  measures,  such  as  in  the
area  of  research  and  development,  follow  thematic  priorities.  Industrial  policy  therefore
inevitably brings together a horizontal basis and sectoral application.

In-depth  analyses  and  regular  monitoring  of  the  competitive  situation  of  individual
sectors  should  enable  the  Commission  to  assess  the  appropriateness  of  the  policy  mix.
Consultation  with  stakeholders  can  play  an  important  role  in  this  assessment  and  the
subsequent  decisions  on  the  most  appropriate  policy-mix  to  apply.  As  in  the  past,  the
Commission, where appropriate, may set out the line it intends to follow in policy documents.

The  annex  of  this  Communication  looks  at  a  number  of  industry  sectors  with  different
characteristics  and  facing  different  challenges.  These  sectors  should  only  be  viewed  as
examples, which  were  chosen  because  they  cover  a  wide  array  of  different  situations.  They
are  used  to  illustrate  how  to  assess  whether  the  combination  of  factors  and  policy  actions
which  influence  the  competitiveness  of  each  sector  is  right  or  should  be  rearranged,  in
compliance  with  the  overall  revisited  industrial  policy  approach,  on  the  basis  of  a  brief
analysis of the sector’s strengths and weaknesses.

The fact that the application of policy needs to take account of the specific characteristics
of  sectors  does  not  mean  that  industrial  policy  must  be  fragmented.  On  the  contrary,  a
broad view is needed. This will guarantee that the application of industrial policy in a given
sector is consistent with the interests of other sectors.

In  addition, approaches that  are tested in a given sector  can  be  added  to  the  industrial
policy  toolbox  and  used  as  models  in  other  sectors  confronted  with  similar  needs.  The
novel  approaches  that  have  been  developed  by  the  European  Commission  to  ensure  the
participation of stakeholders in analysis and policy shaping are good examples. A number of
initiatives  have  been  viewed  as  successful  in  helping  shed  light  on  challenges  to  the
competitiveness of individual sectors’ and possible policy responses. They include the review
of  pharmaceutical 
the
pharmaceutical sector, the STAR 2145 report on the aerospace industries – itself a follow-up
on the ACARE46 initiative – or the Action Plan on Biotechnology and Life Sciences47. They
offer  a  model  of  how  to  ensure  that  EU  industrial  policy  better  responds  to  the  needs  of
business.

the  High-Level  G10  Medicines  Group44 

legislation  and 

in 

44

45

46

47

The ‘High Level Group on Innovation and Provision of Medicines’, also known as ‘G10’.
Strategic Aerospace Review for the 21st century.
Advisory Council for Aeronautics Research in Europe.
Included in the Communication from the Commission «Life Sciences and Biotechnology – A strategy
for Europe» (COM (2002) 27 final)

30

                                                
VI.

CONCLUSION

The  industrial  policy  of  the  European  Union  has  a  key  contribution  to  make  to  the  three
following tasks.

(cid:1)  The first is to set out the boundaries within which industry and entrepreneurs can pursue
their ambitions. It aims to establish a predictable legal framework which can be adapted in
response to policy needs.  Its counterpart  is that  they  should be confident  that,  when  they
respect  these  obligations,  European  society  as  a  whole  accepts  the  pursuit  of  their
activities.  For  the  Commission,  as  for  Member  States,  this  must  be  an  active  role,  for
failure to set  this framework correctly  can  lead to  risks for  the public, or to  the waste of
industrial resources and the frustration of entrepreneurial initiative.

(cid:1)  The second is to ensure that the conditions are present for industry to develop and to
realise  its competitive potential.  European  society  cannot  be  passive  in  its  attitude  to  the
source  of  its  wealth.  The  availability  of  technology,  skills,  an  educated  workforce,  a
positive  attitude  to  risk-takers,  finance  and  the  other  conditions  which  form  a  truly
competitive  and  innovative  business  environment  have  to  be  the  active  concern  of  its
policymakers.

(cid:1)  The  third  is  to  ensure  that  the  frameworks,  institutions  and  instruments  that  are
necessary to the business environment and for industry to be able to act in accordance with
its public obligations are in place and function efficiently, in the broadest sense.

Although this is horizontal  in  its  nature, it has to be applied in a  way that is  adapted  to  the
specific characteristics of different sectors.

The  goal  set  by  the  Lisbon  European  Council  and  the  challenges  of  sustainability  are
ambitious  and  can  only  be  met  if  EU  industrial  policy  is  fully  mobilised.  A  robust  set  of
policy  instruments  is  available  and  there  is  a  general  willingness  of  interested  parties  to
contribute.  However,  success,  and  ultimately  the  availability  of  more  and  better  jobs  and
greater social cohesion, will only be possible if efforts are fully focused.

The Commission intends therefore, over the coming months, to screen the way in which
its main policies interface with the competitiveness of EU industry. This exercise will also
help industrial policy to contribute to meeting the objectives of other policies.

This debate must not remain confined to the Commission. All the EU institutions, but also
the  Member  States  and  candidate  countries,  should  pick  up  the  challenge  in  their  turn.
Improving  EU  industrial  policy,  to  ensure  that  it  stimulates  and  sustains  EU  industrial
competitiveness, is a concern for us all. In this respect, the Commission invites all interested
parties to provide comments on the issues raised by this Communication.

The  newly  established  Competitiveness  Council  will  have  a  key  role  to  play  in  pushing
forward  the  process  started  with  this  Communication.  It  offers  a  forum  to  establish  the
roadmap for industrial policy’s contribution to the Lisbon goal and to monitor progress. It can
ensure  coherence  between  the  policies  at  EU  and  at  Member  State  level  and  improve  their
interaction. It is well placed to review both the general competitiveness situation and that of
individual industry sectors.

This is a process that is starting. The Commission will come back to the issue to draw further
conclusions, in the light of its progress and may propose further initiatives.

31

ANNEX:

1.

The steel sector

CHECKING THE INDUSTRIAL POLICY MIX:
SOME SECTORAL EXAMPLES

The EU is the second biggest steel producer in the world after China, but the first in respect of
the  quality  of  the  production.  The  EU  produces  about  20%  of  the  world  steel  output,  its
turnover  is  calculated  at  €70bn  and  it  employ s  250.000  people.  Furthermore,  aside  from  its
own  economic  importance,  this  industry  is  a  key  supplier  to  the  biggest,  and  perhaps  most
internationally oriented, manufacturing sectors, such as construction, vehicles, machinery and
equipment,  and  fabricated  metals.  It  is  characterised  by  the  coexistence  of  very  large  firms
(the  numerous  mergers  of  the  last  few  years  have  created  a  limited  number  of  truly  global
players in the EU)  and of  smaller, specialised producers. The  sector  is  integrated:  the  top  5
producers represent over 60% of the total EU production, and one of them is the largest world
steel producer. Concentration  within  the  steel business is motivated  not only by  the need to
obtain  synergy  benefits  and  cost  reductions  resulting  from  efficiency  measures,  but  also  to
reach  the  financial  critical  size  needed  to  be  able  to  invest  in  the  necessary,  and  very
expensive, innovative technology. Usually regarded as a traditional sector, it has modernised
very significantly in order to adjust to a changing competitive environment.

The EU steel sector is one of the most competitive in the world. This performance is largely
due  to  its  20-year-long  restructuring  effort.  During  this  period,  the  EU  steel  industry  has
closed  down  50  millions  tons  of  excess  capacity  and  reduced  manpower  from  900.000  to
250.000 people.

In order to keep a competitive edge on technology, the EU industry strongly depends on  its
ability to innovate, requiring a significant research activity. Moreover, the key of success is to
focus progressively on the production of quality steels, tailor-made to the needs of customers.
Successful  quality  competition  is  thought  to  be  crucial  because  the  EU  steel  industry,
characterised by  a limited cost  flexibility,  will  continue  to  face  competitors  benefiting  from
comparative  cost  advantages  and/or  less  stringent  regulations  (state  aids,  environment).
Profitability  in  the  steel  sector  will  continue  to  be  influenced  by  price  volatility  caused  by
rapid  demand  fluctuations  in  combination  with  rigid  supply  structures  and/or  currency
realignments.

The  EU  has  complemented  the  restructuring  efforts  of  the  industry  through  the  specific
framework  of  the  ECSC  Treaty.  This  included  tolerating  State  aid  only  in  as  far  as  it  was
accompanied by capacity reductions, accompanying measures to mitigate the social impact of
restructuring,  and  support  to  research  and  development  (in  particular  applied  research  and
support to pilot/demonstration projects).  The  ECSC Treaty has now  come to an end but  the
EU’s contribution to the modernisation of the sector will be pursued in the framework of the
EC  Treaty.  The  present  policy  mix,  involving  in  particular  a  strong  contribution  from
R&D  and  training  policies,  therefore  seems  to  adequately  address  the  needs  of  the
sector, even though efforts will be needed to maintain competitiveness.

Enlargement,  in  particular,  will  confront  the  EU  with  non-viable  capacities  and  low
productivity in some of the new Member States, and current restructuring efforts will need to
be  pursued  beyond  accession.  The  experience  accumulated  by  the  EU  in  supporting  earlier

32

adjustment in existing Member States – involving the coordinated use of competition, R&D,
professional  training  and  regional  policies  –  can  be  used  as  a  source  of  inspiration  in  this
respect. Alignment with the Community ‘acquis’, in particular EU environmental regulations,
will  also  constitute  an  important  challenge  for  the  steel  sector  in  the  new  Member  States.
Targeted support from the EU could be useful in both respects.

In  addition,  the  international  competitiveness  of  EU  steel  producers  is  threatened  by
protectionist measures in third countries, as well as by problems of supply of key inputs, in
particular  ferrous  scrap,  whose  export  is  restricted  by  certain  third  countries.  Trade  policy
instruments will need to remain mobilised with a view to removing these obstacles.

Industrial  policy  will  need  to  ensure  that  all  these  instruments  are  well  coordinated  so  that
maximum leverage  can  be  achieved,  while keeping in  mind the  need for  a balance between
the three pillars of sustainability.

2.

The chemical industry

The  EU  chemical  industry  is  rather  heterogeneous.  Company  sizes  vary  greatly,  and  SMEs
coexist with world-class companies. The sector plays a major role in the EU, featuring in the
top three industries in 11 of the 15 Member States. It also plays a key role as a supplier of a
variety of downstream, user sectors, ranging from farming through textiles and automobile.

Its overall competitive position is favourable48. The industry’s value added has been growing
at 3.2% per annum over the 1990s, to be compared with 1.9% for manufacturing in general.
The  chemical  industry  generates  16.2%  of  manufacturing's  added  value  in  the  EU.  A
significant increase in labour productivity of 3.4% p/y since 1996 has largely contributed to
the  current  competitive  position.  Moreover,  with  a  trade  surplus  of  €50  billion,  the  second
biggest of all EU manufacturing sectors, it is also a major source of income for the EU as a
whole.

However,  price  competition  based  on  low-cost  feed-stocks  in  the  Middle-East  and  heavy
competition  from  China  in  low-cost/low-margin  products  is  likely  to  become  more  intense.
This  reinforces  the  already  existing  trend  towards  “commoditisation”  of  chemical  products.
To stay ahead of this battle and to maintain its competitive position, the industry’s spending
on research and innovation will need to be increased. However, profit margins are lower than
in  the  US,  making  it  more  difficult  to  finance  investment  and  research.  Furthermore,  skill
shortages  are  widely  reported.  In  addition,  increasingly  stringent  environmental  and  public
health  requirements  are  creating  special  challenges  for  enterprises  in  this  sector,  especially
SMEs.  The  combination  of  these  factors  could  lead  to  a  deterioration  of  the  overall
competitiveness  of  the  European  chemical  industry.  This  risk  calls  for  reinforced
vigilance on the part of the EU.

The EU has established an internal market in chemicals, which has been a major stimulus to
its competitiveness. Public and political concern about the protection of human health and the
environment from the potential risk from the estimated existing  30,000 chemical substances
marketed  in  quantities  above  1  tonne  per  year  (99%  of  the  chemical  market)  has  raised  the
need for a major overhaul of this policy. The challenge is to achieve a high level of protection
for  all  chemicals  while  ensuring  the  efficient  functioning  of  the  internal  market  and
stimulating  innovation  and  competitiveness.  The  Commission  has  proposed  a  strategy  for

48

Source: Eurostat, European Business “Facts and Figures 1990 – 2000”

33

                                                
meeting these challenges49. The legislative package from the Commission will aim at a cost-
effective  implementation  of  the  strategy  proposals50,  while  providing  the  high  level  of
protection that EU citizens require for health and environment. However, it must be carefully
implemented and managed if the competitiveness of industry is to be preserved.

A  further  challenge  will  lie  in  the  upgrading  of  the  chemical  industry  in  the  new  Member
States and transposition of the Community acquis, which will in a number of areas be costly.

A  pro-active  approach  extending  beyond  regulatory  issues  is  therefore  needed  if  the  EU
chemical  industry  is  to  be  put  in  a  position  to  address  the  looming  competitive  challenges
successfully.  This  could  include,  subject  to  cautious  monitoring  of  developments  in  the
chemicals sector, a variety of measures:

–  As in other sectors, innovation is a key factor, and an integrated approach could ensure the
mobilisation  of  relevant  EU  policies  –  in  particular  R&D  policy  and  human  resources
policy – to address the needs of the chemical industry;

–  As a very large user of energy, the chemical industry would benefit more than most other
sectors  from  further  energy  market  liberalisation,  resulting  in  enhanced  competition  and
lower prices;

–  In  terms  of  regulation,  policy  makers  need  find  the  right  balance  between  short-term
burdens  on  the  industry,  on  the  one  hand,and  longer  term  improvements  to  the
environment and to public health as well as encouragements to innovation, on the other, in
a way that takes account of the opportunity cost in terms of lost alternative investment and
of its consequences on industry’s competitiveness.

–  The  chemical  sector  would  also  clearly  benefit  from  the  development  of  global  rules  on

environmental protection where this is possible;

–  Lastly,  trade  policy  instruments  are  indispensable  to  open  up  new  opportunities  for  EU
companies  in  third  country  markets.  The  achievement  of  a  Free  Trade  Area  between  the
EU and the Gulf Co-operation Council (GCC) could make a positive contribution to this,
as  well  as  the  extension  of  the  Chemical  Tariffs  Harmonisation  Agreement  (CTHA)  to
further  trading  partners  or,  in  the  longer  term,  a  complete  elimination  of  tariffs  on
chemicals.

A  well-balanced  combination  of  these  policy  instruments  should  help  maintain  the
competitiveness  of  the  chemical  sector  while  allowing  substantial  progress  in  achieving  the
environmental and social objectives of the EU’s sustainable development strategy.

3.

The aerospace industry

The  defence  and  aerospace  industry  is  characterised  by  specific  structures:  the  market  for
large civil aircraft is dominated by two global players, whereas those for defence goods have
State  bodies  as  the  only  buyers.  It  has  also  been  traditionally  characterised  by  strong  State
intervention, including cases of outright State ownership – although a privatisation process is
well underway in  several Member States –  and public support to  research  and  development

49

50

White Paper setting out the strategy for a future Community Policy for Chemicals (COM(2001) 88)
The  total  direct  costs  to  the  industry  for  risk  assessment  under  the  current  proposals  are  estimated  at
between € 1.4 billion and € 7 billion, with the most likely value at € 3.6 billion.

34

                                                
activities. The industry  is  research-intensive  and neither civil aircraft nor  defence  goods  are
subjected to the normal rules of world trade.

Even though Europe has fostered the emergence of a global competitive player in the sector of
large civil aircraft and has made significant inroads in other sectors (helicopters, satellites and
their launchers), the competitiveness of industry is under attack, as a result of a combination
of factors:

–  Insufficient  EU-wide  industry  consolidation:  even  though  there  have  been  efforts  to
overcome  the  geographic  segmentation  of  markets,  the  process  of  Europe-wide
consolidation is still incomplete;

–  Fragmented and uncoordinated R&D efforts;

–  An  incomplete  internal  market:  as  far  as  defence  markets  are  concerned,  fragmentation
remains the rule, as a result of incompatible national requirements, and the Action Plan that
had  been  proposed  by  the  Commission  in  1997  as  part  of  the  Communication  on
‘implementing  a  European  strategy  on  defence-related  industries’51  has  not  seen  any
concrete  follow-up,  primarily  as  a  result  of  a  lack  of  commitment  by  Member  States.  In
addition, Member States have been reluctant to take a joint approach to public procurement
in  the  defence  sector.  In  the  civil  sector,  on  the  contrary,  the  decisions  taken  by  the
European  Parliament  and  the  Council  to  set  up  a  European  Aviation  Safety  Agency
(EASA),  to  create  common  regulation  in  the  fields  of  aircraft  noise  performances  and
security  and  to  pave  the  way  towards  the  creation  of  the  Single  European  Sky,  give  a
chance  for  the  European  airspace  industry  to  operate  in  a  more  harmonised  technical
environment counterbalancing the consequences of the present diverging national rules;

–  Generally diminishing demand: defence industries have been faced with shrinking markets
since  the  end  of  the  cold  war,  whereas  manufacturers  of  civil  aircraft  are  still  suffering
from the crisis that has struck airlines as a result of the 11 September 2001 events52. The
structural  situation  of  the  aviation  industry  depends  on  its  capacity  to  merge  and
consolidate itself at European level53.

As  a  result  of  these  combined  handicaps,  European  manufacturers  have  been  losing  ground
and are finding it difficult to sustain the levels of investment and innovation that are needed to
remain competitive. The industry therefore finds itself in a critical competitive situation,
and rapid and determined action is needed if this trend is to be reversed.

The policy mix that has been applied at EU level to the aerospace and defence industry has
usually not gone beyond support to R&D activities. This is clearly not enough to address the
competitive  challenges  in  this  sector  successfully.  The  Commission  has  set  up  an  advisory
group  made  up  of  industry  executives  and  Members  of  the  Commission  and  other  EU
institutions. This initiative, known as STAR 2154, has resulted in a report which, on the basis

51

52

53

54

COM (97) 583 final
The  buoyancy  of  the  EU  aerospace  industry  therefore  depends  in  no  small  measure  on  the  economic
situation of carriers.
The  recent  decisions  by  the  Court  of  Justice,  recognising  the  exclusive  competence  of  the  European
Community in the fields governed by internal Community rules should facilitate the adaptation of the
relevant regulatory framework.
Strategic Aerospace Review for the 21st century.

35

                                                
of  an  analysis  of  the  situation,  identified  a  number  of  recommendations  for  policy  action
aimed in particular at improving competitiveness.

The recommendations deal with research and development, human resources and the mobility
of researchers, harmonisation of military requirements in order to facilitate the emergence of a
single  market,  an  ambitious  space  policy  (in  particular  with  the  Galileo  programme)  and
fostering  governance  of  civil  aviation  at  European  level  as  well  as  the  emergence  of  an
effective European policy on defence.

The instruments of a more ambitious industrial policy in this sector could easily be developed
on  the  basis  of  a  clear  commitment.  What  is  needed  is  such  a  clear  commitment  by  all
interested  parties  –  and  above  all  the  Member  States  –  to  concrete  action  to  improve  the
competitiveness of these key industries.

4.

Biotechnology

Biotechnology  is  an  intensely  innovative  activity,  highly  dependent  on  knowledge  and
specialist  resources,  that  increasingly  influences  the  competitiveness  of  ‘downstream’
industries  such  as  pharmaceuticals,  crop  protection  or  agro-food.  Large  firms  are  important
but  the  role  of  SMEs  for  innovation  and  their  links  with  universities  and  research  centres
(from  which  they  are  often  spin-offs)  explain  some  key  features  of  this  industry,  namely
clustering and geographic concentration.

Although  some  European  companies  are  world-class,  overall  the  innovative  capacity  of  the
European biotechnology sector remains far below the US level and the gap does not appear to
be diminishing. The ratio of patents granted by the US and European Patent Offices to US and
EU  companies  is  approximately  3  to  1  and  3  to  2.  US  biotechnology  companies  also  grow
faster and have more new products in the pipeline than their EU counterparts55.

These developments  are  largely the  result of problems faced  by SMEs  in  this  field,  such  as
long  development  times,  strict  authorisation  procedures  and  a  shortage  of  finance,  which
means that SMEs which pioneer new products and processes are often unable to ensure their
marketing. As a result, instead of rapid internal growth, they have to license their patents to
larger  companies  or  accept  take-over.  In  addition,  ethical,  environmental  and  consumer
protection  issues  have  made  it  difficult  to  establish  a  commonly  accepted  and  workable
legislative  framework.  In  turn,  this  has  made  it  difficult  for  companies  to  develop  products
and processes that can be placed on the market under predictable conditions. This in turn is
affecting the competitiveness of downstream industries, first and foremost the pharmaceutical
sector.

Together, these issues point to serious gaps in the policy framework for this knowledge
intensive activity, which have to be addressed if it is to make its full contribution to EU
importance  of
competitiveness.  Although 
biotechnology,  the  policy  focus  was  originally  placed  on  the  environment  and  consumer
protection  aspects,  without  directly  addressing  European  biotechnology’s  competitiveness
(apart from support to R&D activities).

the  EU  has  recognised  very  early 

the 

This  was  clearly  insufficient  to  address  its  weaknesses,  and  this  is  the  reason  why  the
Commission  has  undertaken  an  in-depth  analysis  of  the  competitive  situation  of  the  EU

55

These  issues  are  also  covered  in  the  Commission’s  2001  Competitiveness  Report.  Patent  ratios
correspond to 2000 for the USPTO, and 1997 for the EPO.

36

                                                
biotechnology  sector  on  the  basis  of  studies,  thorough  consultation  of  stakeholders,  and
benchmarking amongst Member States and the US. These exercises led to an identification of
the  needs  of  the  industry  and  a  solid  understanding  of  its  strengths  and  weaknesses.  The
recent  Action  Plan  on  Life  Sciences  and  Biotechnology56  proposes  an  integrated  and
comprehensive strategy combining measures to promote competitiveness with others that seek
to ensure responsible governance. It is based on an extensive consultation of stakeholders to
address societal concerns. Among the main elements of the Action Plan are the following:

–  Strengthening  the  value  creation  chain  is  essential.  Biotechnology  is  highly  knowledge-
and resource-based. Strong priorities therefore are the  availability  of  a  skilled workforce,
effective  support  for  world-class  research,  linking  centres  of  excellence  in  the  European
Research Area, an accessible and effective system of intellectual property protection, and
sufficient availability of capital.

–  Responsible governance must be ensured. Effective societal scrutiny and an ongoing public
dialogue  are  key  preconditions  for  biotechnology  development  in  Europe.  The  dialogue
must  necessarily  include  ethical  issues  that  are  at  the  core  of  certain  areas  of
biotechnology.  A  science-based,  transparent,  effective  and  proportionate  regulatory
framework  respecting precautionary principles  and  appropriate  information  of  consumers
is  a  major  requirement  for  establishing  confidence  and  trust,  while  it  should  not  impose
unnecessary administrative burdens and obstacles to responsible innovation.

–  At the international level, the EU should take a lead in the development of internationally
agreed guidelines, standards and recommendations and should also ensure that developing
countries,  according  to  their  policy  objectives,  have  their  share  in  the  benefits  accruing
from biotechnology.

All  these  priorities  can  only  be  achieved  by  relying  on  a  combination  of  instruments  from
different  policy  areas  (including  public  health  and  consumer  protection,  internal  market,
environmental policy, trade policy, as well as the regulatory framework – conditions of access
to the market, laws authorising or forbidding certain practices, research paths or technologies
–  etc.).  Adequate  coordination  of  instruments  from  various  EU  policies  will  therefore  be
essential to enhance biotechnology’s competitiveness.

5.

The telecommunications sector

Telecommunications  is  a  sector  of  huge  importance  for  the  EU  economy,  which  is
characterised by a close intertwinning of services and manufacturing activities. With revenues
of over €300 billion it employs more than 1.5 milli on people. It has seen double-digit growth
over the past years and is contributing to productivity growth and wealth in many parts of the
economy.  World-class  European  companies  have  emerged  in  the  field  of  services  and
equipment, a majority of them having based their international expansion on a pan-European
presence.

This  situation  is  the  result  of  a  profound  change  in  the  industry  over  the  last  decade,
characterised by the shift from national fixed-voice monopolies to a situation where end-users
are offered a broad range of innovative services from different providers. The main factors of
change  have  been  the  EU-wide  liberalisation  process  combined  with  the  progress  in  digital
technologies.  In  addition,  international  trade  barriers  in  telecommunications  have  been

56

Included in the Communication from the Commission «Life Sciences and Biotechnology – A strategy
for Europe» (COM (2002) 27 final)

37

                                                
removed  to  a  large  extent,  allowing  competition  to  take  place  at  global  level  in  almost  all
market segments.

In  the  field  of  services,  the  industry  structure  is  still  dominated  by  the  former  incumbent
operators,  but  their  market  share  have  been  permanently  decreasing  in  the  field  of  fixed
services,  especially  in  long  distance  and  international  segments.  In  the  field  of  mobile
services,  national  markets  are  characterised  by  the  existence  of  several  operators,  with  the
market share of the leading operators below 50% in two thirds of Member States57.

In  the  field  of  telecommunications  equipment,  economies  of  scale  have  led  to  an  important
concentration  of  the  industry  over  the  last  15  years,  leaving  only  a  handful  of  European
players present on all product segments. However, the dramatic growth of mobile and Internet
services  have  pushed  some  companies  to  focus  on  mobile  technologies  only  while  all  large
groups have been exposed to competition from smaller innovative companies, especially from
North-America, Japan and South-East Asia.

The policy mix that has been applied in the sector is the liberalisation of the infrastructure and
associated  services  markets  based  on  EU  competition  law  combined  with  the  definition  of
EU-harmonised regulatory principles applied by national authorities. In addition, EU support
to  RTD  activities  in  the  field  of  information  society  technologies  (IST)  have  contributed  to
strengthen  the  scientific  and  technological  basis  of  European  industry,  encouraging  it  to
become more competitive at international level.

However, the sector is facing problems which result from a combination of factors: the burst
of  the  Internet  bubble,  the  economic  slowdown,  and  over-capacity.  At  the  same  time  the
mobile sector is confronted with the changeover from second to third generation (3G). High
3G licensing costs are a burden on several operators in Europe. In this context, operators have
reduced  their  capital  expenditures.  As  a  result,  European  equipment  have  carried  out  large-
scale  job  layoffs.  The  competitiveness  of  the  sector  is  therefore  under  severe  pressure,
pointing to the need to mobilise the available policy instruments.

In  this  respect,  the  way  forward  would  appear  to  imply  stimulating  demand  and  increasing
certainty  for  investment.  The  regulatory  and  political  initiatives  that  are  being  implemented
should provide a major contribution to meeting these objectives:

–  The  new  regulatory  framework,  to  be  implemented  by  Member  States  by  July  2003,  is
more  flexible  than  the  existing  one.  It  will  provide  greater  regulatory  stability  and
transparency,  and  will  foster  increased  competition  and  consumer  choice.  The  new
regulatory framework will need to be fully implemented on time, and to remain stable.

–  The eEurope 2005 Action Plan aims in particular to stimulate secure services, applications
and content based on a widely available broadband structure. Broadband has been growing
slowly  up  until  now,  but  with  new  products  and  services  it  is  expected  to  be  one  of  the
major growth markets for equipment manufacturers in future.

–  The  current  Research  &  Development  programs  and  related  initiatives  should  help
encourage the deployment of broadband infrastructure, including 3G, and the development
of  new  applications  by  supporting,  for  example  projects  on  multi-lingual  content,
innovative mobile payment schemes, and trials of innovative 2.5-3G services.

57

Seventh  Report  on  the  Implementation  of  the  Telecommunications  Regulatory  Package,  COM(2001)
706

38

                                                
–  In  the  area  of  e-commerce  in  particular,  the  EU’s  efforts  to  secure  consumer  confidence
through  data  protection,  internet  security  and  trust  in  business  (e-confidence)  will
contribute  to  a  stable  and  predictable  environment  and  enhance  consumer  faith  in  online
business-to-consumer  transactions  –  an  essential  precondition  for  a  competitive  market
environment.

39