Communication from the Commission - Consultation document on state aid for innovation
Date: 2005-09-21
Institutions: European Commission
Subjects: State aid, competition law, consultation procedure, economic growth, innovation, new technology, research and development, sustainable development

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 21.9.2005 
COM(2005) 436 final 

COMMUNICATION FROM THE COMMISSION 

CONSULTATION DOCUMENT ON STATE AID FOR INNOVATION 

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TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

3. 

3.1. 

3.2. 

3.3. 

4. 

4.1. 

4.2. 

4.3. 

Introduction .................................................................................................................. 3 

Principles governing control of State aid for innovation ............................................. 5 

Identifying market failures that affect innovation........................................................ 5 

The aid instrument has to target the identified market failure ..................................... 6 

Limiting distortions to competition and the effect on trade......................................... 7 

Regional dimension...................................................................................................... 8 

Supporting risk-taking and experimentation................................................................ 9 

Supporting the creation and growth of innovative start-ups ........................................ 9 

Tackling the equity gap to increase the provision of risk capital in the EU .............. 10 

Supporting technological experimentation and the risks of launching innovative 
products ...................................................................................................................... 11 

A supportive business environment for innovation ................................................... 13 

Encouraging innovation intermediaries ..................................................................... 13 

Encouraging training and mobility............................................................................. 15 

Supporting the development of poles of excellence through collaboration and 
clustering .................................................................................................................... 16 

Annex: Problems affecting innovation in Europe .................................................................... 18 

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COMMUNICATION FROM THE COMMISSION 

CONSULTATION DOCUMENT ON STATE AID FOR INNOVATION 

(Text with EEA relevance) 

1. 

(1) 

(2) 

(3) 

(4) 

INTRODUCTION 

As set out in the State Aid Action Plan, “Innovation is related to a process connecting 
knowledge  and  technology  with  the  exploitation  of  market  opportunities  for  new  or 
improved  products,  services  and  business  processes  compared  to  those  already 
available  on  the  common  market,  and  encompassing  a  certain  degree  of  risk”.  The 
present document launches a consultation designed to gather stakeholders’ views on 
specific improvements in the rules on State aid for innovation, including clarifications 
to increase legal certainty, new funding possibilities for innovation, the formulation of 
criteria  to  target  the  aid  more  effectively,  and  simplification  of  the  regulatory 
framework. 

Innovation  is  a  central  issue  for  the  EU  to  deliver  growth  and  job  creation,  as 
explained  in  the  forthcoming  Communication  ‘More  Research  and  Innovation: 
Investing  for  Growth  and  Employment’.  State  aid  policy  can  contribute  to  a  more 
innovative  economy,  both  by  preserving  product  market  competition  as  a  driver  of 
innovation, and by putting forward a framework of rules that facilitates the design of 
effective State aid for innovation by Member States. 

Preserving competition should be the first priority when designing effective systems 
to foster innovation in the EU. Competition in a functioning market creates incentives 
for companies to invest in knowledge and innovation, since this helps them generate 
competitive advantage and profits.  

Nonetheless, State aid can in some cases effectively and efficiently contribute to foster 
innovation,  when  it  addresses  market  failures  that  hamper  the  innovation  process 
without excessively distorting competition. The Commission has identified a series of 
problems for unsatisfactory innovation in Europe (see annex). However, many of these 
problems  cannot  be  solved  by  State  aid  and  require  a  more  comprehensive  policy 
approach. Furthermore, too much aid in the name of innovation may actually frustrate 
the  innovation  process,  as  it  might  undermine  competition  as  the  most  effective 
stimulant for comparing ideas and for new, innovative market entry. Therefore, State 
aid  policy  can  only  be  a  limited  response  to  the  problem  of  unsatisfactory 
innovation in Europe. 

(5) 

For  example,  the  Environmental  Technologies  Action  Plan1  aims  at  harnessing 
environmentally-friendly  technologies  and  innovation,  which  can  contribute  to 
environmental  protection  and  at  the  same  time  contribute  to  competitiveness  and 
growth.  The  development  of  eco-innovation  is  essential  in  order  to  prepare  an 

1 

COM(2004) 38, 28.1.2004. 

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environmentally sustainable future, but economic barriers hinder their development. In 
particular,  market  prices  reflect  the  direct  economic  costs  and  not  the  costs  of 
environmental pollution (such as health care costs from urban air pollution). This leads 
to  systematic  underinvestment  in  environmental  technologies,  especially  from  firms 
which cannot afford to be charitable in a competitive market. Well-targeted economic 
incentives can therefore be useful in helping to promote the take-up of environmental 
technologies. 

(6) 

At this stage, the Commission considers that developing a new separate framework for 
State  aid  for  innovation  on  the  basis  of  an  abstract  definition  of  innovation  is 
unnecessary and also not in line with the objective of simplifying EC State aid rules. A 
series  of  concrete  and  targeted  innovation-related  activities,  subject  to  this 
consultation,  were  identified,  which  clearly  address  the  market  failures  that  are 
hampering  innovation  and  for  which  the  benefits  of  State  aid  are  likely  to  outweigh 
any  possible  harm  to  competition  and  trade.  In  doing  so,  the  Commission  used  a 
methodology in line with the economic approach defined in the State Aid Action Plan. 
The new rules will be integrated mainly in a framework for R&D and Innovation but 
also in the Risk Capital guidelines, in the Environmental guidelines and in the general 
Block Exemption (thereby avoiding the notification requirements for Member States). 

(7) 

The following types of innovation-related activities have been selected:  

–  activities that support risk-taking and experimentation and help bridge the gap 

between technological knowledge and the market  

–  activities  (business  services  and  infrastructure)  which  improve  the  general 

business environment for innovation. 

(8) 

(9) 

For  each  of  the  proposed  measures,  the  Commission  would  like  to  obtain  detailed 
comments about the appropriateness of the measure and its design.  

In addition, questions are asked on more specific issues about which the Commission 
would also like to obtain detailed comments.  

(10)  The results of the consultation will be used to formulate new clear rules for inclusion 
in  the  legal  instruments  on  State  aid  and  which  will  define  the  limits  within  which 
State  aid  to  innovation  may  be  seen  to  be  compatible  with  the  Common  Market. 
Ultimately,  it  will  be  the  responsibility  of  Member  States  to  better  target  their 
resources and design effective support measures to foster innovation in the EU. 

(11)  The  Commission  would  welcome  any  comments  on  this  Communication  by  21 
November  2005.  Comments  should  be  sent  to  the  European  Commission  with  the 
reference 
to 
STATEAIDGREFFE@CEC.EU.INT or by post to: 

Consultation 

Innovation 

email 

State 

aid 

for 

by 

DG Competition  

State Aid Greffe 

SPA 3, office 6/5 

B-1049 Brussels 

Belgium. 

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Question  1)  Do  you  think  that  it  is  appropriate  not  to  create  a  separate  Framework  for 
Innovation  and  that  the  new  possibilities  for  State  aid  target  selected  innovation-related 
activities? 

2. 

PRINCIPLES GOVERNING CONTROL OF STATE AID FOR INNOVATION  

(12)  State aid for Innovation can be authorised by the Commission on the basis of Article 
87.3  c)  of  the  EC  Treaty.  In  line  with  the  principles  set  out  in  the  State  Aid  Action 
Plan,  a  general  test  for  the  approval  of  a  State  aid  measure  for  innovation  has  to 
address the following issues: 

(a) 

a well-defined market failure has to exist  

(b) 

the aid instrument has to target the identified market failure: 

•  State aid must be the appropriate policy instrument  

•  The  aid  measure  must  have  an  incentive  effect,  i.e.  it  must  generate  additional 

innovation-related activity 

•  The aid measure has to be proportionate to the problem addressed 

(c) 

distortions  of  competition  and  the  effect  on  trade  should  be  limited  to  ensure 
that the aid measure is not, on balance, against the general interest.  

(13)  By applying this general test, one can devise a series of normative criteria which can 
help  in  designing  ex-ante  rules  for  State  aid  for  innovation  (to  be  included  in 
Frameworks, Guidelines or Block Exemptions). The purpose of this methodology is to 
identify concrete activities for which State aid may be authorised, provided it fulfils a 
series of rules and criteria. Past experience can also contribute to identifying activities 
and  drawing  up  appropriate  rules.  The  criteria  put  forward  in  this  document  will  be 
used for the drafting of such ex-ante rules. It is not foreseen to use the general test to 
assess  the  compatibility  of  individual  notifications.  Moreover,  at  this  stage,  the 
document is produced for consultation only.  

2.1. 

Identifying market failures that affect innovation 

(14)  A  “market  failure”  occurs  when  the  market  on  its  own  does  not  lead  to  an 
economically  efficient  outcome.  The  Innovation  Vademecum2  indicated  that  private 
companies may be reluctant to innovate: they may feel they cannot appropriate fully 
the benefits of innovation as a public good and they may not be aware of the positive 
spill-over effects of innovation (externalities). In such cases, State aid providing direct 
support  to  undertakings  can  be  an  appropriate  instrument  to  compensate  for 
unfavourable risk/return factors linked to innovation. Other market failures identified 
in the Vademecum were inefficient dissemination of information; shortcomings in the 
capital  markets;  and  mismatches  on  the  labour  market.  In  addition,  coordination 
problems may lead to market failure, thus hampering innovation.  

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SEC(2004) 1453, 15.11.2004. 

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(15)  The  scale  of  market  failures  that  hamper  innovation  may  vary  depending  on  the 
undertaking and the type of activities concerned. On the basis of past experience, the 
Vademecum set out three main principles: i) small and medium-sized enterprises are 
more  affected  than  large  firms3;  ii)  market  failures  affect  newly-established  firms 
more; and iii) market failures are greater and distortive effects smaller for activities at 
a distance from the market (e.g. training).  

(16)  Furthermore,  innovative  ventures  and  activities  have  specific  dynamics  which  can 
produce  rapid  changes  in  market  conditions.  Generally,  market  failures  should 
decrease  over  time,  for  instance  because  the  market  concerned  has  matured  and 
information has been disseminated more effectively.  

(17)  Market  failures  involving  cross-border  cooperation  and  cooperation  between  several 
partners tend to be larger, due to coordination problems and the nature of innovation 
as a public good. Market failures in relation to projects disseminating their results to a 
wider  public  or  allowing  non-discriminatory  access  to  the  research  output  are  also 
likely to be larger. For that reason, bonuses for coordination and dissemination may be 
appropriate.  

2.2. 

The aid instrument has to target the identified market failure 

–  Is State aid the right policy instrument? 

(18)  Experience  shows  that  it  is  very  difficult  to  know  in  advance  which  innovative 
products  and  services  will  become  successful  in  the  market.  For  that  reason,  State 
funding for innovation activities should not aim at ‘picking winners’; it should rather 
make innovation more likely by optimising the business environment.  

–  Incentive effect  

(19)  State  aid  for  innovation  must  have  an  incentive  effect  and  result  in  the  beneficiaries 
changing their behaviour in the desired way. Aid should be granted only if it can be 
shown  that,  without  it,  the  proposed  innovation  activities  would  not  have  been 
undertaken.  

(20)  State aid can be granted by different means. In general, only the grant equivalent and 
intensity is taken into account. However, the incentive effects of an aid measure may 
be  influenced  by  its  form  (e.g.  direct  subsidy,  repayable  loan,  tax  reduction  or 
guarantee).  

–  Proportionality 

(21)  The  aid  measure  also  has  to  be  proportionate  to  the  market  failure  tackled.  There 
should  be  no  other  less  distortive  measure  (such  as  general  measures,  or  measures 
involving  less  aid,  or  aid  for  a  more  limited  duration)  which  could  deal  with  the 
market failure as effectively. The aid should be limited in time and scope and should 

3 

In fact it is not clear to what extent large firms are affected by market failures. Small and medium-sized 
enterprises  (SME)  are  defined  in  the  Commission  Recommendation  of  6  May  2003  concerning  the 
definition  of  micro,  small  and  medium-sized  enterprises  -  notified  under  document  number  C(2003) 
1422. 

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be  subject  to  some  evaluation,  so  that  it  can  be  stopped  if  it  does  not  produce  the 
expected result over time. 

2.3. 

Limiting distortions to competition and the effect on trade 

(22) 

(23) 

Innovation activities include stages that are close to the market. This makes it all the 
more  important  to  ensure  that  the  distortions  of  competition  and  the  effects  on  trade 
are limited so that the aid measure is not, on balance, contrary to the common interest.  

It  is  generally  accepted  that  small  amounts  of  aid  and  lower  levels  of  aid  intensity 
cause less distortion of competition. Furthermore, the possible extent of distortion of 
competition depends on the market power of the recipients involved.  

(24)  State  aid  rules  on  innovation  should  be  designed  according  to  the  importance  of  the 
knock-on  effect  on  competition.  While  State  aid  to  SME’s  and/or  to  activities  far 
away  from  the  market  may  qualify  for  lighter  procedural  rules,  and  could  be 
exempted from notification (or at least be subject to simplified approval procedures), 
State aid for instance to large undertakings or to undertakings with a high market share 
may only be authorised after an investigation by the Commission. 

(25)  The Commission currently considers that there are significant risks in authorising aid 
for  non-technological  innovation  on  the  basis  of  ex-ante  rules,  since  these  activities 
could  practically  cover  any  routine  activity  of  the  beneficiaries.  At  this  stage,  it  is 
proposed that ex-ante rules for State aid for innovation be restricted to those activities 
that  relate  to  technological  innovation4,  so  as  to  limit  the  risks  of  circumvention  of 
the rules and distortions of competition.  

(26) 

In  addition,  the  beneficiaries  of  a  given  aid  measure  should  preferably  be  chosen  on 
the basis of an open, transparent and non-discriminatory criteria, in order to limit 
distortions  of  competition  and  negative  effects  on  trade  by  unduly  favouring  some 
undertakings. To limit these effects, there should be no discrimination according to the 
EU country of origin, for example.  

(27)  Another  important  principle  is  that  State  aid  should  avoid  making  it  non-viable  for 
private undertakings to develop their activities in a market where all undertakings are 
subsidised,  thus  crowding  out  private  initiative.  Risks  are  particularly  high  in  the 
presence  of  network  externalities  as  then  the  winner  takes  it  all.  In  particular,  by 
choosing  State  aid  as  an  instrument,  governments  should  seek  to  attract  private 
sector  financial  participation,  rather  than  to  dissuade  it.  For  this  purpose  as  well, 
State aid should be limited in time and amount and possibly be shortened over time.  

4 

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in 

the  Oslo  Manual  page  9:  “A 

the 
As  defined 
implementation/commercialisation  of  a  product  with  improved  performance  characteristics  such  as  to 
deliver objectively new or improved services to the consumer. A technological process innovation is the 
implementation/adoption  of  new  or  significantly  improved  production  or  delivery  methods.  It  may 
involve changes in equipment, human resources, working methods or a combination of these.” (‘Oslo 
Manual:  Proposed  Guidelines  for  Collecting  and  Interpreting  Technological  Innovation  Data’;  1997; 
OECD and European Commission, available at http://www.oecd.org/dataoecd/35/61/2367580.pdf). 

technological  product 

innovation 

is 

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2.4. 

Regional dimension 

(28) 

Innovation  very  often  takes  a  regional  form  and  the  Commission  is  committed  to 
supporting  regional  innovation  clusters  and  poles  of  excellence.  Many  existing  State 
aid  rules  can  be  used  to  generally  support  regional  development  (e.g.  regional 
investment aid, aid to SMEs, for training, employment, aid for R&D). A specific issue 
is whether cohesion policy considerations should be tackled separately or cumulatively 
to the targeting of the market failures hampering the innovation process. While lower 
levels  of  wealth  may  be  associated  with  more  severe  market  failures,  this  may  not 
always  be  the  case  and  it  is  not  clear,  from  the  outset,  why  there  are  more  market 
failures in some regions than in others.  

(29)  Currently, the Regional Aid Guidelines are the main instrument of regional cohesion 
through  State  aid.  However,  there  is  provision  in  some  horizontal  instruments  (e.g. 
SME BER, environmental guidelines) for regional bonuses to increase aid intensity in 
assisted areas. Aid allowed for innovation may normally be cumulated with regional 
aid since each relates to different eligible costs; regional premiums are also possible.  

(30)  Whereas the regional bonus approach is appropriate for dealing with cohesion issues, 
it  may  not  address  perfectly  the  geographical  dimension  of  market  failures  and 
restrictions of competition in the field of innovation.  

(31)  The question is to what extent specific additional provision for regional aspects should 
be  included  in  the  rules  on  State  aid  for  innovation.  The  Commission  is  ready  to 
consider  suggestions  as  to  the  best  way  to  address  the  possible  influence  of 
geographical differences on market failures and restrictions of competition, in addition 
to (or instead of) regional cohesion bonuses. 

Question  2)  Do  you  think  that  the  problems  presented  in  Annex  and  the  market  failures 
identified by the Commission as hampering the innovation process are accurate? If so, why? 
If not, why not? 

Question  3)  The  measures  described  in  this  Communication  provide  ex-ante  criteria  on  the 
basis  of  which  State  aid  for  innovation  would  be  approved.  Do  you  think  that  such  an 
approach is adequate?  

Question 4) Stakeholders are invited to provide empirical evidence about the appropriateness 
of authorising State aid to large companies, in particular in connection with the objective of 
developing clusters around poles of excellence in the EU. Do you think that the Commission 
should  develop  ex-ante  rules  allowing  State  aid  for  Innovation  to  the  benefit  of  large 
companies,  or  that  such  type  of  aid  should  always  be  subject  to  a  case-by-case  stricter 
analysis on the basis of a notification to the Commission? As far as support to innovation (or 
other  state  aid)  is  concerned,  would  it  be  appropriate  to  distinguish  between  different 
categories of large companies? If so, on the basis of which criteria? And for which purpose? 

Question 5) Stakeholders are invited to provide empirical evidence about the appropriateness 
of authorising State aid to non-technological innovation, notably in services sectors 

Question  6)  Should  the  rules  on  State  aid  for  innovation  include  regional  bonuses  for 
cohesion purposes? Should they differ according to the geographical situation of the region, 
irrespective of cohesion issues? 

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Question 7) Are some types of aid more suited to specific situations and specific innovation 
activities (ex: tax rebates, secured loans, repayable advances)? 

3. 

SUPPORTING RISK-TAKING AND EXPERIMENTATION 

(32) 

Innovative  projects/companies  exhibit  a  high  risk  of  failure  and  may  require 
substantial  investment.  Private  investors  may  be  unwilling  to  finance  them,  due  to 
information  asymmetries  resulting  in  high  transaction  costs  for  assessing  and 
monitoring  the  risk  of  innovative  projects/companies,  and  sometimes  a  lack  of  the 
necessary  collateral  (failures  in  the  capital  markets).  Companies  may  refrain  from 
investing  in  innovation  for  the  same  reason  and/or  because  they  may  feel  unable  to 
appropriate  the  profits  of  innovating  (market  failures  linked  to  externalities  and 
innovation as a public good). 

(33)  State  aid  may  help  in  alleviating  those  market  failures,  thereby  attracting  additional 
innovative  activity  and  complementary  private  funding.  The  Commission  has 
identified three areas  which  may be  prone to this type of market failures, and where 
well-targeted State aid may become a necessary and efficient means: i) supporting the 
creation  and  growth  of  innovative  start-ups;  ii)  risk  capital  and  iii)  support  for 
experimentation and commercialisation as ways of meeting that condition.  

3.1. 

Supporting the creation and growth of innovative start-ups 

(34)  Market failure targeted and appropriateness of aid: While start-ups and innovative 
SMEs are key to innovation and the renewal of industry, they are seriously affected by 
many market failures hampering the innovation process. In particular, owing to a lack 
of internal capital and/or shortage of the collateral needed to obtain funding, they may 
face  very  tight  funding  constraints.  Despite  the  existence  of  market-driven  solutions 
(ex:  seed  capital  and  business  angels)  State  aid  may  be  necessary  to  support  the 
funding of innovative start-ups to an efficient level. 

(35) 

Incentive effect and proportionality: For the purpose of designing State aid rules in 
this area, it can be assumed that there is an incentive effect in the case of innovative 
start-ups  (as  defined  below).  However,  to  ensure  proportionality,  there  need  to  be 
limits on the maximum amount of aid and a timeframe.  

(36)  Distortion of competition and effect on trade: The effect on trade and competition 
of  supporting  start-ups  is  likely  to  be  fairly  small.  However,  unless  it  is  sufficiently 
targeted, there is a risk that public funding of innovative start-ups may result in mostly 
unprofitable  start-ups  and  crowd  out  private  money.  Hence,  rules  have  to  be 
established to ensure that funding is limited in time and that the profitability incentives 
are not weakened.  

(37)  Taking these arguments and the need to limit red tape into account, the Commission 
considers that State aid should be allocated on the basis of a definition of innovative 
start-ups which avoids the need to define “eligible costs”.  

(38)  Proposed  rules:  the  proposed  definition  of  innovative  start-ups  is  that  they  should 

meet both of the following criteria: 

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•  Start-up  criterion:  must  have  less  than  [5  years]  of  existence;  must  be  small 
companies  (see  SME-definition,  notably  independence  of  large  companies  not 
more than [50 employees]);  

•  Innovativeness criterion: either i) proof that the beneficiary will produce products 
and processes which are technologically new or substantially improved compared 
to the state of the art in its industry in the Community, and which carry a risk of 
technological or industrial failure or ii) R&D expenses represent minimum [15%] 
of the beneficiary’s overall expenditure 

(39)  The following rules could apply for granting State aid: 

(1) 

(2) 

exemption of [50%] on social contributions and other local/regional taxes (i.e. 
not  linked  to  profits)  until  [5  years]  after  founding  and  for  up  to  [5  years] 
provided the benefits are reinvested in the company or repayable advances 

in addition, the possibility to grant aid of up to EUR 1 million over a 3-year 
period to an innovative start-up without specific restrictions on eligible costs 
and  provided  that:  i)  it  is  not  cumulated  with  any  other  State  aid;  ii)  the 
beneficiary is not a firm in difficulty5, and iii) the company receives the aid 
only once. 

Question 8) Do you agree with the proposed criteria to define innovative start-ups, with the 
approach of not defining eligible costs, with the amounts of aid and cumulation rules? Do you 
think that different eligibility criteria should be established for high-tech sectors like biotech 
and pharmaceuticals which have long time-to-market and product development cycles? 

Question 9) Beyond the proposed rules, empirical arguments are welcomed that demonstrate 
the need for State aid: i) for start-ups independently of the innovativeness criterion, and ii) for 
innovative SMEs established for more than [5 years]. 

3.2. 

Tackling the equity gap to increase the provision of risk capital in the EU 

(40)  Market  failure  targeted  and  appropriateness  of  aid:  Risk  capital  is  essentially 
organised via private operators. Nevertheless, the current rules governing State aid for 
risk capital identify an equity gap in the EU and recognise that market failures linked 
to imperfect or asymmetric information and transaction costs may justify State aid. In 
that context, innovation-related market failures interfere with the efficient funding of 
firms with equity. While those market failures are potentially greatest in the very early 
phase of the lifecycle of an enterprise, State aid too may play a role in later stages e.g. 
in  post-seed  stages  (i.e.  the  end  of  the  early-stage  phase  and  the  beginning  of  the 
expansion  phase,  when  a  new  round  of  financing  is  needed).  The  OECD  Working 
Party  on  SMEs  and  Entrepreneurship,  at  the  2nd  OECD  Ministerial  Conference  on 
SMEs in June 2004 issued a report that explicitly identifies this market gap6. 

(41) 

Incentive effect and proportionality: For the purpose of designing State aid rules in 
this  area,  the  existence  of  an  incentive  effect  in  the  case  of  SMEs  can  be  taken  for 

5 

6 

As  defined  in  the  Communication  from  the  Commission  —  Community  guidelines  on  State  aid  for 
rescuing and restructuring firms in difficulty - OJ C 244, 1.10.2004). 
DSTI/IND/PME(2002)12/final dated 25.5.2004. 

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granted.  However,  limits  on  the  maximum  amount  of  aid  and  a  time  horizon  are 
necessary to ensure proportionality.  

(42)  Distortion of competition and effect on trade: the effect on trade and competition of 
supporting SMEs in their early stages is likely to be fairly small. However, unless such 
aid  is  targeted,  there  is  a  danger  that  public  funding  of  SMEs  may  lead  to  mostly 
unprofitable start-ups and crowd out private money, which conflicts with the need to 
create private equity markets. Hence, rules have to be established to ensure appropriate 
private  investor  participation,  to  keep  funding  short-term  and  to  maintain  the 
incentives to push for profitability. 

(43)  Proposed rules: More flexibility than under the current rules could be envisaged for 
assessing  aid  provided  in  the  form  of  risk  capital  under  the  terms  of  the 
Communication on State Aid and Risk Capital, which will expire soon and is currently 
being reviewed. The Commission will consider whether the current levels of the safe-
harbour  investment  tranches  need  to  be  adjusted  to  take  into  account  the  changed 
situation of the venture capital markets in Europe and its likely future developments. 
The Commission will examine the case for allowing more flexibility in the investment 
tranches and the possibility of block exemption.  

(44)  Currently,  state  ownership  in  risk  capital  funds  is  not  allowed  beyond  thresholds  of 
50%  total  ownership  (70%  in  assisted  areas).  Only  in  the  case  of  funds  targeting 
investment  at  the  seed  stage,  the  Commission  could  consider  the  possibility  to 
authorise funds with state ownership going beyond current maximum.  

(45)  The  Commission  may  consider  specific  provisions  for  post-seed  stages,  which 
facilitate the growth of enterprises without blocking the exit of venture capitalists: by 
allowing the aid given to SMEs to be added to aid given under the risk capital rules, or 
through  guaranteed  loans  (but  at  less  favourable  rates  than  for  start-up),  or  through 
repayable advances with shorter repayment terms.  

Question 10) Do you think that other types of State aid apart from those currently granted in 
respect of risk capital are required in order to help European SMEs grow beyond the start-up 
phase? If so, which ones? 

3.3. 

Supporting technological experimentation and the risks of launching innovative 
products  

(46)  Market  failure  targeted  and  appropriateness  of  aid:  Currently,  under  the  R&D 
framework,  it  is  not  possible  to  grant  State  aid  to  activities  that  go  beyond  the  first 
prototype. Those activities are closer to the market and therefore have the potential to 
significantly distort competition and adversely affect trading conditions. Nevertheless, 
under certain circumstances such activities may be prone to the same type of market 
failures described before. Small enterprises may, for instance, need external financing 
for  the  building  of  large-scale  prototypes  even  if  they  are  marketable,  or  extended 
financing to allow market testing of new products.  

(47) 

Incentive  effect  and  proportionality:  SMEs  may  be  particularly  affected  by  this 
problem  since  the  costs  associated  with  these  activities  can  be  substantial.  However, 
the aid intensity should be limited since it relates to activities close to the market. 

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(48)  Distortion of competition and effect on trade: As there is a risk that activities linked 
to  experimentation  and  commercialisation  might  be  the  same  as  those  for  routine 
business, it is proposed to restrict State aid to technological innovation and to SMEs.  

(49)  Proposed rules: A series of activities could be included in the last R&D stage of pre-
competitive activities, which would become the ‘experimental development stage’ and 
qualify for aid.  

(50)  The following rules could be envisaged to help SMEs: 

(a) 

additional activities (in addition to those currently covered in the R&D 
framework) could be deemed to constitute compatible aid:  

–  development  of  commercially  usable  prototypes  and  pilot  projects  for  the  purpose  of 
conducting technological and/or marketing experiments, where the prototype is necessarily 
the final commercial product and where it is too expensive to produce for it to be used only 
for demonstration and validation purposes  

–  technical  evaluations  and  feasibility  studies  preparatory  to  the  launch  of  a  new  product, 
which  will  include  costs  for  software  and  computer  modelling  for  the  purpose  of 
conducting technological and/or marketing experiments; testing and laboratory costs 

–  expenses  for  adapting  technologies  to  particular  production  specifications  and  for 

optimising the production process, up to the production of the first pre-series batch 

–  marketing costs relating to technological design  

–  management and marketing training 

(b) 

The eligible costs should be similar to those currently covered in the 
R&D context  

(c) 

Forms of aid and conditions: 

–  limited level of aid intensity [15%] 

–  grants, subsidised or guaranteed loans or subsidised repayable advances  

–  necessity to link the above activities to a specific R&D project carried out by the firm itself 

or by another firm 

–  aid  must  relate  to  products  and  processes  that  are  technologically  new  or  substantially 
improved  by  comparison  with  the  previous  state  of  the  art  in  this  industry  in  the 
Community, and which carry a risk of technological or industrial failure. 

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Question 11) Do you think that these provisions would produce the expected effects in terms 
of  encouraging  SMEs  to  launch  innovative  products  in  the  market?  If  not,  what  changes 
should be made to these rules? 

Question 12) Is there evidence that these provisions should be extended to large companies? 
Do you think that notification should be required for measures granting substantial amounts 
of aid to individual firms or individual sectors? If yes, above what amount? What empirical 
evidence should then be requested by the Commission? 

4. 

A SUPPORTIVE BUSINESS ENVIRONMENT FOR INNOVATION 

4.1. 

Encouraging innovation intermediaries  

(51) 

Innovation  intermediaries  are  entities  providing  infrastructure  and  services  to 
undertakings involved in innovative activities. They may be public or private entities. 
The consultation on the Innovation Vademecum showed that these intermediaries were 
not sufficiently covered by existing State aid rules, a factor which potentially restricted 
their development. Two cases should be covered: first when the aid is passed on to the 
final beneficiaries, and secondly when the intermediary receives the aid. 

(52)  Market failure targeted and appropriateness of aid: Innovation intermediaries can 
help solve market failures due to insufficient information dissemination, externalities 
and  lack  of  coordination,  by  providing  services  and  infrastructure  to  undertakings. 
However, the market price for services may be at too high a price for start-ups, small 
and  medium-sized  enterprises,  and  the  market  may  be  insufficiently  developed  for 
private  actors  to  be  willing  to  enter  it.  State  aid  could  be  an  appropriate  solution  to 
change  the  incentives  and  increase  the  provision  and  consumption  of  the  services 
provided by innovation intermediaries.  

(53) 

Incentive effect and proportionality: It is taken for granted that there is an incentive 
effect for small enterprises. However, this will need to be demonstrated in the case of 
medium-sized enterprises, while it is generally acknowledged that large enterprises are 
not affected. Proportionality dictates that aid should be targeted and limited in amount 
and in duration; innovation intermediaries should be open facilities, not discriminating 
between undertakings.  

(54)  Distortion of competition and effect on trade: Only SMEs should be considered as 
eligible for aid, in order to limit distortions. Large firms should pay normal prices, not 
subsidised prices. As regards direct State aid for innovation intermediaries, there is a 
risk  that  this  could  prevent  the  emergence  of  sustainable  private  markets  and  crowd 
out private initiative.  

(55)  Proposed rules: Current State aid policy authorises aid when it is passed on to final 
beneficiaries. The Commission considers that if intermediaries make a minimal profit, 
the principle of no aid can apply to them.  

(56)  As  with  R&D,  innovation  intermediaries  may  carry  out  activities  which  are  in  the 
public  interest  but  which  cannot  be  clearly  separated  from  economic  activities  and 
therefore fall under State aid rules. Where such activities are not market-oriented and 

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do  not  create  selective  advantages  for  the  benefit  of  individual  undertakings,  they 
could qualify for 100% State funding. 

(57)  State aid may be authorised only where the following conditions are fulfilled: 

(a) 

Aid  should  only  be  used  to  purchase  a  set  of  well-defined  services.  Such  aid 
should be part of schemes which would specify the precise services that could 
be entitled to State aid. Such services might include:  

•  research and identification of innovative projects;  

•  business advisory services such as: research, identification of and connection with 
suitable  business  location  (e.g.  in  a  cluster)  and/or  business  partners;  strategic 
advisory  and  training  during  incubation  and  after  creation;  technological 
assistance  for  innovative  projects;  consultancy  for  acquisition,  protection  and 
trade in Intellectual Property Rights and for licensing agreements; consultancy on 
the use of standards,  

•  provision of facilities such as: office space; data banks for the search of existing 
technologies  and  of  partners  for  transfer  of  technology;  quality  labelling,  testing 
and certification services; 

(b) 

Aid  should  only  be  used  to  purchase  these  services  from  clearly  defined 
Innovation  Intermediaries.  Building  on  the  example  of  the  European  BIC 
Network,  the  Commission  proposes  to  define  ‘innovation  intermediaries’  on 
the  basis  of  the  services  they  provide,  as  support  organisations  (public  or 
private)  for  innovative  SMEs  and  entrepreneurs.  To  qualify  as  an  innovation 
intermediary, a legal entity should provide in particular: 

–  specific services as defined above;  

–  at  least  one  of  the  following  types  of  infrastructure:  physical  incubation  for 
innovative  projects  (fully  equipped  offices);  training  facilities;  laboratory 
facilities; testing and certification facilities; 

–  dissemination of services provided and results obtained 

(c) 

SMEs could receive State aid through a kind of “innovation services voucher” 
of a maximum of € 200 000 over a three-year period (irrespective of possible 
de  minimis  contributions) 
innovation 
intermediaries up to that ceiling. 

to  buy  services  from 

in  order 

(58)  Except for non-market-oriented activities in the public interest (see above), direct aid 
to  innovation  intermediaries  should  not  be  permitted.  However,  the  Commission 
considers that aid measures for the clients using these structures can help stimulate a 
market for innovation intermediaries, and indirectly support them.  

Question  13)  How  would  you  regard  specific  support  for  innovation  intermediaries  which 
merge  or  develop  a  joint  venture  to  reach  critical  mass  in  a  technological  field  of 
specialisation? Should investment aid be permitted in this context? If so, on what conditions? 
What other measures could be envisaged? 

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4.2. 

Encouraging training and mobility  

(59)  Market  failure  targeted  and  appropriateness  of  aid:  High  level  of  training  and 
mobility  of  researchers,  engineers  and  other  employees  are  is  necessary  to  increase 
innovation in the EU and there may be problems in matching the supply and needs in 
demand  for  personnel.  The  Commission  considers  that  the  training  of  employees  in 
entrepreneurship,  creativity,  change  management  and  other  subjects  related  to 
innovation  is  highly  beneficial.  Similarly,  the  recruitment  of  highly  qualified 
researchers  and  engineers  would  help  to  pull  research  results  into  use.  Therefore, 
measures going beyond the scope of the current Block Exemption Regulation7 could 
benefit  from  state  aid  and  be  exempted  from  notification,  to  a  certain  extent.  In 
addition, the temporary loan and exchange of personnel between universities or large 
companies and SMEs could be encouraged.  

(60) 

Incentive effect and proportionality: The incentive effect could be presumed to be 
present  for  start-ups  and  small  enterprises,  provided  that  aid  is  not  used  to  simply 
replace  other  employees.  The  incentive  effect  would  have  to  be  demonstrated, 
especially  with  regard  to  medium-sized companies in their development  phase. With 
regard to lending of personnel by large companies to SMEs, the incentive effect will 
have  to  be  clearly  and  specifically  demonstrated,  for  example  by  showing  that  the 
project could not be implemented without the loan of these temporary personnel.  

(61)  Distortion of competition and effect on trade: Only SMEs should benefit from aid. 
Universities  or  large  enterprises  loaning  personnel  would  receive  compensation  for 
sending  personnel  to  work  in  an  SME  (host  SME).  Large  enterprises  exchanging 
personnel with SMEs should not belong to the same group. The duration and amount 
of the aid should be limited.  

(62)  Proposed rules 

Aid for SMEs:  

–  Eligible recruitment costs: personnel costs for highly qualified researchers and engineers 

–  Project-related training costs of staff 

–  Gross aid intensity: maximum [35%]  

–  Project-related limited duration, maximum of [3 years] per enterprise 

–  Condition: need to prove that personnel recruited is not simply replacing other personnel 

Compensation for the university or enterprise sending personnel on loan to an SME:  

–  Eligible costs: personnel costs incurred in the home university or enterprise in the past two 

years for highly qualified researchers and engineers  

–  Amount of aid: cost linked to the loan of personnel 

7 

Commission Regulation (EC) No 68/2001 of 12 January 2001 on the application of Articles 87 and 88 
of the EC Treaty to training aid - OJ L 10, 13.1.2001. 

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–  Project-related, limited duration, maximum [3 years] 

Question 14) Is there evidence that the recruitment by SMEs of other types of highly skilled 
personnel should be also aided? 

Question  15)  Should  the  Commission  adopt  specific  rules  for  cases  where  a  researcher 
chooses not to return to his/her home university or where the university no longer intends to 
hire him/her back? 

4.3. 

Supporting  the  development  of  poles  of  excellence  through  collaboration  and 
clustering 

(63)  The Commission’s Communication ‘Building the ERA of knowledge for growth’8 sets 
as one of the objectives of the 7th Research Framework Programme the development 
of  capacities  to  enhance  research  and  innovation  capacity  throughout  Europe  and  to 
allow for the emergence and reinforcement of European poles of excellence in various 
fields. Poles of excellence could be defined as regional research-driven clusters able to 
attract  researchers,  investors  and  leading  players  in  a  given  sector  in  terms  of  R&D 
expenditure; they can contribute greatly to European global competitiveness.  

(64)  Market  failure  targeted  and  appropriateness  of  aid:  Clusters  are  generally 
identified as groupings of innovative start-ups, small, medium and large enterprises as 
well as universities or research institutions, operating in a particular sector and region 
and designed to stimulate innovative activity by promoting intensive interactions. To 
become poles of excellence, clusters need to have a certain critical mass. They need to 
contribute  effectively 
information 
dissemination among the firms in the cluster. They also need to create a proper balance 
of SMEs and large firms. However, market failures (like externalities and coordination 
problems)  may  prevent  the  establishment  and  development  of  clusters  as  poles  of 
excellence.  In  particular,  public  research  bodies  cooperating  with  industry  generate 
positive externalities but they often suffer from higher degrees of market failure. State 
aid may therefore be a way of tackling these market failures.  

transfer,  networking  and 

technology 

to 

(65) 

Incentive effect and proportionality: State aid should be targeted so that businesses 
and  universities/research  institutions  decide  to  establish  activities  and  invest  in 
innovation-related activities within the cluster.  

(66)  Distortion  of  competition  and  effect  on  trade:  State  aid  for  collaboration  and 
clustering should not be used to circumvent the restrictions on investment aid outside 
assisted  regions.  It  should  be  granted  only  if  it  can  be  shown  that  the  benefits  of 
clustering  outweigh  its  negative  impacts  on  competition.  To  that  end,  ex-ante  rules 
authorising  State  aid  for  collaboration  and  clustering  should  only  cover  SMEs  and 
entities providing infrastructure generating positive externalities (such as universities 
or research institutions). 

(67)  Proposed  rules:  the  Commission  has  identified  a  number  of  measures  that  could 
support  collaboration  and  clustering.  However,  as  this  is  a  new  area  in  the  field  of 
State aid where there is no established practice, and previous experience is extremely 

8 

COM(2005) 118, 6.4.2005. 

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limited,  the  Commission  would  particularly  welcome  additional  feedback  on  certain 
aspects detailed in the questions below. 

(68) 

In  the  current  R&D  framework,  where  there  is  cooperation  between  industry  and 
public institutes, industry has to pay the full cost of the project or give all intellectual 
rights to the public institute so that the payments are not classified as State aid. This 
provision should be amended, and rights should be allocated between partners on a pro 
rata basis according to the contribution of each partner.  

(69)  As is currently expressed in the R&D framework, in all cases where the Commission 
concludes  that  the  purpose  of  the  aid  in  question  is  to  promote  the  execution  of  an 
important  project  of  common  European  interest,  that  aid  may  qualify  for  the 
derogation contained in article 87.3 b). 

(70)  The setting-up of a research centre, private university or equivalent to support a cluster 
could create an entitlement to State aid, for instance in the form of tax exemptions or 
repayable advances.  

(71)  State aid for infrastructure may also be authorised cumulatively with the above rules. 
For example, aid could be justified if its purpose is to provide access to broadband in 
“grey” or “white” areas where the market offers no or not enough broadband coverage. 
More generally, aid for infrastructure supporting innovation could be authorised when 
technological neutrality and open access are guaranteed. 

Question  16)  What  definition  of  cluster/clustering  activities  should  be  followed  and  what 
criteria  should  be  used  to  distinguish  clusters  from  the  broader  category  of  innovation 
intermediaries? 

Question 17) Do you think that State aid should be allowed to promote European centres of 
excellence? If so,  what type  of State aid, for what reasons, and subject to what conditions? 
What other, possibly better, measures could be envisaged? 

Question  18)  Are  additional  criteria  needed  to  avoid  State  aid  being  fragmented  and  to 
encourage the concentration of resources in a limited number of poles of excellence? 

Question 19) What are your views more generally about the need for additional provisions for 
infrastructure that supports innovation (e.g. in the field of energy, transport etc.)?  

Question  20)  Do  you  think  that  large  firms  should  be  entitled  to  State  aid,  e.g.  to  establish 
research facilities in a European pole of excellence? Should the Commission try and develop 
specific  criteria  to  control  such  State  aid?  What  type  of  economic  evidence  should  be 
requested to analyse the necessity of such State aid? 

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Annex: Problems affecting innovation in Europe 

Insufficient  innovative  activity  has  been  cited  by  the  Commission  as  a  key  factor  in 
Europe’s  underperformance  in  productivity  growth9.  It  has  been  identified  as  one  of  the 
reasons  for  insufficient  growth  and  job  creation.  The  2003  Communication  on  ‘Innovation 
policy:  updating  the  Union’s  approach  in  the  context  of  the  Lisbon  strategy’  as  well  as 
indicators such as the Innobarometer10 made it clear that the EU as a whole is not performing 
well enough in the field of innovation. Despite some successes in R&D and the presence of a 
number  of  technological  leaders,  it  is  widely  accepted  that  the  EU  has  to  embrace  a  more 
innovative  approach  to  growth  in  order  to  sustain  its  commitment  to  wider  social  welfare 
goals.  

In that context, the Commission tried to identify the problems with innovation in Europe and 
to  evaluate  what  positive  contributions  State  aid  policy  could  have.  This  was  based  on  an 
analysis  of  past  practice,  resulting  in  the  publication  of  the  Vademecum  on  Innovation,  as 
well as on internal research and contacts with innovation experts.  

The  Commission  found  that  the  EU  has  great  untapped  innovation  potential.  The  EU’s 
performance in innovation shows a large degree of variance between the different sectors of 
industry. In some areas, the EU has success stories in terms of R&D and hosts a number of 
technological leaders. This is notably the case in the field of transport (e.g. Airbus, high-speed 
trains, 
insulated 
transmission  lines,  nuclear,  gas  or  hydraulic  power  plants).  In  other  areas,  the  EU  has  to 
import many of the state of the art technologies and has little successful projects on its own. 

intelligent  signalling  systems)  and  energy  (renewable  energy,  gas 

The Commission found a series of problems, which affect innovation in the EU and prevent 
Europe from fulfilling its innovation potential. The problems can be categorised as follows:  

(1) 

Lack of common rules and standards: Among the problems identified are differences 
in  tax  and  social  security  systems  preventing  the  mobility  of  researchers  and 
innovators; different certification procedures slowing down the transfer of innovative 
business  models  and  ideas  across  EU  countries;  differences  in  patent  protection 
procedures in the different Member States.  

(2)  Weaknesses  in  financial  and  labour  markets:  The  main  problems  identified  here  are 
the  lack  of  private  funding  for  R&D  and  innovation,  especially  for  SMEs; 
underdeveloped venture capital markets; lack of investor expertise and of the ability to 
evaluate innovative companies; lack of availability of skilled labour; inability of SMEs 
to attract highly qualified staff.  

(3) 

Non-functioning product markets: The problems identified under this heading include 
barriers  to  entry  for  start-ups  and  SMEs,  leading  to  insufficient  successful  market 
entries;  the  inability  of  start-ups  and  SMEs  to  grow  rapidly,  both  within  national 
markets  and  in  other  Member  States  (by  contrast  with  the  US  market,  for  example); 
unsatisfactory  IP  protection;  unattractive  risk/reward  ratios  for  investing  in  radically 
innovative  products;  difficulties  for  SMEs to  identify,  develop  and  promote  untested 
technology; and also to create market opportunities and partnerships.  

9 
10 

Productivity: The Key to Competitiveness of European Economies and Enterprises - COM(2002) 262. 
see: http://www.cordis.lu/innovation-smes/src/innobarometer2004.htm 

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(4) 

(5) 

Insufficient  policy  coordination:  Increasingly  the  location  of  R&D  and  innovation 
business  units  is  decided  on  a  global  level.  While  the  US,  Japan  and  emerging 
technology competitors in East Asia are improving their ability to put together major 
resources,  infrastructure  and  funding  to  attract  researchers  and  investments  for 
innovation,  the  EU  is  increasingly  seen  as  being  unable  to  avoid  fragmentation 
between Member States, and is becoming less attractive for the location of R&D and 
innovation business units.  

General “systemic” inefficiencies: Among the problems identified are poor industry-
academia interaction; lack of collaboration and networking;  slow  adoption of ICT in 
business  activities,  excessive  bureaucracy  in  government  funding;  slow  development 
and  adoption  of  environmental  technologies;  no  entrepreneurship  “culture”;  negative 
attitude towards failure; and risk aversion.  

Many of the above problems relate to systemic and regulatory problems, as well as to a lack 
of funding and of market openness. Consequently many problems cannot be solved by State 
aid and require a more comprehensive policy approach. Besides, while some of the problems 
identified above are due to inadequate or deficient public policies, some of those in categories 
2), 3) and 5) may also be the result of market failures.  

The sources  of market  failures  which  are relevant to innovation have been identified by  the 
Commission as the following, on the basis notably of a review of case practice: innovation as 
a public good and externalities; inefficient dissemination of information; shortcomings in the 
capital markets; mismatches on the labour market and coordination problems. These market 
failures  can  possibly  be  tackled  through  State  aid,  by  changing  the  incentives  of  the 
beneficiaries so that they engage more in innovation-related activities.  

In addition, the Commission found that technological innovation represents only a part of the 
innovation  potential.  In  particular  for  the  services  area,  innovation  also  requires  developing 
new business models, methods and tools. Innovation practices in the services sector tend to be 
different  from  those  of  other  sectors.  They  tend  to  rely  more  on,  for  instance,  professional 
knowledge  and  creativity  and  on  organisational  innovation.  Many  service  companies  are 
believed to invest substantially in innovation related activities, but this phenomenon remains 
largely unreported in national statistics, surveys and accounting statements. In the absence of 
adequate  data  on  non-technological  forms  of  innovation  related  investment,  it  is  difficult  to 
ascertain  where  market  failures  might  exist.  The  Commission  is  currently  working  on 
improving financial reporting on non-technological R&D expenditure  

Comments are welcomed on the problems identified as affecting innovation in Europe. 

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