Opinion of the European Economic and Social Committee on the  Communication from the Commission — Consultation document on state aid for innovation (COM(2005) 436 final)
Date: 2005-12-14
Institutions: European Economic and Social Committee
Subjects: ESC opinion, State aid, control of State aid, early-stage capital, innovation, venture capital

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Opinion of the European Economic and Social Committee on the ‘Communication from the
Commission — Consultation document on state aid for innovation’

(COM(2005) 436 final)

(2006/C 65/16)

On 21 September 2005 the European Commission decided, under Article 262 of the Treaty establishing
the European Community, to consult the European Economic and Social Committee on the Communication
from the Commission — Consultation document on state aid for innovation

The Bureau of the European Economic and Social Committee instructed the Section for the Single Market,
Production and Consumption to prepare the work on the subject.

Given the urgency of the work, the European Economic and Social Committee appointed Mr Pezzini as
rapporteur-general at its 422nd plenary session of 14 December 2005, and adopted the following opinion
by 80 votes in favour with two abstentions.

1. Summary and recommendations

innovation,

The Committee welcomes the consultation document on
1.1
state aid for
through which the Commission
intends to establish a framework of legal certainty, as well as
defining criteria for the granting of more targeted aid and
achieving a simplification of the regulatory context.

1.4
The alternative to innovation is the decline of the Union
in cultural and economic terms. The EESC is fully aware of this
and, through the participation of its members in the various
sectors of organised civil society, it is endeavouring to ensure
that (partly through proper use of state aid):

— the externalities of the market are overcome or guided;

1.1.1
The EESC is aware that the Commission document
opens up for the first time a thorough debate on matters which
are now extremely topical:

— entrepreneurial initiative is strengthened;

— what we mean by innovation;

— where the dividing line is between the innovation phase

which qualifies for aid and the marketing phase;

— what action is appropriate to allow SMEs to compensate for

the well-known limitations on their growth;

— in the present process of globalisation, how our main part-
ners behave in the matter of innovation, and what limits
we have imposed on ourselves by adhering to the WTO
rules.

The answers to these questions will influence the new
1.2
legal
this
framework to be proposed by the Commission;
framework will need to reflect the commitment of the Member
States to combine development and progress on the one hand
with respect for the rules, especially those of competition, on
the other.

The insufficient competitiveness of Europe is largely due
1.3
to a modest level of innovation, often resulting from market
failures. In these cases state aid can help to stimulate the actors
of the market itself to invest more in product and process inno-
vation (1).

(1) In 2003 the export of high-technology products as a percentage of
total exports was: for the EU-25 17.8 %; for Japan 22.7 %; for the
USA 26.9 % (Source: Eurostat, Science and Technology 8/2005).

— suitable measures are identified in the various fields to help
micro, small and medium sized enterprises and make them
innovative;

— entrepreneurs and operators working in the social sector
are helped to understand and use the innovations which are
constantly being made in the process of globalisation of the
markets;

— forms of private enforcement are developed,
respect for, and full application of, the rules (2);

facilitating

— practical

form is given to the European Research Area
(ERA), through the coordinated action of the technological
poles and the advanced training schools, so as to dissemi-
nate and apply the results of the research (3);

— instruments and means are used to take action on initial
and continuing training to adapt professional capacities to
the constantly innovating requirements of the market, to
help society to understand the constant changes and to
disseminate and consolidate the principles of
the social
responsibility of enterprises (4).

(2) INT. 268
(3) The objective is to overcome the ‘European paradox’: we are in the
forefront of research, but we are weak in the commercial use of
research results.

(4) Cf. Green Paper on the social responsibility of enterprises.

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1.5
Up to now the Commission has not issued specific rules
on state aid for innovation. In accordance with Articles 87 and
88 of the Treaty,
it has taken account of innovation in the
context of other categories of aid: aid for regional purposes, aid
for training, investment capital measures, aid for employment,
measures to assist SMEs.

1.5.1
To some extent innovation came under the heading of
state aid for research and development (5), which was extended
from 30 June 2002 to 31 December 2005 (6).

1.6
On many questions raised here by the Commission the
EESC has already given its views unanimously or by a large
majority in earlier opinions:

— to grant the appropriate state aid to remedy market failures;

— to take action to compensate for the limits of externalities;

— to agree on shared criteria for drawing up ex-ante assess-

ment criteria, particularly in the field of SMEs;

— to regard innovative processes as important not only in the
technological
services,
commerce and administration, product and process innova-
tion;

field but also in the field of

— to provide for increases in aid for innovation in the cohe-
sion regions and in the areas with geographical difficulties
(mountain areas,
islands and isolated rural areas), partly
through the proper use of ‘tax advantages’ (less burdensome
tax treatment) of a regional nature (7);

— to develop and maintain new forms of financial aid for
SMEs, such as the development of microcredits and support
for operating credit, the securisation of credits, and sureties
for micro and small enterprises, which find it difficult to
obtain access to forms of risk capital given their company
form which is generally personal;

processes;

— to strengthen the centres of excellence with public/private
investments and encourage their links with enterprises and
with the academic world.

1.7
The Committee has already had occasion to emphasise
that state aid intended to encourage investment in innovative
projects carried out by SMEs must also take account of the
growth of the enterprises and of:

— support for regional and transregional innovation networks;

— promotion of the policy of industrial districts and tech-

nology parks;

— the involvement of business angels and service intermedi-
aries such as venture technologists, brokers and patent advi-
sers;

— the setting up of centres for transfer of technology and

venture capital;

— the training and hiring of skilled technical staff (8).

2. Reasons

2.1 Summary of the Communication

2.1.1
The Commission's aim is to open up a debate leading
to an improvement in the Community rules on state aid for
innovation projects.

2.1.2
on six general sectors:

The Commission anticipates and clarifies its position

— support for the creation of innovative enterprises and their

growth in the initial phase;

— the use of risk capital;

— ways of integrating in the existing system the innovation
introduced into research and development

which is
projects;

— to support organisations which assist the innovation activ-
ities of micro, small and medium-sized enterprises with
advice and practical measures;

— aid to SMEs to enable them to acquire services provided by

specialised bodies acting as innovation intermediaries;

— to train, partly with public funds, professional experts in
the various fields of knowledge capable of assisting micro
and small enterprises by guiding them towards innovation

— aid to SMEs to enable them to benefit from the assistance
of highly skilled researchers and engineers and to make
possible effective exchanges with universities and large
enterprises;

(5) OJ C 45 of 17 February 1996 as amended by OJ C 48 of 13

February 1998.

— promotion and development of poles of excellence, likely to

be useful to all firms and to attract private investors.

(6) OJ C 111 of 8 May 2002.
(7) Cf. financial engineering and the social function of credit.

(8) INT. 268.

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2.1.3

Provided that:

— the aid is intended to overcome a well-defined market

failure;

— the aid is the most suitable instrument;

— the aid stimulates the beneficiaries to innovate and is

proportionate to the problem addressed;

— distortions of competition are limited.

2.2 The current situation

2.2.1
In its earlier opinions the EESC always underlined the
importance of controlling state aid with a view to bringing
about in the EU:

— a competition policy leading to convergence between the

various economies of the Member States;

— a business approach based on innovation and entrepreneur-

ship;

— a careful cohesion policy which takes account of the less

favoured regions;

— sustainable growth which respects the need to improve

labour conditions, enterprises and the environment.

2.2.2 While on the one hand competition policy (9) is essen-
tial to ensure that the internal market functions and develops
properly, without distortions caused by discriminatory rules, on
the other hand state intervention can be desirable and necessary
to compensate for the limits of the market and market failures.

2.2.2.1
The Lisbon strategy itself, revisited and enriched
with new pragmatism in the spring of 2005 (10), calls for
special attention to be given to:

— market failures;

— economic and social cohesion;

— sustainable development;

— innovation.

The level of state aid has fallen slightly in recent
2.2.3
years (11), and above all
it has been directed mainly towards
horizontal objectives. In 2003 horizontal aid represented 79 %
of all aid; within this percentage, 14 % was allocated to
research and development (12). This was also noted by the

(9) Treaty, Title VI, Section II: Competition, taxation and approximation

of laws.

(10) COM(2005) 24 final of 2 February 2005. The Member States
should reduce and reorientate state aid to overcome market failures
in the sectors which have potential for growth and to stimulate
innovation.

(11) In the period 1999-2001, it represented 0.61 % of the Community
GDP, and in the period 2001-2003 0.59 % COM(2005)147 final of
20 April 2005.

(12) Source: COM(2005) 147 final, 20 April 2005, Table 7: 23 % to
environment and energy saving; 21 % to regional development;
13 % to SMEs; 3 % to training; 3 % to employment; 2 % to culture
and protecting the heritage.

European Council of March 2005, which reaffirmed the need
to grant suitable derogations where they may be necessary to
compensate for market failures.

in its

The European Parliament,

2.2.3.1
resolution on
consequences of
Strengthening European competitiveness:
industrial changes on the policy and role of SMEs (13), also
expresses satisfaction at the reduction in the overall volume of
aid and reaffirms the usefulness of aid allocated to research,
development, training and advice for small enterprises.

2.2.4
In the context of the process of reforming the aid
system (14), on which the EESC has also given its views (15), the
European Parliament reaffirms the need to work out a clear line
of action on reform of state aid for innovation, understood in
its widest sense rather than being restricted to technological
aspects (16), and capable of operating horizontally in all sectors
which can make a substantial contribution to the Lisbon
strategy, including the commercial and services sector.

The EESC emphasises the fact

2.2.5
in 2004 the
Commission presented a number of structured proposals for a
general reform of aid which take account of market failures.
These proposals, also supported by the Committee, are
becoming reality through the communications already issued.

that

2.2.6 Moreover, the EESC is fully aware that the situation in
this field is very dynamic, because it is subject to variations in
the political, social, economic and legal framework and to the
acceleration of the process of globalisation of the markets.
Suitable periodic adaptations are therefore necessary (17), while
maintaining clarity and transparency of
the legal reference
framework.

2.2.7
In terms of globalisation of markets special attention
should be given on the one hand to the multilateral reference
framework of the WTO and on the other to that of Europe's
main trading partners.

In the United States of America, the United States
2.2.8
Small Business Administration (SBA) grants small and medium-
sized enterprises,
federal public
programmes, various forms of aid for innovation, to which
must be added the aid granted by the individual states as well
as the federal initiative known as the Small Business Innovation
Research Programme — SBIR.

through a number of

(13) Resolution PE_6TA (2005) 0230 (EP report A6-0148/2005 of 12

May 2005, Point 36).

(14) COM(2005) 107 final ‘Action plan on reform of state aid’.
(15) INT. 268.
(16) Cf. note 5, EP Resolution, Point 50.
(17) Cf. SEC(2005) 795 of 7 June 2005.

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2.2.8.1

The SBA runs a series of programmes:

acquisition of patents (50 % reduction of registration and
renewal costs for 3 years);

— Basic Loan Program, providing guarantees (up to 75 %) for
loans which can amount to as much as 2 million dollars
per enterprise

— SBA Investment Program, for Angels Capital and Venture

Capital investments

— Certified Development Company ‘504’ Loan Program, with
aid for innovation and modernization up to 4 million
dollars

— Microloan Program, with short
dollars through intermediaries

term aid up to 35 000

— Prequalification Loan Program, with aid up to 250 000

dollars, through intermediaries

— Export Working Capital Program, with 90 % guarantee, up

to a maximum of 1.5 million dollars

— SBA Express, with aid up to 350 000 dollars and 50 %

guarantee

— SBA Community Express, with aid up to 250 000 dollars

and 75 % guarantee

— SBA Secondary Market Program and SBA Asset Sales

Program, to facilitate access to the shares market

— SBA Women's Network for Entrepreneurial Training Initia-

tive, to train women entrepreneurs.

seed capital assistance for

2.2.8.2
The SBIR initiative, concerned with the granting of
public aid to innovation and research in smaller enterprises,
provides
feasibility studies, of
amounts up to 100 000 dollars in the first phase and up to
750 000 dollars in the second phase in which prototypes are
being developed; for the third phase, no action by the SBIR
funds is envisaged, but mechanisms for finding public and
private funds come into play for the marketing phase.

2.2.9
Recent recommendations by the EURAB, a consul-
tative body set up by the European Commission which brings
together the European academic and business worlds, have
emphasised the need to adopt a similar mechanism at Com-
munity and Member State level to supplement the actions of
the RTD&D framework programme, stressing that ‘This may
require a revision of EU rules for state aid.’ (18)

2.2.10
In Japan, the Agency for Small and Medium-sized
Enterprises provides various types of public support for innova-
tion, such as:

— the Start Up programme, which covers part of the costs of
technological assessment,

practical application of R&D,

(18) EURAB – European Research Advisory board, 02.053 final

‘improving innovation’ 2005.

— the Creative Technologies R&D programme;

— the Local Revitalisation R&D programme;

— the programme to promote cooperation between industry,
the academic world, government and other public officials;

— the Small Business Innovation Research System, the Japa-
nese SBIR, which has the aim of promoting the develop-
ment of SMEs' technological capacity, granting public aid
for their creative activities and financing the marketing of
the research results;

— the programme which supports with public funds the intro-
duction and development of information technologies in
enterprises;

— the ‘Subsidies for SMEs Business Innovation’ programme;

— the ‘Subsidies for Strengthening SMEs Business Resource’

programme;

— the ‘Credit Guarantees Exemption’ programme;

— measures to reduce interest rates on credits provided by the
Japan Finance Corporation for Small and Medium Enter-
the National Life Finance Corporation
prise (JASME),
(NLFC) and the Shoko Chukin Bank;

— the tax concessions plan for SMEs;

— the investments plan up to 300 000 Yen, by the ‘Small and
Medium Business Investment and Consultation Companies’;

— the incentives plan set up by the law on ‘Promotion of
Improvement of Employment Management in Small and
Medium-sized Enterprises
for Securing Manpower and
Creating Quality Jobs’.

2.2.11 With regard to the Multilateral WTO Agreements,
the concept of ‘specific state aid’ is defined as a subsidy which
may be granted only to an enterprise, an industry or a group of
industries in a state granting the subsidy. WTO rules apply
only to such aid, with the exception of the agricultural sector,
and two categories are envisaged: prohibited aid and acti-
vable aid.

2.2.12
Prohibited aid is aid intended to favour exports or
to favour national goods over imported goods, distorting inter-
national trade and thus hampering the trade of other countries:
such aid is subject to WTO assessment by accelerated proce-
dure for the abolition of the aid measure or for tariff counter-
measures to be adopted by the disadvantaged country or coun-
tries.

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2.2.13
As regards activable aid, a country bringing a
complaint against an aid measure activated in another country
must demonstrate that the aid has had a negative effect on its
legitimate interests, on the basis of three types of ‘damage’ (19).
If not the state aid measure is authorised. In the case of damage
proved and recognised by the Dispute Settlement Body the
country which has activated the aid must abolish it. Otherwise
the complainant country has the right to impose compensatory
tariffs.

— inadequate support for new products or productive combi-
nations which create added value, and of quality jobs
capable of guaranteeing the European comparative advan-
tage (20).

2.3.3
This has led to some legal uncertainty, which can be
overcome only through careful consideration of the limitations
and potential advantages of state aid in this sector.

2.3 General comments

2.3.1
The Committee welcomes the Commission proposal
to identify the relationship which exists, and which can be
improved, between state aid and innovation in Europe. It is
clear that the insufficient competitiveness of the EU in compar-
ison with other actors in world trade derives to a large extent
from a weak innovation process; this weakness is made more
acute by globalisation processes.

2.3.1.1
The Committee is also pleased that the issues linking
state aid to innovation are the subject of a public consultation
those most directly
capable of enlisting the opinion of
concerned on this delicate subject.

2.3.1.2
The questions included in the communications are
wide-ranging, well formulated and cover most of the issues
which can arise from market failures and the possibility of
simplifying the procedures. The short time available and the
lack of study group discussion do not allow the rapporteur to
go into the detail of the individual questions or give a fully
argued answer to each of them.

2.3.2
The Committee is aware of the fact that state aid for
innovation does not on its own constitute a solution to the
problem of the EU's competitiveness. Many Community docu-
ments and a number of Committee opinions have shown the
limits to the European Union's action:

— insufficient level of technological and other innovation;

— insufficiency of common rules and measures;

— weakness of
mented;

financial markets, which are still too frag-

— too low a level of employment;

— malfunctioning of the products market;

— lack of coordination of policies;

— difficulty in access to market services;

Product and process innovation, in all its aspects (21),
2.3.4
eventually has an effect on the market and is therefore in a
position to influence activities which could affect competition
and trade in a significant way.

Thus,

in order to be able to give authorisation in
2.3.5
advance, one must be in a position to work out a transparent
and agreed specific reference framework, in a spirit of partner-
ship and proactive cooperation, between the Commission and
the Member States.

2.3.6 T h e de fi ni ti on of
ti ve pr oce ss

i nnov a ti on a nd t h e i nnov a -

2.3.6.1
The EESC is aware that the definition of innovation
given in the Green Paper some time ago should be up-dated to
take account of the changes which have occurred in the last
ten years. It is also necessary to analyse the stages between the
processes of
innovation and the limit beyond which the
marketing stage begins, so that the rules of competition are not
unduly distorted.

2.3.6.2
There was a time when the development of society
was too slow to be perceived in the space of one lifetime.
Today it is so rapid that it is difficult to understand. Societies as
a whole, but above all enterprises, administrations and services
are today undergoing a formidable series of changes which
tend to confuse acquired knowledge.

2.3.6.3
Innovation thus becomes a social process through
which the people, bodies and organisations with most knowl-
edge, because they are given the task of exploring it, help the
‘others’ to draw the appropriate conclusions and transfer them
to their professional activities and daily lives.

2.3.6.4
verification of all utopias (22).

If Utopia is a project for the future, innovation is the

2.3.6.5
After the Green Paper, the Commission has rightly
defined innovation as: ‘The successful production, assimilation
and exploitation of novelty in the economic and social
spheres’ (23).

(19) The agreement defines three types of damage they can cause. One
country's subsidies can hurt a domestic industry in an importing
country. They can hurt rival exporters from another country when
the two compete in third markets. And domestic subsidies in one
country can hurt exporters trying to compete in the subsidizing
country's domestic market.

(20) EP, Committee for Employment and Social Affairs. Opinion for the

ITRE Commission A-6 0148/2005, Point 4.

(21) Cf. Green Paper on innovation COM(95) 688 final.
(22) Cf. Oscar Wilde.
(23) COM(2003) 112 final.

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2.3.6.6
Innovation is a complex process. Alongside the
development of research activities and a better application of
technology, many other factors and conditions, sometimes
changeable, help to generate innovation, and among these can
be mentioned:

— an enterprise culture orientated towards innovation;

— the system of

relationships and interrelationships with
other enterprises, organisations and public bodies, essential
for the creation and dissemination of knowledge and inno-
vation;

— the legal and regulatory framework of reference, especially

on intellectual property;

— access to the capital market, especially with regard to risk

capital and the start-up phase;

— education and training services and the relations between

the academic and scientific world and the enterprise;

— support structures (such as incubators, district networks,
industrial and technological parks) and intermediary struc-
tures for innovation.

The Committee has already had occasion to state
2.3.6.7
innovation is a social process (24), which is based on
that
research, takes place in a system of competition and acquires
space when it is exists in a diffuse way, a positive attitude
towards change and risk. The results are an increase in compe-
titiveness, better cohesion and greater socio-economic well-
being.

2.3.6.8
In order to have objective criteria to go on, the
Committee asks the Commission to specify better, with the
help of the representative organisations of civil society, and
with coordination by Eurostat, which production and services
activities can be included among the activities which it
is
possible now to define as innovative. It would indeed by extre-
mely useful to have guidelines for this complex and changeable
sector.

Brussels, 14 December 2005.

2.3.6.9
Aid for innovation (according to the definition in
the Green Paper (25)). In the view of the Committee, which has
already had occasion to give an opinion on it (26), the existing
framework should be extended to new types of aid not envi-
saged by the current guidelines, and further compatibility
criteria
room for
manoeuvre to the Member States, with no obligation to notify.

should be

identified,

leaving

greater

2.3.6.10
The Communication emphasises the special needs
of the SMEs, repeatedly mentioned by the documents of the
European Parliament, the Council, the EESC and the Commis-
sion itself. The EESC is also convinced that a real stimulus to
competitiveness can come above all from innovative, practical
and targeted actions directed towards micro,
small and
medium-sized enterprises.

In small as in large firms,

2.3.6.11
innovation processes
need the support of all the staff, with commitment at the
various levels. This can happen if there is an environment
sensitive to cooperation and if people are able to accept with
interest
the incentives to try something new. Continuous
training is essential to achieving this.

2.3.6.12
In the EESC's view it is necessary for all Member
States to increase their efforts to make science more compre-
hensible and to increase the number of young people taking an
interest in it (27). Television programmes could also make a
considerable contribution to innovation culture (28). Through
training,
including by television, the ability to communicate
can be strengthened with a view to informing better and hence
to innovating and competing. Targeted information expressed
in accessible terms helps to make people more aware of
science, and to generate innovation.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

(24) Cf. Opinion on the Green Paper on innovation, Sirkeinen, Konitzer,

OJEC C 212/1996.

(25) COM(1995) 688 final.
(26) INT. 268.
(27) In 2003 27 % of the active population of the EU-25, about 50
million people, worked in the specialist and technical field, RHSTO
(Source: Eurostat, Science and Technology, 11/2004).

(28) According to statistical data, 7 people out of 10 glean their infor-

mation from television channels.