Source: EURLEX
Language: en
Format: md

*|*

# 52012SC0298

**COMMISSION STAFF WORKING DOCUMENT Industrial Performance Scoreboard and Report on Member States' Competitiveness Performance and Policies - Accompanying the document Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions A Stronger European Industry for Growth and Economic Recovery Industrial Policy Communication Update /\* SWD/2012/0298 final \*/**

  

CONTENTS

1.    Industrial performance
scoreboard. 3

1.1.      Introduction. 3

1.2.      Overall performance. 5

1.3.      Productivity and skills. 7

1.4.      Export performance. 9

1.5.      Innovation and
sustainability. 12

1.6.      Business environment and
infrastructure. 16

1.7.      Finance and investment 20

1.8.      Annex: Performance of
Member States. 23

2.    Overview of progress by broad
policy area. 28

2.1.      Introduction. 28

2.2.      Innovative industrial
policy. 28

2.3.      Sustainable industry. 36

2.4.      Business environment 41

2.5.      Improving the quality of
public administration. 50

3.    Country chapters. 63

3.1.      Belgium.. 63

3.2.      Bulgaria. 71

3.3.      Czech Republic. 77

3.4.      Denmark. 84

3.5.      Germany. 90

1.           Industrial
performance scoreboard

1.1.        Introduction

A diversified economy that combines well-performing
industries and services sector with a favourable business environment is the
best basis for sustainable growth and the creation of jobs. Although the share
of industry in the EU economy has declined in the last decade, the importance of manufacturing has not
diminished, owing to its growing
interdependence with the
services sectors. While services have become vital inputs in manufacturing
processes, many services sectors depend on industries that produce the equipment and hardware
they use. Increasingly complex value chains that combine products and services,
and changing production methods that emphasise mass customisation and closeness
to the market are creating new opportunities for European industry and
services. European industry should be able to quickly seize these opportunities
to achieve the Europe 2020 goal of smart, sustainable and inclusive growth.

However, the business environments of Member States
need to be flexible and ready for change to benefit from these developments.
Looking at the Member States through a series of indicators illustrates the
variation in their industrial performance, and makes it clear that there is
scope for improvement through structural reform at national level. To
facilitate reform and policy learning, this scoreboard focuses on five areas:
productivity in manufacturing; export performance; innovation and
sustainability; business environment and infrastructure; and finance and
investment.

Productivity and skills. Whilst total productivity is the function of different
production inputs, the quality of human resources and the skill levels of the workforce
have been a strong comparative advantage of the European economy relative to
the rest of the world. A well-qualified and skilled workforce leads to high
labour productivity, which in turn has been the key transmission mechanism for
growth throughout industrialised countries. Hence increasing the level of
skills is the key to increased labour productivity and the continued success of
European industry. This holds especially true for the most advanced economies
at the productivity frontiers. At the same time, in particular the catching-up countries
can boost their productivity by the use of advanced technology based on foreign
direct investment.

Export performance. Exports are a key source of
growth and serve as an indicator of an economy’s performance in price,
technological or structural competitiveness. Some Member States are successful
global exporters of manufactured goods, some are more specialised in intra-EU trade
and others have economies dominated by services. The European value chains that
have evolved due to the Single Market and enlargement have contributed to the
success of EU exports.[1] The EU remains the
largest exporter of goods and
services in the world and has broadly managed to hold a share of 20% of global
exports (excluding energy) – despite the rise of China. Some Member States are performing
better than others. Price competitiveness and ongoing industrial restructuring
help boost exports of the catching-up Member States. Mature economies tend to
benefit from technological competitiveness and structural shifts toward
knowledge-intensive sectors.

Innovation and sustainability. In the long run, innovation capacity is a
key driver of growth. Successful investment in research and innovation can
boost productivity and the competitiveness of European businesses. At the same
time, improved innovation performance facilitates structural change in Member
States’ economies towards economic activity with high added value.

A transition towards a sustainable, resource-efficient
economy is instrumental for maintaining the long-term competitiveness of Member
States. Energy efficiency can reduce the impact on industrial competitiveness of
volatile energy prices on the world market. Over the last decade, many Member
States have significantly improved their energy efficiency and have been able
to grow without consuming more energy. However, wide differences in energy
intensity persist, indicating potential for improvement. Investment in the development, production
and purchase of goods and services needed for the greening of the economy
indicates how extensive such investments are in an economy.

Business environment and infrastructure. The business environment influences the
decisions taken by enterprises. Lack of red tape, an efficient public
administration and judicial system, transparent legislation, and good physical
and digital infrastructure contribute to the productivity and growth of
enterprises by allowing them to seize opportunities and by reducing costs. New
business activity benefits from an easy start-up environment,
competition-promoting regulation, easy access to finance, and open trade. Overall,
a business-friendly environment helps to create growth and jobs by increasing
firms’ chances of success and by improving Member States’ attractiveness for
investment. Competitive energy
markets facilitate cost-efficient production, as energy is an essential input
for all firms. However, the internal market in electricity is still incomplete.
A well-performing transport infrastructure is also crucial to run any business
efficiently.

Finance and investment. A crucial ingredient in allowing businesses to grow
and create new jobs is easy access to finance. Whilst macroeconomic and banking
sector stability plays a crucial role in the supply of credit, the viability
and growth prospects of businesses affect their capability to attract venture capital and other investors.
European enterprises tend to be under-capitalised and have traditionally been
heavily dependent on bank loans. The recession and the turmoil in the banking
sector have affected business investment in equipment.

The scoreboard indicators

The industrial performance scoreboard has indicators in five areas: productivity and skills; export performance; innovation and sustainability; business environment and infrastructure; and finance and investment. Taking into account these areas, the basis for the scoreboard were the 30 or so indicators that are monitored in the report Member States’ Competitiveness Performance and Policies, out of which a representative set of ten individual policy indicators was selected. The selection was based on the following criteria: (i) they are closely related to policy instruments and the economic reform agenda; (ii) they are available on a reasonably timely basis; (iii) there is (almost) full country coverage; (iv) there is a time series available for the last five or so years, so that a country can be compared with its own past performance. 1. Overall industry performance can be gauged through manufacturing productivity. 2. The quality of the workforce in the manufacturing sector is assessed by educational attainment. 3. The share of exports in GDP published by Eurostat is an indication of the openness of the economy, with high-tech exports and eco-innovation exports reflecting specific aspects of export performance. 4. For innovation performance, the main indicator is the innovation index published annually in the Innovation Union Scoreboard (IUS), drawing together the overall innovation performance. 5. For sustainability, energy intensity in industry and the energy sector is used. 6. For business environment and infrastructure, the goal is to measure improvements in the business environment and efforts towards better regulation. An overall business environment score has been calculated by the Commission, based on the annual survey data of the World Bank. 7. Electricity prices (excluding VAT) for small and medium-sized enterprises, published by Eurostat, represent one of the most significant costs of inputs and therefore directly affect industry competitiveness. 8. Enterprises need modern and efficient transport networks to operate. Business satisfaction with infrastructure (rail, road, port and airport) is recorded by an annual indicator published in the Global Competitiveness Report. 9. Bank lending is still by far the main source of access to finance for SMEs and, therefore, a score for access to bank lending has been calculated by the Commission. 10. Business investment in equipment is an indicator of how well businesses can keep up their manufacturing capability over a period of time.

1.2.        Overall
performance

As industrial structures vary considerably across the
EU, the Member States have been following different paths towards a more
knowledge-intensive economy. Accounting for more than 70 % of total
manufacturing output, the five biggest economies markedly affect the EU’s
overall industrial performance (see figure 1.1).

Figure 1.1: Country share in EU manufacturing (2011)

Source: Eurostat

Manufacturing is
an important part of the Member State economies (see figure 1.2). It should be
noted that in addition to manufacturing, mining and energy activities
contribute more to value added in some Member States than in others. In Poland, Slovakia and the Czech Republic mining and energy account for over 6 % of total value
added, whereas in Malta, Ireland, France and Italy this contribution is between
1 % and 2.5 %.

Figure 1.2: Manufacturing and construction in Member State economies (as % of GDP at factor cost; 2011)

Note: LU (2010) Source: Eurostat; LU (STATEC)

Over one third
of the inputs in manufacturing production are business-related services, which are
therefore an important contributor to the competitiveness of industry. About
one sixth of total output of the business-related service sector goes directly
to manufacturing. Business services include network industries (energy,
telecommunication, transport), distributive trade and others (including
consulting, engineering, research and development, and information technology
services).

Looking at the overall performance of the Member
States, it is clear that policy decisions over long periods of time have
created business environments that are specific to each country. Nevertheless,
based on clustering the key characteristics of the Member States as identified
by the indicators of the scoreboard, three main groups emerge.

The ‘consistent performers’ are: Germany, Denmark, Finland, Sweden, Austria, Ireland, the Netherlands, the United Kingdom, Belgium and France. Their industries are dominated by technologically advanced
firms and their workforces are highly skilled. Their research and innovation systems perform well
over a number of indicators. For example, strong public-private collaboration
helps the commercialisation of technological knowledge. Their innovation capacity, high labour
productivity and moderate wage increases make high-value exports competitive in
third-country markets. A mostly friendly business environment, access to
finance and good infrastructure further enhance the productivity of
enterprises. Moves towards high-value production have helped many of these
countries to reduce their energy intensity and benefit from the opportunities
presented by the greening of industries. Performing very well against all these competitiveness criteria,
in particular Germany, Denmark, Finland, and Sweden appear to have the most competitive industrial economies in the EU. With a growing
competitiveness gap, France appears at the lower end. Nevertheless, variations
in their relative performance show that all economies in this group still have
room for improvement.

The group of ‘uneven performers’ comprises Estonia, Slovenia, Spain, Italy, Portugal and Greece, along with Malta, Cyprus and Luxembourg. These
countries tend to show uneven performance, good against some criteria, but below
the average on others. Manufacturing sectors in Spain, Italy and Greece benefit from relatively good levels of labour productivity. Italy’s industry belongs among the most energy-efficient. In several aspects, for xample Portugal has a friendly business environment. On the other hand, difficulties in accessing
finance, further aggravated by bad payment behaviour of public authorities,
pose a serious challenge for SMEs in these countries. Malta, Cyprus and Luxembourg are strong in exports of high-tech and environmental goods, have good
domestic infrastructure, but businesses in particular in the first two are
dragged down by high electricity prices. Most countries in this group also have
in common weaker research and innovation systems and some severe constraints
related to the business environment, although in each country there are examples
of innovative internationally successful companies or even clusters. This
uneven performance does not, however, enable the synergy of the essential
competitiveness ingredients to be reaped, and as a result, hinders to lesser or
greater extent the modernisation and growth prospects of their economies.
Particularly worrying in this respect has been the continuous stagnation or
deterioration in some measures of competitiveness in Spain, Italy, Portugal and Greece.

The ‘catching-up’ group consists of Bulgaria, Romania, the Czech Republic, Poland, Hungary, Slovakia, Latvia and Lithuania. These countries face
significant challenges, as their move towards more knowledge- and skills-oriented
industries is hampered by weak innovation
capacity and knowledge transfer. In spite of
improvement, their resource efficiency is still low, in particular in the case
of Bulgaria and Romania. The business environment is particularly difficult, with clear
problems related to the transparency and efficiency of public administration, for instance when setting up a business, registering property, protecting
investors, and dealing with insolvency. Businesses in these countries are also
particularly unsatisfied with domestic infrastructure. Only Polish enterprises
do not have significant problems in accessing finance. Although they have substantial
relative strengths in several areas, each economy in this group has
considerable scope for improvement. However, there are clear signs that the catch-up process in these countries has been fairly brisk on many
competitiveness criteria, enabling them to further narrow down
their gap with the most advanced economies.

1.3.        Productivity
and skills

1.3.1.     Labour productivity

Total output depends on the quantity and quality of
production factors and how efficiently they are combined. Almost all of the
average growth in real output per capita in the past four decades has been
determined by labour productivity growth. Productivity growth depends on
innovation, research and development spending, and technology dynamism and
diffusion, which in turn are influenced by institutional factors, such as
regulations and preferences. Ultimately labour productivity captures the
improvements in all the dimensions of competitiveness. However, for countries
to fully benefit from investment in innovation and technological progress,
structural reforms have to provide a fertile environment that allows firms to
profit from these investments.

Figure 1.3: Labour productivity in manufacturing

Note: Luxembourg, Ireland and EU average are for 2010; data for Bulgaria, Romania and the UK is not available. Source: Eurostat (except for LU STATEC); expressed as gross value added, in 1 000 PPS/employee, 2011.

Labour
productivity in manufacturing is very high in Belgium, the Netherlands, Austria, Sweden, Spain, Germany and Finland, reflecting their relative specialisation
in highly knowledge-intensive manufacturing and their production systems
equipped with modern technology (see figure 1.3). The high productivity of Ireland[2] is also affected by the operations of
foreign multinationals and their activities undertaken outside the country.
Manufacturing plays a smaller role in France’s economy and its productivity is
slightly lower than the best performers, reflecting an industrial structure
that is less specialised in high innovation sectors. Italy has a large manufacturing sector, although with
productivity only around the
EU average, mainly due to its specialisation in less technology-intensive
sectors, small firm size, and a backlog in implementing structural reforms in
education systems, competition and product market regulations. This also holds
for the Greek economy, which is dominated by services, and whose manufacturing is strongly specialised in food processing.

Between 2006 and
2011, labour productivity in manufacturing improved in most Member States (see
figure 1.4). In contrast, Finland experienced an unprecedented drop in
productivity, mainly due to the contraction in production and R&D activity
of its large ICT sector. Overall, advanced economies tend to record smaller
increases in productivity in line with long-term improvements in total-factor productivity.
On the other hand, for countries that are more distant from the technology and
productivity frontier, there is potential for major leaps forward. For instance
Slovakia, with the highest productivity among the catching-up economies, had
experienced major productivity gains that were driven by large FDI inflows and
the related technology imports.

Figure 1.4: Change in manufacturing productivity (2011, 2006=100)

Note: Luxembourg, Ireland and EU average are for 2010; data for Bulgaria, Romania and the UK is not available. Source: Eurostat (except for LU STATEC); using Nace Rev 1

1.3.2.     Educational attainment

A structural shift
towards a knowledge-based economy is possible only with simultaneous improvements
in the level, quality and relevance of skills of the workforce. In developing
new cutting-edge technologies, transforming them into advanced products and
services, and commercialising them, companies need a workforce with appropriate
educational background, training and skills that is capable of occupying high
value-added jobs.

Figure 1.5: Percentage of people employed in manufacturing with high qualifications

Note:  ‘High qualifications’ consists of employees with at least first or second stages of tertiary education. Source: Eurostat, Labour Force Survey

The share of
highly qualified labour force in Ireland, Spain, Finland and Belgium highlight the role of this production factor in overall labour productivity
performance, as well as the importance of education and skills-related
investments (figure 1.5). On the other hand, the examples of the Netherlands, Germany or Sweden show that investments in advanced technology and top-notch
manufacturing equipment matter equally. This is confirmed by Slovakia and Lithuania, both catching-up economies with relatively high labour productivity, albeit
each relying on different comparative advantages. The former benefited from
FDI-induced imports of modern technologies, whereas the latter benefited from
the higher educational profile of people employed in manufacturing. The low
share of highly-qualified employment in manufacturing in Portugal reflects the prevalence of low-skill, labour-intensive industries (e.g. textiles).

With all but two
Member States showing an increasing share of highly-skilled labour force, the
overall trend since 2006 has been encouraging, suggesting a continued shift to a
more knowledge-based economy and the accompanying increase in medium and highly-qualified labour at the
expense of low-skilled jobs. In
particular Ireland seems to have experienced further structural changes towards
high value-added sectors, such as pharmaceuticals and electronics. On the other hand, the apparent progress of
Luxembourg is likely due to the effect of the partial closure of its iron and
steel plants. Denmark’s minor decline can be explained by its dual export
specialisation in both highly innovative and less education-intensive sectors
(e.g. food products).

1.4.        Export
performance

1.4.1.     Total exports

Smaller economies naturally tend to be more open than
large ones. Nevertheless, there are significant relative differences in how
similarly sized economies benefit from international trade. Of the large
economies, Germany stands out as the strongest exporter of manufactured goods,
whereas Spain, Italy and France show considerably lower export orientation (see
figure 1.6). When considering exports of both goods and commercial services, the
United Kingdom was the second-largest exporter after Germany, reflecting the importance of services for some economies in the EU. The position
of Greece at the lower end is due to its accumulated competitiveness losses, the
fact that it is closed to FDI and the large share of services in GDP.

Figure 1.6: Total exports as a percentage of GDP (2011)

Source: Eurostat

Despite the rise of emerging economies in Asia and
elsewhere, the EU has broadly held to a 20% share of global exports (excluding
energy)[3]. The
relative share of individual Member States in total EU exports of goods
reveals, however, that some economies are coping with global developments
better than others. Overall,
the mature economies tend to
benefit from technological competitiveness and favourable structural developments
toward knowledge-intensive sectors. On the other hand, price competitiveness
and ongoing industrial restructuring induced by FDI help boost the export
performance of the catching-up Member States.

Looking at the share of Member States of the total EU exports of
goods (figure 1.7), it is clear that their fortunes have diverged since 2006. Germany, the Netherlands, Poland and Spain have been able to expand their share of EU goods exports, indicating an
improvement in industrial competitiveness. Belgium, Sweden and Austria have largely maintained their relative positions. The shares of France, Italy, the United Kingdom and Ireland have declined. This development can be due to loss in
price and technological competitiveness, but can also reflect a continued shift towards an economy
dominated by services.

Figure 1.7: Country share of EU exports of goods

Note: The exports cover both intra-EU and extra-EU exports. The EU’s export share in world trade in goods declined in 2006-2010 from 17.3 % to 16.0 %. Source: Eurostat

1.4.2.     High-tech exports

The share of high-tech
products in total exports varies considerably between the Member States,
ranging from 3.7 % in Portugal, 5.7 % in Poland,
around 14 % in Germany, Sweden and Finland, and 19.7 % in France to
43.8 % in Malta. As small countries tend to be more open, some economies
are specialised in intra-EU trade whereas others are global exporters; these
figures need to be read with care and alongside the change in total exports.

Figure 1.8: Change in high-tech exports and exports of goods

Note: The figure shows the change in the share of high-tech exports against the change in exports of goods, 2007 to 2011. Source: Eurostat

A large share
of high-tech exports normally reflects a shift in the industrial structure
towards knowledge-intensive sectors that use advanced materials and
technologies to produce internationally tradable goods with high added value.

Comparing export
performance in goods and the performance in high-tech exports over the crisis
years gives a picture that is skewed by the recession (see figure 1.8). It is
clear that many Member States have faced a difficult exporting environment
during the years in question. In particular, in Finland both high-tech exports
and total exports fell. In many Member States (those in the lower right-hand
quarter), high-tech exports have not yet recovered to the relative level of
2007, even though their goods exports have grown. Many of the catching-up
countries in the upper right hand quarter have improved their exports of goods,
as well as their  exports of high-tech goods (albeit from a relatively low
level).

In many of the Member
States that are catching up, in particular Poland, Estonia and Romania, both exports and the share of high-tech exports increased. This development seems
to reflect the positive effects of large foreign direct investment inflows and
the related imports of advanced investment goods that upgraded domestic
production structures in these countries.

1.4.3.     Exports of environmental
goods

Thriving
eco-industries can make a key contribution towards reaching EU climate change
and environmental objectives. Development and production of the goods and
services needed for greening the economy also fosters innovation capacity and
sustains job creation within the EU. Cyprus, Luxembourg, Germany, the Czech
Republic and the Netherlands have been most successful at seizing opportunities
arising from the greening of economies, as they are the only Member States
where the share of environmental goods exports exceeded 1 % of total
exports (see figure 1.9).

Figure 1.9: Exports of environmental goods as % of all exports of goods (2011)

Note: The outlying performance of Cyprus reflects the relative strength of its photovoltaic production. Source: Eurostat, Commission calculations

Germany performs strongly in all sectors and is
the largest supplier of environmental products and services in the EU. Although
its exports account for a small proportion of its total production, it is the
second largest global exporter (after the US), with a significant share of
world trade in this sector. On the other hand, the eco-industry in the Netherlands is very export-oriented, exporting almost half of its production. Sweden and the UK are specialised in indoor air pollution control and cleaning
technologies. France and Denmark are successful exporters of water processing
and waste management technologies, whereas the latter in particular has
ambitious policies targeting green technologies.

Although total
trade in eco-goods still represents only a small percentage of GDP, it is
encouraging that it increased in most Member States from 2006 to 2011.

1.5.        Innovation
and sustainability

1.5.1.     Innovation performance

Based on the
Innovation Union Scoreboard, the innovation leaders are Sweden, Denmark, Finland and Germany (see figure 1.10). The national research and innovation systems
of these countries perform well on all innovation indicators, including human
resources, excellence in research, intellectual assets, entrepreneurship,
finance and firms’ R&D investments. The performance of these systems is
improved by close cooperation between research institutions and businesses.

Figure 1.10: Innovation Union Scoreboard (0=worst possible performance / 1=best possible performance)

Source: Innovation Union Scoreboard 2011[4]

Moderate
innovators, such as Spain, Greece, Hungary, Poland, Bulgaria and Latvia, are characterised by uneven research and innovation systems. An example would be
the very low share of SMEs introducing product, process or organisation
innovations in these countries.

Whilst innovation
performance varies significantly among Member States, almost all have improved
their performance since 2007. There has also been convergence as less
innovative Member States have improved faster than the already more innovative ones.
In particular, Bulgaria and Portugal have achieved considerable improvement due
to increased private R&D investment. Slovenia and Estonia also have significantly improved their performance, mainly by boosting the creation
of intellectual assets (patent applications and trademarks). The differences
separating the innovation leaders have also narrowed down, with Germany and Finland moving closer to Sweden at the top. On the other hand, Lithuania appears to have lost ground and progress in Poland and Slovakia has been slow.

With an EU average
innovation score higher than in 2007, the overall picture is one of improvement
(see figure 1.11). However, the convergence process appears to have been
slowing down in recent years. Moreover, the innovation gap between Member
States risks widening again due to the diverging way in which countries have
responded to the economic crisis. The leading Member States have responded with
proactive innovation policies, recognising innovation capacity as a key driver
of future growth. On the other hand, the innovation followers and the less innovative
countries are reducing their funding and support for R&D. A positive sign,
however, is that with political will governments can embark on ambitious
policies and improve the innovation performance of their economies.

Figure 1.11: Innovation performance — Change (2007=100)

Note: Progress in innovation performance in the Member States in 2011 compared to 2007. The data is further analysed in the Innovation Union Scoreboard report. Source: Own calculations based on the Innovation Union Scoreboard 2007 and 2011

1.5.2.     Energy intensity

The least efficient Member State consumes nearly 20
times more energy to produce the same value of output as the most efficient one
(see figure 1.12). Ireland, the best performer in 2009, has substantially
improved its energy intensity due to a structural shift from traditional
manufacturing industries to high value-added sectors such as pharmaceuticals
and electronics.

Figure 1.12: Energy intensity in industry and the energy sector

Note: No data for Malta. Source: Eurostat, expressed as kg oil equivalent/euro GVA; ref. year 2000, 2010

A number of Member
States, where energy intensity was still relatively high in 2009 have, however,
improved their efficiency significantly from 2006 to 2009 as can be seen from
figure 1.13. This was evident in particular in those Member States that have
been catching up, as they have benefited not only from improved efficiency but
also from structural change towards less energy-intensive sectors. Energy
efficiency also deteriorated in several Member States, most likely because the
economic crisis caused a drop in industrial production while energy consumption
did not decrease proportionally. This effect was particularly pronounced in Latvia, which saw its GDP fall by 25 % between 2008 and 2010. In any event, many
Member States have considerable potential to further reduce their energy
intensity by facilitating structural change towards high-value industrial
activities.

Figure 1.13: Changes in energy intensity (countries with the biggest change, 2006=100)

Note: Values above 100 indicate improvement. Source: Eurostat

1.6.        Business
environment and infrastructure

1.6.1.     Business environment

The World Bank composite indicator on the business
environment puts the United Kingdom and Ireland at the top in the EU, followed
by the Nordic countries (figure 1.14). These countries rank well in most of the
component indicators.

The business
environment scores are much lower in most of the new Member States. In Italy, very slow legal procedures drag down the overall score. The business environments in
Poland and Greece are ranked as the most difficult, with severe problems when
starting a business, registering property, protecting investors, and dealing
with insolvency.

Figure 1.14: Business environment (0=least attractive / 1=most attractive, 2011)

Note: No data for Malta. Each of the seven components of the indicator has been normalised to values between 1 (best) and 0 (worst). These components are then averaged for each Member State and for each year to obtain a score which reflects the position of the Member State with regard to the best and worst practices measured over 2011. Best practice can be defined in the same way but normalising values to 1 for the best performance over 2006-2011 and zero for the worst performance. Source: World Bank Doing Business, Commission calculations

However, many
Member States have improved their
business environment noticeably in recent years (figure 1.15). The UK has shown that even the best can improve further. The biggest improvements have been
achieved by the Member States with a low starting point in 2006, in particular Slovenia, the Czech Republic, Poland and Hungary. Slovenia has significantly streamlined the
conditions for starting a business and registering property; the Czech Republic has considerably simplified insolvency procedures and the payment of taxes.
In spite of the overall progress achieved, all Member States have continuing
weaknesses in some components, leaving substantial room for further
improvement. Figure 1.16 ranks Member States by progress towards best practice.

Figure 1.15: Business environment, improvement 2006-2011

Note: Data for Malta and for Cyprus are missing. Source: World Bank Doing Business, Commission calculations

1.6.2.     Electricity prices

Electricity prices
for medium-sized enterprises vary considerably across the EU (see figure 1.16).
The prices in France are relatively low due to the country’s reliance on cost-competitive nuclear energy.
In Sweden, Finland and Denmark, enterprises also enjoy
affordable electricity, benefiting from the competition on the common Nordic electricity
market, which shows how countries can liberalise markets across national borders.

Figure 1.16: Electricity prices for medium-sized enterprises, 2011

Note: No data for Austria. Source: Eurostat, data refer to prices in the second half-year; including tax, except VAT; expressed in euro/KWh

The energy market functions efficiently also in the Netherlands, where unbundling has worked well, changing suppliers is relatively easy,
concentration in electricity production is relatively low, and transmission
networks are well connected to
neighbouring countries. In Germany, competition in the electricity sector has increased due to initiatives launched in
recent years, including transposition of the Third Energy Package in 2011,
although better interconnections and higher cross-border transmission capacity
would enable it to function even better. Estonia has direct access to the
Russian gas network; the future of its low electricity prices depend on price
agreements and increases are anticipated from 2013 onwards.

Most Member States have seen their electricity prices
go up between 2007 and 2011 as can be seen from figure 1.17. Whilst the high
prices in Malta and Cyprus reflect the dominance of incumbent energy providers
and the costs of importing energy to a small island economy, in Slovakia they reveal high transmission and
distribution fees. In Italy, the high prices reflect a concentrated market
structure, dependency on energy imports (mainly gas) and an energy mix that makes
it more difficult to produce electricity at competitive prices. On the other
hand, relatively high prices in Italy, Germany, Cyprus and Ireland show that they act also as a major incentive for improving the energy efficiency of
industrial processes.

Figure 1.17: Change in electricity prices for medium-sized enterprises, 2011-2007

Note: No data for AT, IT. Figures for Cyprus also reflect the explosion at the Vassiliko power station in July 2011, which forced it to use its old and less efficient generators to avoid power shortages. Source: Eurostat

1.6.3.     Satisfaction with the
quality of infrastructure

The Global Competitiveness Report surveys the
satisfaction of users of physical infrastructure. The replies differ among the
Member States, but improvements have been seen in most of them. Satisfaction is
highest in France, closely followed by Germany, the Netherlands and Denmark (figure 1.18).

Figure 1.18: Satisfaction with the quality of infrastructure, 2011

Source: Global Competitiveness Report 2012-2013, World Economic Forum, Commission calculations; refers to rail, road, port and airport infrastructure, 1=underdeveloped / 7=extensive and efficient by international standards. http://reports.weforum.org/global-competitiveness-report-2012-2013/#

Since 2006, Italy, Spain and Ireland appear to have enhanced their infrastructure to the satisfaction of their
citizens (figure 1.19). Improvements have been noted likewise in Cyprus, Malta, Hungary and the Czech Republic, no doubt partially as a result of the use of EU
Structural Funds for investments in transport infrastructure. Progress has been
slower in Poland and Romania, which suffer from underdeveloped road
infrastructure and delays in construction projects. Among the mature economies,
satisfaction seems lowest in Italy and Greece, also partially due to the
complexities of preparing and implementing infrastructure investments.

Figure 1.19: Change in satisfaction with the quality of infrastructure, 2006-2011

Source: Global Competitiveness Report, Commission calculations; 2006=100

1.7.        Finance
and investment

1.7.1.     Access to bank loans

The ongoing stresses in the financial markets continue
to be reflected in access to bank loans. Since 2009, the situation has deteriorated in more
than half of the Member States. This deterioration has been caused mainly by
the general tightening of
credit standards due to the greater risk aversion of banks, as well as by
problems in financial sector stability. The supply of credit has been further
restricted by the deleveraging process that has started or continued in some
Member States where the private sector had accumulated large levels of debt
during previous credit expansions and where financial institutions have been
unwinding their excessively leveraged positions.

Alongside supply-side effects, however, the impact of
falling demand for loans has been equally important for some countries. Credit condition surveys have revealed
that the demand for loans has
fallen in particular among small businesses. As their
profit situation has deteriorated, many businesses have postponed investments
and stepped up efforts to find alternative sources of financing, including
longer commercial credit and stronger internal cash reserves. While there were
few quarterly improvements coinciding with the revival of industrial output in
2010 and the first half of 2011, the rejection rate when applying for a loan has
remained historically high. Falling returns and prospects of further
uncertainty have adversely affected SMEs’ capability to attract venture capital and other risk investors.

Access to bank lending remained easiest in Finland, followed by Latvia, Sweden, Poland and Austria (figure 1.20). Since 2009, access to bank
loans in Denmark, Romania, Bulgaria and Estonia has become easier, the last two
countries having seen the largest relative improvement. The situation remained
relatively difficult or worsened in Italy, France, Luxembourg, Hungary, the United Kingdom, the Netherlands and Spain. For instance, in the United Kingdom, loan demand from
small businesses has dropped significantly — in contrast to large and
medium-sized companies — with many small businesses not even approaching their bank about further funding. In the
case of Hungary, Ireland and Luxembourg, the supply of credit has been adversely
affected by the ongoing deleveraging
of bank balance sheets. The
stress in the banking sector has also been reflected in the difficulties encountered
by firms in Ireland, Slovenia, Spain, Portugal and Greece.

Figure 1.20: SME access to bank lending

Note: Responses to six key questions in the above ECB-Commission survey have been used to construct the composite indicator ‘SME access to bank lending’. Data are based on the percentage of respondents who experienced one of the following situations, whereas the normalised values range from zero (worst) to 1 (best possible situation). Source: ECB/Commission, Commission calculations; (0=worst possible / 1=best possible) See also: http://ec.europa.eu/enterprise/policies/finance/data/enterprise-finance-index/access-to-finance-indicators/loans/index\_en.htm

In Spain, Portugal and Greece businesses are also
disadvantaged by the very long waiting times for payments by public
authorities, which further deteriorated in 2011. On the other hand, Ireland has been able to shorten public
sector payment times, demonstrating that this is possible even in a country
undergoing intensive fiscal consolidation.

Although under normal
circumstances most businesses consider that access to loans is more important
than their interest rate, the turmoil in the banking sector has led to
considerable interest rate differentials between countries. For the first
quarter of 2012, the average interest rates for business loans up to EUR 1
million were highest in Hungary, Bulgaria, Romania, Portugal, Cyprus and Greece, averaging over 9 %, well above the EU average of 5.3 %. Austria, Belgium Luxembourg, France and Finland had the lowest average interest rates, ranging
between 2 % and 3.5 %.

1.7.2.     Investment in equipment

Weak business investment holds back economic recovery.
Despite structural reforms that have improved the business environment,
uncertainty and balance sheet cleaning mean that firms are keeping investment
low and hoarding cash. The difficulties in accessing loans and working capital
from banks are contributing to this by forcing firms to build up their cash
reserves. Firms will only invest when they are confident about the economic
outlook and the recovery of consumer demand.

The figures show that business investment in equipment
has suffered throughout Europe during the crisis (figure 1.21). Bulgaria, Latvia and Estonia have seen the largest drops from 2006-2008 to 2009-2010/11 averages. Equipment
investment continues to be above the EU average in many of the catching-up
countries, but investment levels in Belgium, Italy and Austria have also held up well. Investment levels in Finland, France, Lithuania, the UK and Ireland are below the EU average.

Figure 1.21: Investment in equipment, % of GDP, averages

Note: Latest EU and Bulgaria data are for 2009-2010. Source: Eurostat

1.8.        Annex:
Performance of Member States

The spider graphs below
present, for each indicator, the distance of the respective Member State from the EU average. This distance is expressed in terms of standard deviations,
which is a common measure of the spread of observations in a distribution (in
this case, a measure of the variation of Member State performance around the EU
average). This enhances the comparability of the presentation of indicators
with different measurement units and distributions across Member States. The
same method is used in the country-specific bar charts of this report.

Figure 1.22: Performance of each Member State against the EU average on eight main indicators

||

||

||

||

||

||

||

||

||

||

||

||

||

||

||

||

||

2.           Overview
of progress by broad policy area

2.1.        Introduction

This report
focuses on the measures Member States have taken to improve their
competitiveness, and assesses their performance with respect to a number of key
framework conditions. The main policy areas covered are innovative industrial
policy, sustainability of industry, the business environment, and public
administration.

The report is drafted
on the basis of Article 173 of the Treaty and comes under the Europe 2020 Strategy,
specifically the flagship initiative ‘An Industrial Policy for the
Globalisation Era’. The policy areas which are covered in this report are
also ingredients in the European Semester process, which calls for Europe to restore its competitiveness, among other things by investing in key technologies
and reducing delays in payments by public administrations.

This report looks
at competitiveness both horizontally, with an overview of progress by broad
policy area, and by country, with chapters presenting national performance and
policy developments in the same policy areas. The annex provides details on the
indicators and industry classifications adopted and the data used in the
preparation of the various graphs.

2.2.        Innovative
industrial policy

2.2.1.     Global competition

Research and development
(R&D) and innovation are key sources of economic and productivity growth in
the medium term and the EU has confirmed its objective of spending 3 % of
its GDP on research and development by 2020. Successful investment in research
and innovation can boost productivity and the competitiveness of European
businesses. At the same time, improved innovation performance facilitates
structural changes in Member States’ economies towards economic activity with
high added value.

Meanwhile, our
competitors too are pursuing very ambitious innovation policies.[5]
Japan has set itself the target of increasing its R&D expenditure to 4 %
of its GDP by 2020. South Korea is aiming at an R&D intensity of 5 %, Singapore 3.5 %, and China 2.5 % which means that it is likely to overtake the EU by 2014
in terms of R&D intensity.[6]

For R&D
expenditure in the business sector, the US, Japan and South Korea outperform the EU, with the US and South Korea increasing their lead in this field. This
is in particular due to the lesser ability of the EU to translating knowledge
into advanced and commercially successful goods and services. In particular in
the US, young innovative firms can grow rapidly into world leaders[7].
Finally, the skills base in the EU is eroding due to the decline in the working
population and the lack of highly qualified immigrant workers.

Under the current
economic conditions, public R&D expenditure is under pressure and measures
are needed to promote private R&D expenditure. These include facilitating
access to capital, encouraging closer cooperation between academia and
enterprises and creating a business environment conducive to private
investment. The trend whereby multinationals are shifting R&D across
borders within their global value chain offers new opportunities for Member
States to attract foreign direct investment (FDI) and enlarge their knowledge
base.

To reap the
benefits of technological progress, a stronger focus is needed on promoting the
diffusion of technological development into marketable products and services. An
effective strategy is needed to ensure that the necessary skills are available to
consolidate a technology-driven competitive advantage. National systems for
evaluating innovation policy can foster good governance, including the
administration of public R&D budgets, which should aim for maximum impact.
This chapter focuses on recent innovation policy developments in the Member
States, paying particular attention to the business sector.[8]

2.2.2.     Fostering private research

Many Member States
have enacted measures to promote business sector research, in particular tax
incentives, grants and tax credits. France is providing a Research Tax Credit
that reduces the cost of R&D expenditure for businesses, focusing on
technological innovation. Finland has also recently introduced R&D tax incentives.
The Netherlands has cut subsidies and transformed them into generic tax
deductions; especially for R&D wages and R&D-based profits, with the
goal of making it easier to apply for these instruments. Belgium allows similar tax deductions to be combined with a generic allowance for corporate
equity and R&D grants. Greece has recently shifted its R&D support from
grants to loans, guarantees and tax incentives.

However, tax
incentives can be expensive instruments and need to be well targeted. Several
Member States have therefore revised their systems to make them more suitable
for SMEs. For instance, the Czech Republic has redesigned its previous tax
incentive for in-house research so that smaller companies which outsource
research to external institutes or enterprises can also benefit from it.
Measures in Portugal follow a similar line. Austria has turned its tax
allowance into a tax credit that will better suit SMEs which may make few
profits; and France has a scheme targeting young innovative firms with tax
advantages. The United Kingdom is slightly adapting its R&D tax credit
scheme based on a recent evaluation.[9]

Some
countries are not convinced about the value of tax allowances in promoting
R&D. In Germany, it is assumed that large enterprises would benefit from
such a system more than SMEs. For SMEs, the system of direct grants and project-related
support is still perceived as being more efficient.

Another avenue to
enhance growth based on research and innovation is to increase the availability
of venture capital, an area where Europe lags considerably behind the United States. Recent developments include initiatives in the Netherlands, Poland and France to set up new venture capital schemes. Many of these initiatives focus on
fund-of-fund schemes, investing public funds in venture capital funds, aiming
to attract more private institutional investors to the field.

All Member States
are encouraging closer cooperation between academia and enterprises. Estonia has set up further competence centres to bridge the gap between firms and academic
research. In Slovenia, one selection criterion for public research grants is
whether the researcher cooperates with businesses.

Innovation
vouchers for enterprises to buy services from R&D providers remain a popular
policy measure. For example, Estonia, Latvia and Lithuania all have such
schemes and Slovakia is considering a similar system.

Policy example: Slovenia’s call to strengthen companies’ research departments

As part of the Research and Innovation Strategy of Slovenia 2011-2020, the former Ministry of Higher Education, Science and Technology and the Ministry of Economic Affairs launched, in July 2011, a call for proposals aimed at ‘strengthening companies’ research departments’. Its objectives are to ensure effective interinstitutional mobility of researchers, to support the employment of researchers or developers in the economy, to increase the number of PhDs and ‘young researchers’ in companies and to increase the number of interdisciplinary research departments in the business sector. The funding available for the call amounts to EUR 20 million. More than 60 companies and more than 500 researchers (100 PhD students) will be financed until mid-2014.

Knowledge transfer
has also been a focus of policy measures, including measures such as Knowledge
Transfer Partnerships (UK) for using effective intermediaries; INNCORPORA
(Spain), providing support for hiring highly qualified workers; and Sociétés
d’acceleration de transfert de technologies (France) providing wide support
for technology transfer.

Policy example: the UK’s Knowledge Transfer Partnerships (KTPs)

This programme is led by the Technology Strategy Board, and includes three-way partnerships between a business (the company partner), one or more recent graduates (associates) and a senior academic acting as a supervisor (knowledge base partner). The aim of these partnerships is to increase interactions between the knowledge base (a university or research organisation) and companies through the mediation of the associate who during the period he or she stays in the company will work on a project developed in collaboration with the partners for a year or more.

2.2.3.     Internationalisation of
R&D

A large share of
business R&D in the world is performed by a small group of multinational
firms. Some of them have begun shifting R&D investments outside their home
base, which may present some risks, but also provides new opportunities for
Member States trying to catch up with innovation leaders in Europe.[10] R&D activities abroad help firms to
enter new markets and expand and are not a substitute for R&D in the home
country.[11]

In some Member
States (Ireland, Belgium, Hungary, Czech Republic, Austria) the majority of
business R&D is performed by foreign-owned firms. Ireland benefits from considerable process innovation in multinationals as they aim to
preserve their cost competitiveness. In the Czech Republic, the public
investment agency ‘Czech Invest’ continues to make a significant effort to
attract foreign companies and has
set up a web portal trying to link businesses with partners all over the world
such as in the US and China. In Austria, German firms are prominent in the
research and innovation system. While some American and Chinese enterprises have bought successful
Austrian companies, their manufacturing and R&D activities are usually kept
in Austria as long as the productivity stays high. The strategy of Malta for attracting FDI targets life
sciences. In Finland too, attracting FDI is seen as an increasingly important
topic since tangible investments in manufacturing have contracted more than in
other EU countries.

Policy example: Finland’s R&D internationalisation strategy

The strategy focuses on broad-based innovation policy, and the changes and reforms necessary for its implementation. It focuses on global competence and value networks; demand and user orientation; innovative individuals and communities; and a systemic approach. In practical terms foreign companies are eligible for funding by the Agency for Technology and Innovation (Tekes); a strategy for the internationalisation of education, research and innovation has been adopted by the national Research and Innovation Council; the Finland Distinguished Programme (FiDiPro) enables international researchers to work with the best in Finnish academic researchers; and the legal status of universities has been changed to encourage them to internationalise.

2.2.4.     Promoting key enabling technologies

The capacity of European industry to deploy key
enabling technologies (KETs[12]) is vital for preserving
its global competitiveness.[13] KETs are a key source of innovation, providing
indispensable technology building blocks that enable a wide range of product
applications. Due to their cross-cutting nature and systemic relevance, KETs
are instrumental in modernising Europe’s industrial base and in driving the
development of entirely new industries.

Figure 2.1: Competitiveness in KETs

Note: Figure for Malta reflects exports by a single large microelectronics company. Source: Calculations by Commission/ZEW/NIW based on Patstat and UN Comtrade data

A recent study[14]
found that most Member States have policy initiatives supporting basic and technological research on key
enabling technologies. However, in many of them there are no specific measures
covering the later stages of technology and product development and commercialisation.

Policy example: Innovation Alliances in Germany

Innovation Alliances are created around specific application areas or future markets. They combine several stages of technology, aiming at ground-breaking industrial innovation and comprise several strands that are mutually reinforcing in bringing new technologies to the market. The scheme provides funding for strategic cooperation between industry and public research in key technology areas that demand a large amount of resources and a long time horizon, but promise considerable innovation and economic impact. The funding premise is that every euro of Federal money should be matched by five euros from industry. This investment policy is also important for small and medium-sized enterprises since knowledge of future technological developments together with the commitment from large companies enables SMEs to remove some of the uncertainty from the high level of risk involved in R&D investment decisions.

In order to
successfully deploy key enabling technologies, it is important to combine
several actors across the value chain. In larger Member States programmes can
fund projects that focus on the complete value chain, but smaller Member States
often do not cover the whole of it.

SMEs are important
for the deployment of key enabling technologies but they are often too small to
make a difference in a particular industry. To make an impact on a global
scale, large firms are needed. Hence, programmes that promote collaboration
with international partners can be valuable. For instance, the Functional
Materials programme in Finland emphasises the whole value chain and
international collaboration.

There have been
two essential constraints to enhanced collaboration between academia and
business: the low capacity of enterprises to absorb research, and the lack of
applied research capability that enterprises can access. To correct this, Ireland has tried to close the gap by requiring that research programmes involve industry
collaboration. Investments in key enabling technologies, such as
nanotechnology, advanced materials, microelectronics and biotechnology, made by
the Science Foundation Ireland are aligned with the interests of
industrial partners interested in deploying these technologies in areas such as
semiconductors, medical devices or food processing.

Policy example: The French patent fund

France Brevets is a EUR 100 million investment fund dedicated to promoting the use of patents. Its task is to enable universities and other public research bodies, as well as private firms, to better exploit their patents, also internationally. This should happen through creating patent clusters for licencing purposes, and through combined management and pooling of public and private patents.

Smaller Member
States tend to have a less comprehensive research base on key enabling
technologies. To achieve a critical mass, some countries are making specific
choices on research themes to support, and on the scale of intervention. They
concentrate often on close coordination between infrastructure and project
investments. In Denmark, policy-makers have focused on new climate technologies
and the objective of Green Labs DK is to become a leader in developing
new technologies for the purpose of supporting energy-policy objectives on
security of supply, independence from fossil fuels, a cleaner environment and
cost-efficiency.

Several Member
States are promoting key enabling technologies explicitly, while others use
more general programmes targeting industrial innovation. Larger Member States
tend to focus on top-down thematic programmes, whereas smaller Member States
favour a bottom-up approach that is driven by industry demand. Further, many
countries are pursuing active cluster policies to promote regional links
between academia, enterprises, banks and policy-makers, benefiting also key enabling
technologies.

But more could be
done[15] and policy learning can
provide a springboard for action. The United Kingdom is developing a network of
technology and innovation centres — termed ‘catapults’ — based on the German Fraunhofer
Institutes[16], with a focus on
developing pilot and demonstration projects. The development of clusters and
networks can be supported with the assistance of the EU structural funds.[17]
And several Member States have set up ambitious programmes to improve the use
of public procurement as a tool to promote innovation.

Policy example: The Dutch Small Business Innovation Research programme

This programme allows public authorities to publish calls for tender to procure an innovative product that still needs to be developed. In a first step, companies hand in their proposals for product development and several companies are then funded to perform feasibility studies. In the light of these studies, three companies are asked in a second step to develop their idea into a marketable product and are subsidised with up to EUR 450 000 each. In a third step, the procuring authority is free to buy one of these three products. The advantages of this scheme are: it is quick, result-oriented and tailored to SME needs, with 100 % funding and little red tape. The programme has been positively evaluated. More than a dozen marketable innovations (e.g. traffic guiding, dyke monitoring, bio-based catalysis) have been developed through this tool since 2004.

2.2.5.     Using structural funds for
innovation

In some countries,
structural funds are the main source of financing for R&D and innovation
policy budgets (e.g. Greece, Poland, the Czech Republic, Hungary, Estonia, Slovakia, Bulgaria, and Romania). The key question for them is how to spend the
available funds well and how to increase the absorptive capacity.[18]

Structural funds
are widely used to develop a research and innovation infrastructure. Bulgaria has created the Sofia Technology Park specialising in ICT and pharmaceuticals; and Lithuania has created five higher education, research and business oriented science and
technology valleys.

To leverage public
funding, Poland’s Operational Programme Innovative Economy and Hungary’s policy measure Support for Market-oriented R&D Activities show how EU
structural funds can be employed to support industrial innovation. Another
option is to trigger investment through the use of public-private partnerships,
as is the case in the Christian Doppler Laboratories, where every private euro
invested in applied basic research is doubled by a matching public investment.
Grants by innovation agencies are sometimes linked to a requirement that
companies and research institutions pay return fees based on the
utilisation of research infrastructure. The French Key Technologies for the Digital
Economy programme provides 100 % funding for pilot installations involving
nanoelectronics. Industrial partners gain access to the equipment and
laboratories by paying an access fee, and if the project is an economic success
they have to pay a return fee.

Policy example: The CzechAccelerator

The CzechAccelerator 2011-2014 programme is part of the Operational Programme Enterprise and Innovation. Since 2011, the programme has offered companies doing business in ICT, clean technologies, biotechnology, life sciences, new materials or nanotechnology a stay in the US (Silicon Valley, Boston), Israel, Singapore or Switzerland. In addition to an office in one of the business incubators, the participants are provided with consulting services, coaching and training. Companies also participate in various networking events, which makes their search for a strategic partner or investor easier. The programme aims to enhance the managerial skills and capacities needed to successfully commercialise products, implement business plans and gain easier access to venture capital.

2.2.6.     Improving skills for
innovation

Figure 2.2: Tertiary graduates in science and technology per 1000 of population aged 20-29

Note: Latest available data for France (2009) and Italy (2008). Source: Eurostat, 2011

Technological and
industrial changes are increasing the demand for employees with high and
intermediate levels of skills.[19] Thus in a
knowledge-intensive economy, excellence in research, engineering and science
needs to be backed by further skills, in particular in management, team work,
creativity and design. Attracting top talent from abroad can be an effective
strategy to build up excellence quickly and gain a more immediate competitive
advantage.[20]

Skills gaps have
started to emerge in some Member States, partly related to a decline in the
working-age population due to decreasing birth rates over the last decades and
emigration of well-qualified people. This issue is likely to become more
important in the future. Most Member States have a relatively low share of
graduates in science, technology and engineering (Figure 2.2), but not many have taken ambitious action to improve
this. However, some have specific actions; for example, Germany has adopted a strategy to ensure a sufficient skills base;[21] Austria will fund more study places in applied natural
sciences and engineering; and Estonia has an ‘industrial PhD scheme’ and a web
portal to attract Estonian talent from abroad.

2.2.7.     Good governance and
evaluation in the area of innovation policy

Many Member States
are improving the governance of their innovation system, in particular by
extending the use of evaluations. Austria and Finland have evaluated their
innovation system recently.

Others are
evaluating partially: the Czech Republic embarked on an audit in 2012 and Estonia is evaluating its current policies. Germany has commissioned an evaluation of its major
SME innovation programme which supports the findings of
stakeholders and the government that the programme is very successful. The
United Kingdom Innovation Agency NESTA has performed a preliminary evaluation[22] of its SBRI scheme, which aims
to encourage innovation via public procurement. France is evaluating its cluster policy. Luxembourg has established annual
evaluations of university research activities.

Italy has a new agency for evaluating research
and the quality of R&D in universities. In Ireland, a number of partial
evaluation reports have recently been published, but there are no plans to
conduct an overall evaluation of the national innovation system.

Policy example: Germany’s SME innovation programme

The evaluation of the Zentrales Innovationsprogramm Mittelstand (ZIM)[23] notes its easy and quick application procedures, high approval rates (about 75 %), sufficient amounts (up to EUR 350 000 per application), high flexibility (applications can be made by all sectors and industries and equally by individuals and groups of enterprises) and relatively low administrative costs.

Policy
fragmentation due to overlapping programmes, unclear competences of public
bodies and the lack of an overall strategy to promote innovation has been
identified as a challenge in many Member States over the last few years.
However, many Member States have recognised this challenge and are taking steps
to address it. Evaluations of existing policies are a natural first step, upon
which new strategies can be built.

Some Member States
are developing new comprehensive strategies. The United Kingdom published a new
R&D and Science Strategy in December 2011 and France will review its
National Research and Inovation Strategy 2009-2012. Austria has adopted a new
comprehensive innovation strategy with the vision to become an innovation
leader and Finland is likely to streamline its governmental R&D
institutions. Slovenia has adopted a new Research and Innovation Strategy for
the next 10 years and simplified its governance structures. Ireland is planning to reform its innovation strategies on the basis of evaluations.

Romania adopted a reform action plan concerning
the innovation system in 2011, as a result of the functional review performed
in the context of the previous loan received from the EU. In Slovakia, an ambitious new strategy still awaits implementation.

Stakeholder involvement
has been recognised as an
important success factor in public and private innovation governance systems.[24]
A fairly new development is
that the internationalisation of the R&D and innovation system has become
an important issue in many countries.

A question that
will become more prominent in the future is to what extent increased R&D
and innovation spending is translated into successful enterprises, growth and
jobs. One factor that has an effect on this is the business environment,
including improving the business environment for start-ups, reducing the administrative
burden, and pursuing active SME and entrepreneurship policies. Such measures
are essential for fostering innovation and commercialisation of research, and
form an essential complement to policies promoting research.[25]

2.3.        Sustainable
industry

2.3.1.     Introduction

Sustainable
competitiveness refers to the promotion of economic growth and development
while at the same time improving resource efficiency, minimising waste and
strengthening energy security. The Annual Growth Survey 2012[26]
highlighted the importance of unleashing the potential of green growth through
enhancing structural reforms to create a new policy mix of regulatory, market
and voluntary measures to promote investment in greening the European economy.

Businesses are
becoming increasingly aware of the importance of sustainable industry. A recent
Eurobarometer survey[27] highlighted that 93 %
of European SMEs are taking at least one action to be more resource-efficient,
most notably in order to save energy, minimise waste and recycle. However, the survey
also reveals that in comparison with large companies, SMEs less frequently
undertake some form of sustainable activity, less frequently bid for a public
procurement contract which includes environmental requirements, and less frequently
offer green products and services. Although the concept of sustainable industry
is gaining ground, the survey seems to indicate that there is significant
growth potential to further enhance the role of sustainable industry in the EU.

2.3.2.     Energy consumption, energy
intensity and carbon intensity

Within the National
Reform Programmes of the Europe 2020 Strategy, Member States have agreed to a
number of targets, including energy efficiency and renewable energy targets. They
have also been required to submit their second National Energy Efficiency
Action Plan in June 2011[28] and to publish their
National Renewable Energy Action Plans in 2010.

Between 2000 and
2010, final energy consumption in industry[29] in the EU fell
by approximately 12 %. This declining trend in energy consumption in
industry compares to an increase in energy consumption of 7 % for
transport, 32 % for services and 5.2 % for residential sectors over
the same 10-year period. As a result, the share of industry in total final
energy consumption decreased from 29.4 % in 2000 to 25.3 % in 2010.
With respect to energy intensity, for the same period 2000 to 2010, energy
intensity in industry and energy[30] in the EU declined by
10.6 %.

Looking at the figures
at country level, most Member States have seen a decline in energy intensity
over the past decade, 2000-2010. In particular, Member States with relatively
high energy intensity have seen improved efficiency over the past decade.
Particularly large declines in energy intensity were experienced in Bulgaria, Romania, Ireland, Cyprus and Poland. This has been due to a combination of both a decline
in energy consumption by industry and an increase in its gross value added over
the period. Other Member States have seen an increase in energy intensity
between 2000 and 2010, such as Austria, Luxembourg and the Netherlands. In the case of Luxembourg, the increase in energy consumption can be explained
by an increase in energy consumption by industry and a decline in gross value
added. However, in the case of Austria and the Netherlands, the increase in
energy consumption was greater than the accompanying increase in gross value
added in that category.

 Figure 2.3: Energy intensity in industry and the energy sector

Note: Includes construction and final non-energy consumption. Measured in kilograms of oil equivalent per euro gross value added (reference year 2000). The latest data for France is for 2009. No data were available for Malta. Source: Calculations based on Eurostat data

The policy
response of the Member States to help industries improve energy performance
varies according to their specificities. For example, Belgium and the Netherlands provide tax deductions for investment in energy efficiency. The Netherlands also provides a subsidy scheme to support catching-up with the cheapest
available technology in industry for renewables. Various forms of financial incentives
are also provided across Member States. For example, in Malta grants are provided towards the initial capital investment in renewables and in Cyprus grants are awarded for energy-efficient investments. In Finland, funding is granted for
environmental technologies. In Germany, interest-rate subsidies are granted to
projects aimed at increasing the energy efficiency of SMEs. Measures have also
targeted improving energy efficiency in buildings, including in industrial
buildings. Furthermore, initiatives such as the Ecodesign Directive[31]
are driving change and helping to deliver more sustainable products, production
and consumption.

The recent
Eurobarometer survey highlighted further measures that can be undertaken to
assist industry. It underlined that more information on energy service
contracts and options to save energy would help around a quarter of SMEs to
reduce their energy bills. Moreover, 25 % of SMEs stated that simplifying
administrative procedures for creating co-generation capacity, such as
installing solar panels, would be effective in boosting energy efficiency.

The
carbon intensity of European industry[32] declined by
12.1 % from 2000 to 2009. Almost all Member States were part of this, with
the most significant reductions being measured in Romania, Slovakia, Ireland, Bulgaria and the Czech Republic. In all these Member States this was due to
significant declines in carbon emissions accompanied by an increase in gross
value added of industry and energy over this period.

2.3.3.     Resource efficiency

Resource
efficiency is one of the main challenges for the EU, but at the same time it
offers significant potential for European firms. Enhancing resource efficiency
can potentially reduce costs for businesses. There are good opportunities to
improve further in this field, e.g. by adopting cleaner technologies, improving
the use of by-products and waste, and adopting eco-design solutions. As part of
the Europe 2020 Strategy, the Commission has launched the Industry Policy and
Resource Efficiency flagships under the sustainable growth priority. More
recently, the Commission launched a Resource Efficiency Roadmap[33]
in 2011.

The recent
Eurobarometer survey highlights a number of trends in resource efficiency. For
example, a third of European SMEs are striving to improve their resource
efficiency. Around a fifth say that they are taking these measures because of
financial or tax incentives or other forms of public support. Over a third
indicate that measures to improve resource efficiency have reduced their
production costs while about a quarter report that their production costs have
increased.

A 2009 study[34]
suggested that European companies are taking action to increase their resource
efficiency. The most prominent actions were first-order measures, i.e.
incremental changes in production through short-term investments, e.g.
recycling of materials, use of green and intelligent information technology,
and the use of green business models. Second-order measures, i.e. fundamental
changes to business operations involving longer-term investments, were present
to a lesser extent. In both these cases, the lack of access to finance and lack
of knowledge were identified as major barriers.

When looking at
resource efficiency in the context of waste disposal, waste from production
processes is no longer being seen as just a burden, but is being recognised as
an important re-usable resource for industries. Figures from 2004 and 2008[35]
show that the total amount of waste generated by EU industry fell by 8.6 %,
whereas for the whole economy this decline was 8.1 %, thus indicating that
industry reduced its waste faster than the wider economy. Country-specific data
for 2008 indicate that enterprises generate the highest amount of waste (in tonnes
per capita) in Bulgaria, Luxembourg, Finland and Estonia, while enterprises in Latvia, Hungary and Cyprus produce the lowest amount.

Policy example: Thermal insulation of buildings in Austria

A EUR 100 million package for the thermal restoration of existing premises up to 2014 was introduced in Austria in 2009. Owners of both private and company premises are granted special grants for insulating exterior walls of buildings and replacing old heating systems and windows with new ones. In 2011, more than 18 000 projects (approximately 17 500 for residential and 800 for industrial buildings) were funded which triggered a total investment value of EUR 860 million.

Policy example: The Green Start programme in Ireland

The Green Start programme (Ireland) helps companies to put a simple environmental management system in place. The programme is designed to boost the level of environmental awareness concerning regulatory compliance and developments in green markets in companies that have no in-house expertise or exposure to environmental issues. An increase in environmental performance can help companies reach a level where they will achieve competitive advantage through greater resource efficiency (energy/water/waste costs) and greater market share through enhanced credentials.

2.3.4.     Development of
environmental industries

Eco-industry
refers to the production of goods and services to measure, prevent, limit,
minimise or correct environmental damage to water, air and soil and problems
related to waste, noise and eco-systems. The global market for environmental
goods and services represents an opportunity for European firms. The global
market for eco-industries is estimated at roughly EUR 1.15 trillion a
year, with the European Union seen as capturing around one third of it. In the
future the global market could almost double, with the average estimate for
2020 being around EUR 2 trillion a year.[36]

According to a
recent study,[37] European companies are performing well on
the global market, in particular in photovoltaics, air pollution control and
waste disposal where the EU seems to have a comparative advantage. However, the
study also shows that many environmental goods and services included in the
study are sold on local or national markets and not traded extensively.

When looking at
the situation from an SME point of view, the Eurobarometer results suggest that
one quarter of SMEs in the EU, approximately 26 %, offer green products or
services.[38] This would tend to suggest that SMEs still
have significant potential to enter the eco-industry. Furthermore, the results
show that 87 % of SMEs in the EU that sell green products or services only
do so in national markets and that it is large companies that are more likely
to sell their green products or services in foreign markets. Therefore, there
is significant potential for European SMEs to exploit the green market to a
greater extent.

Innovation plays
an important role in helping to decouple growth from environmental pressures
and it is essential to have a framework conducive to innovation, including
competitive markets and openness to trade and investment. Green innovation is
also influenced by other factors such as the environmental policy framework.
For example, in Slovenia, the Slovenian Development and Export Bank (SID) has earmarked
EUR 44 million from June 2012 for SMEs to finance green technology
solutions such as waste or water treatment or reducing air pollution. In Germany, the ongoing Energy Research Programme has allocated EUR 3.5 billion to
energy research between 2011 and 2014. The SDE+ subsidy incentive scheme in the Netherlands is also promoting the use of cost-effective technologies, including renewable
sources of heat. In Italy, as part of initiatives to favour the environmental
restoration and industrial reconversion of local areas in difficulty, such as
Porto Marghera in Veneto and Porto Torres in Sardinia, there is an attempt to
favour the emergence of a more sustainable industry (e.g. through the promotion
of ‘green chemicals’), stressing that restructuring processes can also provide
opportunities. Also, Finland has a green mining programme aimed at making Finland a global leader in the sustainable
mineral industry by 2020.

The size of the
eco-industry can be measured by its turnover, an approximation of which is the
level of environmental protection expenditure. In 2009, the estimated
environmental protection expenditure by industry as a percentage of GDP was
0.43 %.[39] This figure has remained relatively stable
since 2001.

In 2011
approximately 0.71 % of the value of EU exports corresponded to environmental
goods.[40] The percentage varies between Member
States. The largest share of environmental goods in total exports was in Cyprus, Luxembourg and Germany. At the other end of the spectrum, Malta, Latvia and Bulgaria had the lowest level of exports of environmental goods. The large export share of Cyprus is due to the assembly and export of photovoltaic panels from imported parts.

The figure 2.4
shows that the bulk of exports of environmental goods belong to the group of
photosensitive semiconductor devices, including photovoltaic cells which
account for approximately 44 % of EU exports of environmental goods. This
concentration has perhaps contributed to the difficulties the sector has
experienced. Other major exports were devices for filtering and purifying
liquids and gases, accounting for approximately 24 % of exports in 2011.

Several
initiatives have been taken by Member States to promote green industries. Germany has an initiative on ‘electro-mobility’ which aims to establish it as a leading
market for electric vehicles. A similar project has been launched in Finland, known as the Electric Vehicles Systems (EVE) programme. This programme is aimed at
companies and research institutions whose goal is to increase the amount of
business related to electric vehicles and machinery. Germany is also working on
a programme aimed at developing hydrogen and fuel cell technologies. Poland has launched a green technologies accelerator scheme aimed at fostering the
development and international transfer of Polish innovative environmental
technologies.

Policy example: Green deals in the Netherlands

Green Deals are the government’s ‘deals’ with society. The government has asked businesses, citizens, civil society organisations, and local and regional authorities to indicate green projects which they have not managed to launch in an effort to identify how it can help these projects become viable. This can take place through providing advisory capacity, organisational capacity, removing legislative and regulatory obstacles and establishing public-private financing structures. Nearly 60 ‘Green deals’ have been signed since 2011 and an initial analysis by the Dutch Government found that these deals have supported and strengthened the policy to achieve CO2 reduction and renewable energy targets. An example of a green deal includes a pilot project with a greenhouse company to store heat from their greenhouses in the summer for use during the winter.

Figure 2.4: Composition of intra- and extra-EU 27 exports of environmental goods, 2011 (volume)

Source: Eurostat COMEXT

On green public
procurement, the Commission set an indicative target that by 2050, 50 % of
all public tendering procedures should be green.[41]
A recent study[42] found that the uptake of
green public procurement in the EU has been significant. 26 % of the latest
contracts signed in 2009-2010 by public authorities in the EU included all the
core green criteria, while 55 % of these contracts included at least one
core criterion. The top performing countries, according to the contracts signed
by public authorities, were Belgium, Denmark, the Netherlands and Sweden. The Eurobarometer survey also showed that green public procurement is still a
challenge for SMEs, with only 11 % of SMEs bidding for a public
procurement tender that included environmental requirements compared with 16 %
of large companies.

Policy example: ÖkoKauf Wien/EcoBuy Vienna’[43]

An example of best practice in green and efficient public administration is the green procurement initiative ÖkoKauf Wien/EcoBuy Vienna. It is a programme for sustainable public procurement across the entire city administration of Vienna. It has developed about 100 product catalogues and green criteria for supply, construction and other regularly procured services. By changing administrative routines the programme had a significant financial and environmental impact corresponding to about EUR 17 million and 30 000 t of CO2 emissions per year. It demonstrates that green products do not need to cost more and educating suppliers is an important additional result. Ownership of the programme has been broad, with about 180 public procurement practitioners from all parts of the administration involved in 22 working groups.

2.3.5.     Conclusion

In an effort to
tackle the challenges posed by environmental constraints and ensure sustainable
production, Member States are using a variety of demand-side and supply-side
policies. The effects of these policies have not always been fully favourable,
as the difficulties of the photovoltaics sector show. However, demand-side
policies and support, such as green public procurement and labelling, taxation
and subsidies seem to have solidly taken root. Supply-side policies, such as
better access to finance for environmentally viable solutions, education and
information services directed at enterprises, have been identified as
bottlenecks and should be strengthened.

Despite the
potential for problems, well-directed, commercially sound and significant
investment by European industry is needed to seize opportunities in
environmental industries, especially for SMEs. To complement this investment, Member
States have to strike the right balance between creating supportive policies,
avoiding wasteful spending and avoiding excessive burdens on companies when they
design policies aiming at creating incentives for investment required to
achieve sustainable growth.

2.4.        Business
environment

2.4.1.     Introduction

The business
environment can be described as a set of conditions that affect a company’s
operations and include customers, competitors, suppliers, legislation and
economic and political factors. The World Bank Report
‘Doing Business in 2012’, confirms that OECD high-income economies, by a large
margin, have the world’s most business-friendly environment. A good
business environment requires rules that are efficient, transparent and provide
certainty. The regulatory framework must contribute to achieving growth and jobs, while continuing to
take into account social and
environmental objectives.

2.4.2.     Access to finance

Since the
beginning of the financial crisis, SMEs have been particularly affected by
tightening credit conditions and face difficulties in accessing financing. As a result of the slowdown, debt financing
has become more expensive and difficult to obtain, and alternative financing
instruments are often not fully developed in Member States.[44]

According to the
SMEs’ Access to Finance Survey 2011,[45] access to finance is the
second most pressing problem facing EU SMEs after finding customers. Larger and
older companies are more likely to obtain external financing whilst younger and
smaller companies, and in particular microcompanies, are more likely to be
rejected. 77 % of large companies that applied for a bank loan were
granted the loan. The equivalent figure for SMEs is 63 %. For SMEs active for
between 2-5 years, 24 % received the finance requested and for
microcompanies, with less than 10 people, only 16 % could obtain access to
finance.

The survey results
show that access to bank loans has continued to deteriorate; on balance, SMEs
reported a worsening in the availability of bank loans (20 %, up from 14 %
in the previous survey round). Along with access to bank loans, SMEs also
reported a further deterioration in the availability of bank overdrafts and of
trade credit, indicating an overall considerable worsening in the access to
finance.

According to the
survey, since 2009 the overall situation has deteriorated in more than half of
the Member States. This was mainly caused by the overall tightening of credit
standards due to banks’ greater risk aversion. The results show that just under
a fifth (19 %) of EU SMEs applied for a bank loan in the last six months
of 2011, down from 26 % in 2009. Applications for bank loans were most
common in France (31 %) and Slovenia (30 %), while for SMEs in Germany, Italy and Poland there were significant drops in the proportion of firms applying for bank
loans from 2009. SMEs in Ireland (12 %) and Greece (11 %) were most
likely not to apply because of the risk of rejection. SMEs in Finland and Sweden were more likely than those in the other Member States to gain access to bank
loans. In Greece and Ireland the proportions that were rejected were significantly
higher than the EU average.

While the volume
of large loans (over a million euros) to the corporate sector in the euro area has
stabilised on a year-to-year basis, that of smaller amounts, and especially
those below EUR 250 000, which
are most likely to be granted to SMEs, has continued to deteriorate. In addition,
the interest rate differentials for corporate loans have widened considerably
within the euro area, reflecting the sovereign debt problems.

Although the
decline reflects the lack of investment demand in a recession, SMEs perceived a
further deterioration in the availability of bank loans between October 2011
and March 2012 (20% of SMEs thought so in net terms). In the second half of
2011, euro area SMEs’ need for bank loans and overdrafts increased somewhat,
although this was not reflected in their financing need for fixed investment or
for inventory and working capital. The deteriorating economic environment was
responsible for a part of the deteriorating access to loans, but banks’ unwillingness
has also played a role, as 23% of SMEs (in net terms) pointed to a lower
willingness of banks to provide a loan, which was close to their perception in
in the period after the Lehman bankruptcy.[46]

Banks’ continuing
efforts to strengthen their balance sheets, their risk aversion, and their other
difficulties could make it difficult for the European banking sector to continue
to fullfill its role as the main provider of finance to the economy that it had
before the crisis. Lending to businesses could be hampered even more if the
securitisation market for small business loans does not take off in the near
future.

However, obtaining
financing from alternative sources is difficult for most firms. The issuance of
bonds is a viable option only for larger companies with an external rating. The
overwhelming majority of SMEs do not have an external rating and in any case
look for smaller amounts of financing which is potentially more difficult to
place with investors.

Figure 2.5: Venture capital as % of GDP, 2011

Note: No data for Cyprus, Lithuania, Malta or Slovakia. Source: EVCA

Venture capital
funds are operators that provide mostly equity finance to companies with growth
potential. Venture capital is
essential for innovative firms that have prospects for rapid growth and are
willing to take outside equity investors. These firms are a small minority of
all firms, but they often have the potential to grow into large ones. The
December 2011 Commission survey shows that equity financing was used by less
than one in ten SMEs (7 %) during the period April-October 2011. Its use
was more likely among larger businesses (11 % of those with more than 250
employees). Gazelles (firms that are less than five years old and have grown at
more than 20 % per annum) are also slightly more likely (12 %) than
SMEs overall to use equity financing. The main challenge concerning this source
of financing among SMEs is their lack of investment readiness and limited
knowledge of equity financing.[47]

The deteriorating
economic outlook and the sovereign debt crisis have taken their toll on the
availability of venture capital. Many venture capital funds are nursing their
portfolio of companies and are shunning new deals. Venture performance has
remained weak, apart from those in the top quartile, emphasising the importance
of careful selection by investors.[48] Venture capital markets
continue to be seriously underdeveloped in a number of Member States.

Looking at a
selection of policy responses from the Member States, a recent evaluation[49]
identified good practices in terms of stages in programme development: design,
operation and monitoring and evaluation. These practices can be built into any
programme, whether a loan, guarantee or equity scheme, and whatever stage of
company development is targeted.

The Member States
have a variety of programmes over the whole spectrum of funding gaps that firms
may encounter. This makes direct comparisons of programmes difficult,
especially as the client firms range from start-ups with no employees to
well-established growing firms.

In terms of
programme design, good practices require the scheme to fit into the financial
ecosystem; to provide for linkages with other support schemes; to have clear
and specific intervention aims and targets; to avoid crowding out private
sources of finance; for investments to specify the target rate of return; and
to have flexibility built in from the beginning.

When operating
programmes, good practices tended to favour speed in decision-making;
awareness-raising among potential customers; collaboration with private sources
of finance; direct cooperation with the applicants; and provision of advice in
addition to finance.

On programme
evaluation, it is good practice to ensure regular evaluation of the success of
any programme, and ongoing public scrutiny.

Policy example: High-tech Gründerfonds in Germany

In Germany the Equity Fund for High-Tech Start-ups provides venture capital for start-ups with large growth potential, which nonetheless often have difficulty in obtaining financing from private venture capital funds, because the investment seems too risky. The fund provides not only financing, but also coaching to the companies in its portfolio. It is a good example of successfully implemented public-private partnerships, as the Federal Government and private companies contribute to the funding.

2.4.3.     Support to SMEs and the
implementation of the Small Business Act for Europe

In 2010, there
were almost 21 million SMEs in the EU. Of these, over 19 million (or 92 %
of all EU businesses) were microfirms with less than ten employees.[50] The Small Business Act for Europe (SBA) that was
adopted in 2008 reflects the Commission’s commitment to SMEs as the backbone of
the EU economy. The SBA is a
policy framework aimed at strengthening SMEs so that they can grow and create
employment. Between 2008 and 2010, the Commission and the Member States implemented actions set out in the SBA to lighten the administrative burden, facilitate
SMEs’ access to finance and support their entry into new markets. Although many
of the actions outlined in the SBA have been started, a review of
implementation in 2011, and a reassessment of needs in the light of the recent
economic crisis, revealed that more must be done to make Europe more
entrepreneurial.

In order to remain
competitive, to grow and to create employment, SMEs need to be encouraged and
supported in their efforts to enter new markets. The SBA and its review
encourage Member States to take measures to help SMEs access public
procurement, take advantage of the single market, use environmental challenges
as a springboard to new business opportunities, and tap into international
markets beyond the EU.

2.4.3.1.  Entrepreneurship

The SBA Fact
Sheets 2011/2012 provide an analysis of the situation of SMEs across Europe. These indicate that several Member States have launched programmes and initiatives
aimed at improving the environment for entrepreneurship.

Measures have been
taken to encourage people to become entrepreneurs, in particular with projects
targeting young people, the unemployed and women. A large majority of member
States have introduced entrepreeurship curricula in schools and are
increasingly providing entrepreneurship training programmesfor teachers. This
should be extended to all levels of education. Many countries have also
promoted the entrepreneurial spirit with a series of targeted initiatives.
Female entrepreneurship has been fostered through programmes in Ireland, Italy, Luxembourg, Malta, Slovakia and Spain. In Finland child care allowances and social
benefits have been increased to support self-employment.

Policy example: Entrepreneur Individuel à Responsabilité Limité in France

In France, the creation of an entrepreneur statute (Entrepreneur Individuel à Responsabilité Limité or EIRL) allows entrepreneurs to defer the payment of any tax until a turnover has been generated. This reduces the cost of setting up a business and encourages entrepreneurship. This statute also allows entrepreneurs to differentiate between their personal and business capital, thus avoiding situations where a business bankruptcy turns into a personal insolvency.

2.4.3.2.  Public procurement

The SBA Fact
Sheets indicate that SMEs are impeded from participating in public procurement
markets, which account for 17 % of EU GDP, often simply because smaller
businesses are not aware of opportunities or are discouraged by procedures. For
small firms, the costs of participating in tendering procedures can easily be
prohibitive if the process is not efficient. Further, public authorities may
find it easier to focus on large enterprises.

Many Member States
have enacted measures to simplify access to public procurement, using
electronic portals and overhauling their legislation. In Belgium, as from January 2012, it is compulsory for both the Flemish and the Walloon
administrations to use e-tendering procedures. Further, Estonia, Finland, Ireland, Portugal, Romania and the UK have sought to improve access to information
and to facilitate the participation of SMEs in public procurement. To this end
they have improved the electronic procurement system, and facilitated the
participation of, and the flow of information to SMEs.

Many Member States
have also simplified existing laws to reduce and limit requirements for SMEs,
and to divide larger contracts into smaller lots to facilitate access for SMEs.
Austria, the Czech Republic, Italy, Latvia, Romania, Slovenia and Spain are examples of this.

2.4.3.3.  Internationalisation

Many Member States
have introduced support schemes or implemented plans aimed at fostering
internationalisation. According to a study,[51] 25 % of
SMEs in the EU export or have exported at some point during the last three
years. However, most of the exports are to countries inside the EU and only
about 13 % of SMEs export to markets outside the EU.

Support and
financial assistance to businesses interested in expanding their markets has been
introduced in Austria, Denmark and Malta. In the Netherlands the ‘sME Export
Accelerator’ provides easier access to credit for SMEs that want to increase
their exports.

Services and
assistance have been offered to businesses to help them find new markets or
improve their export potential. Estonia’s government is preparing an ‘Asia
Programme’ aimed at helping exporters to enter the Chinese market. Germany has put in place several initiatives to promote exporting. The UK has launched a programme that includes the provision of commercial export finance
facilities to SMEs.

Policy example: Made in Italy portal

The Made in Italy portal is an interactive platform aimed at helping Italian companies to promote and sell their products around the world. The portal is available in English, Chinese and Russian. The services provided, which are all completely free, include e-commerce services and matching services for Italian partners. The programme addresses a key problem for Italian companies, namely the setting-up of online sales channels.

2.4.4.     Reducing administrative
burdens

2.4.4.1.  Administrative burden

The EU’s better
regulation policy aims to simplify and improve existing regulations, improve
the design of new regulations, and increase the effectiveness of applicable
rules and regulations. The better regulation agenda is focused on ensuring that
legislation affecting businesses is fit for purpose and that decision-makers
fully understand all the costs and impacts associated with it.

One report[52]
notes that almost a third of the administrative burden stemming from EU
legislation has to do with inefficient national implementation. The report also
notes good progress in implementing the action programme to reduce the administrative
burden for businesses in the EU by 25 % by 2012. The Commission has
proposed measures that reduce administrative burdens by up to 33 % or more
than EUR 40 billion. Of these, Council and Parliament have so far
adopted measures amounting to a reduction of about 22 %.

According to the
report, all Member States have set targets for reducing the administrative
burden. Targets vary between -15 % (Luxembourg, Malta) and -30 % (Lithuania, Spain). Member States should further improve their stakeholder consultation, adopt a
structured approach to impact assessment and take into account the implications
of legislation for SMEs and microcompanies.

Policy example: Bottom-up regulation in Sweden

The comprehensive programme for reducing small businesses’ costs includes a ‘bottom-up’ regulation, first launched in 2007, which states that every regulation proposed by a government agency must be analysed from the businesses’ point of view to make sure that it does not cause any additional administrative burden. The impact analyses are then audited by the Swedish Better Regulation Council to ensure that the aim of the policy is fulfilled with the least possible administrative costs for companies. The Better Regulation Council can also intervene at an earlier stage in the legislative process, can assist in the scrutiny of impact assessments produced by the Commission, and must be consulted by government administrative agencies prior to the adoption of regulations with a potential impact on the business environment or business competitiveness.

2.4.4.2.  Licence requirements

Licence
requirements refer to any form of government regulation, registration, permit
or approval allowing a business to carry on an activity or an occupation.

The associated
fees and time needed to obtain a licence greatly influence the ease of starting
up a company and doing business.

Figure 2.6: Average number of days to obtain licences in Europe

Source: European Commission based on the pilot survey ‘Business Dynamics: Start-ups, Business Transfers and bankruptcy”, January 2011. This was carried out in 2010 with a limited number of respondents (2 in the case of Malta), which may have skewed the results. An extended survey will be carried out in 2013.

The Commission established in 2007[53]
five different company models (a hotel with a restaurant, a plumbing company, a
manufacturer of steel products, a manufacturer of small IT devices and a
wholesale or retail distributor). These five firm types have since been used as
benchmarks to estimate the burden of licensing procedures.

A recent study[54]
assessed the impact on business exerted by legal and administrative procedures
for licensing. The graph below shows the average number of days needed to obtain
all the required licences to start running their economic activity for the five
models of businesses included in the study.

The average time
to obtain all necessary licences in the EU is slightly over 67 days. The best
performers are the Czech Republic and the UK, with respectively 8.5 and 27.9
days.

There are substantial differences among Member States as
regards the time needed and the cost and complexity of procedures. Austria is one of the best performers in Europe in terms of the total number of licences required.
For all five types of business only two licences are needed. However, the
complexity, the costs and the long delays in obtaining licences hinder business
activity. The Czech Republic has a regulatory system featuring a relatively
small number of licences and low complexity.

Policy example: Ley de Emprendedores in Spain

The legal and regulatory framework for businesses in Spain is one the most burdensome in the EU. The time needed to obtain an operating licence is the longest — 116 days. The government is working on a number of initiatives under the Law on Entrepreneurs (Ley de Emprendedores). These encompass rationalising and boosting the efficiency of the many one-stop shop systems and generalising tacit consent in licensing procedures.

2.4.5.     Services

Figure 2.7: Economic activities as share of GDP (in %)

Source: Eurostat

Services play an
increasingly important role in the European economy. Market services[55] account for more than 50 % of GDP,
compared to around 45 % in 1995. Including non-market services,[56] the sector now represents about three
quarters of the total economy, against about two thirds in 1995. At the same time the share of industry fell
from 24 % to around 19 %.

Part of the shift
represents the outsourcing of service activities previously performed in house.
Manufacturing therefore retains a strong structural relationship with many
services. Services have become important input factors for manufacturing that
increasingly requires specialised services to design new products and manage
the production and distribution processes. This results in vertical integration
of services within the manufacturing process along the whole industrial value
chain. Also, manufacturing firms have started to offer a variety of services
with their products. At the same time, many service industries such as
transport, health and information and communication technologies depend on a
competitive industry to produce the equipment they use. Owing to this mutual
dependency, industry and services are converging.

Business-related
services account for over a third
of production inputs in manufacturing and therefore play an important role for the competitiveness of industry. Such services include
network industries (energy, telecommunications, transport, etc.), distributive
trade and others (including consulting, engineering, research and development,
and information technology services).

2.4.5.1.  Competition and regulation
in business-related services

Government
regulation normally aims to correct market failures and improve the functioning
of markets. However, finding the correct regulatory balance between conflicting
objectives is often delicate. Regulations may become too restrictive and impair
the functioning of markets. This could have an effect on resource allocation and
on production efficiency. Efficient
competition and market regulation in business-related services have a considerable
impact on the overall business environment and can strengthen the
competitiveness of European industry. Competition creates incentives for
companies to innovate and increase their productivity, and thereby to improve
their position in global markets.

Based on a
horizontal regulatory approach, the Services Directive has been a major step
forward towards making the single market for services a reality. It has set in
motion major efforts in the Member States to modernise their administrations
and the legal framework for the provision of services, and to facilitate the
establishment and operation of service activities across borders. Full
implementation of the Services Directive is expected to lead to more investment
and to stimulate competition and productivity, which would also result in
higher performance of the sector and reduced average prices for services.

Figure 2.8: The GDP impact of the Services Directive (in % of GDP growth)

Source: ‘The economic impact of the Services Directive: A first assessment following implementation’, European Economy Economic Papers 456, June 2012, European Commission

The Member States
have advanced considerably in implementing the Services Directive and have
abolished many discriminatory, unjustified or disproportionate requirements, in
particular in business services. Nevertheless, the Commission assessment is
that in many Member States implementation is still incomplete and it has
identified a large number of regulations in force that breach the Services
Directive. In addition, in cases when the Directive leaves the Member States
with a degree of discretion, often the Member States have chosen to maintain
the status quo. Examples of this include quantitative and geographic restrictions,
legal form and shareholding requirements, and the obligation to apply fixed,
minimum or maximum tariffs. To improve the situation, the Commission has
presented[57] a set of actions to
stimulate growth in services, including a detailed report on the implementation
of the Services Directive by Member State.[58]

Based on an
economic assessment carried out by the Commission, the estimated impact of the implementation
of the Services Directive on GDP is 0.8%, with an additional 0.4% expected
under a moderatelu ambitious scenario – where each country would have the
average EU levels of barriers.[59] The expected economic benefit is even
higher in some Member States, reflecting their different starting positions,
the extent to which barriers have already been reduced and the share of
services in the economy.

As part of the
implementation of the Services Directive, points of single contact (PSC) have
been established by all Member States in order to provide entrepreneurs with
access to clear, up-to-date information, together with an easy means of
completing administrative procedures both at home and abroad. So far, the gap
between the best performing and the less performing PSCs is wide, and there is
considerable scope for further improvement. For example, many procedures are
not yet available online and information and support is often available only in
the language of the Member State. The level of awareness among businesses so
far still appears to be rather low and more awareness-raising would be
necessary at both EU and national level.[60]

A recent study has
highlighted PSCs in Ireland, Slovakia, the Czech Republic, Estonia and one German Land (Hessen) as particularly user-friendly, based on the criteria of efficiency/effectiveness,
user satisfaction and online accessibility of information and procedures.[61]

A number of Member
States have recently announced or have already launched ambitious initiatives
to strengthen competition and to further reduce regulatory restrictions.

Entry and conduct
regulation in business-related professions and services remains quite
restrictive in many Member States. However, some Member States are currently in
the process of analysing the potential for removing unjustified restrictions in
regulated professions or have announced that they will do so in the near future.

Policy example: Grow Italy

The Italian government has initiated a number of measures to spur growth by reforming market regulation and strengthening competition in the services sector. The Decree-law Cresci Italia (Grow Italy) promotes enhanced competition in key markets by liberalising professional services, lowering entry barriers in some markets (fuel distribution, insurance, pharmacies), and increasing competition in energy and transport. The government has also strengthened the role of the competition authority.

2.4.5.2.  Competition and regulation
in network industries

The energy market
is still not fully liberalised, since many Member States have not yet
transposed the Third Internal Energy Market Package.[62] New investments are also needed to enhance the energy
and gas networks in Europe. Analysing the competition in energy markets gives a
mixed picture. In some countries a single electricity company either dominates
national production (Cyprus and Malta) or has a large share of the market
(above 80 % in Estonia, Latvia, France, Luxembourg, Greece and Slovakia). On the other hand, Poland, the UK, Spain, Italy and Germany benefit from a
more competitive market.

In the markets for
natural gas, considerable concentration is evident especially in Estonia, Finland and Latvia, but also in Bulgaria, Poland, Portugal and Slovenia. The UK and Germany have the lowest degree of market concentration in the hands of a single company. In
order to increase competition in the gas market, in January 2012 Italy decided to unbundle the incumbent gas operator from the gas transmission operator.

The development of
the transport sector is hampered by legal barriers to market entry, especially
in the rail sector, where lack of competition considerably lowers the
efficiency of the service. Improvements in the sector would particularly
benefit the entire Union if made by large or transit countries. The challenges facing
Member States include reducing the negative externalities generated by the sector,
upgrading the infrastructure or increasing the degree of competition.
Competition is particularly hampered where there is no effective separation
between the infrastructure operator(s) and service providers.

The
telecommunications sector has become increasingly competitive, and in
particular mobile communication prices have fallen steadily in the EU over the
last decade.[63] A comparison of the market share of new
entrants between July 2009 and July 2011 shows mixed results. The EU telecommunications
regulatory framework has encouraged many Member States to liberalise the
sector. However, almost half of the Member States[64] have not yet fully transposed the relevant EU Directives.

2.5.        Improving
the quality of public administration

2.5.1.     Public administration and
competitiveness

The quality of
public administration and institutions that govern economic and social
interactions within a country is a fundamental factor in improving
competitiveness and social well-being. At a time when governments are confronted
with numerous challenges, including fiscal pressures and an erosion of trust in
government,[65] Member States’ administrations have also to deal with
rapid economic change, complex regulatory issues, new technologies and
services, and calls for openness, transparency and increased citizen
participation.

Firms interact
with the public administration in a variety of ways, for instance when
registering a business, applying for licences, settling legal disputes or
paying taxes. The efficiency and predictability of these interactions are
important to economy-wide competitiveness, because they have a substantial
impact on the costs and risks that companies face in investment decisions. In
addition, firms indirectly depend on the public administration, as they
are the prime beneficiaries of public goods and bear a large part of the
overall tax burden.

SMEs face
disproportionately higher administrative and regulatory burdens. Smaller
enterprises have limited managerial capacities and are at a disadvantage when
it comes to hiring specialised staff to look after administrative processes.
The same holds for buying expertise in regulatory and legislative issues.
Particularly in microenterprises, the entrepreneur has to deal with
administration issues, which can deflect attention from core business
activities. Furthermore, costs resulting from delays are more problematic for
small firms, as their activities and range of products are usually less
diversified than those of large firms.

The large number
of interactions between the public administration and enterprises, as well as
the various channels of transmission through which administrative quality has
an impact on a country’s competitiveness, make it difficult to fully capture
the complexity of this relationship. The most important features of public
administration for competitiveness are determined by the costs and uncertainty
of firms in dealing with the public administration, as well as by its
effectiveness in providing public services (see Figure 2.09). On this basis,
the quality of an administration for the business environment could be captured
through the following categories of links.[66]

The general
links cover overarching influences that affect the quality of the public
administration and its relationship to the business environment. These are general
governance (the multi-dimensional concept of administration quality), tools
for administrative modernisation (the use of instruments to enhance the
capacities of the administration; developments in the general sophistication of
service provision), and corruption and fraud (the extent to which the
powers of government and administration are exercised for private gain,
including state capture by vested private interests).

The specific
links capture the most important interactions and contact points between
the public administration and private companies. These are starting a
business and licensing, public procurement, tax compliance and
tax administration, and efficiency of civil justice.

Against this
background, modernising public administrations in the Member States for
competitiveness includes two separate but related aspects: reforms of the
(regulatory) framework conditions under which private companies operate, and
internal measures to improve the quality of service provision by increasing the
public administration’s capacities and incentives to provide goods and services
in a reliable, flexible, efficient and effective manner.

Figure 2.9: Channels of transmission for the relationship between public administration and competitiveness

Source: WIFO (2012)

The quality of public administration affects competitiveness through two general transmission channels: · The direct channel refers to the performance of public administration in dealing with firms from a business perspective. This channel can be further subdivided into ‘cost’ and ‘quality’ components, the latter referring to the reduction of uncertainty about public rules and decisions as a productivity-enhancing service to the enterprise. Costs, both direct costs (e.g. fees resulting from application and registration processes, compliance costs resulting from firm staff devoting time to bureaucratic procedures, fees for obtaining permits for new production technologies, costs due to staff time necessary for tax compliance) and costs of duration (e.g. payment delays in the context of public procurement, long processing times for solving commercial disputes, etc.), are a major barrier to competitiveness. High costs of interaction with the administration adversely affect the main drivers of economic growth as they are likely to discourage trade, investment and entrepreneurship, and reduce the capacity for innovation. Uncertainty about costs, duration and outcomes encourages smaller, shorter-term, and lower-productivity investment. Firms face considerable uncertainty about future conditions when making long-term decisions. In addition to shocks in the form of business cycles or crises, firms may find themselves insecure about the future business environment or regulatory framework. An efficient public administration can help to reduce this uncertainty through fast, predictable and reliable enactment of the general laws and rules affecting a business. · The indirect channel captures the efficiency of public goods provision and resource use. A public administration that provides services efficiently and absorbs relatively few resources has an indirect impact on productivity and competitiveness. This is mainly due to the fact that public goods represent a central input factor for private production and that markets are unable to provide them efficiently. Thus, the allocation of public funds (not only the amount of allocations, but also their composition and quality), the efficiency in the provision of public goods, and the cost of administration are key factors for a country’s competitiveness.

2.5.2.     Policy improvements

The reform of
public administration is a key challenge in several Member States (e.g. Bulgaria, Greece, Hungary, Italy, Latvia, Lithuania, Romania, Poland and Slovakia). In these
countries, weak administrative and judicial capacity, and legal uncertainty,
constitute key impediments in addressing economic development challenges.
Nevertheless, in the aftermath of the crisis, almost all Member States have
implemented deep changes that have an impact on the functioning of the public
administrative systems and institutions.

However, the
responses of the Member States have varied in their scope, scale, nature and
effectiveness. Some governments have focused on reducing staff and wages in the
public sector, but others have taken this opportunity to speed up the pace of wider
administrative modernisation. At the same time, efforts are being made in some
Member States to fight corruption and improve the efficiency of the civil
justice systems. Figure 2.10 depicts the overall effectiveness of government in
the Member States.

Figure 2.10: Government effectiveness (2010)

Source: World Bank — Worldwide Governance Indicators

2.5.2.1.  Administrative modernisation

Modernisation of
the public sector is pursued through the application of an array of tools that
aim to increase the capacity of the public administration to provide high-quality
services. Although solutions differ from one Member State to another, most
instruments involve making use of opportunities provided by information and
communication technologies (ICT), applying a strategic approach to human
resources management, organising and steering public services provision based
on performance, putting the clients’ needs at centre stage, and reorganising the
interaction between the public and private sectors.

Electronic
and technology-enabled government

The enhanced use
of e-government applications is a central characteristic of many recent reforms
of public administrations. The use of online public services is a procedural
solution to many general problems currently facing the public sector — such as
accessibility, facilitating internal and external administrative processes,
reducing administrative burdens and cutting red tape — thereby harvesting gains
in transparency, efficiency and effectiveness of services.

Internal public
sector excellence potentially benefits from ICT through several channels: public
sector employees are relieved of routine tasks, several procedural steps can be
outsourced to the clients themselves, the quality of information transmitted is
increased while transaction costs are reduced, some tasks can be centralised,
e.g. at shared service centres, and processing times are generally reduced.
Additionally, there could be synergies with other internal technological
innovations in the public sector, such as knowledge management and business
management software.

Electronic
exchange of information between administrative entities — e.g. regulatory
bodies at different levels of government — may speed up multilevel
decision-making processes and thus improve the overall quality of regulatory
management and policy enforcement. To the extent that problems of mutual
coordination and cooperation stem from informational deficiencies, substantial
progress can be made through interactive systems of communication. Successful
strategies for collaboration among different parts of the administration and levels
of government must, however, incorporate the setting of common technology
standards and the creation of a data network between organisations.

External
applications of e-government include informative, transactional and
interactional procedures, which are often streamlined for business interests.
In several Member States some basic government services for businesses (e.g.
social contributions for employees, submission of data to statistical offices,
public procurement, customs declarations, VAT declarations, corporate tax
declarations, environmental-related permits, and registration of a new company)
are now 100 % e-enabled (Figure 2.11). This has been supported by the
Services Directive, which requires Member States to set up points of single
contact through which businesses can obtain all relevant information and
complete all necessary procedures and formalities by electronic means. However,
the take-up by businesses remains lower, which challenges the public sector to
rethink how public services can become more user-centric and move away from a
one-size-fits-all approach to e-government services, and towards greater
personalisation.

Figure 2.11: Availability of eight business-related e-government services vs use by small enterprises (10-49 employees)

Source: CapGemini (2010); Eurostat (2011)

Although the
utilisation of social media in the public sector is still very limited, there
are several examples of the use of innovative communication technologies, with
special reference to external communication and participatory feedback
processes.

Policy example: Estonian prohibition on the collection of duplicate data

Previously Estonian companies had to provide the same data in various reports and the data were presented on paper or in a format that did not allow them to be processed electronically. Starting from 1 January 2010 the Business Register launched an electronic data transmission system for submitting annual reports. Under the Accounting Act, from 1 January 2010 the state or local government institutions have no longer been entitled to require businesses to provide data which they have already submitted to the Business Register in their annual reports. The government can exempt the state or local government institutions from the prohibition for a period of up to two years. In order to avoid duplicate data collection, Statistics Estonia intends to improve its data collection channel eSTAT, such that data submitted electronically to the register according to the taxonomy of the annual report will be pre-filled for the economic units in eSTAT. The respondent needs to complete only the rows not included in the annual report. Statistics Estonia will be able to cease duplicate collection of the data included in annual reports after 2012 (when the collection of data for 2011 is finalised).

Policy example: Point of Single Contact for Business in Luxembourg

‘Guichet.lu’ is a national website with the objective of simplifying contacts with the state through fast and user-friendly access to all the information and services provided by public institutions. The website is designed to operate as a one-stop shop for businesses. It is divided into two main sections: one for citizens and one for businesses. The business section is structured around the life cycle of a company (start-up, operation, R&D, environment, international trade, etc.) and offers businesses access to information and online services provided by the state; a description of the main administrative procedures; the possibility to download forms and to submit them online and electronically signed to the competent administration; and the possibility to carry out administrative procedures electronically.

Human
resources management

Human resources
management has become a central component of public sector reforms to enhance
the skills and capabilities of administrative staff in dealing with the
challenges of a modern public sector. The different cultural settings and
backgrounds in the Member States determine how public sector personnel is
controlled and managed. The tools used by the Member States vary significantly —
including policies such as improving recruitment strategies, development,
training, communication, leadership and motivation of employees — but they have
in common a shifting focus from simply administering public personnel towards a
people-centred approach. The degree of implementation of different human
resources management tools by Member States is described by the
post-bureaucracy index (Figure 2.12). Based on the analysis of public
employment systems across the EU with regard to the legal status of employees,
career structures, recruitment, salary systems and tenure system, contemporary
trends in public personnel management reflect a convergence toward reforms that
affect the legal status of public employees. Government staffs are experiencing
a tendency towards more private law contracts without guaranteed lifetime
employment, more flexible working patterns and pay, and a weakening of
collectivist cultures. Not all human resources tools are uncontested and their
application has to be evaluated in the light of the local context, but
understanding public personnel as a key resource of the public sector is a
central question in public sector modernisation.

Figure 2.12: Post-bureaucracy index[67] (0 % = traditional bureaucracy, 100 % = post-bureaucracy)

Source: Demmke and Moilanen (2010)

Performance orientation and evidence-based steering

Performance orientation, one of the most widely used
instruments for modernising public service provision, includes the measurement,
incorporation and use of information that refers to the quality of service
provision. The performance perspective is fundamental for strategic thinking
and steering of the administration. From an internal perspective, performance
measurement aims to achieve a general improvement in the manageability of
public sector organisations by providing information for improved decisions and
supporting evidence-based instruments such as impact assessments; from an
external perspective it is a prerequisite for benchmarking. Thus, it can serve
as a foundation for informed decisions by policy-makers and increases
accountability towards stakeholders, including businesses. Some Member States,
such as the UK, used performance information already in the 1980s, while others
have only recently started to make use of it (e.g. performance budgeting,
management by objectives, regulatory impact assessment).

Policy example: Regulatory impact assessment in the United Kingdom

One of the earliest adopters of regulatory impact assessments was the United Kingdom, which in the late 1990s shifted its emphasis from deregulation to better regulation. A better regulation support unit was set up in the Cabinet Office to systematically apply this tool in order to inform policy decisions and provide a framework for the ex ante analysis of the costs, benefits and risks of policies. This regulatory impact assessment (RIA) of policy proposals is based on five principles formulated by the Better Regulation Task Force in 1997: (i) proportionality (intervention only when necessary, minimisation of costs); (ii) accountability (decision must be justified); (iii) consistency (of all government rules and standards; fair implementation); (iv) transparency (clear communication and effective consultation with affected interest groups, easily understandable); and (v) targeting (focus on problem, minimisation of side effects). The Department for Business, Innovation and Skills, currently responsible for the UK’s better regulation efforts, has recently adopted the ‘One-in, One-out’ rule, which requires the administration to suggest the abolition of one regulation in the same ‘red tape challenge theme’ as a consequence of every new proposal resulting in a regulation, in order to cut, or at least avoid increasing, red tape for businesses.[68] One of the key criteria for the success of the impact assessment was the top-level political support it received. Other factors are the allocation of responsibility for impact assessment programmes between the relevant line ministries and a central control and support body, thorough training of the regulators, consistent but flexible analytical methods (qualitative assessments and quantitative cost/benefit analysis), integration of RIA into the policy-making process and communication of its results, and extensive involvement of the public.[69]

Service
orientation

The introduction
of systematic quality management and the improvement of administrative
processes, such as one-stop shop concepts, ensure that the public sector sets
its course according to the expectations of businesses and citizens. Defining
the satisfaction of clients as a target variable of public conduct leads to a
large array of further tools, such as stakeholder consultation, participation,
e-government, service charters, reduction of red tape, better trained service
personnel, and easily understandable and concise forms.

Policy example: Service quality management among local administrations in the Netherlands

A quality institute (KING) supports representatives and public servants of local administrations in their ambition to be close to the public and business. KING is established by the local administrations and aims to achieve a sustainable increase in the effectiveness of local government and a steady improvement in the quality of local services. The label ‘good quality of local administration services’ for dealing with businesses could serve as a model for cities outside the Netherlands.

Institutional
reorganisation: market mechanisms and decentralisation

The institutional
arrangement of public tasks, i.e. cooperation with the private sector and
competition within the public sector, is another key reform tool. First,
several market mechanisms (e.g. benchmarking, the systematic comparison of
costs and outputs, and competitions that promote best-practice solutions[70])
help to make European public administrations comparable and allow best
practices to be identified and efficiency to be improved. Second, the inclusion
of the private sector and the general public in administrative tasks, by means
of both consultation and co-production (e.g. outsourcing of formerly public
tasks to markets, public-private partnerships, cross-departmental support
units), has increased the number of organisations that hold an active stake in
public service provision. Third, several reform approaches have included
decentralisation efforts and notions of agency multiplication, whose effects
are largely dependent on the national context and the administrative culture.

2.5.2.2.  Efficiency of civil justice

A highly efficient
civil justice system is overwhelmingly important for competitiveness. Securing
property rights, timely and correct resolution of business disputes,
insolvencies, commercial claims and labour disputes, and swift enforcement of
decisions are all important for a business environment conducive to growth,
risk-taking and investment. The direct costs of ‘using’ the system, associated
with the indirect costs stemming from the long duration of procedures,
constitute a burden for businesses and undermine access to justice. At the same
time, an inefficient judiciary system that is vulnerable to political or
special interest influence and corruption is probably one of the largest obstacles
to economic development and competitiveness.

Figure 2.13 ranks
the Member States based on the time (calendar days) and estimated cost (percentage
of claims) required to enforce a contract.

Figure 2.13: Time and cost to enforce contracts in the EU Member States

Source: Word Bank, Doing Business (2011)

Some Member States
have initiated reforms aimed at reducing delays in the legal system, in
particular through changes in judicial organisation and a general reduction of
the number of courts (e.g. Austria, Belgium, France and the Netherlands). However, the efficiency of civil justice systems needs to be improved in many
countries, in particular by reducing backlogs, speeding up judicial proceedings
and introducing alternative forms of dispute resolution, as highlighted by the
2012 European Semester recommendations.[71]

Performance
measurement

Techniques and
methods to speed up the processing of cases are increasingly being implemented
by Member States. This requires quantified objectives to be set (timeframes for
different case types) and performance to be evaluated. For example, some
regions of Germany (e.g. the Stuttgart Court of Appeal) have introduced a
system of inspections (Nachschau) through which Court of Appeal judges
visit lower courts to look at cases pending longer than a certain period.

Performance
measurement is essential, as it is the only way to understand real
inefficiencies and to devise reforms capable of speeding up civil procedures.
The publication of court performance data (including timeframes and duration)
is a key component of the public accountability of courts and helps to set up
processes where delays are identified and trigger action. For example, some
regions in Denmark (e.g. the Esbjerg District Court) and Finland (e.g. the Turku Administrative Court) publish annual reports on courts’ performance.

Case
management policies

Long judicial
procedures increase the uncertainty and cost for the plaintiff and the
defendant. Delays can result from the way in which procedures are regulated but
also from deliberate tactics employed to lengthen the process. Procedural rules
containing standards for certain types of cases, and enhanced powers of judges
in the conduct of the proceedings are central in reducing the length of
contract disputes. Several instruments have been applied in a number of Member
States to speed up the proceedings:[72] limitations on the
number of hearings, for example two hearings for a typical case; limitations on
adjournments; an active case management role for judges (authority to push
cases forward); stimulation of early meetings between parties; triage between
small and large cases, with separate procedures; standard templates for
decisions. Overall, case management policies need to take into account the
complexity and the size of the claim.

Alternative
dispute resolution

An important role
in resolving disputes rapidly and economically can be played by alternative
dispute resolution mechanisms. These can be used by disagreeing parties as a
means to come to an agreement outside of litigation in court, and take the form
of arbitration, conciliation or mediation. Many of these processes are
organised and conducted outside the judicial system by different institutions.
But alternative mechanisms can also be informal methods attached to official
judicial mechanisms and to settlement methods such as mediation programmes and
ombudsman offices. An increased use of alternative methods allows courts to
concentrate primarily on those matters that require resolution by a judge.

Alternative
mechanisms have gained widespread acceptance in most Member States. They are
also being used as a means to speed up dispute resolution in specific areas,
such as construction. For example, the UK Housing Grants, Construction and
Regeneration Act 1996 recommended that contracting parties include in their
contracts provisions for adjudication[73] of disputes.

2.5.2.3.  Corruption and fraud

By undermining the rule of law, deterring investment and distorting
competition and the efficient allocation of public funds, corruption has
significant effects on a country’s competitiveness. It is estimated that
annually up to one per cent of EU GDP is diverted through corruption.[74] The occurrence of corruption is probably
one of the most widespread problems facing administrative systems, and this
holds true for many of the Member States.

The 2011
Eurobarometer[75] survey on corruption
carried out in all 27 Member States showed that the majority (74 %) of
Europeans believe that corruption is a major problem in their country. The
differences of perception among Member States are considerable (i.e. from 98 %
to 19 %). Almost half of all Europeans (47 %) think that the level of
corruption in their country has risen over the past three years. Most Europeans
think corruption exists within local (76 %), regional (75 %) and
national (79 %) institutions. Europeans believe that bribery and the abuse
of positions of power take place in all areas of public service. National
politicians (57 %) and officials awarding public tenders (47 %) are
the most likely to be considered involved in such activities. 40 % of
Europeans believe that too close a relationship between business and politics
contributes to corruption. Lack of action by politicians (36 %) and lack
of transparency about how public money is spent (33 %) are believed to be
contributing factors.

One very common proposal of international anti-corruption programmes is
the establishment of dedicated independent anti-corruption agencies with law
enforcement powers.[76]
This approach has been used in several Member States. For instance, Bulgaria and Romania have established anti-corruption agencies and have taken a number of measures
to pursue judicial reform and the fight against corruption. However, if such
agencies are to make a real contribution to the fight against corruption, the
independence of the judiciary needs to be strengthened.

State capture

State capture refers to attempts by individuals or firms to influence the
drafting of laws or regulations. Increasing accountability and the level of
transparency could make an important contribution to successfully combating this
form of corruption. For instance, Slovenia has had a mandatory register of lobbyists
since 2010; France and Germany have voluntary registers, and the UK and Irish governments are considering whether to introduce mandatory registers of
lobbyists.

Specific areas, such as public procurement, are considered at higher
risk. According to the assessment made by Transparency International,[77] this is particularly the case in Bulgaria, the Czech Republic, Italy, Romania and Slovakia, where, in spite of legislative frameworks
in line with the EU law, the rules are often circumvented with impunity. The
obligation for public administrations to publish details on their spending and
funding decisions, especially in the context of public procurement tenders,
could be a useful tool to increase transparency. For instance, Portugal has reached a share of 75 % of public procurement tenders that are fully digitised,
whereas this proportion is below 5 % for the rest of Europe.[78]

Policy example: Central electronic registry of contracts in Slovakia

Following its introduction in late 2010, the government operates a central electronic registry of contracts and invoices.[79] All contracts awarded by and invoices paid by public administrations, including those at regional and municipal level, have to be published in the online registry. In addition, following the amendment to the Civil Code, the contracts awarded by public bodies become legally valid only upon their publication on the internet. The measures adopted have significantly increased transparency and public control of public spending.

A positive contribution can also be made by disclosing asset declarations
of staff, adopting dedicated rules for handling conflicts of interest not only
at the level of members of parliament, but for the administration too,
conducting compulsory public hearings on draft laws in the presence of experts,
carrying out external supervision of the financing of political parties and
generally strengthening media independence.

Administrative corruption

At the root of administrative corruption (i.e. corruption that affects
the implementation of existing laws) is discretion on the part of public
servants, who may discriminate or prioritise service delivery and apply
exemptions from existing regulation. Therefore, one step to curb administrative
corruption would be to cut red tape and to conduct risk analyses of existing
laws on a regular basis to identify those bearing a high risk of
misapplication. A further powerful step would be to increase the use of
e-government tools for interacting with the public administration. In
particular, this allows anonymous interactions between firms and public sector
officials, which could be an effective measure to limit administrative
corruption.

2.5.2.4.  Towards less burdensome
taxation systems

The tax
compliance burden and competitiveness

The compliance
burden of taxation has become heavier for businesses in the last two decades.
Economic literature indicates that since compliance costs for businesses are
high and fall disproportionately on small enterprises, it is not enough to
calculate the purely financial cost of a tax rule; the administrative costs it
causes also have to be taken into account. For example, the compliance costs
connected with a tax credit may well outweigh its perceived value for some
firms; consequently, the design of tax policy must include such costs.

The Annual Growth
Survey 2012 paid attention to both the quality and the quantity of tax revenues
and noted that tax systems could be improved by reducing the administrative
burden and coordinating measures at EU level. This could be done while keeping
revenues stable, and without compromising the fight against tax fraud and
evasion.

Given the
complexity and variety of tax systems, comparisons are difficult. The most
wide-ranging study has been conducted by the World Bank and PriceWaterhouseCoopers,
measuring the burden a sample company would incur around the world. According
to this study, the European Union scores slightly below average among the OECD
countries. The average total time required to pay taxes in the EU is 208 hours
(OECD average 195). However, thanks to policy efforts and the increasing use of
online tools, there is a general trend towards a lower tax compliance burden, meaning
that EU countries must improve their tax systems just to maintain their
relative position.

Figure 2.14
depicts the situation as of 2012 by showing the number of hours a company
operating in the same conditions would need to spend to comply in the Member
States.

Figure 2.14: Number of hours to comply across the European Union

Source: Chart adapted by the Commission based on the PwC study Paying Taxes 2012, The Global Picture

The data paint a
complex picture — there is large variance in the burden caused by any of the
three tax types, and Member States can have a light burden for one tax and a
very heavy one for the others. This suggests that there is room for improvement
and policy learning using good practices.

Clearly, all taxes
impose some collection burden on economic actors. The scope and weight of rules
governing tax collection could also depend on the prevalence of tax avoidance
and attempts to reduce it. However, increasing the compliance burden does not
seem to be a very successful way of combating avoidance. Comparing data on the tax
compliance burden with the size of the shadow economy, it appears that
countries with a heavy compliance burden also tend to have a higher than
average shadow economy. In other words, countries that score well in terms of the
tax compliance burden also tend to have a smaller black market. However, the
causality is not clear as the compliance burden may be a consequence of tax
avoidance, because countries facing high levels of both may try to reduce them
with more rules. Independently of this, there is no discernible positive
effect: a heavy compliance burden does not seem to lead to less tax evasion,
not even over time, and therefore penalises honest businesses without achieving
its goal. Furthermore, a tax system that is burdensome on companies is also
likely to be more expensive for the state to administer and enforce, in terms
both of resources and personnel.

In conclusion,
since a heavy tax compliance burden clearly imposes higher costs on businesses,
without any evident benefits in reducing tax evasion, and is probably more
expensive to run, lightening the tax compliance burden would have a positive
effect on competitiveness.

Policy example: The Office of Tax Simplification in the UK

Although the United Kingdom is already one of the top performers among the Member States in terms of the tax compliance burden, the UK government has committed itself to further improving its tax environment. A new Office of Tax Simplification (OTS) was set up in July 2010 in order to specifically address this issue. Particular attention has been paid to smaller companies, which are most likely to suffer from regulatory burdens. In particular, the OTS was given the task of compiling a ‘small Business Tax Review’, published in February 2012, aimed at providing the government with independent advice on how to simplify the tax system. The two goals of this process are to make the tax obligations easier to understand, and simpler to fulfil. The report has started a dialogue between the OTS and the government aimed at identifying action that could be taken to make tax compliance easier and quicker.

Broadening
of the tax base

In recent years,
flat-rate taxes have received a considerable amount of attention as a tool for reducing
the complexity of the tax system and a means of attracting investment. However,
apart from VAT, where multiple rates lead firms to keep parallel accounting
systems and thus increase the administrative burden, flat rates do not
automatically lead to a lighter compliance burden; they only do so when linked to
a simplification of the tax code, reducing exemptions and deductions and leading
to a broader tax base. An example of this is Ireland, where the flat corporate
tax rate (at 12.5 % in most cases) was combined with a cut in tax
deductions by 29 %. At the same level of resources raised, a low flat rate
imposed on a larger base is more efficient than a higher rate, or multiple
rates imposed on a tax base narrowed by exemptions and deductions, since these
inevitably increase the complexity of the system. The tax code is often used as
a policy instrument to promote or discourage certain forms of behaviour; it is
clear that this increases its complexity and the administrative costs. These
can be so high that sometimes firms can choose to forgo the tax incentives they
could claim rather than incur the administrative costs necessary to do so. This
is the case in particular for smaller companies, which have very limited amounts
of in-house tax expertise.

There has been a
widespread trend towards a broader tax base with a reduced tax rate, even
though most countries have at the same time continued to grant new allowances
to favour investments in priority areas such as R&D. Nonetheless, the steep
decline in corporate tax rates has stopped since the outbreak of the crisis. At
the same time, top marginal income tax rates are on an upward trend again,
which is to the disadvantage of non-incorporated businesses. This is
particularly relevant for SMEs.

While broadening
the tax base has proven to be an effective method of reducing the tax
compliance burden, it is often difficult to implement. The multiple aims of the
tax system make it difficult to introduce reforms without a fundamental
rethink, and the elimination of allowances, incentives and special tax rates is
politically difficult, as this always creates winners and losers.

Inevitably, the
number of authorities the taxpayer has to have contact with and report to is
positively correlated with the resulting administrative burden. For instance, a
study has indicated that the compliance costs for VAT are higher when it is
administered by a different authority from the one dealing with corporate
income tax. In many countries taxes and social charges have in the past been
administered separately, sometimes each by a different administration. While
this is sometimes still the case, there has been a movement towards reducing
the number of interfaces for the taxpayer.

Value added
tax

Within the
taxation system, VAT has become a larger revenue component, partly owing to a
rise in the standard rate in half of the Member States. As noted in the Annual
Growth Survey 2012, it is growth-friendlier than taxes levied on capital and
labour income. This makes VAT central in the pursuit of fiscal consolidation
and economic growth. The OECD also considers that reforms to broaden the VAT
base would be good for both economic growth and tax revenues. Less clear-cut is
the effect of VAT on the compliance burden. The compliance costs of VAT are
substantial according to most studies, but they are estimated to differ greatly
across countries, and across firms within the same country. For instance, in
the United Kingdom they have been estimated to range from approximately 2 %
of the total bill for small businesses to 0.04 % for large businesses. VAT
compliance costs are partially due to the possibilities of evasion and fraud,
but as the effectiveness of checks does not seem to increase as the burden
increases, there is room for improvement.

One of the most
effective ways to reduce the burden of VAT compliance appears to be to have
fewer rates and exceptions. This was advocated by the Commission’s 2010 Green
Paper on the Future of VAT, which noted that a ‘broad-based VAT system, ideally
with a single rate, would be quite close to the ideal of a pure consumption tax
that minimises compliance costs’. Most Member States have been reluctant to
take action on this front. There are reasons to believe that VAT is not an
optimal way of achieving other goals — studies suggest that the increased
compliance burden and the distortion of incentives created by a complex VAT
system can easily outweigh its benefits, and that social goals could be better
achieved through targeted social policies.

The one-stop shop
approach and the use of online tools have been widely adopted in taxation and
often also cover the administration of VAT. The Commission is planning to use a
one-stop shop approach for cross-border transactions, in which information
about all VAT regimes should be provided through a central web portal. The
one-stop shop system will initially be applied to e-commerce, broadcasting and
telecom services, even if the payment will be allocated to different Member
States. The system will be gradually extended to other goods and services.
Electronic invoicing will be a cornerstone of the system.

While a
well-designed system and robust electronic support can significantly reduce the
VAT compliance burden, they do not change the fact that the burden falls
disproportionately on smaller enterprises. Therefore some countries have
devised special regimes that reduce their obligations with regard to VAT as
well as other forms of taxation.

Special
regimes for small and micro enterprises

There are good
reasons for policies that aim specifically to reduce the tax compliance costs of
smaller companies. The OECD found that while total business tax compliance
costs tend to be higher for large companies as an absolute figure, as a
percentage of sales they are significantly higher for SMEs; similarly, the
European Tax Survey estimated that European SMEs have a cost to tax revenue
ratio (i.e. the ratio between total tax-related compliance costs and paid
taxes) of 30.9 %; for large companies this was 1.9 %. For small firms
time is literally money and time used to prepare taxes could be used productively.
This could create a more level playing field, in particular for
microenterprises. Reducing the tax compliance burden on small and micro enterprises
could improve their chances of survival and encourage growth.

While all Member
States have simplified tax rules for SMEs, often reducing the amount of
information to be reported to the tax authorities and the frequency of filing,
some countries have taken much more radical steps. In particular, they have
allowed some or all taxes to be replaced by a simple replacement tax, usually
defined as a cash-basis or presumptive tax.

The design of a
simplified taxation regime for microenterprises is important, since it has to
achieve the goal of reducing the administrative burden on them without
producing distortive effects, such as encouraging companies to stay small, or
creating conflicts with other aspects and aims of the tax system (e.g.
incentives and rebates). Therefore, such systems need to be designed for the
specific conditions and needs of the microenterprises of a specific country.

3.           Country
chapters

3.1.        Belgium

Sectoral specialisation of manufacturing – Belgium (2009)

Note : No data available for sectors C12 (tobacco products), C15 (Leather and related products), C30 (other transport equipment) and C32 (other manufacturing) Source: Eurostat

3.1.1.     Introduction

At the detailed
manufacturing industry level, Belgium is specialised in capital-intensive
industries, such as fabricated and basic metals, chemicals, food and electronic
equipment. At the more aggregated sector level, Belgium is specialised in
sectors featuring medium-high educational and innovation intensity, such as
chemicals, petroleum industries, but also textiles. Overall, manufacturing
produces 13.8 % of total value added (versus 15.5 % in average in the
EU).

Belgium belongs to
the top EU countries in terms of productivity levels, although its performance
is weak in terms of productivity growth and wage costs remain high (the contry-specific
recommendations of the European Semester 2012 required Belgium to act in this
respect). With regard to exports, Belgium is still specialised in low- and
medium technology goods, for which price competition is higher, although the
share of high-tech exports has been rising rapidly.

3.1.2.     Innovative
industrial policy

According to the
Innovation Union Scoreboard 2011, Belgium is one of the innovation followers,
although with an above average performance. Its relative strengths are in
high-skilled human resources, the attractive open research system and the high
number of innovative companies. Its relative weaknesses are business
investments, intellectual assets and outputs.

In 2000-2010,
private expenditure on R&D declined (from 1.42 % to 1.32 % of
GDP)[80] due to two reasons: (i) changes
in the economic structure, which has become more service-oriented; and (ii) the
reduced Belgium-based R&D activities of the telecommunications and chemical
sectors. Business R&D is highly concentrated in only a few sectors, and in
a small number of large companies and multinationals. Four sectors are
responsible for 50% of R&D expenditure (pharmaceuticals, chemicals,
computer-related services, and telecommunications equipment). The dominance of
the services sector in Belgium, which is growing at a faster rate than
manufacturing, would justify specific measures to improve the knowledge
intensity of the service sector over time.

A key challenge
for Belgium is how to speed up the transition towards a more knowledge-intensive
economy by fully exploiting the strengths of its research and innovation
system, including by further developing the support given to clusters, and
better conditions for the growth of innovative firms. This includes addressing
the fragmentation of the relatively low level of public R&D expenditure,
promoting entrepreneurship and the commercialisation of research outputs. The relevant
authorities have recognised the importance of innovation for productivity
growth, and competitiveness. This is reflected in the budgetary decisions taken
by all political entities in recent years[81].

The federal
government provides a 75 % payroll tax exemption for researchers.[82]
Despite the availability of highly-qualified human capital, there appears to be
a mismatch between demand and supply of labour in some sectors. Shortages of
skilled graduates, in particular in in sciences and engineering could become a
barrier to improving the competitiveness of the Belgian economy.

All Belgian
regions have developed strategic innovation approaches covering all major
aspects of an innovation strategy. In the Walloon Region the focus has been on
supporting a limited number of competitiveness poles (a cluster approach); in
2011, EUR 125 million was allocated to R&D projects on competitiveness
clusters under the Marshall2Green.

New approaches
have been developed under the so-called ‘Creative Wallonia’ Plan, including supporting
the market take-up of new products and services; and promoting cultural and
creative industries. Concrete actions include promoting creativity in schools;
monitoring innovative performance; and creating an electronic platform for
networking.

In the Flemish
Region, the willingness to address through innovation the major economic and
societal challenges is a main driver of research and innovation policy. In
2011, the competence poles for industrial design, logistics, materials research
and mobility have been extended and a new competence pole for sustainable
chemistry has been created.

In the Brussels
Capital Region, the preparation of a new research and innovation strategy has
started in 2011. To improve innovation financing, the Region created a fund to
support starting young innovative companies (Brustart). The implementation of
an Interfederal Plan for Research and Innovation has to ensure better
coordination of the efforts made by the Regions and the federal government with
regard to R&D and technological innovation.

Within the
framework of its industrial policy, special attention was given by the Walloon
government to the internationalization of the competitiveness clusters to
attract foreign investors and to boost international visibility. The Flemish
government adopted in 2011 the White paper ‘A new industrial policy for
Flanders’ presenting a global view of Flanders’ industrial future and
comprising 50 concrete actions to be followed by an Industry Council. A
particular investment fund (TINA fund) with EUR 200 million at its
disposal has been set up in order to help reforming the Flemish economy through
innovation.

3.1.3.     Sustainable
industry

The Belgian
economy is some 20 % more energy-intensive than the EU average, due to the
high energy intensity of its industry and the poor energy efficiency
performance of households. The higher energy intensity of industry can be
explained by the large share of particularly energy-intensive activities, such
as the production of metals and chemicals, in the country’s industrial
structure: these two activities represent one fifth of all industrial value
added and consume almost two thirds of all final energy used in industry[83].
Improvements have been made however: between 2006 and 2010, the energy
intensity in Belgian industry and energy sectors decreased by 8 %.

Belgium has developed a series of measures on energy
efficiency, covering most sectors, with a particular focus on refurbishing existing
buildings. It is also one of the best performing EU countries in terms of green
public procurement, according to a recent study.[84]

The emission
intensity of the Belgian economy is high in some important sectors (such as
heavy industry or residential heating) but is mitigated overall by the
importance of nuclear energy. In particular, the emissions from road transport
have increased over the past two decades whereas most other sectors managed to
cut emissions. Consequently, road transport now already represents 20 % of
all greenhouse gas emissions, and should be a central part of every future
emission reduction policy3.

The Walloon ‘Plan
Marshall 2.Vert’ incorporated guidelines for broader integration of the sustainable
dimension. To this effect, the Government launched ‘Employment-Environment’ Alliances
(the first one is dedicated to energy efficiency in buildings) and introduced a
6th competitiveness cluster dedicated to new environmental technologies. Flanders will elaborate a new regulation for strategic and ecological investment projects;
this regulation is aimed at projects that offer a global or integral
environmental or energy solution at company level. In the Brussels Region, the
‘Employment-Environment’ Alliances mobilise and coordinate public and private
partners and associations around concerted actions on sustainable construction,
water and waste.

Compared to the EU
average, Belgium has a medium performance with regard to waste generated by
enterprises and with regard to the share of environmental goods of the total
export of goods. The 2010 trade balance of environmental goods was in deficit
for the majority of Member States and also for Belgium (- 0.14 % of GDP).

3.1.4.     Business
environment

The share of
successful loan applications was in 2011 higher in Belgium than in other EU
countries, even though access to private capital (bank lending) became more
difficult in 2011 compared to 2009. Belgium’s performance is particularly high
in the amount of venture capital flowing to early stage investments. Belgian
SMEs have also better access to public financial support than similar firms in
other EU countries. On the other hand, business organisations expect that access
to finance will become more difficult in the future also because of a more
restricted lending policy from banks confronted with Basel III requirements;
most problems are encountered with the craft enterprises.

The duration of
payments by public authorities also has an impact on the financing needs of
SMEs. In 2011, the average duration of payments by Belgian public authorities
was 73 days, exceeding the limit of 30 days set by the EU directive and above
the EU-average of 66 days. Corrective measures have been implemented in 2011
and will be pursued in order to respect the deadline of 30 days.

A number of
initiatives have been taken to improve access to funding for SMEs. The various
measures put in place cover a wide range of needs for SMEs and include
financing (loans, guarantees, venture capital investments, cash advances etc.)
and support measures such as credit mediation. Some new initiatives have been
taken such as FINMIX (helping companies to participate in venture capital
financing) or the Win-Win Loan which has been extended to all SMEs and with
increased amount limits (Flanders).  Also loan guarantee schemes such as the
Automatic Financing product or various support schemes by Participatie
Maatschappij Vlaanderen have been put in place. Other examples (Wallonia) are the VIVES2 fund to support spin-offs and the development of the BIOWIN pole
via risk capital participation in the VESALIUS Fund. Belgium has been one of
the first countries to create a Credit Mediator service, as well as using a monitoring
system of the financial markets and access to finance of companies (Flanders) to detect possible problems very soon. In Wallonia, the Concileo mediation
platform was transformed from
a temporary anti-crisis measure to a permanent service.

According to the
Global Competitiveness Report, Belgians are quite satisfied with the quality of infrastructure, although a decrease in
the satisfactory score is observed since 2006. Congestion (concentrated in bottlenecks around Brussels and Antwerp and on some trunk roads) is placing a particularly heavy burden on
the Belgian economy; estimates of the cost of congestion in Belgium range from 0.05 % of GDP to 2 % of GDP. For company cars, the development
of an environment-friendly fiscal system will further be pursued via a new
taxation system. A more efficient public transport service would encourage a
transfer of traffic from road towards more environmentally-friendly modes of
transport. Also increased coordination between the different levels of powers
and responsibilities would help in reducing negative transport externalities.

3.1.5.     Services sector

Electricity prices
for Belgian medium size enterprises are slightly higher than the EU average
(0.1147 €/kWh vs. 0.1117 €/kWh). Although measures have been taken to
limit the indexation of prices, efforts to enhance competition in the markets
for energy are needed for more competitive pricing. This could include reducing
the competitive advantage posed by amortised nuclear plants. The electricity
and gas market regulator and the competition commission should play a more
active role to improve price transparency. The distribution rates that seem to
have caused price rises to the tune of 20 % should be reviewed.

Generally
speaking, goods and services are more expensive in Belgium than in many other
Member States, reflecting weak competitive pressures and some structural
barriers, especially in the retail sector and network industries. The
country-specific recommendations of the 2012 European Semester require Belgium to remove obstacles from competition in the network industries.

3.1.6.     Public
administration

Belgium’s overall public administration
performance, as depicted by the World Bank’s Government Effectiveness
Indicator, is above EU average. Perceived quality of public services, including
quality of the civil service and policy implementation in Belgium is quite good, although not exceptional. On the other hand, the use of tools to
improve public administration performance (e-government, impact assessment, performance
and service orientation, accountability) is less widespread than on average in
the Member States.

Belgium’s situation as regards corruption and
fraud is better than the EU average. Indeed, irregular payments, as well as
diversion of public funds and experience of corruption are rarer than in other
Member States. Also the individual experience of corruption (3 % of all
cases) is much lower than the EU-average (10 %).

The civil
justice indicator is above the EU-average and also the time for resolving
insolvency is good compared to EU mean; in Belgium it take less than one year
to resolve insolvency, while it takes on average almost two years on average in
the European Union.

Belgium performs
quite well in terms of indicators linked to paying taxes (the number of
payments and the complexity of procedures); according to the most recent World
Bank Doing Business data, Belgian firms, on average, make 11 tax payments a
year (EU-average: 17) and spend 156 hours a year filing, preparing and paying
taxes (EU-average: 218). Nevertheless
administrative costs of taxation are slightly higher than the EU average. Since the latest reform in 2010 (when the
tax payment process and administration were improved by mandating electronic
filing for medium-size businesses), no new tax reforms to make paying taxes
faster or easier for businesses, have been recorded.

The public
procurement index is slightly above the EU average. Whereas on average the
typical costs of taking part in a tender amount to 0.19 % of the respective
domestic GDP per capita in the EU, participation in Belgium causes cost of
0.18 % of GDP per capita. As from 2012, it is compulsory for both the
Flemish and the Walloon administrations to use e-tendering procedures.

The performance of
Belgium with regard to starting a business and licensing is higher
than the EU average. In Belgium there is a fully operational one stop shop to
start up a company and the
procedures for starting up a business seem less complex in Belgium than in the EU; it takes only four days in Belgium compared to two weeks on average in the
EU. However, the cost of
starting-up a company and the licensing complexity sub-indexes are closer to
the EU-average.

Overall profile of public administration

Source: WIFO

The use of new
tools to improve the performance of public administration, in particular
evidence-based instruments, is less widespread than in many other Member
States. Nevertheless, a tool called ‘e-Depot’ was introduced in 2007 to offer notaries
a quick and easy way to complete, sign and deposit the forms and documents
required to create a company in all administrative databases.[85] Tax, social security and land registry
information can also be researched electronically. Thanks to e-Depot, a company
can be set up in just a few days. Overall, e-Depot provides complete and
integrated services for notaries and their clients, as well as the authorities.
It improves their work by providing access to a complete database, reduces time
and costs, facilitates trade, improves administrative work, and allows for
paperless interaction.

According to the
World Bank Doing Business 2012, Belgium’s overall performance with regard to
responsive administration matches the EU average, but it performs particularly badly
in terms of the time needed to transfer property and the cost of doing so[86]. On the other hand, the cost of enforcing
contracts is lower in Belgium (16.6 % of the claim, as against the EU
average of 20.84 %). On the policy front, the procedures for e-invoicing
have been simplified at federal level, and property registration has been
tightened up for entrepreneurs by the introduction of time limits and
implementation of the ‘e-notariat’ system. Belgium has also recently adopted a package to modernise its public
procurement legislation.[87]

A survey on
administrative burdens shows that the administrative burden fell from 2.55 % of GDP to 1.43 %
between 2000 and 2010.[88] However, inefficient government bureaucracy is still listed as one of
the three major problems in terms of doing business in Belgium.[89]

The time and
effort needed to obtain permits still seems to be a problem experienced by many
businesses. The results of the
2011 survey (2010 data) on administrative burden show that businesses saw a
slight increase in administrative burdens (0.07 %) as a proportion of GDP,
compared with 2008. For businesses, environmental legislation has been the main
factor in increasing administrative burdens, with a rise in the relative share
of burdens resulting from such legislation compared with the other two domains
that were examined (taxation and employment).

Initiatives are
being taken at the federal and regional levels to simplify and streamline
investment procedures, and to enhance the performance of the authorities
vis-à-vis the business sector.

One of the
projects covered by the Flemish multiannual programme ‘Decisive Governance’ (Slagkrachtige
overheid) concerns fast procedures for investment files. In this context,
the Flemish government decision (July 2011) to introduce a single permit
integrating the environmental with the urban planning licences, can be referred
to. The Walloon Region and French Community continue the implementation of
their Administrative Simplification Plan (Ensemble Simplifions) and the
Industry Action Plan with the aim to minimise administrative complexity and
reduce the administrative burdens affecting all users of public services,
particularly companies; the introduction of the confidence principle was
launched as a pilot project. To succeed in the 25 % reduction goal, the Brussels government approved a list of 11 projects; the main focus is on businesses. The
new federal government established the priority to reduce by 2014 the
administrative burden for all companies by 30 %.

3.1.7.     Conclusions

Belgium presents a competitiveness profile that
reflects in many ways the average position of Western Europe, with strengths in
many pillars and the need to improve in a number of others. Specific weaknesses
relate to the fragmentation of research efforts, the relatively low level of
private investment, and deficiencies in leveraging intellectual assets.
Improving the commercialisation of research and promoting entrepreneurship are
challenges Belgium shares with many other Member States.

An important
challenge concerns Belgium’s competitiveness. Although the Belgian
economy is characterised by high labour productivity and a high level of
foreign direct investments, Belgium is losing its relative good competitive
position in recent years and Belgian exporters have progressively lost shares
in world market. Moreover, even if the share of high-tech exports has been
rising, Belgian exports are mainly composed of low/medium-tech goods, facing
fierce competition from lower-cost countries.

In such context, a
key challenge for Belgium is how to speed up the transition towards a more
knowledge-intensive economy by fully exploiting the strengths of its research
system, including by further developing the support given to clusters and
better conditions for the growth of innovative firms.

In general,
pro-business policies, despite the high taxation system, provide the right
conditions for businesses to develop their activities. Further implementation
of initiatives at the federal and regional levels to simplify and streamline
procedures is needed and will enhance the performance of the authorities
vis-à-vis the business sector.

Finally, improving
the efficient use of energy and other resources will lower costs and will
directly boosts productivity by virtue of making better use of inputs.

3.2.        Bulgaria

Sectoral specialisation of manufacturing – Bulgaria (2009)

Note : No data available for sectors C19 (coke and refined petroleum products) and C21 (Manufacture of basic pharmaceutical products and pharmaceutical preparations) Source: Eurostat

3.2.1.     Introduction

The manufacturing
sector plays a slightly bigger role for Bulgaria than for the EU in total. This
is mainly due to specialisation in labour-intensive industries e.g. textiles
and clothing, leather and footwear, and in capital-intensive industries e.g.
manufacture of cement, lime and plaster, refined petroleum products and
non-metallic mineral products. The primary sector is larger compared to the
average for the EU due to the higher share of agriculture. In general, the
Bulgarian economy is dominated by sectors with low and medium-low technology
intensity. With respect to services, wholesale and retail trade, financial
services, tourisms, transportation and health-care services are the most
important market services in the Bulgarian economy.

Overall, Bulgaria is a typical member of the group of countries featuring relatively lower income
levels and specialisation in labour-intensive industries. While labour
productivity per hour worked has gradually increased over the last years, it is
still about 58 percentage points below the EU27 average. The crisis seems to
have accelerated Bulgaria’s structural change towards more advanced and knowledge-intensive
industries and sectors, as demonstrated by the sizeable gains in exports by
technology-driven and mainstream manufacturing industries. However, Bulgaria can be seen as catching up with respect to competitiveness, in particular as
regards specialisation and the quality ladder, but not with respect to R&D.

3.2.2.     Innovative industrial
policy

According to the
Innovation Union Scoreboard 2011, Bulgaria belongs to the modest innovators
group in the EU i.e. its innovation performance is well below the EU average.
Though, Bulgaria has been slowly catching up for the past 7 years. In 2010 the
investments in research and innovation represented only 0.60 % of GDP[90].
Although the updated National Reform Programme reconfirms the target of
1.5 % GDP spending in R&D activities by 2020, investment in this field
will have to be further raised.

The industrial
research and innovation activity essentially takes place in the sectors of
information and communication technology, electronic equipment, machine building
and pharmaceuticals with increasing trend of trademark applications. However,
the number of patent registration applications[91] and the share
of SMEs introducing innovations are still very low compared to the EU averages.
Therefore, the development of adequate human capital, well-established clusters
and technology centres is essential for the innovation capacity of Bulgarian
companies. The establishment of the first science and Technology Park[92]
in Sofia, a project of approx. EUR 50 million co-financed by the
ERDF, will deserve continued public support.

The current
innovation strategy was adopted in 2004 and, today, it does not appropriately
tackle the bottlenecks in the area of industrial innovation. Overall, there is
policy fragmentation because research and innovation policies are being
developed separately by respective ministries, each with different policy
objectives and implementation structures. So far, the national R&I funds
(i.e. Innovation fund and Science fund) have not effectively supported
companies and universities in their innovative projects, for lack of regular
funds. National funding for R&I has no stable mid- to long-term funding
perspective. The planned adoption of a new Law on Innovation in 2012 and the
next innovation strategy will have to set an adequate and up-to-date innovation
framework in Bulgaria, which is coherent with the national research policy.

3.2.3.     Sustainable industry

Although the
sustainability indicators continue to improve, the industry lags behind the EU
average in terms of energy intensity and carbon intensity. Moreover, the
industry is particularly vulnerable to energy price shocks and stringent
environmental and emissions obligations because of the high level of energy
intensity of the economy and the dependency on limited number of foreign energy
suppliers. National strategies in key areas such as carbon emissions and water
have not been delivered yet. Nevertheless, Bulgaria is committed to deliver on
its 2020 targets, namely to increase the share of renewable energy in the
energy mix to 16 % in 2020 and to reduce the greenhouse gas emissions in
the non-ETS sectors by 20 % by 2020.

In October 2011,
the Council of Ministers adopted a national plan for green public procurement.
The plan sets binding objectives for the central administration on green
procurement of 6 product groups (e.g. IT equipment, air-conditioning,
lighting). A System for Certification of Green Jobs is operational since
January 2011 and 786 new green jobs were created under this programme.

A new Law on waste
management, transposing the Waste Framework Directive, was adopted in 2011. The
law introduces a life-cycle approach on waste management and defines greater
role of municipalities as owners of the infrastructure. The goal is to create
an integrated waste management infrastructure and to address several
bottlenecks on permitting as well as restriction on ferrous and non-ferrous
metals recycling.

A couple of calls
have started under Operational Programme Competitiveness in 2011 in the area of
green industry. They aim at mitigating the negative impacts of large
enterprises and SMEs on the environment by supporting the adoption of energy
efficiency technologies.

The Ministry of
Economy, Energy and Tourism is working on a national plan for the introduction
of electric vehicle, which will be presented during 2012.

3.2.4.     Business environment

The regulatory
environment is not stable and predictable for the companies as legislative acts
change very often. The national harmonisation with the EU legislation sometimes
is complex and contradictory. In the Doing Business 2012 Bulgaria’s ranking
worsened for a second consecutive year (from 57 in 2010 to 59 in 2011),
pointing to excessive red tape and inefficiencies in the business environment,
including permitting, access to electricity, contract enforcement, and the
insolvency framework. The following reforms to improve the business
environment, both at local and state level, are still lagging: alleviation of
regulatory regimes and permitting; simplification and decrease of
administration fees, implementation across the board of tacit consent;
significantly increasing the provision of e-government services; and
improvement of the public procurement framework. The actions, in the spheres of
improving the functioning of the judicial system and fighting against
corruption and organised crime, could be strengthened further, as noted in a
recent Commission report.[93]

Bulgaria envisages to adopt the Small Business Act
as a national strategy in 2012 and possibly also the SME test thereafter. The
SME Test has not yet been implemented as the introduction of mandatory impact
assessment of regulatory measures was delayed several times so far. Companies
are still too small to internationalise. If enterprises internationalise, they
invest in neighbouring countries such as in the countries in the Western
Balkans and in Turkey rather than in the EU. This is because Bulgarian
companies have better knowledge of these markets, face less competition from
multinational companies or are not aware of existing FTAs with other countries.

The absorption of
EU funds is low because of low administrative capacity and limited access to
finance despite financial engineering. The administrative procedures are
complicated and, at the same time, the enterprises do not find the needed
co-financing for the projects[94]. Meanwhile, more than a billion
euros were allocated to SMEs in 2007-2013. This included
EUR 988 million from ERDF in the form of grants and financial
engineering instruments, EUR 80 million from the Competitiveness and
Innovation Framework Programme, EUR 9 million from the European
Progress Microfinance Facility and over EUR 500 million from EIB in
the form of credit lines for SMEs.

Over the past
years, SMEs have encountered difficulties in financing innovative projects due
to high interest rates and credit rationing, while start-ups have not been able
to find appropriate funding. In 2009 and 2010 Bulgaria registers a share of
investment in seed and start-ups significantly lower than the EU average[95].
Moreover, Bulgaria experienced the largest increase in unsuccessful loan
applications over the past several years - from 3 % in 2007 to 36 %
in 2010[96]. This has a direct
impact on SMEs’ innovation and growth potential[97].
The limited public financial instruments and guarantees for innovation mainly
consist of EU programmes, which are still to be realized. Therefore, it is
urgently needed to speed up their absorption and make them attractive to
enterprises.

Several calls for
proposals to support SMEs were launched in 2011 through Operational Programme ‘Competitiveness’.
These calls are in the areas of compliance with international standards, energy
efficiency improvement, and enlargement of clusters. Altogether about EUR 1.2
billion has been allocated to this programme in 2007-2013.

3.2.5.     Services sector

The modernisation
of the transport and energy infrastructure is a major challenge after years of
underinvestment in core areas such as highways, ports, rail, and gas
interconnections. The railway sector has experienced decreasing performance and
shrinking market share over the past decade. The enhanced usage of European
structural funds will be a prerequisite for the successful completion of these
projects as Bulgarian public funding is limited. Although medium-sized
enterprises in Bulgaria pay the lowest electricity prices in the EU, the
liberalisation reforms of the electricity and gas markets are still
uncompleted.

Bulgaria is a top performer in relation to the
speed of broadband internet. However, the deployment of broadband in Bulgaria is still lagging behind the EU average. The provision of broadband internet in
rural areas is the lowest in the EU. In the area of the health services sector,
important public health measures have been continuously postponed and, thus,
hindered the potential for growth of the sector.

Professional
services such as these provided by architects, lawyers and others are subject
to regulations on legal forms, shareholding or prices which may hamper
competition. In general, competition in the services sector is also hampered by
the absence of a clear distinction between rules applicable for the
establishment of a service provider and the cross-border provision of services
by a provider established in another Member State.

3.2.6.     Public administration

Bulgaria is still in the process of reinforcing its
public institutions, which have to become stable and efficient and increase
their capacity to support the business environment. The Council of Ministers
adopted the Action Plan for Optimisation of the State Administration
(2010–2011) in July 2010. Around 75 % of the proposed measures in the
Action Plan have been accomplished by the end of 2011. The reform of the state
administration also included a reduction of 14 % of the staff since 2009.
However, there are still many
corruption risks in public contracting and procurement processes due to
inefficiency and lack of transparency in the public administrations.[98]

According to the
Government, 89 measures from its plan for reducing administrative burden have
been implemented and another 37 are in progress. The total expected economic
effect from these measures is EUR 55 million less costs for the
business. Also, a methodology for cost-based calculation of fees for administrative
services has been developed and will enter into force in 2013. However, the
criteria of exemption from the methodology are very broad. The expected
economic effect from this methodology is between EUR 25 and
100 million savings for the business and the citizens.

The procedure of
impact assessment of future regulatory acts has still not been implemented.
There were only a few pilot measures (e.g. Law
on independent evaluators) that had been subject to an ex-ante impact
assessment. There is no clear timetable.

Overall profile of public administration

Source: WIFO

The implementation
of e-government has been delayed many times and, since 2011, it has become a
priority for the Government.[99] A strategy for e-government
was adopted in 2011 aiming to integrate the existing systems and tools within
individual administrations. According to the National Revenue Agency, most
administrative services have been made available online for the past several
years. Despite the progress of the implementation of different action plans,
businesses and citizens do not perceive significant amelioration of the public
services so far.

Bulgaria has in general a very low tax structure
favourable to businesses. However, tax evasion and relatively low
administrative efficiency of the tax system appear to be significant
bottlenecks to the system. Further, the shadow economy is large, by some
estimations the largest in the EU.

              The tax compliance
burden is still very high and stands at around 500 hours according to Doing
Business 2012. In 2012 the Government plans to simplify VAT invoicing rules and
fully implement the Late Payments Directive.

3.2.7.     Conclusions

Bulgaria is still in the process of reinforcing its
public institutions, which have to become stable and efficient, while
increasing their capacity to support and promote the business environment.
Important structural reforms to improve Bulgaria’s competitiveness have been
continuously postponed for the past several years. Such reforms include, among
others, cutting the red tape at national and local level, fostering innovation
in view of increasing industrial productivity, setting an integrated R&I
system and improving the energy efficiency across the economy. Bulgaria has committed to more than double its current R&I spending by 2020 and will
have to make effective use of all existing policy instruments in order to
succeed. This will imply to focus resources on key sectors and enhance
participation of industry and business in innovation activities. The
modernisation of the transport and energy infrastructure is another major
challenge to growth. The increased absorption of structural funds will be
crucial in supporting all these key undertakings.

3.3.        Czech Republic

Sectoral specialisation of manufacturing – Czech Republic (2009) ||

Note : No data available for sectors C12 (tobacco products) and C33 (installation of machinery and equipment) Source: Eurostat ||

3.3.1.     Introduction

The manufacturing
sector plays a crucial role in the Czech economy, representing 24.3 % of
value added in 2011 (EU average was 15.5 %). The main areas of
specialisation within the manufacturing sector are transport equipment,
electrical and optical equipment, machinery and equipment and basic metals and
fabricated metal products. Over the past decade there has been an increase in
specialisation in sectors such as rubber and plastic, air transport, motor
vehicles, trailers and semi-trailers. On the other hand, there has been a
decline in specialisation in the textile sector, refining petroleum and nuclear
fuel and recycling.

3.3.2.     Innovative industrial
policy

The Innovation
Scoreboard 2011 classifies the Czech Republic as a moderate innovator with a
below average performance. In an effort to shift the Czech economy towards
higher value added the Czech Republic adopted the International Competitiveness
Strategy for 2012-2020 and the new National Innovation Strategy (NIS) in 2011.
A more targeted set of national R&D and innovation priorities will be
submitted to the Government in the course of 2012.

The Czech Republic has a target to increase public R&D investment to 1 % of GDP by
2020. While there was an increase in expenditure on R&D in 2010, public
R&D expenditure remained similar to the level reached in 2009, that is,
0.58 % of GDP in 2010. However, there was a good performance of the Czech
research and innovation system in terms of business expenditure on R&D
(BERD), which reached 0.97 % of GDP in 2010, mainly due to a strong
manufacturing sector with industrial specialisation in innovative sectors. The
majority of companies performing R&D are foreign owned.

One of the main
problems faced by the Czech Republic is the lack of co-operation between
research and business sector. The above mentioned problem is mainly due to low
readiness of research organisations to collaborate with companies (e.g. a code
of practice concerning intellectual property right issues for the purpose of
technology transfer is often missing), low horizontal mobility between the
research organisations and companies, but also low demand for contracted
research from companies. Structural funds are helping in this regard. There is
also a lack of policy instruments for long-term collaboration between
Universities and businesses. Some progress is expected from ‘competence centres’
which are to be set for mid-to-long-term projects and are to be fully
government-funded. The setting up of an evaluation and funding allocation
system which rewards best science and technology teams to create an incentive
for firms to start co-operating with Universities would be useful. While the National
Reform Programme 2012 makes reference to work launched in this respect, results
are only expected in the end of 2013.

The Czech Republic also suffers from a lack of co-ordination and fragmentation of
responsibilities on innovation policy at government level. The planned
amendment of the relevant Act[100] in 2012 should be helpful in this respect as it will strengthen the
role of the Council for Research, development and Innovation, which would help
in overcoming the issues of weak coordination and governence.

Direct support,
such as those financed through structural funds, remain the main policy tool to
foster R&D spending with low investment from the private sector in R&D
and innovation. Introducing new types of tools for R&D and innovation
support would thus be beneficial. A positive development relates to the tax
reform adopted on 1 January 2012 but which will be effective from 1 January
2014. Amongst other things, this will allow tax credits for R&D services
purchased by companies from universities or research organisations, as opposed
to the previous practice of tax credits only for in-house R&D. In May 2012,
the Government also approved the amendment to the Act[101] on investment incentives, using investment incentives
that would make the Czech Republic more attractive for both domestic and
foreign firms.

The Czech Republic tends to suffer from a lack of venture capital to support innovative
businesses. In light of this, Government’s recent approval of a joint stock
company which aims at supporting the creation of new SMEs and the development
of innovative and technologically oriented companies is welcomed.

3.3.3.     Sustainable industrial
policy

The Czech Republic is one of the most energy-intensive countries in the EU, mostly due to the
high energy intensity of its industry and an unfavourable energy mix. Renewable
energy was 9.2 % of the gross final energy consumption in 2010. There is
an intention to extend two existing nuclear power plants. Smarter grids are
important for an increase uptake of renewable energy and energy efficiency
improvements and in this respect some progress has been made. However, concerns
remain about the capacity of the electricity grid to facilitate increases in
renewable energy generation from domestic and mainly foreign sources.
Consequently, the Czech Republic is currently holding talks with Germany on the interconnection of electricity grids concerning problems faced by the Czech Republic with excessive transit of electricity from Germany.

In September 2011,
the Second National Energy Efficiency Action Plan was adopted. The National
Reform Programme 2012 makes reference to programmes to support projects that
contribute to reducing energy consumption in industrial production. However,
adoption of the Government’s long term energy policy and also the Climate
Change Policy has been postponed and these strategic documents are to be
submitted in 2012. Subsequently, the energy efficiency target has not yet been
established. A number of legislative amendments proposed in 2011 have also been
delayed.

In the area of
environment legislation, eco-audits have been carried out in consultation with
stakeholders to eliminate environmental legislation which was overburdening
businesses unnecessarily. As a result 96 specific incentives have been
identified to be reduced or eliminated and some of them have already been
implemented.

The New Waste Act
of the Czech Republic is still being developed. A new Waste Management Plan is
envisaged for mid-2013. Czech industry has a particular interest in secondary
materials given their importance for Czech industry. With respect to recycling
and waste related to construction material, good results have been achieved in
the Czech Republic with approximately 86 % of construction and demolition
waste being re-used. A raw material policy is also planned to be submitted to
the Government by August 2012.

3.3.4.     Business environment

Regulatory and
support environment

The Czech Republic has a target of reducing administrative burden for businesses by 30 %
compared to 2005 levels by 2020, with an intermediate target of 25 % by
the end of 2012. Most recent data suggests that a reduction of 22.6 % in
administrative burden has been achieved, with 295 information obligations being
reduced or cancelled. Czech authorities are currently working on re-measuring
administrative burden.

Czech Points[102] and ‘data boxes’[103] are currently in place and new features in the data
boxes have been implemented. Other features are planned for the second quarter
of 2012, such as providing links to e-banking services.

The Czech
Government has set a target of 50 % of population and 95 % of
business using e-government services by the end of 2015. Data as at 2010
suggests that 91 % of businesses and 22 % of citizens are using
e-government services. It is pertinent to note that data for 2011 shows a
significant rise in e-government use by citizens, measuring 42%. This notable
increase is likely due to the establishment of basic public administration
registers. While this is good progress, the system is still not fully
operational, e.g. paper copies are still required by law courts. The National
Reform Programme 2012 also makes reference to projects of electronic
legislation (e-legislation) and electronic legal code (e-collection) which aims
at simplifying access to law for citizens, business and public administration.
The Czech authorities aim to complete this project by 2015. Concerning the ease
of starting up a business, the Czech Republic does not score well in this
regard[104].

A new Act on
Business Corporations which entered into force in January 2012 will take effect
on 1 January 2014. This Act will replace the current Commercial Code as part of
a re-codification of civil and business laws. Amongst others, this new Act
provides for elimination of a minimum capital requirement and creditors’ protection
to be enhanced by new solvency requirements. The Ministry of Justice is also
preparing a new law on business registers that should simplify company
starts-ups so that register could be made by public. However, one-stop shops
have not yet been established.

The Czech Republic fairs very well with respect to the time and cost it takes to obtain
licenses[105] with the lowest level of licensing
complexity in all dimensions (number of licenses, time and costs) compared to
the other countries in the survey. On the other hand, the Czech Republic scores badly with respect to payment culture[106] with average delays in payment by both the public and
private sectors increasing between 2010 and 2011. Total value of payments lost
is also high, calculated at 3.1 % of payments lost compared to total
turnover in 2011. The late payment directive is currently being transposed into
the Czech legislation and should enter in force in 2013.

Through its Export
Strategy for 2012-2020, which was approved by Government in March 2012, the
Czech Government is aiming at securing growth for exporting firms, shift the
composition of Czech exports towards final products and increase the share of
exports to countries outside the EU. The document was created in co-operation
with the Czech Chamber of Commerce and the Czech Confederation of Industry.

Access to
finance

Access to finance
remains one of the main concerns highlighted by Czech businesses, especially in
the early stages of financing[107]. Instruments such as seed and venture capital funds were still not
operational in the Czech Republic[108]. However,
as identified in the 2012 National Reform Programme, the new state Seed/VC fund
designed to assist in funding for newly emerging innovative businesses will be
introduced at the end of 2012. During the summer 2012, commercial banks will be
supported by the INOSTART programme, falling under the Swiss-Czech Co-operation
programme. This programme will provide investment loads, backed by preferential
guarantees and targeted technical assistance, to start-ups with innovative
business plans in the Olomouc and Moravia-Silesa regions.

3.3.5.     Services sector

Challenges remain
in the Czech Republic with respect to competition in network industries, in
particular in the telecoms and electricity/gas market where incumbents still
control the vast majority of the market. There is also lack of competition in
the railway sector.

With respect to
the gas market, a new gas line is being build and is expected to be finalised
in 2 years’ time. There is also a gas interconnection with Poland. While there are 5 distributors of gas in the Czech Republic, there is no
significant price differential amongst distributors. A similar situation is
also present in the electricity market. While the transmission and distribution
of electricity has been unbundled there are three main distributors in
the Czech market charging similar prices across the board. With respect to
railway sector, there has been a gradual liberalisation of the market with a
new competitor entering the market (RegioJet).

There is a
particular concern about entry requirements for notaries. Despite the
judgements of the Court of Justice in May 2011 concerning eight Member States,
the Czech Republic has refused to repeal the nationality requirement for
notaries. There are also 335 regulated professions (compared to the EU average
of 152); 25 of these are in business services, (EU average is 13).

3.3.6.     Public administration

As measured by the
World Bank’s Government Effectiveness Indicator, the overall public
administration performance scores for the Czech Republic are lower than the EU
average showing an inferior perception of quality of public services and policy
implementation than the EU average. Scores for the quality of its institutions,
regulatory framework and the efficiency and stability of its public
administration are all low[109].

In contrast, the
composite indicator on the use of tools for administrative modernisation
(e-government, impact assessments, performance and service orientation,
accountability) points to a performance significantly better than the EU
average. In fact, the Czech Republic is one of the best performing Member
States. This is due to good results in e-government services, implementation of
modern human resource management tools and intensive reliance on evidence based
instruments such as regulatory impact analyses.

However,
indicators on corruption exhibit a significantly lower score compared to the EU
average indicating that corruption is still a major issue[110]. In this context, especially in relation
to the sub-indicator on ‘diversion of public funds’ this type of corruption is
perceived to be very common by a majority of respondents.

The current
anti-corruption strategy for 2011-2012 established extensive anti-corruption
measures which a long list of measures to be tackled. While a quarterly report
is submitted to government with updates on the government website, a central
website with comprehensive information concerning public tenders is still
lacking. An anti-corruption strategy for the period 2012-2013 is currently being
drafted.

The composite
indicator on starting a business and licensing shows that the Czech Republic’s performance is fairly equal to the EU average. However, looking at
sub-indicators shows that this result is mainly driven by the indicator on the complexity
of obtaining permits. By contrast, in the remaining sub-indicators – such as
the existence of a fully operational one-stop shops – the Czech performance is
below average.

While the
composite indicator on public procurement shows a better than EU average score,
this indicator should be interpreted with caution. This composite indicator
takes into account three indicators of the direct and indirect costs of public
authorities to assess public procurement. In relation to cost and time needed
to participate in a public bid, the Czech Republic scores well. However, the
indicator does not take into account the competitiveness of the Member State, such as the number of public bids. This is an important factor when assessing
the overall effectiveness of public procurement.

The system of
non-transparent public procurement contracts is one important aspect of the
anti-corruption strategy. Non-compliance with public procurement provisions has
had an effect on Structural Funds with a number of operational programmes being
interrupted. However, on 1 April 2012 the new Act on Public Procurement entered
into force. The Act simplifies and makes the tendering process more transparent
and extends the powers to supervise public procurement contracts by the Office
of Protection of Competition. As of 1 April 2012, an e-market place system has
also become functional for tenders below the threshold. While this reform is an
important step forward, proper enforcement and implementation is crucial. The Czech Republic also still needs to fully address the issue of anonymous shareholding, which
was initially foreseen to be addressed in 2012. Such company ownership can lead
to conflicts of interest in tendering procedures, also in relation to the
implementation of Structural Funds.

Concerning tax
compliance and tax administration the composite indicator reports a score
significantly lower than the EU average. This holds true for both the time
needed to prepare tax returns as well as administrative costs. The tax
compliance burden for businesses is relatively high[111]. Tax regulation in the Czech Republic is identified
as one of the main problematic factors for doing business[112].

The adoption of
the Act No 458/2011 is supposed to improve the efficiency of tax collection, as
it establishes a single collection point for the collection of taxes,
healthcare and social security contributions. It will be fully in force as of
1 January 2014. The reorganisation of tax and customs administration and the
institutional reform related to the single collection point have been launched.

Overall profile of public administration

Source: WIFO

The efficiency of
civil justice composite indicator shows that the Czech Republic again performs
worse than the EU average. This is due to the fact that it takes up to 100 days
longer to enforce contracts at a higher cost than the EU average and it takes
longer to resolve insolvencies when compared to the EU average[113]. There is a lack of expertise to fight
financial crime, weak power of prosecutors and low efficiency of contract
enforcement. To tackle this, a draft state prosecution act aimed at
strengthening the independence and responsibility of the Prosecution Office is
aimed at being submitted to the Government in June 2012. Several measures have
been highlighted in the national Reform Programme 2012.

The Czech Republic does not have a public servants act in place to promote stability and
effectiveness of the public administration with the adoption of such an act
being postponed a number of times in the past. The Ministry of Interior is
working on a new bill which aims at legislating rights for all public
officials, both at the central and local level. The final draft bill is
expected to be submitted to Government by 30 September 2012 with entry into
force foreseen for 1 January 2014. The adoption of this act is one of the key
conditions for the use of Structural Funds in the new programming period
2014-2020.

3.3.7.     Conclusions

As one of the most
energy intensive countries in the EU, moving towards a cleaner and more
efficient energy mix is crucial. The Government should deliver its long term
energy policy as soon as possible and also establish its energy efficiency
target.

The Czech Republic also faces challenges with respect to improving the business environment. A
key area of concern here is access to finance for business, in particular in
the early stages of financing. Seed and venture capital funds would be
beneficial in this regard.

While progress has
been made to address deficiencies in public administration and corruption, such
as the adoption of the Public Procurement Act, this area remains one of the
major challenges faced by the Czech Republic. Effective monitoring of the new
act and continued efforts to deal with corruption are crucial for the business
environment.

3.4.        Denmark

Sectoral specialisation of manufacturing – Denmark (2009)

Note : No data available for sectors C12 (tobacco products) and C19 (coke and refined petroleum products) Source: Eurostat

3.4.1.     Introduction

Manufacturing
plays a smaller role for Denmark than for the EU in total (10.9 % compared
to 15.5 % in 2011). Danish industries are specialised both in sectors with
high innovation intensity (machinery), and with low innovation intensity (water
transport). In exports, Denmark is strongly specialised in sectors with low
innovation and medium-low education intensity. Overall, Denmark’s specialisation profile is determined both by intangible assets (marketing-driven
industries such as games and toys), but at the same time by natural endowments
(agricultural products, maritime industries), explaining its bipolar
specialisation in both innovative and less innovative sectors.

Danish
manufacturing cost competitiveness has deteriorated since the last decade
giving rise to an appreciation of the real effective exchange rate. Nominal
unit labour costs have increased by significantly more than in the EU27 and in
the Euro area, reflecting in particular relatively higher wages and weaker
productivity growth in Denmark. As noted in the country-specific
recommendations of the European semester 2012, these could be at least
partially addressed by removing obstacles to competition and improving the
quality of the educational system.

3.4.2.     Innovative industrial
policy

Denmark is an innovation leader according to the
Innovation Union Scoreboard 2011. Denmark is successful concerning linkages and
entrepreneurship and intellectual assets and research systems, while input in
terms of human resources is relatively low.

The strong
cooperation between private and public partners in the innovation system has
led to a strong involvement of also SMEs in the innovation system. Denmark actively participates in public-private cooperation in the EU with good results for
participating firms. Denmark has recently launched reforms to boost innovation
and is currently elaborating a new broad innovation strategy. The strategy aims
at strengthening the links between public expenditures on R&D&I and
growth. The aim is further to accelerate the development process in a few key
areas which are expected to speed up the results in terms of growth and
productivity. Two related initiatives are the strategy for public procurement
for innovation, and a strategy for innovation networks and clusters involving
regions.

The key areas are
water (technologies for cleaning etc.), maritime affairs, green technologies,
creative industries and health care industries where Danish industries have
comparative advantages.

Even though the
Danish innovation system is well functioning, a number of challenges remain.
Despite impressive efforts to increase R&D and innovation, so far the economic
effects in terms of innovating firms and medium- and high-tech manufacturing
exports have not fully materialised. The reasons are likely to be found in bottlenecks
in the commercialisation of research, and lack of growth among new firms, reflecting
the experience of many other Member States.

3.4.3.     Sustainable industry

Danish industry
scores comparatively well in energy and carbon intensity with low scores on
both parameters. The Danish industry is relatively low energy and carbon
intensive. Danish industries have comparative advantages in exports of goods
and services based on bio-technology and energy technologies and are
particularly successful in exporting wind-turbine components, insulation
materials and energy efficient pumps.

Following up on
the former Government’s Energy Strategy 2050 (February 2011) and the
present Government’s Our Future Energy (November 2011), an energy
agreement for Danish energy policy for 2012-2020 was launched in March 2012.
The agreement contains a number of initiatives promoting green technology
growth and the transformation of industry to become less energy intensive and
less dependent on fossil fuels. The initiatives in the energy agreement aim at
raising the share of renewable energy in final energy consumption to more than
35 % in 2020; and at reducing the gross energy consumption by 7.6 %
in 2020 relative to 2010.

Comprehensive
policy measures in the environmental technologies action plan, the energy
agreement as well as other initiatives promoting green growth and the Business
Innovation Fund provide evidence on Danish ambitions in this policy area.

3.4.4.     Business environment

Regulatory and
support environment

Regulatory reform
is a priority and many ambitious measures have been implemented. The target of
reducing administrative burdens for business was met in 2010 and the new
Government has launched a strategy for reduction of administrative burdens. The
strategy is centred around the Business Forum for Simpler Rules which advises
the government on where the burdens are perceived to be particularly high and
on corresponding simplification measures. The Business Forum consists of the
main interest organisations, businesses and experts. The strategy also focuses
on the continued measurement of administrative burdens and on handling EU
legislation.

Indicators on SME
performance and SME policies indicate that Denmark perform well above the EU
average with the exception of entrepreneurship. A number of measures aiming at
increasing the entrepreneurial spirit in the education system have been
implemented. Denmark has for a number of years had a high level of start-ups.
The challenge is a low level of high growth and innovative firms. This is well
recognised and has been addressed by a number of measures[114].

Other measures
aiming at improving business conditions include advice to business in crisis
aiming at promoting a ‘second chance’ for failed enterprises. Transfer of
business due to retirement of owner has become an issue as many firms need to
have their ownership transferred.  In order to address this issue, the Danish
Business Authority has launched the initiative Business Transfer Denmark (‘EjerskifteDanmark’).

In order to
facilitate start-up of new enterprises, two digital initiatives will be
launched in 2012. A digital guide will provide enterprises an overview of
requirements and possible business relevant regulation. From the end of 2012
will all new enterprises be equipped with basic tools for digital communication
with authorities.

Despite the growth
friendly business environment, the low level of high growth firms remains to be
a challenge together with low labour productivity growth. The problem of weak
productivity growth is well recognised and the government has appointed a
Productivity Commission in order to address the issue and get a better
understanding of the reasons behind the development. Nevertheless, studies
point towards competition and education as possible drivers.

Access to
finance

Following the
financial crisis, access to finance again became a problem for SMEs. A number
of bank packages aimed at securing the functioning of the financial system and
easing access to finance for firms have been launched.

Recent financial
measures include the ‘Development package’, which launched several initiatives
in order to generate new loans for enterprises. The package includes, among
other, an increase of the Export Credit Fund’s export credit facility and an
extension of the reduced capital-adequacy band, which allows for additional
funds. Business development is supported by an increase of the credit facility
of ‘Vaekstkaution’ loan guarantees and a subordinated debt initiative targeted
at SME’s. Overall, the financial measures taken in Denmark to support lending
activity seem to have been appropriate and well designed for meeting the needs.

3.4.5.     Services sector

Weak competition
in the services and construction sectors is hampering productivity growth and
innovation in these sectors. The electricity and natural gas sectors were
liberalised in 2000. Being natural monopolies, the transmission and
distribution companies are subject to economic regulations. The retail market
for electricity and gas has been liberalised gradually although some
regulations still exist, which according to the Danish Competition and Consumer
Authority, limits the competition on the retail market and makes consumers less
inclined to change distributors of energy. The market for large consumers was
fully deregulated by 2000, and the freedom to choose supplier was implemented
for all other consumers by 2003.

While large
enterprises are active on the market and reap the benefits of competition, most
SMEs, private consumers and public institutions have refrained from switching
suppliers and remain customers of companies that sell electricity at a
regulated price. The picture is similar for natural gas. In general the
regulated retail prices have increased more than prices for large consumers.

In order to
improve the competition on the retail electricity market, the Danish Parliament
has passed a bill on June 2012 on introduction of a wholesale model, where the
electricity retail companies become the central players at the market. The
model is also known as a supplier centric model. The wholesale model will have
effect from October 2014.

Regarding the
telecom sector, the Danish mobile market is characterised by strong competition
at retail level and mobile broadband is increasing significantly. The fixed
telephone market is still dominated by the incumbent operator.

According to the ‘Konkurrencepakke’
in 2011, more railway lines should be opened up for competition. However, the
rail passenger market is still not open to competition, but licensed operators
are providing services on about 15 % of the network.

The postal
services were liberalised in 2011. The new legislation enables free entry for
competing firms on all postal markets. State owned ‘Post Danmark’ has however
in reality still monopoly on the market for delivering letters as it is the
only actor on major parts of the market.

With the exception
of lawyers, the level of regulation of professional services in Denmark is low. A bill decreasing lawyers’ monopoly on representing parties in minor cases
of debt collection was introduced in 2011. However, pharmacies, dentists,
construction, financial markets and the markets for taxis are subject to
regulations that considerably limit the competition on these markets. The
problems are well recognised and the Government has announced a new competition-package
before the end of 2012, with initiatives aiming at increasing the competition
in these markets, generally strengthening the competition law and initiatives
aiming at increasing the competition within the public sector.

Concerning retail
and wholesale services, zoning laws were partly liberalised in 2011. Shops’ opening
hours will, with the exception of holidays and special days, be liberalised in
2012.

3.4.6.     Public administration

Denmark’s overall public administration
performance, according to the World Bank’s Government Effectiveness Indicator,
is significantly better than the EU average. Denmark is one of the countries
where the quality of public service provision is perceived to be most excellent
in international comparison.

According to the
global government governance indicator, Denmark has one of the most efficient
public administrations of very high quality and impartiality. Regulatory
quality is also high in Denmark according to the World Bank.

The composite
indicator for corruption and fraud displays very good results in comparison to
the EU-average, with irregular payments and the diversion of public funds being
far less common than in the EU27. The individual experience of corruption
appears to be especially low, with a value of not more than 2 % of all
respondents in the according survey. This corresponds well to the overall
assessment of similar corruption assessments (such as in the Worldwide
Governance Indicators) where Denmark regularly performs best.

Tax compliance
burdens are relatively low in Denmark compared to the EU average. The average
number of hours to comply with VAT rules is only two thirds of the EU average.
Also the number of payments per year for enterprises is low in an international
comparison. Tax compliance and compliance costs for other purposes are not
perceived as a big problem for Danish enterprises with regard to current
legislation. But industry organisations complain that it is however very time
consuming for companies to familiarise themselves with new pieces of
legislation on tax.

The compound index
for public procurement signals some scope for smaller improvement. The average
delay in payments from the public administration is 12 days, and is shorter
than in most other EU countries.

The composite
link-level indicator for starting a business and licensing reflects a similarly
good performance in Denmark, including a fully operational one-stop shop for
start-up purposes and licensing procedures that are less complex than the
EU-average. Most strikingly, however, are the fast procedures to start-up a
company and the elimination of all administrative costs whatsoever to do so.

Most
sub-indicators measuring the efficiency of civil justice are well above the EU
average, especially due to the perception of the judiciary as highly
independent from political pressure and the short time necessary to enforce
contracts as well as to resolve insolvency. However, the costs of enforcing
said contracts (23.3 % of a claim) are slightly above average
(20.6 %), which indicates some room for improvement.

Overall profile of public administration

Source: WIFO

Denmark has been one of the most ambitious
countries regarding e-government for several years and in August 2011 a new
e-government strategy was launched, also taken up by the new government. With
its new e-government plan the government has launched new targets for the
digital communication with both business and citizens. Digital portals for
communication with both citizens and business have existed for a number years
and the new strategy takes the digital communication further by introducing
mandatory digital communication between public authorities and business and
citizens.

The business
portal ‘virk.dk‘
will from 2012 be supplemented by personalised services with content related to
the situation of the specific business. After identifying themselves,
businesses will be able to see recent reports to public authorities and get an
overview of coming reporting requirements and selected data stored about the business
in public databases. In this way the personalised section of ‘virk.dk’ will
help business’ get an overview of their obligations towards the public
administration.  The main website, www.virk.dk, also gives access to all
digital self-service solutions for businesses.

3.4.7.     Conclusions

Ambitious policies
related to the business environment and public administration have been
successful. Danish ambitions regarding sustainability of industry are very
high. Concrete measures are in place in order to reach targets of reducing the
use of fossil fuels and increasing energy efficiency throughout the economy.
The impacts of the response to the financial crisis are yet too early to assess
but the existing initiatives concerning access to finance appear comprehensive.

Challenges remain
with reference to the innovation system and competition in some markets. Even
though Denmark is an innovation leader, the economic effects are in some
respects lower than expected given the ambitious efforts to increase the
functioning of the national innovation system. A strengthening of the linkages
between the private and public sectors in the innovation system has yielded
promising results. Lack of skilled capital is a bottleneck for enterprises and
taken into account the well established links between education and innovation
and productivity growth, policies aiming at increasing the supply of skilled
labour should be taken into consideration.

3.5.        Germany

Sectoral specialisation of manufacturing – Germany (2009)

Source: Eurostat

3.5.1.     Introduction

The impact of the
crisis has been less harmful to the German economy than initially expected. Germany’s manufacturing production rebounded quickly and the labour market has proven
remarkably resilient. Manufacturing plays an important role in
the German economy and contributes 22.6 % to Germany’s total value added
compared to an average of 15.5 % in the EU (2011). Germany is particularly specialised in technology-driven industries and capital-intensive
industries, such as machinery, electrical and optical equipment, motor
vehicles, metal products or chemicals.

Germany’s cost competitiveness has
improved over the last decade, as indicated by a depreciation of the real
effective exchange rate. Labour productivity per hour worked is
about 24 percentage points above the EU27 average and about 10 percentage
points above the Euro area average.[115] Overall, the German
industry enjoys a favourable position with respect to competitiveness but faces
important challenges in securing its competitive position also in the medium
and long term.

3.5.2.     Innovative
industrial policy

The Innovation
Union Scoreboard 2011[116] classified Germany among the innovation leaders in the EU[117],
based on its R&D capital stock as well as its output in terms of patents
and new products. Funding for R&D and innovation has been increased over
the last years. With an R&D intensity of about 2.8 % in
2010, Germany is approaching its target of 3 %. However, other major
competitors outside the EU also pursue ambitious innovation policies and some
invest even more in research and innovation. Moreover, significant disparities
remain at regional level in terms of R&D investments as well as innovation
performance, including for example in respect to technology transfer and
cooperation between firms and universities or other research institutes.

Germany’s ‘High-Tech Strategy 2020"[118]
defines the central goals of Germany’s research and innovation policy. The
strategy concentrates public R&D resources for scientific and technological
research into areas that face particular global challenges. These include
energy and climate protection, health and nutrition, mobility, as well as security
and communication. The strategy also supports the development of key enabling
technologies, which act as drivers of innovation and which build the basis for
new products, processes and services[119].

The Central
Innovation Programme for SMEs (‘Zentrales Innovationsprogramm
Mittelstand’, ZIM) successfully assists SMEs in enhancing their research
and innovation efforts in order to develop new products, processes and
services. The program was opened for enterprises (including connected
enterprises) with up to 500 employees until end of 2013. In addition, the
supplement costs for transnational projects will be reconsidered by an increase
of 5 % of the funding rate. In recent years the Association of German
Chambers of Industry and Commerce (‘Deutscher Industrie- und Handelskammertag’,
DIHK) identified ZIM in its innovation report (‘Innovationsreport’) as ‘best
practice’. For 2013, the planned annual budget has been fixed to about
EUR 500 million, which will finance an estimated 5 000 new
applications and 8 000 on-going projects[120].

In view of the
demographic trends, an important long-term challenge will be to avoid a
systematic skill shortage in industry, services and academia.
Shortages of skilled workers are emerging in various sectors and regions. High
skilled professions, such as engineers and IT professionals, continue to be
particularly in demand. SMEs are generally more affected than large
enterprises. The challenge is addressed in the government’s initiative ‘Konzept
für Fachkräfte’[121]. The related key
actions aim in particular at increasing the number of tertiary students,
reducing early drop-out from education and training and enhancing life-long
learning as well as the labour market participation of older workers and women.
The initiative recognises that mobilising domestic labour potential will not be
sufficient and that the German economy will also depend on better attracting
skilled workers from other EU but also non-EU countries[122].
In 2012, laws have entered into force aiming to better facilitate the recognition
of professional qualifications obtained abroad as well as the immigration of
non-EU skilled workers (blue card law). While these measures go into the right
direction, it remains to be seen whether they will be sufficient.

3.5.3.     Sustainable
industry

Overall, the environmental
performance of Germany’s industry can be characterised as good. The
energy intensity in manufacturing is below the EU average and the carbon
intensity in industry is close to the EU average. Moreover, green
technologies, products and services play an increasingly important role
in the German economy. In 2012, about 34 % of companies offered green
products or services compared to 26 % in the EU[123].

In respect to raw
materials, there are two factors which may have a particular impact on
the competitiveness of German industry: the dependence on high quality raw
materials and the substantial price increases over the last years. The
challenge of access to raw materials is primarily being addressed through
initiatives of the private sector; however, the Federal Government also
actively supports the establishment of raw material partnerships.

Germany is pursuing a major reform of the
energy system, which includes a gradual phase-out of nuclear energy
production until 2022, measures to accelerate grid expansion, and a more
market-based development of renewable energies. The new energy strategy
introduced in 2011 opens the door to new opportunities for growth, but it also
involves challenges in terms of potentially high costs and risks of
vulnerability of the system due to capacity constraints. Energy prices in Germany are already among the highest in Europe and are expected to increase further[124].
If the energy strategy is to be successful, the overall economic costs need to
be minimised, including by increasing the cost-effectiveness of renewable
energy, by stimulating competition in the energy markets and by further
enhancing energy efficiency. The timely deployment of the required
infrastructure will be an important pre-requisite for achieving the strategy’s
objectives.

In 2011, the
German federal government also decided to launch a new Energy Research
Programme ("Sechstes Energieforschungspro-gramm"),
which increases the financing for R&D in these areas by 75 %, mainly
using funds from the special ‘energy and climate fund". Between 2011 and
2014, about EUR 3.5 billion will be dedicated to energy research[125].

The public
procurement system in general has an important potential to support the
deployment of environmentally friendly products given its significant level of
expenditure. The public procurement system is increasingly integrating
sustainability aspects, in particular energy efficiency and emissions, based on
a life-cycle approach. Since August 2011, the revised public procurement laws
place an even stronger emphasis on energy efficiency and require the highest
standard of energy efficiency performance[126].

3.5.4.     Business
environment

Overall, Germany offers a favourable business environment. It scores the highest among
the 27 Member States concerning the overall satisfaction with the quality of
infrastructure. However, it scores around average regarding the administrative
burden of the regulatory framework[127].

Entrepreneurship
and SME policy

The business
environment is favourable for entrepreneurial activities and
federal and regional programmes are in place to support the development of SMEs
through a broad range of consulting and financing services. Of particular
importance is also the support provided by the well-developed network of
chambers of commerce and other crafts and business associations, both in Germany and abroad. Compared to the EU average, German SMEs tend to be more active in other
EU and non EU markets. The high share of exports to emerging markets indicates
further growth potential.

Nevertheless, Germany is traditionally lagging behind the EU average regarding entrepreneurial activity[128].
Low unemployment, emerging skill shortages as well as demographic effects are
likely to result in a further decline in the number of entrepreneurs.
For 2012, the number of entrepreneurs who start a business is expected to be at
a lower level, because of less ‘necessity’ entrepreneurs[129].
A further decline in the number of entrepreneurs could hamper Germany’s economic growth and innovation performance in the long term. Moreover, women
still represent only one third of entrepreneurs, indicating further untapped
potential.

In 2011, the
Federal Ministry of Economics and Technology has introduced an ‘EU SME
Monitor’ (‘Mittelstandsmonitor für EU-Vorhaben’)[130].
The tool provides information on current and planned EU initiatives early on in
the process and aims to facilitate better involvement of German SMEs and their
representatives in the European decision- making process, including the participation
in public consultations[131].

Access to
finance

Access to
finance for the
private sector (including SMEs) was not substantially restricted in 2008/09 and
credit growth has picked up slightly since then, with no significant tightening
of lending conditions in sight[132]. The German federal
government undertakes considerable efforts to provide start-up companies with a
wide range of support services and financing instruments, including risk
capital[133]. Nevertheless, while
the availability of risk capital is broadly in line with the EU
average, Germany has the potential to still do better in this respect.

Reduction of
administrative burden

Germany has made noticeable progress over the last
years in reducing the administrative burden related to reporting
obligations in the business sector. By the end of 2011, a reduction in
reporting obligations of 22 % has been achieved under the ‘Bureaucracy
Reduction and Better Regulation programme". Since the initial target for
2011 was a reduction of 25 %, the federal government agreed in December
2011 to introduce a number of additional simplification measures, such as the
reduction of the minimum archiving period for invoices and documents. These
measures still need to be implemented.

Furthermore, the ‘Bureaucracy
Reduction and Better Regulation’ programme has been extended in 2011 to cover
in addition to reporting obligations also other measurable compliance
costs. The National Regulatory Control Council ("Nationaler
Normenkontrollrat") now scrutinises the administrative burden and
compliance costs for businesses, citizens and public administrations of all
newly proposed regulations[134]. Continuing the process
of simplifying the regulatory framework and reducing the administrative burden
for enterprises, especially SMEs, should contribute to further strengthening
investment and encouraging entrepreneurship.

3.5.5.     Services sector

Competition in the
gas and electricity sector has increased due to initiatives
launched in recent years, including the transposition of the Third Energy
Package in 2011. The new legislation should further strengthen the independence
of energy production and supply, on the one hand, and transmission activities,
on the other hand. In 2012 the federal administration is establishing a market
transparency agency (part of the Federal Cartel Agency) aimed to better
monitor competition and pricing in the gas and electricity market and to
improve market information and transparency.

Competition has
developed noticeably over the last years in the telecommunication sector[135].
Moreover, the government has recently proposed a revision of the act against
competition restrictions and has adopted a revision of the telecommuni-cations
act. Effective implementation of these measures should contribute to further
stimulating competition.

In the postal
sector, competition develops only slowly[136].
In 2012, the government has announced its intention to review the competition
framework in the postal sector[137].

Also in the railway
sector competition develops only slowly, mainly due to the lack of
effective separation between the infrastructure manager and the railway
holding. Competition has increased over the past year, in particular in the
regional rail passenger market. However, in the long-distance market there is
very little competition[138].

A draft law has
been proposed to partially open up the long-distance bus transport market
but still needs to be adopted.

The government
announced that it will assess in the coming period whether entry and
conduct regulation in services sectors can be further reduced without
any negative impact on quality and safety[139].

3.5.6.     Public administration

According to the
World Bank Doing Business Report[140] and the Government
Effectiveness Indicator[141], Germany has in general a business friendly regulatory environment and an efficient
and transparent public administration. While overall the perceived
quality of public services is ranked above the EU average, there is scope for
further improvement or simplification in some areas.

On average, payments
by public authorities are processed within 36 days, which is
considerably below the EU average (66 days). Also in respect to late payments,
the average delay (11 days) is noticeably shorter than the EU average (28 days)[142].
Public procurement processes seem to be well organised but often
remain complex. On average, companies have to invest slightly more time than on
EU average when participating in a public tender[143].

Germany has made progress over the last years in
reducing the costs and time of business start-up and licensing procedures.
The time required to start a business and the administrative costs are broadly
in line with the EU average, but there is still room for further improvement[144].
Moreover, fully operational One-Stop-Shops for starting a company do not yet
exist in all Länder.

Overall, the German
tax system is rather complex. The average time required to comply with
tax obligations (221 hours) exceeds the EU average (208 hours). While Germany still scores slightly better than the EU average in terms of the tax compliance
burden[145], in particular
SMEs would benefit from further simplifications. The tax compliance burden
weighs disproportionally high on SMEs, since they have less resources and
expertise than large companies. The 2011 Tax Simplification Act ("Steuervereinfachungsgesetz
2011") has introduced some further improvements and simplifications,
for example regarding electronic invoicing. Despite the complexity of the tax
system, the public authorities are quite efficient. The corresponding
administrative costs measured in per cent of tax receipts are smaller
(0.8 %) than the EU average (1.3 %).

Overall profile of public administration

Source: WIFO

While in general the online availability of information and basic
public services seems satisfactory, small enterprises in Germany still use e-government services less often than their
counterparts in some other Member States[146]. The federal government intends to pass legislation
in this legislative period with the aim of increasing the availability of
e-governance services.

              The civil justice
system in Germany is perceived as particularly independent and efficient[147]. Enforcing contracts in Germany takes less time in comparison with
the EU average (394 days vs. 556 days) and is less expensive (14.4 % of
the value of the claims compared to 20.6 % in the EU). The time to resolve
insolvency issues (1.2 years) is also shorter than the EU average (1.95 years)[148].

3.5.7.     Conclusions

The impact of the
crisis has been less harmful to the German economy than initially expected.
This is due to a large extent to the German industry’s favourable position with
respect to competitiveness, a strong orientation towards international markets,
a resilient labour market, the absence of a serious credit crunch and an
overall favourable business environment.

Germany is among the innovation leaders in the EU
and the framework conditions are conducive to R&D and innovation. The
capacity of Germany’s industry to innovate and to remain at the technological
frontier is of increasing importance in securing Germany’s competitive position
also in the medium and long term.

An important
challenge will be to avoid a systematic skill shortage by adapting both the
educational system and labour market to the changing requirements of technology
and innovation. The declining number of entrepreneurs could also have a
negative impact on Germany’s economic growth and innovation performance.

The new energy
strategy creates important opportunities for growth, but also entails
considerable challenges regarding the overall economic costs and the timely
deployment of the required infrastructure.

[1] Commission Staff
Working Document ‘External Sources of Growth: Progress Report on EU Trade and
Investment Relationships with key Economic Partners’, SWD(2012)219 final,
18.7.2012.

[2]     Ireland’s productivity level is to a significant
extent inflated by the operations of foreign multinationals, in particular in
the chemicals and pharmaceuticals sectors. The very high values are likely to
be affected by R&D and marketing activities undertaken mainly outside Ireland, and by transfer pricing activities.

[3]     Commission Staff Working Document,’External
Sources of Growth: Progress Report on EU Trade and Investment Relationbships
with Key Economic Partners’, SWD (2012) 219 final, 18.7.2012.

[4]     The Innovation
Union Scoreboard 2011 is based on three types of measures: ‘enablers’, or
inputs to the innovation process (human resources, research systems, finance
and support), ‘firm activities’ (investments, linkages and entrepreneurship,
intellectual assets) and ‘outputs’ (SMEs introducing product, process,
marketing or organisational innovations, and high-growth innovative firms).
Data for 2011 reflect performance in 2009/2010 due to a lag in data
availability. On a scale ranging from 0 (worst possible performance) to 1 (best
possible performance), the score of Member States varies between 0.2 for Latvia and 0.8 for Sweden. For details of the calculation method, see ‘Innovation Union Scoreboard
2011’, http://ec.europa.eu/enterprise/policies/innovation/facts-figures-analysis/innovation-scoreboard/index\_en.htm

[5]     Innovation Policy Trends in the EU and Beyond,
December 2011, available at http://www.proinno-europe.eu/inno-policy-trendchart/page/innovation-policy-trends.

[6]     Innovation Union Competitiveness
Report 2011, http://ec.europa.eu/research/innovation-union/pdf/competitiveness-report/2011/iuc2011-full-report.pdf.

[7]     See e.g. Veugelers R. and Cincera M (2010) ‘Europe’s Missing Yollies’, Bruegel Policy Brief.

[8]     The country reports of the Innovation
Trendchart available at http://www.proinno-europe.eu/inno-policy-trendchart/
repository/country-specific-trends provide detailed information about the
Member States’ innovation policies. Analysis based on performance indicators
regarding innovation and research per Member State can be found in the Innovation
Union Scoreboard 2011, http://ec.europa.eu/enterprise/policies/innovation/files/ius-2011\_en.pdf,
and the Innovation Union Competitiveness Report 2011, http://ec.europa.eu/research/innovation-union/pdf/competitiveness-report/2011/iuc2011-full-report.pdf.

[9]     http://www.hmrc.gov.uk/research/report107.pdf.

[10]    See Innovation Union Competitiveness Report 2011,
pages 116-117, available at:

http://ec.europa.eu/research/innovation-union/pdf/competitiveness-report/2011/iuc2011-full-report.pdf.

[11]    ‘Internationalisation of Business Investments and
an Analysis of their Economic Impact’, European Commission (2012).

http://ec.europa.eu/research/innovation-union/index\_en.cfm?pg=other-studies

[12]    KETs are composed of six core technologies:
micro-/nanoelectronics, nanotechnology, photonics, advanced materials, industrial
biotechnology and advanced manufacturing technologies.

[13]    See the report of the High Level Expert Group on
Key Enabling Technologies and its policy recommendations at http://ec.europa.eu/enterprise/sectors/ict/files/kets/hlg\_report\_final\_en.pdf.

[14]    Idea Consult et al.: Exchange of good policy
practices promoting the industrial uptake and deployment of Key Enabling
Technologies — Final report July 2012, not yet publicly available.

[15]    http://ec.europa.eu/research/innovation-union/index\_en.cfm?pg=intro.

[16]    The German Fraunhofer is Europe’s largest
application-oriented research organisation focusing on technological innovation
and new systems solutions for customers, and helping to reinforce the
competitive strength of the economy.

[17]    ‘smart Specialisation Platform’: http://ipts.jrc.ec.europa.eu/activities/research-and-innovation/s3platform.cfm.

[18]    Funding Innovation in the EU and Beyond, December
2011, page 6, available at http://www.proinno-europe.eu/inno-policy-trendchart/page/innovation-policy-funding.

[19]    Cedefop (2011), ‘What next for skills on the
European labour market?’, Briefing note.

[20]    Innovation Policy Trends in the EU and Beyond,
December 2011, available at http://www.proinno-europe.eu/inno-policy-trendchart/page/innovation-policy-trends,
page ii.

[21]    The ‘Konzept zur Fachkräftesicherung’, including
initiatives to better activate the domestic supply of workers (e.g. women,
workers aged 60+, reducing school drop-out rates and improving the education
system), but also measures to better attract employees from other EU and non-EU
countries.

[22]    http://www.nesta.org.uk/publications/reports/assets/
features/buying\_power. See also Mini Country Report UK of the innovation Policy Trendchart, December 2011, page 17.

[23]    http://www.zim-bmwi.de/download/studien-berichte-expertisen/zim-endbericht-kurz\_08-2010.pdf

[24]    Innovation Policy Trends in the EU and Beyond,
December 2011.

[25]    See Raffaello Bronzini/Eleonora Iachini: Are
incentives for R&D effective? Evidence from a regression discontinuity
approach, Banca d’Italia Working Papers, Number 791, February 2011.

[26]    COM(2011) 815, http://ec.europa.eu/europe2020/pdf/annual\_growth\_survey\_en.pdf.

[27]    Eurobarometer Report ‘sMEs, Resource Efficiency and
Green Markets’ March 2012. The report focuses on three core themes — resource
efficiency, green markets and green jobs, with a particular focus on SMEs: http://ec.europa.eu/public\_opinion/flash/fl\_342\_en.pdf.

[28]    Submitted under the Energy Services Directive
2006/32/EC and the forthcoming Energy Efficiency Directive, NEEAPs require
Member States to describe how they intend to reach the 9 % indicate energy
savings target by 2016.

[29]    Final energy consumption
by industry covers all industrial sectors, e.g. the iron and steel industry,
the chemical industry, the food, drink and tobacco industry, the textile,
leather and clothing industry, and the paper and printing industry, with the
exception of transformation and/or own use of the energy-producing industries.

[30]    For ease of comparability between sectors and
countries, energy intensity is measured as the ratio between consumption and
total gross value added in the energy sector and industry (including
construction and the non-energy sector) and is measured as kg of oil equivalent
per unit. Due to data availability considerations and to the specific structure
of the Eurostat databases on energy and national accounts and of European
Economic Area greenhouse gas inventories, the indicators of energy and carbon
intensity calculated in the report have been built in order to include a
broader, still consistent definition of industry and provide information for
all Member States (with the exception of Malta) in the most recent available
year. In particular, energy intensity calculations refer to final energy
consumption in industry (including construction), final non-energy consumption
(i.e. for chemical reduction activities) and consumption in the energy sector.
On the other hand, the carbon intensity indicator refers to CO2 emissions
in industry (including construction), from industrial processes and from
solvent and other product use in industry and CO2 emissions from
energy industries. Both aggregates (energy consumption and emissions) have then
been put into relation with consistent gross value added data at constant
prices (2000 as the reference year).

[31]    The Eco-design
Directive provides consistent EU-wide rules for improving the
environmental performance of energy-related products (ERPs) through eco-design. It prevents disparate national legislations on the
environmental performance of these products from hindering intra-EU trade. This
should benefit both businesses and consumers, by enhancing product quality and environmental
protection and by facilitating the free movement of goods across the EU.

[32]    Carbon intensity is measured as the ratio between
CO2 emissions in the energy sector, manufacturing (including
construction), process emissions and solvents, on the one hand, and GVA in the
energy sector and industry (including construction) on the other.

[33]    The roadmap aims to transform Europe into a
sustainable economy by 2050 and outlines how the EU can achieve
resource-efficient growth. The roadmap identifies the economic sectors that
consume the most resources, and suggests tools and indicators to help guide
action in Europe and internationally. It is an agenda for competitiveness and
growth based on using fewer resources when producing and consuming goods and
creating business and job opportunities from activities such as recycling,
better product design, materials substitution and eco-engineering:

http://ec.europa.eu/environment/resource\_efficiency/pdf/com2011\_571.pdf.

[34] ‘study on the Competitiveness of the European
Companies and Resource Efficiency’, ECORYS study carried out for DG Enterprise
and Industry, 2009.

[35] ‘sustainable Industry: Going for Growth & Resource
Efficiency’, 2011.

[36] ‘The number of Jobs dependent on the Environment and
Resource Efficiency Improvements’, ECORYS study, 2012.

[37]    Ibid.

[38]    In the Eurobarometer survey, green products and
services are those with a predominant function of reducing environmental risk
and minimising pollution and resources. For this survey, products with
environmental features (eco-designed, eco-label, organically produced, with a
substantial recycled content) were also included.

[39]    Eurostat data.

[40]    Exports of Environmental Goods refer to intra- and
extra-EU 27 exports of goods from ‘eco-industries’ divided by total intra- and
extra-EU 27 exports of goods (in nominal values). ‘Eco-industry’ refers to
sectors whose products measure, prevent, limit, minimise or correct
environmental damage. The trade codes considered to cover eco-industry goods
are those identified on pages 190/191 of the Ecorys study of 22 October 2009 on
the ‘Competitiveness of the EU eco-industry’, carried out for DG Enterprise and
Industry.

[41]    ‘Public Procurement for a Better Environment’,
COM(2008) 400. ‘Green’ means compliant with endorsed common ‘core’ green public
procurement criteria for ten priority product/service groups such as
construction, transport, cleaning products and services:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2008:0400:FIN:EN:PDF.

[42] ‘Assessment and Comparison of National Green and
Sustainable Public Procurement Criteria and Underlying Schemes’, 2010.

[43]    www.oekokauf.wien.at.

[44]    Industrial policy: Reinforcing competitiveness,
COM(2011) 642 final.

[45]    ECB and European Commission, SMEs’
Access to Finance, Survey 2011, 7 December 2011, http://ec.europa.eu/enterprise/policies/finance/files/2011\_safe\_analytical\_report\_en.pdf.

[46]    ECB, Survey on the access to finance of small and
medium-sized enterprises in the euro area. October 2011 to March 2012, April
2012.

[47]    ECB and European Commission, SMEs’ Access to
Finance, Survey 2011, 7 December 2011.

[48]    EIF, European Small Business Outlook,
2/2011.

[49]    http://ec.europa.eu/enterprise/policies/finance/guide-to-funding/indirect-funding/files/evaluation-of-national-financing-programmes-2012\_en.pdf.

[50]    Are EU SMEs recovering from the crisis? Annual
Report on EU Small and Medium-sized Enterprises 2010/2011, Ecorys.

[51]    http://ec.europa.eu/enterprise/policies/sme/marketaccess/
files/internationalisation\_of\_european\_smes\_final\_en.pdf.

[52]    Europe can do better: Report on best practice in
Member States to implement EU legislation in the least burdensome way, 15 November
2011.

[53]    Assessing business start-up procedures in the
context of the renewed Lisbon strategy for growth and jobs.

[54]    Business Dynamics: Start-ups, Business Transfers
and Bankruptcy, http://ec.europa.eu/enterprise/policies/sme/business-environment/start-up-procedures/.

[55]    (i) Trade, hotels, transport and communications
services;

      (ii) Financial intermediation, business
activities (real estate, renting, leasing, R&D, and other business
services).

[56]    Public administration, education and welfare.

[57]    Communication ‘Partnership for new Growth in
Services 2012-2015’ on the implementation of the Services Directive,
COM(2012)261 final.

[58]    The report includes assessment of the economic
impact; the status of the Points of Single Contact; and implementation details
by Member State.

[59]    Commission Staff Working Paper on the
implementation of Directive 2006/123/EC on services in the internal market
(‘services Directive’), DG MARKT, 2012.

[60]    Commission Staff Working Paper on the
implementation of Directive 2006/123/EC on services in the internal market
(‘services Directive’), DG MARKT, 2012.

[61]    The functioning and usability of the Points of
Single Contact under the Services Directive — State of Play and Way Forward,
Deloitte, 2012, http://ec.europa.eu/internal\_market/services/docs/services-dir/study\_on\_points/final\_report\_en.pdf.

[62]    AT, BG, EE, IE, ES, CY, LT, LU, NL, PL, RO, SI, SK,
FI, SE and UK have not transposed or have failed to fully transpose the Gas
Directive (2009/73/EC) and/or the Electricity Directive (2009/72/EC).
Infringement proceedings have been initiated against these Member States.
Assessment under the European Semester 2012/2013.

[63]    Mobile telephony prices fell by around 30 %
between 2006 and 2010 according to the 2011 Teligen ‘Report on Telecoms Price
Developments’.

[64]    Belgium, Cyprus, Germany, Greece, Spain, France, Italy, the Netherlands, Poland, Portugal, Romania and Slovenia.

[65]    European Commission (2011), Eurobarometer 76.

[66]    These links were identified and described in the
framework to assess the quality of public administration for competitiveness
purposes developed by the Austrian Institute of Economic Research (WIFO) in the
Study on Excellence in public administration for competitiveness in EU
Member States (2012) carried out for DG Enterprise and Industry. A summary
assessment of performance against the EU average for each public
administration–competitiveness link is illustrated in each country chapter
through a spider diagram highlighting the weaknesses/strengths of the EU Member
States.

[67]    The post-bureaucracy index — developed by Demmeke
and Moilanen (2010) in a study on Civil Services in the EU of 27 commissioned
for EUPAN — describes the degree of implementation of different human resources
management tools concerning the legal status of employees (public law civil
servants vs employment based on private law), career structures (regulated
insider promotions, etc.), recruitment (special recruitment, private sector
experience), salary systems (seniority, performance-based, regulated by law)
and tenure system (lifetime tenure, special job security).

[68]    BIS (2012), One-in, One-out: Third Statement of
New Regulation, London, Department for Business, Innovation and Skills.

[69]    OECD (1997), Regulatory Impact Analysis: Best
Practices in OECD Countries, Paris.

[70]    For example, the European Public Sector Award
(EPSA): www.epsa2011.eu.

[71]    COM(2012) 299, http://ec.europa.eu/europe2020/pdf/nd/eccomm2012\_en.pdf.

[72]    CEPEJ —
European Commission for the Efficiency of Justice (2006), Compendium
of ‘best practices’ on time management of judicial proceedings, Strasbourg,
Council of Europe, CEPEJ (2006) 13.

[73]    Adjudication refers to a specific type of
arbitration, where an adjudicator reviews evidence and argumentation including
legal arguments set forth by the litigants in order to come to a decision that
determines rights and obligations between the parties involved. The decision is
legally binding but can be reviewed by a court.

[74]    European Commission (2011), Europe can do
better — Report on best practice in Member States to implement EU legislation
in the least burdensome way, High Level Group of Independent Stakeholders
on Administrative Burdens.

[75]    Special
Eurobarometer 374, February 2012, http://ec.europa.eu/public\_opinion/archives/ebs/ebs\_374\_en.pdf.

[76]    OECD (2007), Specialised Anti-Corruption
Institutions — Review of Models, Organisation for Economic Cooperation and
Development — Anti-Corruption Network for Eastern Europe and Central Asia, Paris.

[77]    Transparency International (2012), Money,
Politics, Power: Corruption risks in Europe.

[78]    European Commission (2011), Fighting Corruption in
the EU. Communication from the Commission to the European Parliament, the
Council and the European Economic and Social Committee, COM(2011) 308.

[79]    www.crz.gov.sk.

[80]    In the same period public R&D expenditure
increased (from 0.52 % to 0.65 % of GDP). Total R&D intensity
(private and public) stagnated (rising only from 1.97 % in 2000 to 1.99 %
of GDP in 2010).

[81]    Public R&D budgets have increased from
EUR 2.29 billion in 2009 to EUR 2.47 billion in 2012.

[82]    Foregone revenues from R&D tax incentives are
almost as big a subsidy as direct public funding of business R&D. Taking
both of these into account, support for business R&D in Belgium is 0.17% of GDP, higher than in most other Member States.

[83]    Source: Schmitz, T. (2012), ‘Greenhouse Gas Emissions
and Price Elasticities of Transport Fuel Demand in Belgium’, OECD Economics
Department Working Paper No 955.

[84] ‘Assessment and Comparison of National Green and
Sustainable Public Procurement Criteria and Underlying Schemes’ 2010.

[85]    http://www.simplification.fgov.be/
showpage.php?iPageID=3622&sLangCode=FR

[86]    World Bank, Doing Business 2012, Belgium.

[87]      http://www.publicprocurement.be/portal/page/portal/
pubproc/beep%20algemeen/wetgeving%20overheidsopdrachten/

[88]    Sixth edition of the survey on administrative
burdens, commissioned by the Agency for administrative simplification.

[89]    Third factor behind ‘restrictive labour
regulations’ and ‘tax rates’ (World Economic Forum Global Competitiveness
Report 2011-2012).

[90]    The 0.60 % GDP consists of almost equal shares
of public (0.29 %) and private (0.30 %) investment.

[91]    1.22 patents per million of residents, compared to
the EU average of 115.8.

[92]    The park will focus on R&I activities in the
areas of ICT and pharmaceuticals.

[93]    ‘On Progress in Bulgaria under the Cooperation and Verification Mechanism’, COM(2012) 411 final, http://ec.europa.eu/cvm/docs/com\_2012\_411\_en.pdf

[94]    There is a problem of co-financing of EU projects
in Bulgaria as under the EU Financial Regulation (Article 111) double funding
of projects is not possible.

[95]    Source ECVA.

[96]    Source Eurostat.

[97]    A 2011 report from the Bulgarian Small and Medium
Enterprises Promotion Agency showed that innovation activities of enterprises
are in direct correlation to access to financing.

[98]    Transparency International ‘Money, politics, power:
corruption risks in Europe’ 2011.

[99]    According to the Bulgarian Industrial Chamber, only
30 out of 700 administrative services are available through internet.

[100] No 130/2002 Coll.

[101] Act No 72/2000 Coll.

[102] ‘All in one’ contact points where any
citizen can obtain all the information about the personal data held by
authorities in centralised registries.

[103] An electronic delivery system for sending and
receiving documents related to public authorities.

[104] According to the World Bank Doing Business Report
2012 it takes 20 days to start up a business in the Czech Republic. However, the
Czech Government has indicated to the World Bank that these figures are
outdated. The start-up procedures data published by DG Enterprise and Industry
says that it takes 15 days to start a company in the Czech Republic — http://ec.europa.eu/enterprise/policies/sme/business-environment/start-up-procedures/progress-2011/index\_en.htm.

[105] European Commission’s study ‘Business Dynamics:
Start-ups, business transfers and bankruptcy’ 2011. Data from this report is
based on a survey from a number of stakeholders and measures the complexity of
licensing procedures (in terms of cost, time and effort) for five model
companies (hotels with restaurant, plumbing company, wholesale or retail
distributor, manufacturer of steel products, manufacturer of small IT devices).

[106] The Czech Republic scores among the worst performing
countries in the European Payment Index 2011. Average delays in payments by
both the public and the private sectors increased between 2010 and 2011 from 10
to 13 days and 15 to 17 days, respectively. .

[107] Czech Republic is one of the Member States identified
in the ECB-Commission survey on access to finance of SMEs (December 2011) where
rejected loan application was higher than the EU average in 2011 and where the
loan application situation deteriorated between 2009 and 2011.

[108] The European Private Equity and Venture Capital
Association (EVCA) also estimates that the share of investment in seed and
start-ups as a percentage of GDP is lower than the EU average in the Czech Republic.

[109] ‘Global Competitiveness Report 2011-2012’ World
Economic Forum.

[110] Transparency International ranked Czech Republic in 57th place in its 2011 report, as opposed to 53rd
place a year earlier.

[111] World Bank Doing Business Report 2012 estimates that
on average firms make 8 tax payments a year and spend 557 hours filing,
preparing and paying taxes. .

[112] ‘Global Competitiveness Report 2011-2012’ World Economic
Forum.

[113] The World Bank doing Business Report highlights that
it takes 611 days to enforce a contract and requires 27 procedures.

[114] For details, see the SBA fact sheet: http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/files/countries-sheets/2010-2011/denmark\_en.pdf

[115] Eurostat data for 2010.

[116] Innovation Union Scoreboard 2011, http://ec.europa.eu/enterprise/policies/innovation.

[117] Together with Denmark, Finland and Sweden.

[118] High-Tech Strategy 2020 for Germany http://www.hightech-strategie.de.

[119] Report on ʻInnovation Policy Trends in the EU
and Beyondʼ, December 2011, INNO Policy Trend Chart, http://www.proinno-europe.eu/inno-policy-trendchart.

[120] ʻZentrales Innovationsprogramm
Mittelstandʼ  http://www.zim-bmwi.de.

[121] Bundesregierung, ‘Konzept für Fachkräfte",
22.6.2011, http://www.bundesregierung.de.

[122] Bundesarbeitsagentur ʻPerspektive 2025:
Fachkräfte für Deutschlandʼ,
http://www.arbeitsagentur.de.

[123] Flash Eurobarometer 2012, European Commission, http://ec.europa.eu/public\_opinion/flash.

[124] EU energy and transport in figures, DG Energy, http://ec.europa.eu/energy/observatory/statistics.

[125] Pressemitteilung ʻBundeskabinett
verabschiedet 6. Energieforschungsprogrammʼ, 3.8.2011, http://www.bmwi.de.

[126] Novellierte Vergabeverordnung (VgV), 20.
August 2011.

[127] Global Competitiveness Report 2012, World Economic
Forum.

[128] SBA Fact Sheet 2012, DG Enterprise & Industry, http://ec.europa.eu/enterprise/policies/sme.

[129] DIHK Gründerreport 2012.

[130] Mittelstandsmonitor für EU-Vorhaben,
http://www.bmwi.de.

[131] The initiative has been highlighted as a good
practice in the Report of the High-Level Group of Independent Stakeholders on
Administrative Burden, December 2011 http://ec.europa.eu/dgs/secretariat\_general.

[132] See ECB’s ʻbank lending surveyʼ of April
2012.

[133] Including for example through the ʻERP Start
Fundsʼ, the ʻERP/EIF Dachfondsʼ, or the ʻHigh-Tech
Gründerfondsʼ.

[134] The initiative has been highlighted as a good
practice in the Report of the High-Level Group of Independent Stakeholders on
Administrative Burden, December 2011 http://ec.europa.eu/dgs/secretariat\_general.

[135] Monopolkommission, www.monopolkommission.de.

[136] Monopolkommission.

[137] BMWi,
Eckpunkte zur Änderung des Postgesetzes, www.bmwi.de.

[138] Monopolkommission.

[139] National Reform Programme 2012.

[140] Doing Business Report 2012, World Bank.

[141] Government Effectiveness indicator,
World Bank.

[142] European Payment Index, Intrum Justitia.

[143] Cost and effectiveness of public procurement in Europe, European Commission, http://ec.europa.eu/internal\_market.

[144] Doing Business Report 2012, World Bank.

[145] Paying Taxes Report 2012, World Bank.

[146] Survey on ICT use, 2011, Eurostat.

[147] Global Competitiveness Report 2012, World Economic
Forum.

[148] Doing Business Report 2012, World Bank.

CONTENTS

3.6.      Estonia. 88

3.7.      Ireland. 95

3.8.      Greece. 102

3.9.      Spain. 108

3.10.    France. 114

3.11.    Italy. 120

3.12.    Cyprus. 126

3.13.    Latvia. 133

3.14.    Lithuania. 140

3.15.    Luxembourg. 146

3.16.    Hungary. 152

3.17.    Malta. 160

3.18.    Netherlands. 164

3.19.    Austria. 171

3.6.        Estonia

Sectoral specialisation of manufacturing – Estonia (2009)

Source: Eurostat

3.6.1.     Introduction

Estonia is one of the countries that are catching
up fast: it has a highly developed e-government, a SME-friendly business
environment and is highly supportive of entrepreneurship; manufacturing
production has regained the ground lost during the crisis producing 17.3 %
of value added (EU average is 15.5 %). However, Estonia has a weak
innovative business culture with low R&D intensity; it has relatively lower
income levels and a relative specialisation in labour-intensive industries. In
general, Estonia is improving its competitiveness and, if it keeps momentum, it
will join the group of higher income countries that are specialised in
labour-intensive industries.

In terms of trade and
industry specialisation, Estonia’s rapid recovery in industrial production has
been driven by manufacturing of food, electronic products and equipment, wood
products, fabricated metal products, motor vehicles, electrical equipment as
well as machinery and equipment, 70 % of which were sold on the external
market. Estonia’s main trading partners are Sweden and Finland, Russia, other Baltic States and the rest of the EU. While Estonia still has sectors with
low or medium innovation and education intensity and predominantly exports
low-to-medium tech products, it has been climbing the technology ladder thanks to
dynamic medium-to-high tech exports.

3.6.2.     Innovative industrial
policy

Estonia ranks slightly below the EU average according to the 2011 Innovation
Union Scoreboard. In spite of the government’s efforts to create competitive
framework conditions for businesses innovation, Estonia has no clearly
formulated industrial policy and its R&I system appears too fragmented. To
increase its competitiveness, Estonia needs a comprehensive innovation strategy
that would allow the identification of knowledge-intensive sectors that could
push the country up on the value chain.

The R&D
intensity target of 3 % of GDP in 2020 is achievable only if business
R&D grows significantly and Estonia is able to attract more R&I
intensive foreign direct investments. Despite recent improvements, only about
10 % of Estonian companies are active in R&I. The support and
investment tools available for fast-growing innovative firms include: KredEx
technology loan, the Estonian Development Fund pilot programs, a start-up
programme supporting innovative companies, and the ‘start-up Estonia’ pilot
scheme aimed at training fast growth start-ups on how to get funding from the
market. However, the current grants are aiming at cutting edge technology and
therefore have fewer candidates among companies. To remedy this, Enterprise Estonia has launched a new program supporting innovation in the manufacturing
industry; KredEx is also offering a simpler loan scheme with a lower
technological threshold but targeting technological upgrade. There are no
specific tax measures acting as incentives for companies to invest in R&I,
but the retained profits of firms are not taxed, thus encouraging investment in
general.

Cooperation
between academia and business continues to be weak; hence the need to
significantly encourage the exploitation of research results by the business
sector, particularly for boosting the productivity of existing industries. There
has been some progress in terms of technology transfer: the number of patents
and industrial designs has increased, in part as a consequence of the six
technology transfer offices operating in universities (part of the Spinno
programme). In general, neither universities nor the twelve excellence centres
engaged in academic research have enough incentives to promote an efficient
commercialization of research output, in spite of the fact that they own the
intellectual property rights. In an effort to undertake industrial research and
develop innovative products, eight competence centres, co-financed by
companies, have been created; some of their products have been already released
on the market. The government is planning to evaluate these centres against their
work programme and cut financial support in cases where progress is insufficient.

On the demand
side, the innovation vouchers program, intended to open the doors for SMEs
towards R&I, has been extended: the price is now
4 000 EUR/voucher, limited to one per company. The list of R&D
providers has been extended to include private entities – i.e. competence
centres – and the possibility of including designers is being studied. However,
while universities and companies seem satisfied by the program, its real impact
has not been thoroughly evaluated.

In terms of the
skills gap, there is still an
insufficient supply of scientists, engineers and ICT professionals, which also
constitutes a hindrance for foreign R&I investments. In order to increase
the level of highly skilled graduates, the government initiated an ‘industrial
PhD scheme’ two years ago, whose final impact still cannot be estimated. In
addition, the Estonian Development Fund has initiated an IT Academy and the
Chamber of Commerce has been campaigning to raise awareness about vocational
schools, as these are historically not well regarded in Estonia. Further, a matching portal that intends to bring Estonian talents back home has
been started in 2011, with 11 people (out of 500 subscribers) returning as a
result of using this service.

3.6.3.     Sustainable industry

Estonia needs to step up its efforts to promote
greener growth, as it has an industry with high energy intensity, high CO2
emissions, and high dependence on non-renewable resources, as most
electricity is generated by oil shale. However, the share of renewable energy
has been growing in recent years, as Estonia has been developing a renewable
energy support scheme, in spite of the fact that the transposition of EU
legislation on renewable energy (and the electricity and gas sectors) is
lagging behind. Most environmentally friendly tools are co-financed by the
Environment Investment Fund.

Estonia still suffers from high dependence on
imported energy from Russia and a relative isolation from the EU gas and
electricity networks. The construction of the Estlink 3 marine cable ensuring
an electricity interconnection with Finland has been started in 2011. In
addition, the first stage of the Tartu-Sindi high voltage line has been
completed. Estonia is considering some supply diversification through the
participation in a regional LNG terminal as well as strengthening the energy
interconnection with Latvia.

In order to reduce
GHG emissions and improve energy efficiency, particularly in the building and
transport sectors, Estonia has made some investments, including from the sale
of CO2 permits trading. Most notably, some 500 electric cars have
been distributed to social workers and the government plans to complete the
charging infrastructure by 2012. In terms of public transportation, some 18 new
electric trains have been acquired and the upgrading of the rail at the Russian
border has started. There are some plans to introduce environmentally friendly
trams and buses, start the works on the main Tallinn-Tartu highway and in the
Eastern parts of the country, acquire a more fuel-efficient air fleet and
expand the national airport; however, these plans need to be materialized in
due course. Further, the energy efficiency of some blocks of flats and public
buildings is being improved through a building renovation program that started
last year. In spite of this progress, there is a modal shift of passenger
transport from public transport towards private cars (a volume decrease of more
than 10 %), and of freight transport from rail to road. Consequently, the
National Energy Efficiency Action Plan should effectively address the need to
make the public transport more efficient. Further, a commitment to the ‘Rail
Baltica’ project, which foresees a double track electrified line connecting Poland,
Lithuania, Latvia, Estonia and Finland, would increase the modal share of a
more sustainable rail freight and passenger transport.

In terms of
co-generation of heat and electricity, the gradual decommissioning of 3 oil
shale plants that will be partially replaced with biomass plants has started
last year. The most pressing problem remains the renovation of district heating
networks, as they have areas entailing losses of up to 50 %; the problem
is exacerbated by municipalities lacking the capacity to oversee district
heating.

One of the main
environmental challenges in Estonia is waste management: the discharge of waste
generated by oil shale (70 %) needs to be reduced. While 4 landfills have
been closed and some 70 contaminated sites are being cleaned up, there are
hundreds of smaller sites left from the Soviet era that need to be tackled.
While the state-owned Estonian energy company is planning to invest in a waste
incineration co-generation power plant in 2013, municipalities lack the
capacity to oversee waste collection.

3.6.4.     Business environment

The OECD
Economic Review considers Estonia to be a dynamic business environment with
good network readiness, as well as high levels of corporate governance and
transparency. Estonia’s entrepreneurship-friendly business environment is strongly
supported by e-government – one of the best in Europe.

In general, access
to finance remains tight in Estonia: loan volumes dropped by 5 % in 2011,
in spite of the fact that the number of lenders increased by 12 %, leading
to a healthier competition between banks. On the one hand, banks have become
more risk-averse – the loan rejection rate is approximately 30 %.
Moreover, some companies are involved in the informal economy and tax evasion,
being therefore unable to secure traditional financing. At the same time,
smaller companies and start-ups complain about banks becoming stricter in terms
of required collaterals. On average, microenterprises seem to have a much
harder time accessing financial support schemes.

Estonia has made some progress in developing
programmes financed with structural funding and state support. Approximately
130 companies have benefitted from start-up loans, as well as export guarantees
offered by KredEx, whose number of credit guarantees for loans has increased
3.5 times. Further, Enterprise Estonia provides business plans advice and has
offered some support financed through the European Social Fund: a
EUR 7 000 start-up grant and a EUR 32 000 development grant
for companies up to 3 years old focused on fast growth; a new ‘start-up Estonia’
scheme is being started, aimed at coaching start-ups on getting funding from
the market. However, a 2010 Report by the National Audit Office, cited by OECD
Economic Surveys: Estonia 2011[1],
argues that enterprise support is inflexible and fragmented, benefiting only a
few companies, while support policies have not been focused on whether the
distributed funds have created any permanent development benefits.

In terms of venture
capital, the Estonian Development Fund is specialized in early stage (seed and
start-up) venture capital investment. So far, the Fund has the biggest early
stage investment portfolio in Estonia (EUR 7 million) with 15
investments; in general, investments must be made together with private
investors, only for equity expansion, and in exchange of a holding of
10-49 %. A new venture capital targeting seed and start-up financing is
under discussion – the Baltic Investment Fund, supported by the European Investment
Fund (EUR 40 million) – but the commitment of both Latvia and Lithuania is not entirely clear yet; Estonia has already announced its support for the
initiative (EUR 20 million).

When it comes to
access to foreign markets, about 15[2] Estonian start-ups
(mostly in biotech and ICT) have obtained financing in the UK and/or the US. The Export Revolution Program has had some initial success: the first 24 export
managers that were matched with companies lacking international experience are
still employed; the second offer of another 25 export manager places had 500
applications, which shows room for program expansion. On the contrary, the
program supporting the hiring of foreign engineers and developers has had more
limited results, as only approximately 25 foreign export managers were hired.
In addition, the Chamber of Commerce has set up an Export Academy offering
training and export awareness services. Further, Estonian companies are
encouraged to participate in international trade fairs and explore foreign
markets: currently, five Estonian enterprises are supported in their efforts to
enter the Chinese market.

Estonia supports entrepreneurship through a set of
targeted measures. In the educational system, entrepreneurship is offered as an
elective in five universities and will be introduced as mandatory in secondary
education starting with 2013; students can also participate in an ‘entrepreneur
shadowing’ programme. In addition, the competition for business ideas is being
continued and a new initiative – ‘Garage 48’ – has been designed to build a
company/prototype in 48 hours.

Given Estonia’s geographical position, transport and
transit are crucial for the economy. While the coverage of infrastructure
networks is in general adequate, its quality could be improved.[3] Further progress could be made in
increasing the interoperability of transport systems, the availability of
intermodal connection points (especially those linking ports and railways), and
upgrading the infrastructure of hubs, especially in border sections. Public
transport faces several problems, such as: a fragmented market approach, an
inadequate quality of the services, an ineffective subsidising system and a
poor state of the fleet.

3.6.5.     Services sector

Services are quite
a significant part of the Estonian economy and constitute approximately
18 % of total imports and 24 % of total exports. IT seems to be the
most competitive sector – exports increased during the crisis by 12 % in
2009 and 16 % in 2010 – followed by telecommunications, financial services
and retail. The number of regulated professions in Estonia is quite low. As far
as competition is concerned, the efficiency gains from having merged the 3
competition authorities into one are not yet apparent.

3.6.6.     Public administration

In terms of the
overall performance of the public administration, Estonia is at the EU average,
as measured by the World Bank’s Government Effectiveness Indicator. Similarly,
the perceptions of the quality of public services and policy implementation,
respectively, are at the EU average. However, Estonia scores significantly
better than the EU average in terms of tools for administrative modernisation,
which is mainly due to the expansion of business related e-government services.

Corruption seems to
be a relatively minor issue in Estonia: ‘diversion of public funds’ occurs
seldom, and the experience of corruption reported by individuals is only half
the EU average. Estonia ranks in the top group of Member States in terms of
licenses and starting a business; the time required to start a business is half
the EU average and the corresponding cost is approximately a third of the EU
average.

Payment delays
from public authorities are just 10 days compared to an EU average of 28 days.
Further, Estonia is considerably above the EU average in terms of tax
compliance and tax administration efficiency: it takes only 85 hours per year
to pay taxes in Estonia, compared to the EU average of 208 hours. As for the
efficiency of civil justice, Estonia is at the EU average.

Recent
initiatives

The government has
set the target of reducing administrative burden by 20 % in 2014 in 4
sectors: permits & licences, environment, construction and social services.
The obligation to submit annual reports and tax returns electronically has
reduced the burden on companies by 29.7 %, according to the government.
E-invoicing has started to be used by public authorities, but further expansion
is hindered by the high costs of digitalization. Email notifications on VAT
liabilities are sent to companies, which has reduced the number of companies
being late. The government is planning to further expand e-services by further
increasing the availability of electronic pre-filled tax declarations and
creating an application for smart phones. However, the e-bookkeeping platform
is not operational yet, as the project seems to have stalled at the Ministry of
Justice.  Recently, Estonia has prohibited the duplicate collection of the data
included in companies’ annual reports: the Business Register is using an
electronic data transmission system for submitting annual reports, and
government authorities cannot request any of such data that has been already
submitted.

The law on public
procurement has been amended, such that e-procurement for at least 50 % of
tenders becomes mandatory in 2013. In an effort to increase transparency,
procurements above EUR 10 000 must be announced in the public
procurement register and companies are required to draw up a procurement plan
every year. However, the participation of companies is rather low, in part due
to a frequently changing and rather complex procedure. According to the 2012
Report of Transparency International, the capacity of the body overseeing
public procurement is severely limited, compared with the body monitoring the
use of EU structural funds, which poses an increased corruption risk.

Estonia has indicated its intentions to extend the
powers of the Tax Office to fight tax evasion. In 2011, Estonia adopted a package of legislative proposals that reduce the tax burden on labour,
provide incentives to increase participation in lifelong learning, and reduce
incentives to borrow; the fringe-benefit tax on work–related studies has been
abolished as of 2012. In addition, Estonia enacted the first stage of a
comprehensive reform of the preferential excise taxation system for motor
fuels, narrowing the scope of application of the reduced excise rate; this
measure is intended to reduce market distortions, minimise fraud and create
incentives to improve energy efficiency.

Despite this
progress, a few areas still remain problematic. The current rules for
accepting/rejecting construction and planning permits are still confusing and
interpretable, and it is not clear if the amendments of the Construction Law,
to be enforced in 2014, tackle this issue. While a new regulatory impact
assessment system has been introduced in 2012, its implementation is
less advanced. In spite of the fact that the Reorganization Act has been
amended, little progress has been achieved to make insolvency processes faster
and cheaper.

The comprehensive
reform of the legal system has produced good results, and a new Public Service
Act has been adopted by Parliament, coming into effect in 2013. This civil
service reform aims at increasing the openness, flexibility and transparency of
the public service.

Overall profile of public administration

Source: WIFO

In terms of local
administration, a comprehensive reform remains outstanding, as there is a need
to ensure a better provision of public services. Local resources are currently
dispersed and local authorities do not have the capacity needed to handle
projects financed through EU structural funding.

As for fighting
fraud and corruption, a new Anti-corruption Act is currently in Parliament. It
aims at widening the scope of the e-register to include declarations of
interests from civil servants, local authorities and enterprises. In addition,
there is no legislation for regulating lobbying and protecting whistle-blowers,
which, according to Transparency International, weakens the quality of the
integrity system in Estonia.

3.6.7.     Conclusions

Estonia has a well performing business
environment, supported by strong e-government and a developed culture of
entrepreneurship. In order to increase productivity and thus improve its
competitiveness, Estonia should promote a coherent industrial policy and a
systematic and comprehensive research and innovation strategy. Particular
attention could be paid to the following: encouraging companies to innovate and
better exploit the resources offered by universities and research institutes,
improving access to finance and creating a more competitive environment,
increasing the supply of high-skilled labour according to market needs, and
improving training schemes, and promoting greener growth by continuing to
increase the share of renewables and modernizing the infrastructure. At the
same time, Estonia’s share of higher value added products and services, in
particular in exports, could be further raised. Finally, cooperation
opportunities in the Baltic region could be exploited in a more fruitful way.

3.7.        Ireland

Sectoral specialisation of manufacturing – Ireland (2009)

Note : No data available for sectors C12 (tobacco products), C19 (coke and refined petroleum products) and C31 (furniture) Source: Eurostat

3.7.1.     Introduction

Ireland has a diversified economy with a strong
manufacturing base that produces 25.8 % of total value added (the EU
average is 15.5 %, 2011). However, the economy has two distinctive parts:
the export-oriented and technology-driven part (including information
technology, medical technology, pharmaceuticals, and chemicals), and the domestic,
small business sector that is less innovative, less technology-oriented, and
exports less. The key challenge for Ireland is to improve the prospects of
these domestic firms.

The
technology-driven multinationals, in particular in the chemicals and
pharmaceuticals sectors, are driving the high labour productivity improvements
in Ireland. However, it should be noted that the extremely high labour
productivity figures are to some extent inflated by research and marketing
activities undertaken mainly outside Ireland, as well as by transfer pricing.

3.7.2.     Innovative industrial
policy

The difficult
economic situation has continued to have an effect on Irish research and
innovation. Business expenditure on research and development fell about
2 % between 2009 and 2010, driven by a decrease in the foreign affiliates.
Although research spending by the indigenous firms rose by 3.6 %, the
foreign affiliates continued to spend about two thirds of the total[4].
To address this discrepancy, the R&D tax credit has been made more flexible
and SME friendly by the Government. The headline target for R&D investment
is 2 % of GDP and Ireland is on track towards the goal.

The policy
response was spelled out in the Irish strategy for science, technology and
innovation for 2006-2013. One of the recent achievements is the Innovation Fund
Ireland that seeks to support the development of a vibrant venture capital
market. The use of technology transfer has increased considerably since 2007
when Enterprise Ireland started a programme for this. In 2011 the overall
number of spin-out firms was 30, with 95 technology licences issued.
Recommendations on managing intellectual property, based on good practices have
recently been published.

A number of
partial evaluation reports of the strategy have been published, but there are
no plans to conduct an overall evaluation of the national innovation system.

A new research
prioritisation report was published in March 2012. It identifies 14 priority
areas, with an added focus on increasing the efficiency and effectiveness of
the Irish science, technology and innovation ecosystem. The priorities are to be complemented with
an implementation focus on coherency, monitoring, cooperation with industry,
and upgrading of skills as part of initiatives aiming to accelerate the commercialisation of research, in
particular through cooperation with businesses.

Ireland’s well-educated workforce has continued to
expand as the number of science, engineering and technology postgraduate
students has increased by 33 % between 2005 and 2010. The Government has
this year also allocated EUR 20 million to a new Education and
Training Fund to retrain long-term unemployed.

The Government has
introduced a new ‘Procuring Innovation’ initiative which focuses on procuring
solutions to cover needs, rather than prescriptive products or services. This
practice of purchasing often favours SMEs, as they can have innovative
solutions, and SMEs’ access to public procurement seems already to be
improving.

The widely recognised
policy challenge is to continue to improve the financial and managerial
capacity, and ambition, of indigenous companies to research, innovate and to
turn these into growth.

Overall, the
policy response on research and innovation currently being implemented is
comprehensive, but the number of strategies and priorities might lead it being
too fragmented, with diminished efficiency and effectiveness[5].
To make sure that this is not the case, and to enable a sharper policy focus, a
comprehensive evaluation of the innovation system and related past policies
should be carried out and efforts focused on the most successful policies.

3.7.3.     Sustainable industry

The use of
environmental technologies in Ireland has increased in waste and energy use, in
particular in the food industry; and energy efficiency has improved in the
engineering sector. However, there is potential to increase awareness about
sustainability issues among Irish firms. At least for smaller firms, the
adoption of cleaner technologies largely depends on demand pull from customers
(whether other firms or consumers), and even here awareness-raising might be
useful.

There is a series
of programmes seeking to provide support for greener businesses, including the
‘National Action Plan on Green Public Procurement’ that addresses the purchase
of energy-using products, energy services, and capital projects.

Concerning the use
of energy, the Irish energy intensity is lower than the EU average, reflecting
structural changes in the economy, in particular the trend towards higher value
added goods like pharmaceuticals, electronics and high-value foods. Further
improvements have been obtained from fuel mix changes and energy efficiency
improvements. Over the period 1995 to 2010, the energy intensity of industry
fell by 54 % (5.0 % per annum). However, if the structural change had
not occurred, the annual fall in energy intensity would have been only
one-tenth of this.[6]

Despite the
progress achieved in the environmental performance of the Irish industry, there
is considerable potential for Ireland to get the indigenous firms to grasp the
opportunities a comprehensive greening of the economy.

3.7.4.     Business environment

Access to
finance

The severe banking
crisis has had a considerable influence on SMEs’ access to finance. Although
the low level of final demand has led to a sharp contraction in investment, many
SMEs also signal that they find access to working capital difficult. The Irish
rejection rate for credit  applications is the second highest in the euro area,
and Irish SMEs are among the most likely to have faced increased collateral
requirements, increased interest rates, and lower loan amounts.

The Irish credit
demand would seem to be close to the euro area average, as measured by changes
in firms’ reported need for external financing. Application rates for credit
are slightly lower than the EU average. The difference between Ireland’s ranking on demand and application rates is partly explained by a share of
discouraged borrowers, who need loans but have not applied for credit. For Ireland, this figure is double the euro area average.[7]

The Credit Review
Office was set up in 2010 to resolve disputes between banks and their SME
clients about loan refusals. Although the absolute number of cases reviewed has
been relatively small (197), the banks have become more careful as a result of
its existence. Of the cases where a decision has been reached, over half of the
bank decisions contested have been overturned.

The Government has
set lending targets of EUR 3.5 billion in 2012 and
EUR 4 billion in 2013 for the two largest Irish-owned banks. The 2011
lending targets were achieved, but 2012 is proving to be more difficult. Banks
have been slow in reorienting their practices from lending against real estate
collateral to lending for general business purposes, while SMEs have had to
adjust to providing a greater volume of information needed for banks to make
cash flow-based analysis. To improve the decision-making processes and to
facilitate SMEs’ access, four banks have introduced a standardised application
form for SME loans and are training front-line staff on SME credit issues. The
Government has also taken upon itself to further address the problem through
actions that seek to contribute to informed lending decisions at the banks,
improved sectoral expertise and better lending products.

These are included
in the ‘Action Plan for Jobs 2012’[8], and the Government has
already launched actions to provide capital for high-growth firms; partial
guarantees for business loans; allocated funds for the delivery mechanism of
the micro-lending scheme; and increased investment in private venture capital
funds. Further action is scheduled for strategic investment, and improving the
quality of loan applications.

Irish legislation
mandates a 30-day payment period for business payments (unless otherwise
specified), but this is not enforceable and the average payment period between
firms in 2012 is 66 days, causing problems for many SMEs. For public sector
payments there is a code of paying suppliers within 15 days. The Government has
also requested business organisations to introduce guidelines on prompt
payments charter.

Overall, access to
finance continues to be one of the weak points of the Irish business environment.
It remains to be seen how quickly and to what extent bank lending recovers, and
whether complementary financing options emerge when Irish SMEs start to invest
again. The government should follow developments closely and, if need be,
intervene with supportive policy measures.

Regulatory and
support environment

Despite the
business-friendly regulatory environment, SMEs are concerned about the rising
costs of doing business, including rates for energy, transport, refuse
collection, and municipal taxes. Despite the high unemployment, skills gaps
have been emerging for some businesses

Exports of the SME
sector are mainly going to the UK, and lack of language and management skills
have been hindering further export efforts. The Government is attempting to
provide more targeted support for SMEs, particularly in terms of assisting
firms to access new markets, and identifying businesses with growth potential
at an early stage.

Key measures in
the ‘Action Plan for Jobs 2012’ include establishing a new Potential Exporters
Division within Enterprise Ireland to target potential exporting companies, and
the setting up of a new one-stop-shop support structure by creating a new Small
Business Unit in Enterprise Ireland and a new network of Local Enterprise Offices.
These measures are in line with the objectives of Europe’s Small Business Act
(SBA) and should have a positive impact on the small business sector.

Export promotion
assistance for indigenous SMEs is being complemented by efforts to attract
inward entrepreneurial start-ups through specific cooperation between Enterprise Ireland and the Industrial Development Agency, an initiative designed to
complement targeted inward foreign direct investment from larger firms. Enterprise Ireland supported 93 new high-potential start-ups in 2011 and approved
EUR 20.4 million in funding.

Policy initiatives
focusing on improved SME participation in public procurement include the
lowered minimum values for public contracts and reduced company size
restrictions. In addition, a new Procuring Innovation initiative is intended to
focus on procuring solutions to specific needs, rather than being limited only
to pre-defined products or services.

In conclusion, the
Government has identified most of the areas that Irish businesses and their
organisations have identified as problematic. The actions of the ‘Action Plan
for Jobs 2012’ are a reasonable attempt to address these problems, but the
challenge is to ensure coherent and efficient implementation of the plan, in
particular keeping enough flexibility to increase focus on measures that are
working well.

3.7.5.     Services sector

Improving the
implementation of e-government initiatives continues. Telecommunication services are competitive, which has
driven mobile prices lower despite the consolidation towards only four
operators. However, the spread of broadband is hindered by a lack of business
demand, especially in areas with low population density.

The Act
liberalising postal services was enacted in August 2011 and competing courier
services have started to appear on the scene. The Government policy is to keep
An Post as a strong participant in the marketplace.

High dependence on
imported fuels and past underinvestment in distribution networks have kept
electricity prices relatively high. However, recent investment in the network,
increased competition, the single market with Northern Ireland, and the
deregulation of electricity markets have improved the situation. The customer
charter of the electricity company promises a connection in 14 days and
customer surveys indicate an 80% satisfaction rate on the service.

The Government has
indicated that it sees the motorway infrastructure substantially complete, and
the ‘Medium Term Capital Investment Framework 2012-2016’ prioritises health,
education and water services. On the rail network, provision of freight and
international passenger services have been opened to competition, but Irish
Rail is still the only operator. The separation of the provision of essential
functions for rail infrastructure is planned for before March 2013.

3.7.6.     Public administration

The public
administration of Ireland performs better than the average of other studied
Member States, but the progress in the use of administrative modernisation
tools (e-government, impact assessments, performance and service orientation,
accountability) is uneven. On one hand, Ireland has a comprehensive set of
business-related e-government services, and the use of regulatory impact
assessments is sophisticated. On the other hand, the internal management
methods of Ireland’s public administration are traditional, in particular in
human resources.

Further
development of e-government services is outlined in the ‘eGovernment 2012-2015’[9]
plan, requiring that information and transactional services are easily
identifiable, and that e-procurement, e-invoicing and e-payment facilities are
expanded to new devices. The Government is will also make data (e.g. on
environment, transport, education and crime) held by public bodies available and
easily accessible for reuse and redistribution.

Despite past cases
of corruption and fraud, currently indicators do not point to problems in this
area. The perceptions-based indicators on irregular payments and on the
diversion of public funds are better than the EU average and individual
corruption has been experienced in only 2 % of the cases.

Ireland also performs well in starting up a
business and obtaining licenses. The time required to start a company is 12.3
days (World Bank measure), which is slightly below the average (13.7 days), and
the costs are substantially lower (0.4 % as compared to the average of
5 % of income per capita). In line with this, the overall licensing
complexity is low despite the fact that there is not yet a fully operational
one-stop shop.

Public procurement
procedures are efficient and it takes 15 person days per firm and per tender to
participate, which puts Ireland above the EU average of 16.6 days. The typical
cost of taking part in a tender is smaller (0.13 %) than the EU average
(0.19 %). The average payment time is 13 days compared to the EU average
of 28.3 days.

On tax compliance
and tax administration Ireland is among the top performers. The average time to
prepare and file tax returns is 76 hours (EU average is 208 hours). The
administrative costs of taxation per 100 units of revenue collected are
1.1 % (EU average is 1.3 %).

The civil justice
system score is better than average but there is scope for improvement. Both
the time (650 days) and the costs (26.9 % of a claim) of enforcing
contracts are high[10]. However, resolving an
insolvency only takes 0.4 years, which is significantly faster than the EU
average (1.95 years). The perceived independence of the judiciary is high.

The costs and
uncertainty of using the judicial system, including many courts’ limited
understanding of business issues have been identified as problems by SMEs. As
part of its Euro Plus Pact commitments, the Government has proposed
liberalisation of the legal profession, likely to be enacted in 2012. Taken
together with a price transparency initiative, this could over time lead to
lower costs and more efficient legal procedures[11],
including the time and costs of contract enforcement. In addition, the Government has drafted a ‘Mediation Bill’
to promote mediation as an alternative to court proceedings, reducing legal
costs and speeding up dispute resolution.

Overall profile of public administration

Source: WIFO

The Government’s
plans for reforming the public service[12] are largely driven by the need to reduce the number of public servants
so that gross pay expenditure would be 15 % lower in 2015 than it was in
2008. The plan also is to rationalise state agencies, use shared and e-services
and otherwise streamline the public administration. It is important that this
is done without detrimental effects for users of the public services.

3.7.7.     Conclusions

Ireland has made good progress in achieving the
goals of the Memorandum of Understanding guiding its adjustment programme, and
despite the remaining challenges, these efforts have contributed to the
improving business prospects and strengthening competitiveness.

The Government
faces the challenge of improving the prospects of the domestic sector.
 The indigenous sector is held back by weak domestic demand, relatively weak
innovation, problems with access to finance, and rising costs of doing business
at local level. The government should keep a close eye on access to finance, as
improvement in this area is crucial for future growth.

The Government’s
answer has been the ‘Action Plan for Jobs 2012’ that contains over 270 actions,
a detailed timetable for their implementation and quarterly implementation
reports. The breadth of the plan, and the way implementation has started are
promising signs that Ireland is making a determined effort to reduce the
differences in the competitiveness of the domestic and multinational sectors.
The challenge is to avoid the fragmentation of efforts, and increasing policy
focus on the most promising initiatives enhancing innovation and growth.

3.8.        Greece

Sectoral specialisation of manufacturing – Greece (2009)

Source: Eurostat

3.8.1.     Introduction

The service sector
is the primary sector in the Greek economy. Tourism is one of the key sectors
both in terms of economic growth and employment. Travel and Tourism supported
directly 332 000 jobs or 8.0 % of the country’s total employment
(3.2 % in the EU), and 768 000 jobs or 18.4 % of total
employment if indirectly supported jobs are added (8.4 % in the EU).
Manufacturing contributes 9.9 % of the total value added (EU average 15.5 %
in 2011), where Greece features strong specialisation in the food processing
industry (manufacture of vegetable oils, processing and preserving of fruit and
vegetables). Other important sectors are metal, chemicals, cement and textile.
The Greek merchant fleet is the largest in the world. Greek ship owners control
15 % of the world’s shipping capacity.

Greece has been in recession since 2008, one of
the most severe ever experienced by a Member State. 150 000 jobs were lost
in SMEs in 2011. In 2012 it is estimated that a further 240 000 jobs will
be lost. Unemployment has soared to over 20 %, with youth unemployment
above 50 %. 6 out of 10 firms saw deterioration in their earnings in 2011
compared to 2010.

Difficult economic
conditions and continuing uncertainty are taking a heavy toll on Greek
businesses.[13] Structural reform is a
key priority of the Greek government's strategy for economic recovery. The
Memorandum of Understanding for economic adjustment includes several
commitments which aim to address concerns on the Greek business environment.
The recession, aggravated by austerity measures, has made efforts to reduce the
deficit ever more challenging.

According to the
World Economic Forum Competitiveness Report 2011-2012[14],
the three most problematic factors for doing business in Greece are:

1.
Inefficient government
bureaucracy

2.
Access to finance

3.
Corruption

The World Bank ‘Ease
of doing business 2012 Report’ [15] ranks Greece 100 out of 183 economies. There are a number of well documented weaknesses of the
business environment. Progress has been made with newly adopted legislation, in
the context of the adjustment programme, which has addressed competitiveness
weaknesses.

The reform
impetus, reinforced by the current crisis, has been underlined by the OECD in
its report ‘Economic Policy
Reforms 2012: Going for Growth’ according to which Greece has achieved the most
considerable progress in promoting reforms from 2008-09 to 2010-11. However, an effort is still needed to open
up the economy and continue implementing much needed structural reforms. Change
is essential because the private sector is crucial to re-start the economy and
spur growth.

3.8.2.     Innovative industrial policy

The dominance of
the low-tech sectors, lower value added production and reluctance of the
financial sector to finance innovation under the current difficult financial
situation, are hindering increased investments in R&D. Greece has fallen to
20th position of the Innovation Union Scoreboard 2011[16].
Based on their average innovation performance, the EU Member States fall into
four performance groups. Greece belongs to the third performance group which is
below that of the average of the EU27. It is a moderate innovator. The
Innovation Scoreboard notes that relatively strong elements in Greek innovation
include human resources and entrepreneurship. Greece is lagging behind in
finance, firm investments and intellectual assets. To improve its innovation
performance Greece would need a new orientation of policies and an environment
which is more innovation-friendly.

Due to the
difficult economic situation, R&D investments both from the public and
private sectors have decreased. EU structural funds are the most important
funding source for Greek innovation. In order to bring innovation closer to the
market, the General Secretariat of Industry launched in May 2011 the programme
‘New Innovative Entrepreneurship”. The main objective of the Programme is to
encourage a shift from necessity-driven to opportunity-driven entrepreneurship
by supporting young companies in the development of both product and service
innovations. 1 170 project proposals of EUR 192.9 million were
submitted to this Programme. 439 have been positively evaluated, out of which
more than half are start-ups.

In addition,
during the period 2007-2011, EUR 622 million has been granted to
Greek organisations from the Seventh Framework Program for Research and
Technological Development. The economic crisis has further weakened the
production sector and squeezed access to finance leading to a negative impact
of the innovation performance. Many well educated Greeks have moved abroad
looking for better work opportunities. It relieves pressure on the job market
but some fear it will create a brain drain.

3.8.3.     Sustainable industry

Although Greece has a favourable climate, only a small fraction of energy production is attributed
to renewable energy sources. Project Helios is a plan for an expansion of Greece’s solar power production from 206 MW to 2.2 GW by 2020, and then
10 GW by 2050. The project aims to attract up to EUR 20 billion
in investments and is expected to create thousands of jobs.

Several projects
have been launched to encourage improved environmental performance, e.g.
programmes to promote the development of green products and services as well as
improved waste management treatment.

A new law[17]
simplifies procedures for environmental licencing. and should reduce the time
needed for issuing permits. It introduces specific deadlines for each of the
administrative steps in the authorisation process, reduces the number of
projects for which an environmental impact assessment is required and the
number of signatures needed have been decreased from 3 to 1. Several
implementing decisions are still needed for full implementation of the law.

3.8.4.     Business environment

Greece has some recognized weaknesses of the
business environment. Legislation which is burdensome has been set up to
protect certain interest groups and bureaucracy hampers entrepreneurship. In
addition, the lack of competition holds back productivity and competitiveness,
as noted by the Task Force for Greece. The focus of further efforts should be
on the removal of regulatory and administrative restrictions that close markets
and stifle opportunities. Greek public authorities and agencies need to be
organised and equipped to design and implement growth-friendly business
policies. [18] In 2010 and 2011 a number of laws were
adopted to improve the business environment. They address well-known
deficiencies, such as starting-up a company, licensing of manufacturing
activities, investment authorisations and administrative burden to exports.

Economic reforms
have addressed the liberalisation of several closed professions, which are a
major cause for inefficiencies in Greece. Legislation aims, inter alia, to
abolish fixed prices or compulsory minimum fees and reduce geographical
restrictions and fixed profit margins. In this respect, new legislation[19]
aims at lifting restrictions on entry and exercise of regulated professions.
Notaries’ fees have been cut by almost 30 %, although they still remain
above the level of fees charged in other euro area countries with the same
notarial system. The rules governing minimum fees of lawyers, engineers and
architects still need to be streamlined.

Law 4072 was adopted on 11 April 2012 on Business-Friendly
Greece. The Law contains
several policy actions to remedy barriers to entrepreneurship. It includes
provisions on company law, starting up, establishment and winding-up of a
business, simplification of license procedures, public procurement, taxation
and the absorption of EU Structural funds.

In 2010 a fast
track procedure for strategic investments was adopted (3894/2010). The fast
track procedure curtails the licencing process with shorter and binding
deadlines and the elimination of overlapping or repetitive acts by the public
administration. On 1 February 2011 a new Investment Incentives Law was voted by
the Greek Parliament (3908/2011). The Investment Law provides incentives for
investment plans exceeding EUR 100 000.

Greek companies
are confronted with more administrative hurdles to company registration than
observed in other Member States.[20] According to the World
Bank Ease of Doing Business Report 2012, Greece is ranked 135 of 183 countries
on the ease of starting up a company. Given the severe recession, the high rise
in unemployment and the freeze of public sector hiring, simplified procedures
for start-ups are crucial elements to create the right environment for growth.
To simplify start up procedures, in April 2011 the one-stop shop system for
registering new companies was launched. The system aims to facilitate
registration by reducing the number of procedures as well as time and costs.
The one stop shop service is provided by 59 chambers of commerce and 3 200
notary offices. To date, over 7 000 companies have started through the new
procedures. Lawyers are not required for companies with a share capital of less
than EUR 100 000. Notaries are still needed for Public Limited
Companies and Limited Liability Companies.

The General
Commercial Registry, GEMI, became operational in April 2011. It will include
all established companies. With the development of the registry, online
completion of procedures for company formation and for administrative
procedures should be ensured. In accordance with the Memorandum of
Understanding, by July 2012 all companies established in Greece should be able to publish relevant company data through GEMI.

Law 3982/2011 on
simplifying and accelerating licensing of manufacturing activities has three
parts:

1.
Fast track procedures
for licensing manufacturing activities

2.
Development of business
parks

3.
Modernization of
licensing procedures for technical professions

The law aims to
remove bureaucracy and to strengthen the role of the public service to
effectively control the obligations of enterprises. Specific reduced deadlines
are set within which the administration must reply to requests.

For business activities
that do not disturb others (‘low nuisance actitities’), which represent
up to 80 % of requests, the licence is first issued and then checks are
carried out. The licenses for such activities are issued by a statutory
declaration. For medium nuisance level activities, there is the
possibility to obtain the license through the submission of guarantee letters.
For high nuisance level activities there is no change in the procedures.

Greek companies
face serious problems in obtaining access to finance due to the severe
recession and the difficult situation for the banking sector which has seen
outflows of deposits and a rise in non-performing loans. The main public tool
for facilitating SME access to finance is the Hellenic Fund for
Entrepreneurship and Development (ETEAN). It is financed from public means and
the EU structural funds and addresses financial gaps through loan guarantees,
counter-guarantees, co-investments and subsidised loans to SMEs.  ETEAN SA will
provide revolving engineering financial instruments through the creation of
funds as defined by the EU Regulations (such as holding funds, loan funds,
guarantee funds, etc.). ETEAN SA will co-invest funds with banks for the
provision of loans to small and medium sized enterprises with favourable terms
(e.g. very low interest rate). Such funds are:

-
The Fund for Energy
Efficiency in households and

-
The Entrepreneurship
Fund, amounting to
EUR 460 million, which is used to establish loan funds and guarantee funds.

A new SME
Guarantee Fund has been set up and signed on 21 March 2012. The Fund is a joint
initiative between Greece, the European Commission and the European Investment
Bank. Established by using EUR 500 million from unabsorbed Structural
Funds for Greece, the Fund will guarantee EIB loans to SMEs via partner banks
in Greece totalling up to EUR 1 billion.

3.8.5.     Services sector

The service sector
is the most important sector in the Greek economy. It contributes to more than
70 % of the economy. Greece is traditionally associated with tourism where
hotels and restaurants make a substantial contribution to the economy. Over the
last decade the service sector had a strong growth with tourism and shipping
taking the lead. The Greek merchant fleet is the largest in the world. Greek
ship owners control 15 % of the world’s shipping capacity.

Barriers to entry can
still be found in Greek legislation, in particular in the retail and education
sectors, e.g. in the retail sector priority to obtain a licence is given to
specific categories of persons and in the education sector Greek nationality is
required for founders of private schools and the majority shareholding should
also belong to Greek nationals.

3.8.6.     Public administration

Improving the
effectiveness, accountability and integrity of the public administration is a
key priority reform to be implemented in Greece. The structural reforms needed
by the country can only be delivered by a well functioning administration which
is built on stable, coordinated and empowered structures, providing the basis
for the necessary ownership and accountability for the reforms. Equally
important, the administration must be supported by civil servants having clear
responsibilities. The key objectives of the administrative reform in Greece are:

(1)
to improve the
effectiveness, accountability and integrity of the administration and to
simplify the administration's decision-making processes;

(2)
to have a strong centre
of decision-making with real inter-Ministerial coordination;

(3)
to create the necessary
structures in each line Ministry for effective monitoring of procedures
including expenditure, internal control and audit, human resources management
and information and communications technology.[21]

Greece’s overall public administration
performance, as depicted by the World Bank’s Government Effectiveness
Indicator, is well below the EU average. Perceived quality of public services,
including quality of the civil service and policy implementation in Greece are very low (0.52 compared to 1.18 in the EU). Overall low scores of Greece are common, as illustrated in the diagram.

The use of tools
to improve public administration performance (e-government, impact assessment,
performance and service orientation, accountability) is equally far below the
EU average. Especially the availability of business related e-government
services is particularly low, and so is the use of impact assessment.

The corruption and
fraud indicator shows a problematic situation in Greece as compared to the EU
average. The irregular payments and bribes index is especially low and a strong
gap can be observed in comparison with the EU average. Diversion of public
funds is also problematic, while the corruption sub-indicator is closer to the
EU average.

Composite summary
indicators for the efficiency of the civil justice system and for tax
compliance and tax administration are both below average. The time to enforce
contracts is problematic as it takes 819 days for enforcement as compared to
556 days in the EU-average. The delay in payments is also very high compared to
the EU average. Due to the difficult financial situation of the Greek state,
payment delays have risen to 114 calendar days, 4 times longer than the EU
average. The performance in terms of public procurement is also well below
average.

With regard to the
tax compliance and tax administration index, all the sub-indicators are
slightly below the EU average. The situation is similar for the civil justice system,
even if the cost for enforcing contracts is above the EU average.

Starting a
business and licensing indicator is below average in Greece, mainly due to the
cost to start up a business which is especially high (20 % of GDP per
capita which is 4 times higher than the EU average). One exception is the time
required to start up a company: in Greece it takes 10 days to start up a
company which is 3 days faster than the EU average.

Overall profile of public administration

Source: WIFO

Improved
efficiency of the public administration needs to be ensured to fully implement
the Economic Adjustment Programme, to increase accountability and improve
effectiveness. The implementation of the reform programme becomes complex due
to the fact that responsibilities are dispersed across a wide range of
ministries and agencies.

The Memorandum of
Understanding provides for the setting up, by December 2012, of a high-level
transformation steering group, chaired by the PM, which will supervise, monitor
and ensure the implementation of administrative reforms. On 6 January 2012 France and Greece in collaboration with the Task Force for Greece, signed a memorandum of
understanding paving the way for the implementation of the central administrative
reform. The German government has started providing technical assistance
for administrative reform at local and regional levels.

3.8.7.     Conclusions

An effort has been
made, over a very short period of time, to simplify procedures and to boost
competitiveness. Measures introduced so far aim, among others, at the
simplification of licencing procedures, fast-track investment authorisations,
the creation of a unique Business Registry (GEMI) and a one stop shop system
for all registration procedures.

Overall, the
implementation of the newly adopted laws has been slow. Responsibilities fall
under different Ministries that are reluctant to loose competence and certain
laws face strong opposition from different interest groups. Streamlined
collaboration across ministries is necessary to ensure swift implementation of
adopted laws. The reform of the Greek public administration therefore remains
an important task because it can contribute to raising the overall efficiency
of the economy by enhancing the state’s capacity to implement newly adopted
legislation and thereby improving the business environment. In addition to the
difficulties with regard to the implementation of much needed structural
reforms, with a contraction of the GDP of up to 18% since 2008, the lack of
economic growth has made it challenging for Greece to meet its fiscal targets.

3.9.        Spain

Sectoral specialisation of manufacturing – Spain (2009)

Source: Eurostat

3.9.1.     Introduction

Manufacturing
plays a slightly smaller role for Spain than for the EU in total (13.5 % of
total value added versus 15.5 % for the EU). Spain is specialised in
marketing-driven industries, capital-intensive and labour-intensive industries.
At the more aggregated level, Spain is specialised in low innovation and low
education sectors (manufactures for construction, wearing apparel), however in
exports it also specialises in medium-high innovation sectors such as motor
vehicles and in low technology sectors such as non-metallic mineral products.

Very low
productivity growth and high growth of wages over the period of 1999-2008 lie
behind the deterioration of price competitiveness. During the boom period,
growth in Spain was driven mainly by increase in labour utilisation, while
productivity measured by TFP had a negative contribution. Since 2007, Spanish
labour productivity per person employed has been improving. It stays above the
EU average and reached the euro-area average in 2009. However, a significant
part of this improvement comes from the sharp reduction in employment since in
low value added sectors and longer working hours. To achieve a long-lasting
re-balancing of the economy, Spain must tackle the structural problems that are
hampering growth and limiting competitiveness.

3.9.2.     Innovative industrial
policy

According to the
Innovation Union Scoreboard 2011, the performance of Spain in innovation is
still below the EU27 average, classifying the country in the group of moderate
innovators. The considerable increase in R&D expenditures since 2000 until
the beginning of the crisis has not resulted in a clear improvement of the
innovation capacity in the country. Contrary to the trend of other economies of
its group, Spain has not experienced a catching-up process towards a more
innovative model of production. Indeed, only modest progress has been observed
in the introduction of innovative product processes and services.

A number of
reforms have been recently introduced to improve the Spanish research and
innovation system, namely the Spanish innovation strategy (e2i) adopted in 2010
and the Law of Science approved in 2011. These initiatives still need to be
fully implemented and their coordination with the regional innovation
strategies of the Autonomous Communities is important in order to achieve more
coherence and synergies. The current on-going revision of the Integral Plan on
Industrial Policy (PIN 2020) may also be a good opportunity to pursue a
structural change towards a more knowledge-intensive economy building on
existing sectors as well as potential new growth areas.

Furthermore, Spain has set up the INNCORPORA programme, which provides support to private companies with
a view to contract highly qualified workers, thus fostering knowledge and
technology transfer and business innovation.

Nevertheless, the
current cuts of public investment, together with the still low R&D
investment performed by businesses, may represent additional challenges for the
coming years. This may request a review of the efficiency of the public
expenditure and introduce a more performance-based financing system, linking a
proportion of institutional funding to progress in scientific excellence, level
of internationalisation and public-private cooperation. A refocus of the
Structural Funds for the 2014-2020 programming period towards innovation and
competitiveness could contribute to this aim. Also, an evaluation of the
R&D tax credits of the last years may be helpful to analyse why business
R&D activities remain so low. As part of a deeper reform of university
financing and governance, there is also a need to reinforce incentives for the
cooperation for innovation between universities and the private sector.

3.9.3.     Sustainable industry

Spanish energy
infrastructure has been upgraded in the last years and has now levels above
European averages in the production and distribution of electricity and gas.
The energy sector should focus now in improving efficiency and offer a
competitive cost for industry. In the past, Spain put forward an ambitious
policy mix of measures concerning energy efficiency and support to renewable
energy sources which is currently being discontinued. Increasing competition in
the energy sector and completing the interconnections with neighbouring
countries would improve functioning of the energy market.

A reform of the
regulatory body for energy (Comisión Nacional de la Energía) has been
recently proposed to merge it with other sectoral regulatory bodies and the
competition authority following the Dutch model. The aim is to reduce the
number of bodies and simplify their structure and functioning. The impact of
this reform remains to be seen. In any case, the regulatory framework would
benefit from transferring tariff setting powers from the ministry to the
sectoral regulator, allowing for a more robust, transparent and predictable
tariff setting process with a lower degree of political interference.

Although Spanish
manufacturing industry has become more energy efficient in recent years, it
still has room for improvement compared to its equivalents in other Member
States. The risk of future increases in electricity prices for medium-sized
industrialists, in particular, due to the on-going efforts of the government to
reduce the financial deficit of the energy system may represent a strong
incentive for that.

In spite of the
efforts since 2009 in fostering internationalisation of Spanish enterprises in
sectors related to energy and climate change, Spain still scores below the EU
average in the percentage of exports of environmental goods. Some improvements
have been achieved in green public procurement with the Law on Sustainable
Economy which has recently introduced a system to identify the carbon print of
products of public procurement.

3.9.4.     Business environment

Inadequate access
to finance remains the first area of concern for Spanish enterprises,
especially SMEs. According to the Spanish Statistics Institute (INE), 60 %
of SMEs will need financing for their working capital until 2013. Credit supply
is still limited and has been scarcer since last year. Other alternative
financial instruments are still underdeveloped, for lack of both demand and
supply. Reinforcing the system of government backed guarantees and loans to
SMEs may be a good opportunity to help in this area, including the use of
Structural Funds under the JEREMIE initiative[22].
Spain has already three JEREMIE funds in place and is developing a fourth
JEREMIE with the Chambers of Commerce which should be operational by the end of
the year. Late payments by public authorities remain a central issue of concern
in Spain. The early transposition of the Late Payments Directive into national
legislation has not shortened public payments periods yet. In fact average
public payment periods have increased in 2011. The current on-going process of
fiscal consolidation presents an additional element of risk. In the beginning
of 2012, the government has put in place an ambitious programme to pay out the
stock of bills held by the local administrations. This will help alleviate the
liquidity problems of smaller enterprises but its implementation needs to be
monitored in detail.

Strong investments
in recent years, many co-financed by Cohesion Policy Funds, have significantly
upgraded Spanish transport, telecommunications and energy infrastructure. The
transport infrastructure deficit of the past has, to a large extent, already
been addressed. The resulting extensive network of motorways, high-speed
railway lines, airports and ports requires high on-going maintenance and
renewal costs. Spain should limit new infrastructure investment to those
projects for which there is genuine demand and which are affordable, taking
into account the high opportunity cost of public funds. Priority should be
given to freight rail transport, given its current underdevelopment and
environment-friendly character. While the EU average is almost 20 % of total
freight transported by rail, Spain accounts only for 4 %.

In recent years a
growing number of highly productive Spanish companies have been competing
successfully in key global sectors of high-added value. However, Spanish SMEs
(which have a higher presence than in other big countries of EU on total
production) are less internationalized than their European counterparts.
Indeed, only 40 000 firms export regularly and of those only 20 000
export more than EUR 50 000 per year. Moreover, Spanish exports are
still mainly directed towards the European internal market and less to
high-growth world markets, the exception being some Latin American markets
where Spanish telecommunications, banking and civil construction have a strong
presence. Spain counts with a wide national, regional and sectoral structure of
internationalisation support to SMEs which may help in expanding the base of
exporting companies and consolidating a higher number of regular exporters. The
Spanish economy is less oriented to exports than EU27. The increase of its base
export appears to be necessary in the current context of required external
surplus in order to reduce its external debt. The government has recently
reviewed the status of ICEX, the Agency serving Spanish companies to promote
their exports and facilitate their international expansion, in order to
increase the scope and breadth of its activities. A new programme ICEX-Next has
been put in place in the beginning of the year which will take over the PIPE
which is in phasing out. PIPE has been an extremely successful programme which
can inspire similar practices. Spain should consider strengthening the links
between internationalization and innovation by developing joint programmes
covering both aspects or even a unified agency. Furthermore, a deeper
integration of the regional and central government export agencies would
contribute to greater cost efficiencies and stronger policy coordination.

3.9.5.     Services sector

According to
recent studies[23],
the services sectors (both business and local services) have the greatest
development potential for the Spanish economy both in terms of growth and jobs
for the coming years. Spain has created far fewer services jobs (5 %) than
have been created in the rest of Europe (15 %) during the period
1995-2005. The still low productivity of these sectors may be enhanced by
fostering competition, improving efficiency and upgrading the skills of the
labour force.

Despite progress,
significant restrictions exist in retail trade (in particular for large-scale
outlets in certain regions) and in professional services by means of reserved
activities, obligatory membership in professional associations and regional
fragmentation of the market. However, the government is currently working on a
law on professional services.

3.9.6.     Public administration

Compared to other
EU Member States, Spanish overall public administration performance scores low
regarding the effectiveness and the quality of public services and policy
implementation as perceived by entrepreneurs[24].
High fluctuations and politicisation in the public administration together with
a heavy bureaucracy may explain these results.

Indeed, the legal
and regulatory framework for businesses in Spain is one of the most burdensome
of the EU. Although the cost to start-up a company is fair in comparison to the
average, the time needed to start up a company is still 28 days which is double
the average number of days in the EU.

The time needed to
obtain an operating licence is the longest in the EU with 116 days. The current
government has decided to tackle this issue with ambition and is working on a
number of initiatives framed in the so-called Law on entrepreneurs (Ley de
Emprendedores). These initiatives encompass rationalising and improving the
efficiency of the multiple one-stop shops systems, generalising the positive
silence in licensing procedures, etc. Royal Decree 19/2012 of 25 May has
recently eliminated the need of municipal license regarding environment and
public health for retail outlets of less than 300 square meters.

In addition to the
heavy bureaucracy, the proliferation of divergent regulation stemming from
regional and local layers of the administration further compiles the problem by
obliging enterprises to fulfil different criteria for the same activity to
operate in different regions or municipalities. There is evidence that this
regional fragmentation comes along with an increase in absolute terms of the
regulatory acquis in the country that could be seriously hampering
productivity growth. The Spanish government has acknowledged this issue in its
latest National Reform Programme submitted to the Commission in April 2012 and
intends to issue basic legislation to counter the high level of regulatory
fragmentation of the Spanish internal market in order to harmonize and simplify
the regulatory framework.

With the exception
of e-government, the use of tools for enhancing administrative modernisation is
globally deficient compared to EU average. Evidence-based instruments (impact
assessments for new legislation, fitness checks for existing legislation) are
not used as intensively as in the EU on average. The systems of human resources
management in the public administration also indicate that Spain still follows predominantly a more traditional model compared to EU average.

Although Spain ranks globally well in e-government, the use of e-government by small enterprises in Spain is still below EU average. The administration has taken several initiatives to turn
many procedures online in the recent years but more efforts can be done to
publicize and promote its use among enterprises and citizens.

The performance of
Spain in fraud and corruption is almost similar to EU average.
Individual experiences of incidents relative to corruption reported are clearly
below average (3 % as compared to 10 % in the EU). However, diversion
of public funds and irregular payments and bribes are perceived to occur more
often in Spain than in other Member States.

Regarding public
procurement issues, Spain is also slightly below average, with some scope
for improvement, especially in reducing the time of payment from public
authorities, which is much longer than average. In Spain the average delay in
payments from public authorities is 80 days nowadays which makes it one of the
worst performing countries on this indicator. The costs indicators per
competition however are both better than average.

Tax compliance
and tax administration are
slightly better than EU average. In Spain it takes annually 21 hours less to
prepare and file tax returns and to pay taxes. Administrative costs of
taxation are also below EU average.

Overall profile of public administration

Source: WIFO

Spain has been recently working on three areas
to improve tax compliance procedures: 1) improving coordination between the
different layers of the Public Administration which collect taxes; 2)
increasing the use of e-government; 3) accelerating the payments by the
Administration. The government has prioritized two areas for the coming year:
the swift implementation of the VAT directive and the compensation of debts/credits
between administrations. Both measures may help alleviating the liquidity
problems of SMEs. Additionally, some academics and business organisations
demand the introduction of a single tax account for all taxes and
administrative level (national, regional, provincial and local). This would
greatly simplify tax compliance and would permit tax and debt compensation.

              Civil justice is
slightly more efficient in Spain than EU average. Indeed, enforcing contracts
indicators, as well as the time for resolving insolvency indicators show better
performance than EU average. The recently adopted labour law (RDL 3/2012) has
introduced a number of instruments in view of improving the resolution of
labour related disputes. Spain has also taken measures to promote mediation as
an alternative to judicial litigation by means of the Royal Decree Law 5/2012
on mediation in civil and commercial matters. According to WEF-Global
Competitiveness Report 2012, low independence of judiciary is a point for
improvement.

3.9.7.     Conclusions

Among the large
economies of the EU, Spain has been the country hit the hardest by the economic
crisis both in macroeconomic terms (sharp increase in unemployment, slow
recovery of GDP growth) and at firm level (worsened profit margins, number of closed
businesses) . The worsening business environment and the difficult access to
finance for firms may have contributed to this bad performance. Also, some
characteristics of the Spanish enterprises may explain their lower resilience,
such as a smaller size of the Spanish average firm compared to countries with a
similar development level, a lower productivity and a lower degree of
innovation and internationalization.

The government is
working on a number of initiatives to improve the business environment.
However, important structural challenges still exist to increase growth and
productivity of firms such as the excessive and slow bureaucracy, the low level
of internationalisation of enterprises, difficult access to finance, low
innovation activity and lack of competition in certain sectors.

3.10.      France

Sectoral specialisation of manufacturing – France (2009)

Source: Eurostat

3.10.1.   Introduction

Manufacturing
plays a smaller role for France than for the EU in total (10.1 % of value
added in 2011 vs. 15.5 % for the EU) and its share is declining. France is specialised in medium-innovation and high-education sectors (e.g. transport
equipment such as trains and aeroplanes, business services), but less in high
innovation sectors, notably due to its lower specialisation in machinery and
computers. It has experienced a rapid deterioration of its trade deficit,
especially marked for manufacturing sectors.

France belongs to top group of EU countries in
terms of productivity levels, although the competitiveness gap vis-à-vis to the
best performers is growing. France has increased its industry specialisation in
technology-driven industries (air- and spacecraft), while considerably
decreasing its relative share of capital-intensive industries (cement, refined
petroleum). In exports, France the relative share of technology-driven
industries has decreased and the share of marketing-driven industries has increased.
The relative share in sectors with high education (business services) has
increased considerably while the share in high innovation sectors has decreased
(computers, communication equipment). France has climbed further up the quality
ladder, in particular in labour-intensive industries.

The external
competitiveness of France has deteriorated over the past decade. This can be
seen in the export market share that has dropped 19 percentage points between
2005 and 2010, and in the growing trade deficit that reached a record EUR 70 billion
in 2011. This deterioration stems from both cost and non-cost factors.[25]
To improve non-cost competitiveness, significant reforms have been undertaken
to promote research and innovation, and such reforms should be continued and
strengthened in the future. However, the increasing labour costs have
contributed to the deterioration of firm profitability, damping investment,
productivity and innovation. Over the last decade, the real compensation per
employee has increased more rapidly in France than in the euro area on average,
whereas productivity increase has only kept pace with the euro area average. This
has led unit labour costs to rise faster in France than in the euro area.

France has experienced a moderate appreciation of
the real effective exchange rate over the last decade, indicating nevertheless
a loss in cost and price competitiveness. Nominal unit labour costs have
increased by 23 % between 2000 and 2010, compared to an increase of
14 % in the EU27 and 20 % in the Euro area. The employment
legislation remains very protective and the minimum wage is among the highest
in Europe. Labour productivity is about 27 percentage points above the EU27
average and about 13 percentage points above the Euro area average, but still
slightly lower than in other advanced economies, reflecting the lower
specialisation in high innovation sectors.

3.10.2.   Innovative industrial policy

France is the EUR15 ‘innovation follower”[26]
whose performance has improved faster in 2008-2010, notably as regards non
technological innovation and the propensity of enterprises (including SMEs) to
commercialise innovation (including abroad). This progress may be due to the
numerous measures taken in the field of innovation and industrial policy, in
particular the reform of universities, the considerable budget dedicated to
support R&D expenditures both in the public and private sectors (including Investments
for the future programme, whose impact will be observed in the coming
years), the clustering policy (Pôles de compétitivité[27]),
and the creation of France Brevets[28]. But this has
not allowed catching up with ‘innovation leaders’ yet.

Business R&D
expenditures have been maintained in 2009[29]
despite the crisis and have slightly increased in 2010[30].
This is largely attributed to public financial support, in particular the Research
Tax Credit. However, business R&D expenditures have not significantly
increased over the last decade and remain insufficient overall. The business
R&D intensity is slightly above the EU average, but as a whole the weight of
medium and high-tech sectors in the economy and the number of mid-tier
enterprises with high R&D intensity remains insufficient.

Enterprises below
500 employees have markedly increased their R&D expenditures in 2008-2009.
SMEs and mid-tier enterprises do benefit from public support to business
R&D, such as funding of innovative projects by the Innovation Agency OSEO.
The R&D expenditures by high-tech sectors have also markedly increased in
2008-2009, and the share of medium to high-tech sectors in total exports is
significantly higher than the EU average.

In terms of
financial support to business R&D, the priority was given to technological
expenditures in the past few years. Non R&D innovation expenditures and the
number of trademarks and designs are much lower than the EU average. Non
technological innovation remains a challenge, notably in the services sector.
This raises the question of the dissemination of innovative techniques to the
entire economic fabric, for example through clustering and training policies.
International openness of innovative companies may deserve special attention
too. Apart from high-tech sectors, the propensity to commercialise technologies
and knowledge abroad appears to be much lower in France than in Member States
which are categorised as ‘innovation leaders”. This translates for example into
a lower share of knowledge-intensive services in total exports and less licence
and patent revenues from abroad.

Despite notable
progress, more will be necessary to catch up with ‘innovation leaders”,
including in particular further public-private collaboration as regards
research and innovation but also education and training (with a view to ensure
stronger consistency between the skills taught, career guidance, business
developments and societal challenges).

3.10.3.   Sustainable industry

Energy intensity
in industry and the energy sector is relatively low. However, the number of
patents related to societal challenges (climate change, ageing) is well below
the EU average, as well as intra-EU exports of ‘green’ products and services.
The trade balance of environmental goods is negative, although France is a successful exporter of water processing and waste management technologies. The
current sustainable industrial policy includes in particular the Investissements
d’Avenir programme[31], the Pôles
de compétitivité[32], and the steering
committee for eco-industries set up in the aftermath of the États
Généraux de l'Industrie. These measures, whose impact will be observed
in the coming years, are totally relevant in terms of green specialisation
strategies, but they do not reflect in statistics yet. They should favour in
the next years investments devoted to low carbon technologies and may require
complementary demand-side policies, in particular in the fields of public
procurement and information to consumers and SMEs.

Besides, reaching
the national 2020 targets in terms of greenhouse gas emissions and renewable
energy will require a considerable transition from the whole economy, far
beyond the ETS sector, and not least from the transport and construction
sectors.

A relatively large
number of electrical car models are available on the market since 2011. Sales
increase very rapidly but account for less than 0.5 % of the market,
despite financial incentives. To allow mass production, several bottlenecks
need to be eliminated, in particular adequate financing to allow sufficient
battery-charging infrastructures (including quick charging), standardisation
(plugs, battery packs), R&D (e.g. charging terminals powered by renewable
energy sources, autonomy of batteries, management of consumption peaks,
wireless charging). Governmental plans are adequate but need to be fully
implemented.

Satisfaction with
the overall quality of transport infrastructures remains the highest in the EU,
even if it is decreasing. However, France could have better exploited its
geographic position to play a central role in the shift to non-road freight in Europe. In particular, rail freight volume is diminishing while entry of new operators is
hindered by various competition barriers since several years. The freight
potential of French ports is underexploited, notably due to insufficient
interconnection of most ports with their hinterland and with other non-road
transport modes, in particular rail.

Coherent national
and local strategies, including infrastructure planning, and taking into
account all transport modes in a coordinated manner, could help exploiting the
green and competitive potential of the transport sector.

Ambitious national
targets are established for energy efficiency in buildings. The challenge is
now to ensure their achievement, notably through sufficient financial means,
but with a high effectiveness of public spending. This could include for
example continued financial support to renovation by private households,
including in co-owned properties, with minimum quality control of works; a
major renovation programme in state-owned buildings and tertiary buildings;
targeted information for SME owners, including for example through billing and
smart metering; increased number of graduates and apprentices in the
construction sector and adequate professional training.

3.10.4.   Business environment

Access to
finance

As a whole, access
to credit has improved between 2009 and 2011, with a catch-up effect since the
cyclical trough, and is relatively easier than in most Member States, even if
it remains relatively difficult. Existing mechanisms such as mutual guarantees,
public guarantees and the Credit Ombudsman seem effective. Credit
conditions have temporarily tightened in the last quarter of 2011, especially
for short term cash facilities (in particular low amount overdrafts) and small
or very small enterprises.

In 2012, access to
credit for investment projects[33] could
get more difficult (higher interest rates, stricter collateral requirements).
Given the structural lack of equity financing in France, especially for SMEs,
and the downward pressure on margins, even a slight tightening of credit
conditions may have a direct impact on bankruptcies and corporate investment,
in particular investment in non-fixed assets and other ‘non-compulsory’ expenditures
such as R&D, commercial prospection abroad, or non technological
innovation. This may be particularly acute for (independent) SMEs and mid-tier
enterprises and enterprises operating in high-tech and other innovative
sectors.

Regulatory and
support environment

In recent years France has introduced a number of reforms to limit the increase in labour costs, targeting
in particular low-skilled workers. These reforms have sought to limit the rise
in the minimum wage and to reduce the tax burden on labour. Regarding the
minimum wage, discretionary increases on top of the regulatory adjustments were
stopped since July 2006. In 2008, the procedure for the annual review of the
minimal wage level was improved by the creation of an advisory committee of
independent experts. In order to reduce the tax burden on labour, one of the
highest in the EU, the French authorities have adopted a number of measures, in
particular social security exemptions for lower salaries. However, further
steps are needed to shift the tax burden from labour to other forms of taxation
that weigh less on growth and external competitiveness. Unfortunately three
recent measures taken by the new government tend to increase labour costs: (a)
a lowering of the retirement age to be financed by social contributions on
labour; (b) the abolition of a decrease in social security contributions that
was to be coupled with an increase in the standard VAT; and (c) the 0.6%
increase of the minimum wage in real terms.

Overall, the Loi
de Modernisation de l'Économie (2008) has had a positive impact on the
duration of payments in the private sector. The average duration of payments by
the public sector has been over 60 days in 2010 and 2011, with particular
delays by some local authorities or some specific institutions such as
hospitals.

Some notable
measures to promote entrepreneurship include the auto-entrepreneur statute and
the individual entrepreneur statute (EIRL). Procedures for starting up a
business have been considerably simplified and shortened. The cost to start-up
a business is 5 times cheaper than the EU average, and the time needed to
start-up a business is twice shorter than the EU average. However, despite
regular batches of simplification measures, the regulatory environment of
businesses remains characterised by its complexity and instability, and
administrative procedures to run a business remain very burdensome overall. ‘Gold
plating’ of EU laws is recurring, especially in the environmental field.

3.10.5.   Services sector

The services
sector is characterised by a limited and diminishing commercial deficit between
2006 and 2010, although there is still room for fully exploiting the export
potential of knowledge-intensive services and environmental services.
Electricity prices for medium-sized enterprises are still among the cheapest in
the EU.

The number of
regulated professions is in line with the EU average. Some progress has been
made with regard to certain professions such as lawyers and taxi drivers,
although restrictions remain in professions, such as lawyers, veterinaries and
accountants. The entry of a new operator in mobile telecommunications is an
important step, but the competition framework is far from being optimal in the
energy and transport sectors.

3.10.6.   Public administration

The performance of
public administration scores above the EU average. As a whole, the quality of
public services and policy formulation and implementation, and the credibility
of public servants’ commitment to policies are positively perceived.

Overall, tax
compliance and tax administration score slightly above the EU average. The time
required to comply with taxes and the number of tax payments are both low in
international comparison and several tax procedures are available on line. It
takes 132 hours yearly to prepare and file tax returns and to pay taxes,
against 208 hours in the EU on average. However, the total tax rate (over
65 % of commercial profits) is 30 % above the average of high income
economies in the world and 20 % above the EU average (France ranks 26 out of 27 Member States)[34].

There is less
corruption and fraud in comparison to other Member States. The individual
experience of corruption (3 % of all cases) is clearly lower than the EU
average (10 %).

The efficiency of
the civil justice system is higher than in the rest of the EU, even if time for
resolving insolvency and judiciary independence are very close to the EU
average. Time to enforce contracts is significantly shorter than the EU average
(it takes 331 calendar days as compared to 556).

A noteworthy
simplification effort was conducted in 2011. This effort led to the vote, in
March 2012, of the ‘simplification and reduction of the administrative burden
Law". This act includes several measures aimed at simplifying
administrative procedures for enterprises, such as the simplification of the
pay roll, an electronic strong-box and an advanced social ruling.

On-line
availability of basic public services to businesses is in line with the EU
average. An electronic one-stop shop is in place for starting up a business in
the services sector, but the number of administrative procedures fully available
on line remains limited. The interfaces between businesses and government at
regional level have been streamlined in 2010, but there is significant scope to
further streamline administrative structures, in particular at local level, and
to ensure easy access to public authorities for all enterprises, including
SMEs.

The use of new
tools to improve public administration performance (e-government, impact
assessments, performance and service orientation, accountability) is slightly
below the EU average. As regards the elaboration of legislation, practices for
ex-ante evaluations have been harmonized by a circular issued in February 2011.
However, there is still room for improvement as concerns stakeholder
consultations, in particular in terms of explaining how the results were taken
into account in the relevant proposal. As a whole, by international comparison,
very high public spending and tax rate does not translate into significantly
higher government effectiveness or better public services for businesses.

  Overall profile of public administration

Source: WIFO

3.10.7.   Conclusions

Overall, France remains among the consistent performers, although its external competitiveness has
significantly deteriorated over the last decade, with trade deficits reaching
record levels (EUR 70 billion in 2011). Apart from the recent rise in energy
prices, this is due to the persistent rise in labour costs over the last decade
that has lowered firms’ profitability to the detriment of their innovation
capacity and their ability to invest in R&D. As a consequence, exports of
knowledge-intensive manufacturing industries have suffered.

As regards
non-cost factors, significant reforms to promote research and innovation have
already been undertaken and this momentum should be maintained and
strengthened. However, the measures taken so far on the cost side, mainly lower
social contributions on low wages, have proved to be insufficient. Furthermore,
some recent measures have tended to increase labour costs.

The relatively low
business R&D intensity in France reflects the sectoral composition of the
economy, with high-tech manufacturing sectors accounting for only a modest
share (despite a relatively high R&D intensity in individual economic sectors).
The economic fabric would benefit from a higher number and stronger growth of
companies of medium and intermediary size (which still undertake limited
research activities). Overall, the propensity of SMEs to innovate,
commercialise knowledge and technologies and invest in non-technological
innovation remains significantly lower than in Member States which are ‘innovation
leaders”. Further public-private collaboration in research, innovation,
education and training could help mitigate these weaknesses.

Tightening credit
conditions, when combined to the lack of equity financing and the downward
pressure on profit margins, could lead to shrinking investment by businesses,
in particular SMEs. This could weaken in particular investment in non fixed assets
and other expenditures such as R&D and non technological innovation,
commercial prospection abroad and marketing, which are though crucial for
non-price competitiveness.

As a whole, the
performance of public administration is better than the EU average, notably as
regards tax compliance. However, despite notable improvements in particular as
regards cost and time to start up a business, the regulatory environment for
businesses remains complex and burdensome overall.

3.11.      Italy

Sectoral specialisation of manufacturing – Italy (2009)

Source: Eurostat

3.11.1.   Introduction

Italy has a relatively large manufacturing
sector (in 2011contributing 15.9 % of its value added, compared to 15.5 %
for the EU average) and shows high indices of specialisation for sectors such
as leather products, textiles, machinery, and metal products. In terms of
exports, the three main sectors are those of machinery (which also records the
largest trade surplus), metal products and transport equipment. Looking at
technological specialisation, Italy is relatively more specialised in low tech
and low intermediate tech sectors than the EU as a whole. It should be noted
that Italy has the largest number of enterprises in the EU. With its
3.8 million SMEs, Italy has almost twice as many as Germany. These small businesses could become more competitive global players if remaining
obstacles to their growth were removed, and the existing facilities for
clustering and networking were more widely used.

Italy has been recording declining competitiveness since the end-1990s, due to both cost and non-cost factors. The current account balance moved
from a surplus of around 2 % of GDP in the late 1990s to a deficit of
3.2 % in 2011, mainly reflecting a deteriorating
trade balance, as the surplus on manufacturing goods has not compensated the
large deficit in energy products. Stagnation in productivity is the key factor
behind Italy’s loss of cost competitiveness since the euro adoption. With an export product mix partly similar
to that of some emerging economies, Italy has been relatively more exposed to
increasing global competition. As a response to these competitive pressures,
restructuring started already in the pre-crisis years; while maintaining its
specialisation in labour-intensive sectors, Italy’s exports moved up the
quality ladder, both by Italian companies pursuing upgrading strategies and by
less-efficient firms exiting the market (in the less knowledge-intensive
sectors).

3.11.2.   Innovative industrial policy

The latest
Innovation Union Scoreboard confirms Italy’s position in the group of moderate
innovators with performances below the EU average. In particular, investments
in R&D are relatively low (in particular by the private sector), as are
venture capital investments, patent applications (though the situation is
better for trademarks and designs), and exports of knowledge-intensive
services. There is good progress in the indicators related to human resources
(e.g. new doctorate graduates) and to entrepreneurship (e.g. SMEs
collaborations).

The National
Reform Programme announces the intention to consider the possibility of
introducing an ‘automatic’ and permanent tax credit mechanism to ensure a more
predictable and favourable framework for private investments in R&D. The
actions taken in the past were in fact too fragmented. The main supporting
programme ("Industria 2015"), organised around five thematic
Industrial Innovation Projects, has been quite successful in identifying the
main competitive challenges, in launching new initiatives and in favouring
public-private partnerships (and, indirectly, in supporting a reform of
vocational training) but has been quite disappointing as far as expenditures
are concerned, also as a result of the general credit squeeze in the economy.
The administrative procedures linked to ‘Industria 2015’ have been very
time-consuming (considering that partnerships often involve between 20 and 25
actors).

Programmes to help
companies to improve valorisation of intellectual and industrial property
rights have been launched (Fondo nazionale d'innovazione).

A number of
existing programmes managed by the Ministry for Education, University and
Research support both fundamental and industrial research in Italy. The main ones are the Fund for the promotion of research (FAR), in the Centre-North
of the country, and the Research and Competitiveness Operational Programme
2007-2013, for convergence regions in the Mezzogiorno. In recent months, new
calls for proposals for the development and reinforcement of national
technological clusters and on the ‘smart Cities and Communities’ theme have
been published.

Following the
major universities reform of 2010, the system is continuing to be modernised,
and future performance could be improved thanks to the role of ANVUR, the new
agency in charge of evaluating research and the quality of the R&D in
universities. In particular, ANVUR opinions should be taken into account in the
allocation of funds to universities. Results of the evaluation should be
available by mid-2013.

3.11.3.   Sustainable industry

Italy continues to register one of EU’s best
performances for energy intensity of the industry and energy sectors. This is
partly related to high electricity prices and high import dependence that have
provided a strong incentive for investments in energy efficiency throughout the
industry. There appears to be some progress towards the EU energy and climate
change targets for 2020, especially with regard to the development of renewable
energy sources, while progress towards the reduction of greenhouse gas
emissions remains modest.

The incentives for renewable energy have been
extremely successful, especially for solar photovoltaic energy, but have been
less effective in supporting the emergence of a national industry in the
sector. Actually, it appears that in 2010-11, imports of photovoltaic cells accounted for around
0.5 % of GDP of the increase in Italy’s trade deficit. Measures for energy saving and energy efficiency
have been established or confirmed, notably a successful tax credit for energy
savings in buildings (extended to the end of June 2013) and ‘white certificates’
(tradable Energy Efficiency Certificates issued to energy distributors and
energy service companies that certify the reduction of consumption achieved
through measures and projects of energy efficiency improvement).

In the framework
of  initiatives to favour the environmental restoration and industrial
reconversion of local areas in difficulty, such as those of Porto Marghera in
Veneto and of Porto Torres in Sardinia, there is an attempt to favour the
emergence of a more sustainable industry (e.g. through the promotion of ‘green
chemicals’), stressing that restructuring processes can also provide
opportunities.

Concerning the
diffusion of Green Public Procurement in Italy, the implementation of the 2008
national Action Plan is in progress. New Ministerial Decrees have been adopted
defining minimum environmental standards for a number of goods purchased by
public administrations (food, buildings’ cooling and heating). Further decrees
for transport and cleaning services are in preparation.

3.11.4.   Business environment

Access to finance
is a key concern in Italy and the situation has worsened in the last year.
Firms, especially SMEs, are facing tightening credit conditions. At the same
time, banks have reported a sharp slowdown in the demand for loans from
businesses in the first half of 2012, due to the general slowdown and low
growth prospects. As a result, according to the Bank of Italy, loans to
non-financial corporations have dropped significantly in December 2011 and
again between March and July 2012.

The Central
Guarantee Fund for SMEs is the main public tool to support companies in this area
and has registered an increase in applications in the latest years (especially
for SMEs’ liquidity needs rather than investments). It has been refinanced and
its scope has been increased.

A new tax
instrument (Allowance for new Corporate Equity - ACE) will be also be used to
improve companies’ capitalisation. It allows companies to deduct part of the
notional return on new injections of equity capital from taxable income. It is
expected to encourage firms, including small and medium enterprises, to increase
their capital base, while overcoming the debt bias of the tax system regarding
investment financing decisions.

The risk capital
market is still relatively small. The recently-established Italian Investment
Fund, focusing on mid-caps companies, is playing a big role in increasing the
supply of risk capital in Italy (with around EUR 1 billion, it
represents 60 % of the total risk capital market). As of June 2012, the
Italian Investment Fund has made direct equity investments in more than twenty
companies, mostly in the manufacturing sector. The possibility to use ‘network
contracts’ among SMEs (the contratti di rete were established in 2009
and allow companies, while remaining independent, to aggregate in order to
implement projects of common interest in areas such as innovation  and
internationalisation) to improve access to credit is being considered.
Concerning late payments, a key problem in Italy where average duration of
payments is one of the highest in the EU and the existing stock of commercial
debt is estimated between EUR 60-80 billions, a mechanism to certify
existing credits vis-à-vis the public administrations and to allow for their
compensation with tax debts has been defined at the end of May 2012 with
specific ministerial decrees. An agreement was also signed between government,
business organisations and banks, to ease the conditions for cash advances from
banks totalling at most EUR 10 billion.

Italy has put in place a structured governance
system to follow-up the implementation of the Small Business Act. A dedicated ‘permanent
dialogue’ (tavolo permanente) involving the relevant actors has been
set-up after the adoption of the SBA while the implementation of the SBA has
been formally included in the law on Company Statute adopted in November 2011.
An annual law on SMEs will be adopted starting from this year, possibly
including an extension of the ‘network contracts’ also to professional bodies
and universities. The national SME Envoy closely monitors the process.

3.11.5.   Services sector

The services
sector in Italy is quite heavily regulated and insufficiently open to
competition, although there has been progress in the last years, notably in retail
trade and the energy market – especially in electricity, although the lack of
an adequate infrastructure leads to a suboptimal use of the generating capacity.
Combined with the market shortcomings, this leads to higher energy prices for
consumers. The transport sector and local public services (including water
distribution and local public transportation) appear to be lagging behind in
this process.

The government’s
strategy is very much focused on increasing competition across the board and
numerous measures have been introduced, notably by the so-called ‘Cresci Italia’
(‘grow Italy’) decree-law of January 2012, for example in the fields of
professional services, petrol stations or pharmacies. Also, a new Transport
Authority is to be established with a wide scope of competence covering both
transport services and infrastructure, including highways, railways, airports,
ports and local public services. Its mission is to promote competition, reduce
costs, improve quality standards and fix methodologies for procurements and
concessions.

The new Transport
Authority is, potentially, an important step forward in sectors where much
remains to be done. However, there are still services sectors where further
interventions could be considered, notably the reduction in the scope for
professional orders’ legally reserved activities, as this has a cross-cutting
impact. A reform of professions was adopted in August 2012, but this only
focused on entry, promotion, insurance and training requirements. In general,
full implementation of the pro-competition measures is crucial. The wider
competence granted to the Competition Authority with regards to local public
services and to restrictions of economic activities can also be considered
steps on the right direction.

3.11.6.   Public administration

Italy’s overall public administration
performance, as depicted by the World Bank’s Government Effectiveness
Indicator, is well below the EU average. Both the time needed (1210 days) and
the cost (29.9 % of claims) for resolving commercial disputes through the
courts are matters of concern for the Italian Authorities, together with a more
general problem, the slowness of the Italian justice system, which arguably
damages the country’s competitiveness performance and its capacity to attract
new foreign investments. This is likely to be partly linked with organisational
problems within the judiciary system that are also being currently addressed by
a review of the territorial organisation of the courts of first instance.

In general,
Italian administrative procedures are particularly burdensome for business. A
more general burden for Italy is the time to implement all sorts of
infrastructure projects such as in transport, which has obvious implications
for industrial competitiveness and is highlighted, for example, by surveys on
the satisfaction with the quality of infrastructure where Italy is in the worst performing group within the EU.

Even if Italy is performing below average in the field of public procurement, Italy has recently adopted
several measures to simplify public procurement rules, notably in the ‘salva
Italia’ (‘save Italy’) law of December 2011. In particular, measures to
facilitate SMEs access to tenders through e-procurement, reduction of
administrative burdens, division of contracts into lots, simplification of
conditions for joint bidding have been established.

The fights against
corruption, tax evasion, the shadow economy and undeclared work are a priority for
the Italian Government. In this regard, an initial set of measures has been
established on the organisation of administration’s decision making processes,
on levels of transparency within the public administration and on technical
training for civil servants. A draft anti-corruption law is still being
discussed in the Parliament – the swift implementation of this law could have a
large beneficial effect on the business environment.

Italian tax system
is quite burdensome for companies and heavily weighs on labour in particular.
Once again, time is an issue as 285 hours per year are estimated to be
necessary in average to comply with the major taxes, compared to 187 hours in Spain for example. The tax system is also quite unstable as it is regularly amended through
urgent measures (Decree-Laws).

Italy performs relatively well with regard to
the operation of one-stop-shops to start up a company and time required to
start-up a company. Most one-stop-shops for start-ups are now operative at
municipal level. Online services and payments are available in parts of the
country but there are delays in implementation.

To encourage
entrepreneurship, the Grow Italy decree-law has created the possibility for
people under 35 to create a simplified limited-liability company, with fewer
formalities and less capital. Some simplifications were extended to all
entrepreneurs in the growth package adopted in August 2012.

Overall profile of public administration

Source: WIFO

In order to
improve the effectiveness of the public administration and to eliminate
unnecessary costs without reducing services to citizens, the Government has launched
a spending review and nominated an extraordinary commissioner for the
rationalisation of expenditures. In July 2012, a decree-law was adopted aiming
at saving a total of EUR 26 billion in 2012-2014. Further initiatives
have been announced for the following months.

3.11.7.   Conclusions

The economic
crisis is having serious negative effects on the Italian industry while, at the
same time, public resources are scarce. This follows a period of declining
competitiveness since the end-1990s, due to both cost and non-cost factors.

In this context,
Italian industrial policy focuses on four priorities: access to finance, SMEs,
industrial restructuring, research and development. The new government, in
place since November 2011, has broadly confirmed these priorities, and has also
emphasised the importance of the Digital Agenda.

There is
relatively more progress on the improvement of the business environment and on
the opening of services sectors to competition and less on promoting an
innovative industry, where implementation of previous measures has been
somewhat disappointing and more ambition would be required given Italy’s competitive position. Also, access to finance remains a particularly problematic
issue in Italy. Finally, Italy still has a large potential to develop a more
sustainable and competitive industry.

3.12.      Cyprus

Sectoral specialisation of manufacturing – Cyprus (2009)

Note : No data available for sectors C12 (tobacco products) and C19 (coke and refined petroleum products) Source: Eurostat

3.12.1.   Introduction

Manufacturing
plays a less important role in the Cypriot economy than in the EU on average (6.1 %
of total value added against 15.5 % for the EU). Slightly more than
10 % of the total workforce is employed in this sector (EU average:
17.5 %), which is the lowest in EU. The most successful manufacturing
exports are pharmaceuticals and photosensitive semiconductors devices, which
accounted for 22.5 % and 12 % respectively of domestic exports in 2009.
However, the revealed comparative advantage of Cyprus is concentrated in low
and medium-to-low technology sectors, namely food, beverages and tobacco.

Cost
competitiveness of the Cypriot economy significantly deteriorated over the last
decade, reflected in the increase of real effective exchange rate. Indeed,
while labour productivity grew slightly faster than the average of the euro
area, not only is it more than 25 points below EU average, but it has also
been offset by a faster growth of prices and wages.  Rising production costs
are among the causes of the gradual decline of the Cypriot manufacturing
sector.

3.12.2.   Innovative industrial policy

The performance of
Cyprus in terms of R&D and innovation remains weak, in spite of the
notable progress in building a research system and in creating a vision for its
transition to a knowledge-based economy. Cyprus has a very low level of R&D
expenditure as a percentage of GDP (0.50 %), which
is in line with its national commitments under the Europe 2020, but far from
the EU average (2.0 %). Moreover, the innovation system relies mainly on
public expenditure as investment contribution of businesses to R&D is among
the lowest of all Member States (0.09 % of GDP against an EU average of
1.23 %). Partly because of the structure of the economy (service sector
dominance) and partly because of the characteristics of the productive sector
(small companies in traditional sectors), industrial research in Cyprus is virtually absent and the approach taken by industries is to obtain technology by
licensing or to buy knowledge incorporated in new machines and equipment.

In addition, the
financial crisis is further weakening an already unfavourable situation, both
because consolidation efforts of the Government may result in a reduction of
R&D budget, and because of the absence of a venture capital market which,
along with the credit crunch, is limiting the access of R&D companies to
high-risk bank loans, when business expectations allow for the relaunch of
investments.

In such a context
of limited resources, policy makers are concentrating their efforts in selected
areas with high-tech potential. This is one of the pillars of the new National
Strategy for Research and Innovation 2012-2015, which is in its final stage of preparation.

The strategy
foresees supply-side and demand-side measures. Besides traditional direct
funding schemes, such as incentives for innovative product development, an
initiative on financing innovation in business calls the public sector to lead
the development of technologically innovative solutions addressing its specific
needs. The new innovation policy aims also to foster cooperation among public,
business and research organizations; to encourage the creation of local
platforms and clusters; and to promote cooperation with European platforms such
as Manufuture.

However, raising
the involvement of businesses in research implies also addressing the
weaknesses in the governance of the research system. Firms that have a high
R&D intensity, for example, claim that their limited participation in
government programmes, despite the incentives offered, is due to time-consuming
bureaucratic procedures. Indeed, the success of an innovation policy
presupposes also the active participation of businesses both in the design and
in the implementation of innovation policies. Cyprus should strengthen the
involvement of industrial community in the governance bodies of the academic
and research institution, which should naturally improve the
university-industry cooperation.

3.12.3.   Sustainable industry

Investments in
power generation using natural gas have succeded through the recent discovery
of seven trillion cubic feet of natural gas in the Economic Exclusive Zone of
Cyprus. According to estimates, this is enough to cover the energy needs of the
island for the next 200 years and creates opportunities to become an energy hub
and exporter. A pipeline carrying gas to Cyprus is expected to be operative by
2016, while the government is tendering licenses for the exploration of
hydrocarbon reserves in another 12 offshore blocks.

However, there are
risks associated with a small and isolated energy grid. These, and the
dependency on imported oil for energy generation was illustrated by the
explosion at the Vassiliko power station in July 2011. In order to meet the
resulting power deficit, the Electricity Authority of Cyprus (EAC) was forced
to use its old and less cost-efficient generators and to rent a large number of
small-scale diesel generators from abroad.

Apart of the
opportunities to build a diversified, secure and sustainable energy system, the
reserves have implications for industrial policy. A smart exploitation of the
gas fields has the potential to create new impetus to the economy of Cyprus, in addition to the direct exploitation revenues. However, this process needs to be
properly managed by the Government, when considering the impact in terms of
influx of foreign companies and workers, along with the environmental risks
posed by the exploitation of gas. Thus, it is of utmost importance to design
measures that minimise risks for the tourism and secure benefits for Cypriot
economy in the long term. The exploitation of the gas offers also the
opportunity to promote R&D in the energy sector in Cyprus and enable development of new industries to exploit the energy resources of Cyprus.

Those developments
should not be detrimental to pursuing ambitious policies and concrete measures
for renewable energy sources and energy efficiency. The Government provides
grants and subsidies for energy efficiency investments and feed-in tariffs for
electricity generated from renewable sources. The energy efficiency of the
industrial sector has improved by 25 %, mainly due to improved technology
in the cement industry. In addition, there has been systematic training of
industry managers and engineers in energy management, good practices and energy
auditing. Cyprus has exceeded the first indicative target on the contribution
of renewable energy to the gross final energy consumption, as the target of
4.92 % set for 2012 was already exceeded in 2010 (5.8 %). It is also
one of the few Member States where the share of environmental goods exports
exceeded 1 % of total exports, reflecting the relative strength of its
photovoltaic production.

3.12.4.   Business environment

Access to
finance

Conditions of
access to credit have deteriorated, reflecting the exposure of Cyprus’s banking institutions to Greece (175 % of GDP). Recent downgrades of the three main
Cypriot banks’ ratings to non-investment grade, has reduced the banks’ ability
to access international markets and has caused liquidity constraints in the
Cypriot financial system.

The consequent
credit crunch can be seen in the sharp tightening of credit standards. Combined
with anecdotal evidence of interest rates at nearly 8 %, and collateral
demands at 140 %, this has squeezed an economy where SMEs mostly cover
their financial needs through loans from banks and financial institutions.

Although the banks
are not expecting credit standards to change much, after four quarters of
consecutive decline, the net demand for loans by enterprises is expected to
grow in the second quarter of 2012.

In this context,
the Government is preparing a financing mechanism to facilitate SMEs access to
finance, by providing guarantees to stimulate growth and job creation. The
mechanism will involve the creation of a holding fund managed by the European
Investment Fund (EIF), which provides guarantees to commercial banks to grant
loans at competitive rates to SMEs. It is expected that this mechanism will
improve the financing conditions for SMEs in the form of lower interest rates,
longer repayment term and a grace period.

Regarding the
implementation of two JEREMIE instruments, the 65.8% (€13.1m) of the total
portfolio of the "Funded Risk Sharing Product" (FRSP) has been
disbursed to the SMEs up to the end of August. More problematic is proving the
implementation of the "First Loss Portfolio Guarantee Product" (FLPG)
for which there seems to be a reduced demand for loans due to the fact that
SMEs are currently much more interested in lower interest rates (like in the
case of FRSP) than reduced collateral requirements (like in the case of FLPG).

Another source of
concern for Cypriot entrepreneurs is late payments, either by Government and
private sector. For instance, in 2010 it took more than three weeks longer (73
versus 54 days) for a Cypriot firm to get paid than EU average. The national
law transposing the late Payment Directive is expected to be approved by the
parliament by September.

Regulatory
burden

In general, Cyprus offers a favourable business environment. Entrepreneurship capacity is good and the
burden of government regulation is low. Satisfaction with administrative
requirements is above the EU average.

Nonetheless, there
are areas where there is room for improvement. Major sources of complaint among
stakeholders are in the length to comply with building regulations
(677 days); and, as a consequence, to get electricity; the inefficiency of
the judicial system in enforcing the contracts (735 days); and the severe
restrictions in key transport sectors in terms of working hours (e.g., ports,
warehouses). To improve the functioning of the judicial system, Cyprus is evaluating the establishment of commercial courts to resolve trade disputes.

One of the main
reasons for the loss of competitiveness in the economy is the system of wage
indexation (cost-of-living-allowance – COLA), which is a twice-a-year automatic
adjustment of wages linked to the average percentage changes in the consumer
price index. The application of this mechanism has caused loss in costs and
prices competitiveness and rapidly growing trade deficit, as wages adjustments
does not reflect similar increase in labour productivity. In addition, the
uniform application of the system does not allow wages to reflect productivity
differences across sectors, with a consequent inefficient allocation of resources.
In the context of fiscal consolidation efforts undertaken by the Government,
there has been a two-year suspension of the system in the public service, which
seems to be occurring also in the private sector, though this is at discretion
of each employer. However, negotiations to modernise COLA are under way and the
aim is to reach an agreement the soonest possible.

3.12.5.   Services sector

Despite the
liberalisation of the market, the Electricity Authority for Cyprus (EAC)
remains the only domestic provider; The small size of the market and the high
initial investment costs have made it difficult for new companies to enter the
market. Hence, the demand faced by EAC is inelastic and any price increases are
borne by the consumers. Since 2007, Cyprus has constantly been within the top
three in the rankings for electricity prices within the EU.

The possibility
that the discovery of natural gas will lead Cyprus to have a more diversified
and international energy sector in the long run does not remove the short-term
disincentives for investment. Given the prospects of the gas resources for the
island, Cyprus needs to promote the development of a competitive energy market,
in line with the requirements of the Third Energy Package.

Some restrictions
remain in those regulated professional services where fixed or minimum tariffs
exist (such as lawyers and architects), and these play an important role in a
variety of contractual and legal obligations for businesses (and citizens).
Improving the quality and reducing the cost of professional services could have
a multiplier effect on the economy in the medium term.

3.12.6.   Public administration

The public
administration of Cyprus performs close to the average of the sample of Member
States. The World Bank’s Government Effectiveness measure that can be
interpreted as a comprehensive assessment of the quality of a public
administration in a very broad sense indicates a public service quality that is
better than the EU average.

Compared to the
other Member States, Cyprus lags behind in the adoption of tools of
administrative modernisation (e-government, impact assessment, performance
and service orientation). In addition, all of the most important public
services for enterprises are not yet online (although 75 % are), whereas
their take-up rate has increased to 74 %. On the other hand, both the
provision for (42 %) and take-up by (25 %) citizens are among the
lowest in EU. The reliance on instruments of a modern human resources
management (performance-related pay, flexibility, skills development) is also
below the EU average.

Corruption measures also indicate an average
performance of the administration. The index values for irregular payments and
for diversion of public funds are very close to the EU average. Individual
experience with corruptive public suppliers occurs slightly less than the
average, i.e. in about 6 % of all cases.

The indicators for
starting a business and licensing point to some scope for improvement;
this holds especially for the cost for starting up a company. In Cyprus, it costs about 13.1 % of income per capita to start-up a (model) company. This
is much higher than the EU average of 5 %. However, the time needed for
registering and starting up a business is only 8 days, which is substantially less
than the EU average of 13.7 days. Further, Cyprus is one of the Member
States that have already implemented a fully operational one-stop-shop to start
a business.

The public
procurement system has some weaknesses in comparison with the other Member
States. Although payment delays of public authorities (23 days) are
slightly shorter than average (28.3 days), the typical cost and time used
up in the procurement process are substantially worse than average cost and
time. Public tenders can be submitted electronically via a system of
e-procurement.

Cyprus offers a generally favourable tax system
for enterprises, characterised by low tax (23.2 %) rates and a broad tax
base. In terms of tax structure, Cyprus relies heavily on consumption taxes,
while the tax burden on labour is low. Overall, Cyprus is among countries that
have a fairly low share of distortionary taxation, i.e. labour and capital
taxation.

Overall profile of public administration

Source: WIFO

While the administrative
burden of complying with taxes in Cyprus is fairly good (on average, firms
spend 149 hours a year filing, preparing and paying taxes and pay total
taxes amounting to 9.1 % of profits), the administrative cost of tax
collection (the expenditure on tax administration as a percentage of tax
revenues) is the highest in the sample with 7.4 % of total receipts[35].
Further, personnel expenditures on core administration (without the military)
are highest among the Member States.

Despite that the
estimates of the size of black economy in Cyprus do not suggest that income tax
evasion is higher than that of other countries, the Government is set to
strengthen the prevention and inspection of combating illegal and undeclared
work.

Efficiency of
civil justice in Cyprus is a slightly better than EU average. Costs of enforcing contracts (16.4 % of
the claim) and the time required for resolving insolvency (1.5 years) are
slightly lower than the respective EU averages, whereas the time of contract
enforcement is higher than on average (735 days as compared to
556 days). The overall perception of independence of the judiciary is a
somewhat better than at the EU average.

Cyprus has taken significant steps to better
serve the citizen and to enhance the productivity and the effectiveness of
public services. The Citizens’ Service Centres (CSC) enable the provision to
citizens of over 50 services of six government departments. The Companies
Registration System (e-filing) was introduced to allow for complete online registration
of companies, and is also expected to partly address the cost of setting up of
a business, which is higher than the EU average. Additionally, the system of ‘e-procurement’
was implemented enabling the performance of public procurement competitions
using electronic means.

Furthermore, Cyprus has committed to reducing the administrative burden of the national legislation by
20 % by 2012. To achieve this target, a sectoral baseline project was
created for the reduction of administrative burden in all legislation relating
to enterprises, based on eight priority areas. A number of proposals have been
submitted in each of these priority areas on the basis of recommendations
proposed by a consultancy and after a consultation with relevant government services
and the private sector. It is expected that implementation of all
recommendations will lead to a total reduction of 22 % of administrative
burden.

Regarding
e-government, a horizontal proposal was also submitted aiming at promoting the
use of existing electronic systems in the Public Service.

3.12.7.   Conclusions

Increasingly
negative trade balance of goods indicates a lack of competitiveness in the
Cypriot industry, which is a serious problem for a small open economy that
relies on export-driven growth. Indeed, surpluses in the services balance have
only partially offset it, resulting in average current account deficits of six
percent of GDP since 1995.

The shortcomings
of the cost of living adjustments have also become more evident in the current low-growth
environment. The Government has started on a serious effort to modernise the
system. If the wage indexation system will be reformed to better reflect
sectoral productivity gains, it could improve the economy’s ability to respond
to the current economic downturn. Good prospects have been created by the
discovery of natural gas however the current high electricity prices damage
competitiveness. Despite the small size of the domestic market, there is room
for improvement. Finally, Cyprus should accelerate its effort to overhaul its
R&D and innovation policies to adjust the structure of the economy towards
more knowledge-intensive and high-growth activities.

3.13.      Latvia

Sectoral specialisation of manufacturing – Latvia (2009)

Note : No data available for sectors C12 (tobacco products), C22 (pharmaceutical products and pharmaceutical preparations) and C32 (other manufacturing) Source: Eurostat

3.13.1.   Introduction

Latvia is one of the countries that are catching
up: while it cannot yet be described as a knowledge-based economy, it has made
progress in terms of sustainability, and manufacturing production now exceeds
pre-crisis levels. The manufacturing sector accounts for 14.1 % of total value
added versus 15.5% in the EU on average. However, Latvia has very low R&D
intensity and a business culture that is not yet mature; it has relatively
lower income levels and a predominant specialisation in labour-intensive
industries. In general, Latvia has improved its competitiveness, especially in
terms of specialisation.

The manufacturing
sector is focused on food processing, wood processing, and mechanical
engineering. Latvia’s main trading partners are the other Baltic countries, Russia, Germany Poland, Sweden, Belarus and the rest of the EU. At the more aggregated level, Latvia is specialised in both high and medium high sectors like electrical and optical
equipment, chemicals and sectors with low and medium-low intensity, such as
metal processing and machinery, wood, food production, and services sector. Latvia has been climbing the technology ladder to medium-to-high tech exports.

3.13.2.   Innovative industrial policy

Latvia’s poor innovation performance could impair
its long-run competitiveness: Latvia has been consistently ranked amongst the
last by the Innovation Union Scoreboard. The Latvian Competitiveness
Report 2011 highlights its poor innovation performance as one of the main
weaknesses. While R&D intensity recovered somewhat in 2010, reaching
0.6 % of GDP, it remains one of the lowest in the EU, which makes the
national target of 1.5 % by 2020 rather ambitious. Latvia’s innovation policy has so far been characterised by rather disparate measures,
over-dependent on structural funding, and whose effectiveness has not been
thoroughly evaluated. Latvia needs a comprehensive industrial policy to provide
support for the development of an entire infrastructure for innovation. The
work that has started on the elaboration of a modern industrial policy is only
a first step in this direction.

There is little
R&D investment by both domestic companies and foreign affiliates to support
trade specialisation towards knowledge-intensive and innovation-driven sectors.
Latvia has one of the lowest business R&D expenditure in the EU (0.22 %
GDP in 2010); in part due to the poor innovation performance of SMEs. Most of
the support programs for innovative companies are financed from EU structural
funding, with state co-financing. In order to help enterprises develop new
products or more efficient production processes, the following support programs
have been designed: ‘Development of New Products and Technologies”, ‘Introducing
New Products and Technologies in Production”, ‘support for protection of
industrial property rights", ‘support to Science and Research’ and
‘High Value Added Investment’ programme". Two new programmes are in
the initial phase: the ‘Development Programme of New Products and
Technologies by Micro-, Small and Medium-Sized Enterprises, and a
programme for the development of innovative green products (supported by a
Norwegian financial instrument). Under the ‘EUREKA programme”,
businesses may submit projects to apply for assistance. In addition, a ‘Market
oriented research programme’ is in place to support cooperation between
scientists and entrepreneurs. The achievements of all these programs should be
closely evaluated against their goals.

The cooperation
between business and academia continues to be weak and research
commercialization is rather low. Companies do not use enough of the research
potential of universities and
their participation in the 6 competence centres (aiming at bringing together
innovative enterprises and research institutions) is rather limited. The
technology transfer contact points operating in several universities have
modest results, in part due to the incomplete IPR legal framework, which does
not encourage universities to patent their inventions.  In 2011, seven clusters
were created in areas like electronics, chemistry and pharmacy, space or
logistics, but their added value remains uncertain. Latvia has made a first
attempt at modernization by creating nine national research centres, which seem
to focus disproportionately on academic research. In addition, 381 companies
have been incubated so far, out of which 79 have stayed operational; it remains
to be seen if the remaining companies will survive once incubation is over.

The innovation
vouchers program, intended to encourage SMEs to invest in R&D, has been
developed but is not operational yet. The value has been set at
LVL 10 000 /voucher, with a limit of one per company. The list
of R&D providers has been limited to universities and research institutes,
product certification institutions, testing and calibration laboratories as
well as patent attorneys and the Latvian patent office. This program will need
to be closely monitored by checking if the benefiting SMEs actually continue
with R&D activities.

The skills mismatch continues to be a problem. There continues to be a lack of scientists,
engineers and technicians. Many Latvian scientists chose to pursue their
careers abroad. To address this, Latvia is making efforts to modernise the
vocational education system: six out of the 38 vocational education institutions
have become vocational education competence centers, with ERDF support. The number of doctoral students having received scholarships in
priority areas (STEM) increased by 38% in 2011, with ESF support. The adopted
amendments to the Law on higher education institutions stipulate, inter alia,
the obligation to attract foreign academics in universities, and the
recognition of study achievements obtained outside formal education.

Overall, Latvia has to put considerable effort into
developing and implementing a systematic and effective research and innovation
strategy, which could encourage more firmly the innovation activities of
companies.

3.13.3.   Sustainable industry

Latvia has made progress on the sustainable
dimension but is yet to adopt a long-term strategy for energy. While most of
the energy in Latvia is generated by gas, biofuel and hydropower, the industry
represents 14.3 %[36] of the total GHG
emissions. Its energy intensity is more than double the EU27 average, which is
mainly due to its specialisation in energy-intensive sectors. . While the
energy intensity in wood processing has significantly worsened, affecting the
whole manufacturing sector, sectors like cement, metal, food processing, and
textiles have decreased their energy consumption. There are some environmental
standards in place and companies that switch to alternative sources of fuel or
are involved in technological innovation thus obtain a surplus of ETS
allowances.

Latvia’s energy efficiency is significantly below
the EU average – the intake of energy relative to GDP was 80% above the EU
average in 2010. There are not enough incentives for shifting consumption
towards energy efficient products. In particular, energy efficiency is low in
the transport sector, which is the largest emitting sector in Latvia (with 25.9% of the country’s GHG emissions in 2009); the public transportation
network could be further consolidated and the use of renewable energy and
further railway electrification could be envisaged.

In terms of
renewable energy, Latvia has committed to reach a target of 40 % of
renewable energy sources in final energy consumption and a 10 % share of
renewable energy in the transport sector by 2020. However, progress is lacking
in developing a coherent and stable renewable energy policy; the adoption of
the new Renewable Energy Law seems to have been delayed indefinitely. Given
this situation, stakeholders complain about the instability of legislation that
cripples the market and creates unfair competition. The Ministry of Economics
has prepared the draft of the long-term policy planning document Energy
Strategy 2030 and plans to submit the strategy to the Cabinet of Ministers in
2012. Renewable energy and energy efficiency projects are
financed through structural funding and through the Climate Change Financial
Instrument (CCFI).

The liberalisation
of energy markets is undermined by the limited interconnectivity of the main
network industries and the relative
isolation of Latvia from the EU gas and electricity networks. In the electricity generating sector,
Latvenergo has a dominant position. The National Regulatory Authority has
become legally independent since August 2011. Interconnectivity with the other
Baltic countries is being improved. Given that the Latvian electricity network
is also interconnected with those of Belarus and Russia, a synchronisation with
the EU electricity system would require negotiations with Russia and Belarus on the technical operation of the networks.

The structure of
the waste management system is still not in line with the principles of
resource efficiency. Latvia still landfills 90 % of municipal waste, with
a low level of landfill taxes, compared to other countries. Separate waste
collection and recycling are rather limited, in part due to a lack of appropriate
investments and incentives. Industrial recycling is also in its incipient phase
and is benefiting from state aid. Progress has been made with establishing
water treatment stations in small and medium size towns. In an effort to
re-start EMAS registration, which dropped dramatically during the crisis, the
biggest pollutants have been offered incentives to join EMAS. In spite of this,
SMEs have little incentives/possibilities to join EMAS.

3.13.4.   Business environment

While Latvia has made efforts to reduce the administrative burden on business, increased focus on
real efficiency gains is still needed, as most of the initiatives taken are
fragmented, thus less effective. The government lacks a comprehensive strategy
on supporting enterprises and improving the business environment, as it is
narrowly aiming at improving international rankings – especially the World Bank’s
Doing Business Report where Latvia is much better ranked than in the WEF
Competitiveness Report.

The Support
Measures for Micro Enterprises can be considered a ‘best practice’ for
introducing simpler procedures and supporting start-ups. This measure reduced
the state fee for registering an enterprise by 50 %, cut the costs of
business start-ups, reduced the equity capital requirement to a minimum of
EUR 1.43, and introduced a special reduced tax rate of 9 % for
micro-enterprises.

In spite of the
recent improvement in the availability of bank loans, access to finance still
remains a problem. The cost of capital is relatively high, hindering both debt
and equity financing, mainly due to: low level of information disclosure, weak
corporate governance and entrepreneurial culture, poor quality of business
ideas, and unwillingness to dilute ownership to attract equity investment. Companies
involved in the informal economy and tax evasion are unable to secure
financing, as banks refuse any candidate with ‘double accounting sheets'.

It seems that the
support programmes available for enterprises, financed mostly via EU structural
funding, are rather fragmented. The creation of a financial development
institution is not finalized yet. Of the capital instruments available for
microenterprises and SMEs, only a few investments have been made[37]. Of the measures targeting the
manufacturing industry, the programme for improving the competitiveness of
enterprises has granted approximately two thirds of the available loans for
2011-2013. A new venture capital initiative targeting seed and start-up
financing is under discussion – from the Baltic Investment Fund, supported by
the European Investment Fund (EUR 40 million) – but the commitments
of Latvia and Lithuania are not yet entirely clear.

The Strategy for
attracting FDI targets sectors like machinery and metal working, wood
processing and the creation of a ‘shared service centre”. Latvia has 13 Foreign Economic Representative offices in charge of promoting export and attracting
FDI, but their results are yet to become concrete, especially in the face of
competition from the other Baltic countries and Poland.

In terms of
support for entrepreneurship, there are some measures for people who are just
starting their business, such as free consultations and training. Students who
submit a good business plan can obtain financing through the Innovation Motivation
programme. These initiatives need to be evaluated against the survival rate of
the supported start-ups.

The poor condition
of infrastructure is being slowly addressed with the support of EU financing.
In order to modernise regional and national roads, the quality standards for
road construction need further improvement. Further, a commitment to the ‘Rail Baltica’ project, which foresees a double
track electrified railway connecting Poland, Lithuania, Latvia, Estonia and Finland,
would increase the modal share of a more sustainable rail freight and passenger
transport.

3.13.5.   Services sector

The competition climate could be improved, especially
in sectors like: construction, healthcare and pharmacy, public services and
food supply,which is dominated by two big chains. Licensing restrictions on
opening pharmacies have been relaxed, but the market power of wholesalers still
remains. There is only one big supplier on the sugar market, which is
problematic. In terms of public services, port authorities occasionally run
commercial-like activities that prevent private companies from offering their
services, leading to legal disputes.

The number of
restrictions on regulated professions seems to be moderate, except for
construction where regulations are heavier, and entry requirements for
notaries, as Latvia refused to repeal the nationality requirement.

The Competition
Council has sufficient discretionary power in implementing the current law: the
Council uses in medium less than one year to adopt a decision. However, the
capacity of the Competition Council needs to be strengthened, in order to allow
it to make market investigations more actively.

3.13.6.   Public administration

In terms of the
overall performance of public administration, Latvia ranks considerably lower
than the EU average, as measured by the World Bank’s Government Effectiveness
Indicator (see graph below). The perceptions of the quality of public services
show a notably inferior performance when compared to the EU average. On the other
hand, Latvia scores better than the EU average in terms of tools for
administrative modernisation, which is mainly due to the full implementation of
8 business related e-government services, and some use of flexible recruitment
and a tenure system for public service employees.

As for licenses
and starting a business, Latvia is at the EU average: while the time needed to
start a business is higher than the EU average and the one-stop-shop is not yet
fully operational, the costs for starting a business are significantly lower
than the EU average; licensing procedures are assessed as being more convenient
than the EU average. In terms of public procurement, Latvia’s performance is
above the EU average:  payment delays from public authorities are of 18 days,
compared to 28 days for the EU average, and the time to participate in tenders
is considerably lower than the EU average. Further, Latvia is slightly below
the EU average in terms of tax compliance:  it takes 290 hours per year to pay
taxes in Latvia, compared to the EU average of 208 hours, whereas tax
administration efficiency is above the EU average.

Compared to the EU
average, corruption is an important issue in Latvia. The Global
Competitiveness Report (WEF 2011-2012) identifies corruption as the third
most problematic factor for doing business, and shows relatively high levels of
wastefulness of government spending, diversion of public funds, and favouritism
in decisions by officials. A majority of surveyed respondents reported as
common the ‘diversion of public funds’ due to the political influence of vested
interests, as well as a high frequency of undocumented payments and bribes by
firms in relation to public services; 16% of respondents report having
experienced corruption, as compared to an EU average of 10%. Further, the Latvian
Competitiveness Report (2011) identifies corruption as being highly
correlated with underdeveloped financial markets, weak corporate government and
inequality in Latvia. In terms of recent progress, criminal liability for
private sector bribery has been expanded and public sector bribery has been
criminalized. According to the 2012 Report of Transparency International,
the Corruption Prevention and Combating Bureau – well-resourced and independent
– has been a critical player in the fight against corruption in Latvia.

Overall profile of public administration

Source: WIFO

Recent studies[38] 
suggest that the informal economy is quite sizeable in Latvia, considerably larger than in peer group countries, and concentrated in sectors like
construction, services and retail. The government is stepping up its efforts:
after several initial delays, the Action Plan to Combat Shadow Economy is being
implemented; the law on reporting undeclared income has been adopted recently. However,
the law on lobbying has not been adopted yet and regulatory processes are still
exposed to political capture by private interests. According to the 2012
Report of Transparency International, the protection of whistle-blowers is
still piecemeal, as the current legislation does not provide adequate
protection for those who report on cases of bribery or abuse of office.

As for the
efficiency of civil justice, Latvia performs worse than the EU average: while
the time needed for the enforcement of contracts – 369 calendar days – is
significantly lower than the EU average, the cost for the enforcement of
contracts is notably higher than the EU average, the time needed to resolve
insolvency significantly exceeds the EU average, and the independence of the
judiciary is well below the EU-benchmark. In general, Latvia’s weak corporate governance structure generates a high number of business disputes,
thus hurting its competitiveness. There is a large backlog of proceedings in
the first and second instance courts in civil and commercial cases, especially
as regards contractual obligations. While the authorities are working towards
improving court infrastructure and the efficiency of procedural law, there is a
need to further strengthen judicial independence as well as the professional
performance of judges, especially regarding knowledge of EU law. The amendments
to the Insolvency Law decreased the duration of the insolvency process from
three years to one year and one month and the costs of insolvency were cut to
half the previous amount; however, the law has some loopholes, for instance in
terms of possibility of appeal and further improvements are being discussed.

While the first
electronically registered enterprise was created in 2010, the one-stop-shop
e-registration for companies is not fully operational. The government intends
to introduce the one-stop-shop in the registration of real estate and real
estate property rights. While the government is planning to have approximately
150 e-services in 2012, only 46 have been introduced on the portal latvija.lv;
the platform is not very user-friendly, very few services are available in
English, and entrepreneurs seem to have little knowledge that it actually
exists. At the same time a good example is the Electronic Declaration System
(EDS), which allows the submission of declarations, reports and tax
calculations to the State Revenue Service (SRS) electronically; it is currently
possible to submit 95 % of all the reports and declarations foreseen in
normative acts.

In terms of public
procurement, there are significant delays due to long tendering and appeal
procedures. The number of applying SMEs is still low, as rules seem to be
targeting bigger enterprises. While the government plans to introduce a
one-stop-shop for local government services, the Plan for Improving the
Application of the Electronic Procurement System and the guidelines for local
government procurement are still not fully implemented. According to the 2012 Report
of Transparency International, a large proportion of contracts are still
awarded using negotiated or restricted procedures, which can reduce competition
and protect certain interests.

The new
Construction Law was supposed to reduce the time necessary to obtain
construction permits to 69 days and the approval of architectural
specifications to 6 procedures, but it has been delayed in Parliament at the
second reading stage. Nevertheless, the Cabinet of Ministers approved changes
to the General Construction Guidelines, which reduced the deadlines from 30
days to 10 days. However, it is still necessary to visit 11 institutions in
person in order to obtain a construction permit.

3.13.7.   Conclusions

In order to
improve its competitiveness and move further towards a knowledge-based economy,
Latvia could benefit from a further strengthening of the growth potential of
its economy through a range of structural reforms. Particular attention could
be paid to the following: promote a coherent
industrial policy, further improve public procurement and the performance of
public administration, continue to reduce the administrative burden, and
improve the absorption of EU funds.

While the support
for microenterprises is considered a best practice, the business environment
could be further improved by encouraging companies to innovate and better
exploit the resources offered by universities, improving access to finance,
creating a more competitive environment, increasing the supply of high-skilled
labour and improving (re)training schemes. Moreover, Latvia would benefit by
promoting greener growth through continuing to improve energy efficiency and
increase the share of renewables, and modernise the infrastructure, including
roads, railways and public transportation. Finally, cooperation opportunities
in the Baltic region could be exploited in a more fruitful way.

3.14.      Lithuania

Sectoral specialisation of manufacturing – Lithuania (2009)

Note : No data available for sectors C12 (tobacco products) and C19 (coke and refined petroleum products) Source: Eurostat

3.14.1.   Introduction

Lithuania has a large manufacturing sector
accounting for 20.4 % of value added compared to the EU average of 15.5 %.
The economy is specialised in market-driven manufacturing industries (e.g. food
products); medium-technology sectors (chemical products); and labour-intensive
industries (e.g. wood and furniture products). Exports include both
low-to-medium technology sectors (e.g. mineral products) and medium-to-high
technology sectors (e.g. chemical products and textiles). Partly on account of
its industrial structure, Lithuania’s R&D intensity is below the EU
average, although the share of high value added production is increasing and
the country is moving towards exports with higher added value.

Lithuania belongs to the group of ‘catching up’ countries.
Closing the gap with better performing economies is hindered by competitiveness
and business environment weaknesses. Lithuania experienced a strong real
effective exchange rate appreciation over the last decade which led to a partial
loss in price competitiveness. However, an internal correction has occurred
since 2008 and export markets have been diversified. While labour productivity has
increased over the same period, it is still significantly below the EU average.
An important challenge for Lithuania is to continue to raise productivity to
catch up with regional peers. Increased investment in research and education
would be beneficial, in this respect, as well as a business environment that
fosters more innovation.

3.14.2.   Innovative industrial policy

The Lithuanian
economy compares poorly against other EU member states based on the Innovation
Scoreboard 2011 indicating that it is only a ‘modest innovator'. Lithuania is comparatively weak in the categories of ‘open, excellent and attractive
research systems’, ‘linkages and entrepreneurship’, ‘intellectual assets’, and
’innovators and economic effects’. In particular the crisis has contributed to
a strong decline in innovative SMEs collaborating with other enterprises and in
license and patent revenues from abroad. Lithuania has the lowest share of knowledge intensive services
in the EU. Annual R&D expenditure has remained stable since 2004 at around
0.8 % of GDP. This has the potential to hamper the development of
high-technology industries and can lower long-term growth potential. Lithuania has set an ambitious target to raise annual R&D expenditure to 1.9 % of
GDP per annum by 2020. This would require a significant effort on the part of
the private sector and national authorities and the private sector.

At the policy
level, co-ordination has improved. The Lithuanian Strategy for Innovation
(2010-2020) has drawn together separate initiatives aimed at increasing
innovation, including those aimed at strengthening support infrastructure;
developing institutional capacity; improving cooperation between academia and
the private sector, raising human capital and promoting innovative public
procurement. Lithuania is also continuing to reform its science base, in
particular through the development of five integrated Science, Research and
Business Centres (‘Valleys’). Lithuania has introduced financial incentives,
including R&D tax credits and innovation vouchers, in order help businesses
procure R&D services and contract technical feasibility studies from
universities and research institutes.

The main policy
challenge remains to significantly increase the level of government R&D
funding. The efficiency of financial support could also be improved by
targeting those scientific areas where Lithuania is most competitive. To
develop human capital, entrepreneurship programmes should be widely introduced
into higher education curricula, and more incentives should be provided for
academic researchers to cooperate and collaborate with enterprises. On the
demand side, obstacles should be progressively removed to support the creation
and development of innovative companies, and public support should be
considered for prototyping, feasibility studies and start-up financing.

3.14.3.   Sustainable industry

The energy
intensity of Lithuania’s industry is twice the EU average. To comply with the
EU Climate Change regulation, Lithuania is required to restrict the rise in carbon
dioxide (CO2) emissions to 15 % between 2005 and 2020 in the
non-EU ETS sectors, but based on current trends CO2 emissions are
set to rise by more than 20 %. Action is required to improve the
efficiency of household heating, particularly in apartment blocks, and the
emission-intensive transport sector. Waste management could also be improved:
86 % of municipal waste is landfilled, and Lithuania has one of the lowest
re-cycling rates, at 11 % (in 2010 5 % of municipal waste was recycled
domestically and 6 % abroad), in the EU. Finally, Lithuania’s energy infrastructure would benefit from more competition and greater
interconnectivity in order to bring down energy prices and better support
economic development.

Lithuania has made limited progress with respect to
improving the energy efficiency of buildings; only an estimated 1 000
buildings have been upgraded through the EU supported JESSICA Holding Fund. The
government introduced a new version of the Multi-Apartment Building Modernisation
Programme in December 2011 but it is more modest than its predecessor and is
not likely bring about significant efficiency gains. Although additional
financial support is foreseen for renovation projects with strong energy saving
potential, the targeted number of projects has been reduced. Other aspects of
energy policy may also affect the success of the programme. Lithuania currently applies a 9 % reduced VAT rate to residential heating and
subsidies are provided to low-income households to cover increases in energy
prices; both of these measures reduce the incentives to improve residential
energy efficiency. Given that there are more than 30 000 apartment blocks
with very low energy efficiency, greater efforts are needed to bring about
significant gains in energy saving. This could also imply a review of fiscal
incentives.

3.14.4.   Business environment

Lithuania’s slipped two ranks to twenty-seven in the
2012 World Bank’s Doing business report. Despite this marginal decline of Lithuania’s comparative ranking, several measures have recently been implemented to improve
the business environment, described below and in the section on public
administration.

In order to
improve operating conditions for businesses, the government raised the VAT
registration threshold, from LTL 100 000 to LTL 155 000,
and the threshold up to which firms are eligible for 5 % profit tax, from
LTL 500 000 to LTL 1 million. With respect to tax
administration, an electronic declaration system was introduced enabling the
direct on-line submission of documents, and an electronic VAT return system was
established allowing companies to apply electronically for their VAT return on
goods/services acquired in other EU countries. A new law on the restructuring
of enterprises was introduced on 1 October 2010 providing more favourable
conditions for enterprises experiencing financial difficulties, offering an
enterprise the possibility of restructuring in order to avoid bankruptcy.

Credit to
enterprises started to rise again in the last quarter of 2011 after declining
since 2009 when the credit bubble burst. This proved to be temporary, as it
declined again in 2012 and lending remains low due to continuing deleveraging
and persisting uncertainties in the economic outlook. Foreign owned banks, particularly
subsidiaries of Swedish banks, play an important role in the financial sector:
foreign subsidiaries manage nearly 90 % of bank assets, of which over two thirds
are controlled by the three largest banks.

The banking system
was badly hit by the financial crisis, and required action taken by the
Lithuanian authorities and support from the foreign parent banks. Financial
soundness indicators have gradually improved since the crisis although the
number of non-performing loans remains high. Weak demand and a lack of good
projects appears to be restraining lending rather than supply constraints, and
the government continues to support financing for SMEs through the EU
structural funds[39]. The venture capital
market is embryonic and not a significant source of finance for SMEs.

3.14.5.   Services sector

The services
sector is the largest sector in the Lithuanian economy making up just under
two-thirds of GDP and attracting
around a half of total FDI. The Lithuanian Government has set a strategic goal
to become the Northern European Service Hub by 2015, when services are expected
to make up around a half of Lithuania’s exports. One of the most important
sub-sectors is information and communication technologies (ICT); Lithuania has well-developed ICT infrastructure which has helped it attract business
outsourcing services from some of the EU’s largest corporations.

The Lithuanian tax
system suffers from a significant degree of tax evasion; administrative
efficiency could also be improved. The size of the shadow economy is estimated
to be larger than the EU-average. There is also a large VAT compliance gap
(i.e. the difference between VAT receipts and the theoretical net VAT liability
for the economy given the VAT rate structure) implying substantial lost revenue.
Administrative costs per unit of tax revenue are relatively high and the time
taken for businesses to pay their taxes could be reduced by improving
administrative procedures.

The Lithuanian
government has recently adopted a comprehensive tax compliance strategy and a
programme of measures for 2011-2012. Cash registers have been introduced for
food products in markets and border controls have been strengthened. These
measures are bringing results, helping to improve tax compliance and
administrative efficiency. However, further steps are still needed to reduce the
size of the large shadow economy, which is acting as a drain on public
finances.

3.14.6.   Public administration

Lithuania’s scores considerably below the EU average
for overall public administration performance, as measured by the World
Bank’s Government Effectiveness Indicator, and below the EU average on the use
of tools for administrative modernisation (e-government, impact
assessment, performance and service orientation, accountability). The latter is
due to relatively lower availability of business related e-government services
as well as shortcomings in the application of modern and flexible human
resource management tools for public service employees. Lithuania also scores well below the EU average on corruption, in particular due to many
reported incidents of corruption when dealing with public administration:
27 % of respondents in Lithuania compared the 10 % EU average.

On starting a
business and licensing, Lithuania performs broadly in line with the EU
average. The costs of starting a business are lower than the EU average while
the procedure for obtaining licenses is comparatively more complex. After
recent reforms, the time taken to set up a business is only slightly more than
the EU average. On public procurement, Lithuania performs better than
the EU average including lower costs incurred and less time taken to apply for
tenders.

Tax compliance
and tax administration is
slightly better than the EU average; the time necessary to prepare and file tax
returns in Lithuania is 175 hours per year and administrative costs of taxation
are 1.18 per 100 units of revenue collection, compared to EU averages of 208
hours and 1.32 units, respectively. On efficiency of civil justice, Lithuania scores similar to the EU average. Although the time taken to enforce contracts is
much less, the costs are slightly higher than average. Beyond that, the
perceived level of judicial independence is significantly lower than the EU
average indicating greater vulnerability to the influence of members of
government, firms and citizens.

Overall profile of public administration

Source: WIFO

The government has
undertaken several recent initiatives aimed at improving public administration.
The authorities have taken measures to reduce the administrative burden on
enterprises. The target for administrative burden reduction is 30 % by
2012. The authorities estimate that if current legislation is approved the
administrative burden will be cut by around 27-28 %. The authorities are
undertaking a major regulatory reform project aimed at streamlining business
inspections, which are currently carried out by more than seventy public
institutions. The reform aims to produce legislative acts and guidelines on
inspections with a view to reducing their frequency, making them less
burdensome and more targeted. The number of inspection agencies will also be
reduced through consolidation. Checklists are being introduced to standardise
inspections, inspection agencies are being encouraged to introduce
risk-assessment systems and telephone consultations. The Ministry of Economy
and the Ministry of Justice are closely coordinating the reform process, so
that usage of these tools becomes standard practice for inspection agencies.

Start-up
conditions for enterprises have been improved: the estimated number of days
required to start-up a company has been reduced as well as the associated
costs. The time to register a Private Limited Company (PLC) as a VAT payer was
reduced from 6 to 3 days. In 2010, legislation was implemented making it
possible to register a PLC online, which usually takes around 1 day. The
associated costs of registering a PLC were reduced from LTL 773 to
LTL 254 – (approximately 67 %). If a PLC is registered online no
notary approval, which normally taking 2 days and costs LTL 500, is
required, and there is the possibility of opening a bank account with the
minimum required capital. Overall, the number of procedures was reduced from 6
to 3, and the time for PLC registration reduced from 22 to 6 days. There has
also been some improvement in the delivery of construction permits: the number
of procedural requirements was reduced from 15 to 13 and the time to deal with
construction permits was reduced from 142 to 71 days.

3.14.7.   Conclusions

Lithuania has taken action in several areas in order to boost
competitiveness while the economy still faces a number of important challenges.
Efforts should be made to significantly increase the level of R&D spending
in order to encourage greater innovation; support should also be targeted in
the scientific fields where Lithuania is most competitive. In relation to the
goal of promoting innovation, the reforms to higher education system should
also help to match the demand and supply of skills. There is a need to further
develop entrepreneurial skills. Lithuania’s energy infrastructure would benefit
from more competition and greater interconnectivity in order to bring down
energy prices and better support economic development. There are also
improvements to be made in energy efficiency.

Although measures have been taken to
improve tax compliance, the Lithuanian tax system still suffers from a high
degree of tax evasion which is a drain on public finances and holds back public
spending in growth enhancing areas. Administrative efficiency could also be
improved. The Lithuanian authorities have introduced recent reforms in public
administration which will improve the environment for businesses. The reform of
the state owned enterprises should be completed and further efforts should be
made in areas where Lithuania compares less favourably against EU peers.

3.15.      Luxembourg

3.15.1.   Introduction

Manufacturing
plays a less important role in the Luxembourg economy than in other Member
States, as it accounts for only 6 % of added value in the economy[40].
Luxembourg specialises in mainstream manufacturing industries (rubber
products) and capital-intensive industries (basic iron and steel, cement, basic
non-ferrous metals). It also has technology-driven industries (radio and TV
transmitters). Manufacturing production recovered in 2010 after the crisis, when
it fell around 33 %, but has again declined since the second quarter of
2011, especially with a number of important iron and steel plants temporarily closed.

Luxembourg belongs to the group of higher-income
Member States with specialisation in labour-intensive industries, which is due
to the very low value-added contribution from technology-driven industries and
innovation-intensive sectors, as well as to its mixed quality performance.

Cost
competitiveness of the Luxembourg economy remains a challenge because of high nominal
unit labour costs. These continue to increase faster than in the neighbouring
Member States, especially in manufacturing, mostly because of low productivity
growth. Luxembourg has temporarily modified the automatic indexation of wages by
a minimum interval of 12 months between each revision round. However, from 2015
onwards the automatic indexation will again be applied.

3.15.2.   Innovative industrial policy

The Innovation
Union Scoreboard 2011 ranks Luxembourg as an innovation follower with
innovation performance above the EU27 average. Relative weaknesses remain in
firm investments and linkages & entrepreneurship. Relative strengths are in
human resources and innovators. Open, excellent and attractive research
systems, finance and support and intellectual assets are well above average.

Luxembourg has made substantial efforts in developing
research and innovation policies and has made good progress in its transition
towards a more knowledge-intensive economy, for example by strengthening links
between higher education and businesses.

The project ‘Cité
des Sciences’ (City of Science) is a practical implementation of a concept of the
‘triangle de la connaissance’ (the knowledge triangle), aiming at reinforcing
relations between research, education and innovation. The project progressed
well in 2011, the objective being to host on one site all the major public
R&D institutes of Luxembourg, as well as private and start-up companies, a
new technical school, an university campus, the National Archives and cultural
centres. Under the ‘Biotec’ initiative, two institutes have been established:
Integrated Biobank of Luxembourg (IBBL) and the Luxembourg Centre for Systems
Biomedicine (LCSB). In autumn 2011 LCSB opened on the site.

Programmes like ‘ATTRACT’
and ‘PEARL 2008-2013’ of the National Funds for Research (FNR-Fonds national de
la recherche) aim at attracting and keeping researchers in the country, were
allocated EUR 3.8 million for the years 2008-2010. A further EUR 13.7 million
is foreseen for 2011-2013. In 2011, the ‘Aides à la Formation-Recherche’ programme
2008-2013 of the FNR supported 442 young researchers in their PhD studies, and 106
in their post-PhD studies.

National efforts on
R&D concentrated on limited number of priority fields notably through the CORE
programme 2008-2013 of the FNR. In 2011, the programme funded 28 projects for
EUR 16.2 million.

The Luxembourgish
portal for innovation and research provides a guide on support for innovative
projects and setting up innovative businesses. The start-up innovative firms
may call for subsidies or loans, for example an equipment loan (‘crédit
d'équipement’) and a start-up/takeover loan (‘prêt de création-reprise’).
Special aid targets apply for small enterprises or small private research
organisations which were created less than 6 years.

The 2012 National
Reform Programme confirmed the targets for R&D spending (by 2020:
2.3-2.6 % of GDP, with 1.5-1.9 % from the private sector and
0.7-0.8 % from the public sector).

Though Luxembourg aims to concentrate R&D efforts on a limited number of priority fields, especially
through the CORE program of the FNR, it seems that they are not selective
enough to allow critical mass to be gained in all the domains identified.

3.15.3.   Sustainable industry

According to a
mid-term report on the implementation of the National Energy Efficiency Action
Plan (September 2011), the intermediary target of 3 % for 2010 has been
achieved. The 9 % target by 2016 could be reached, if all measures that
are so far proposed and planned would be timely implemented. Luxembourg intends to continue the support for upgrading the energy efficiency of old
buildings and the construction of energy-efficient new buildings.

Reaching the
11 % target of renewable energy sources in final energy consumption by
2020 (2.7 % in 2009) will be challenging. Therefore, the timely
implementation of cooperation mechanisms (for an amount estimated by Luxembourg to 0.5 to 3.5 TWh) with other Member States will likely be necessary. Luxembourg imports the major share of its electricity and is totally dependent on imports
for gas. Further interconnections with neighbouring countries could foster
import of electricity from renewable sources and foster security of supply for
gas. The reflection is ongoing on investment in electricity and gas
infrastructure. A 10 % share of renewable energy in the transport sector
is planned to be attained by 2020.

The most
challenging objective, however, is the national target for the reduction of
greenhouse gas emissions for sector that are not included in the EU emissions
trading scheme (ETS). The tareget reduction is -20 % by 2020, when
compared to 2005 levels. In order to reach the target, it is expected that Luxembourg will need to either design additional policies reducing greenhouse gas emissions
or make use of costly flexibility mechanisms.

There are
currently four voluntary agreements signed between the Government and companies
from non-ETS sector which aim to improve energy efficiency in the participating
industrial companies by 1 % per year. In March 2012, the Luxembourg authorities also announced a plan to increase the share of electric vehicles to
10 % of the car park, with
the objective of reaching 40 000 electric cars by 2020. Subsidies for the purchase of electric cars
have increased, while CO2 thresholds for subsidies for the purchase
of low-emission automobiles have been lowered.

With regards to
eco-technologies, it should be emphasized that the 240 new aid applications
motivated by Luxinnovation between 2011-2013 refers to not only those under the
law dated 5 June 2009 for promoting RDI, but also covers those submitted based
on the law dated 18 February 2010 on the protection of the environment and the
rational use of natural resources.[41] However, the country
experiences lack of the critical mass and visibility with regard to
eco-technologies. Therefore there is intention to set up an action plan
defining priorities for development in specific areas. It is worth mentioning
that Luxembourg has a high share of high-tech exports in total exports, and the
share of environmental goods appears to be one of the highest in the EU
(1.62 % of all exports of goods in 2011).

3.15.4.   Business environment

Lending conditions have remained restrictive after the continuous
tightening in 2007-2009. Nevertheless, credit tightening has been less
pronounced in Luxembourg than elsewhere in the euro area, and SMEs
continue to enjoy reasonable conditions for access to finance. It seems,
however, that there were fewer requests for bank loans in 2011 than in previous
years.

A set of different
loan schemes for enterprises continue to apply (equipment loan;
start-up/takeover loan) as well as a ‘vaccin anti-crise’ which provides
counselling services to companies suffering from financial difficulties.

Luxembourg has several entrepreneurship schemes, including
on female ambassadors, business mentoring, young entrepreneurship (including activities
like an innovation camp), and a TV programme called ‘success Stories’.

The transfer of
business are continuing to apply through the Companies Exchange based at
Chamber of Commerce and Chamber of Trade and Crafts, for transfer of business
and putting buyers in contact with sellers and through the Cross-border
Companies Exchange, for selling and transfer companies in France, Luxembourg
and Belgium.

In addition, with
regard to the impact of legislation on enterprises, a simplification programme
2010-2014 is being implemented. A form to assess the impact of each legislative
measure on businesses has recently been amended in order to simplify it and add
SME and gender tests to the form. Issues on administrative burden can be
signalled through a dedicated website of the Simplification Department of the
State Ministry.

3.15.5.   Services sector

The institutional
competition framework was modified by the law on Competition in October 2011.
Two competition bodies were merged into a single Competition Council, which is
independent of the executive power. The Council must now be consulted on any
draft law or regulation which may affect competition, namely leading to
quantitative restrictions, exclusive market zones or standard pricing and sales
practices.

New legislation was
adopted in September 2011 on simplified administrative procedures for the development
and operating conditions of classified establishments, notably by introducing
some tacit authorisations and an obligation for the administration to respect
specific deadlines.

3.15.6.   Public administration

According to the World
Bank’s Government Effectiveness Indicator (EU-wide average is calculated
without Malta), in terms of overall public administration performance, Luxembourg is well above the EU average. Perceptions indicate a high quality of public
services and a high quality of policy implementation.

The take-up of
e-government services by citizens and enterprises is one of the highest in Europe (67 % and 90 % respectively). One-stop-shop and e-government services are
multilingual and available to businesses mainly through the ‘Guichet
Enterprises", which is one of the two main sections of a national website
‘Guichet.lu'.

‘Guichet
Enterprises’ is edited by the two ministries in partnership with the Chamber of
Commerce, the Chamber of Trade and Crafts and the Business Federation
Luxembourg (FEDIL). The information is structured around the life cycles of a
company (creation, exploitation, R&D, environment, international trade,
etc.). The website also offers the possibility to download forms and to submit
them online and electronically signed to the competent administration. Though
not all business related e-government services are already available online,
this website for businesses is an example of good practice. It is also worth
mentioning that firms or those who consider setting up a company are entitled to
free legal advice at the Chamber of Commerce and the Chamber of Trade and
Crafts (the membership to these Chambers is mandatory but they are highly
subsidised by the State).

Overall profile of public administration

Source: WIFO

The time required
to start up a company in Luxembourg is above the EU average (19 days in 2011
against the EU average of 6.5 days), but this score is balanced by a high
enterprise survival rate after two years which places Luxembourg at the third
position among Member States.

Corruption
indicators show a better performance than the EU average. Performance is
especially good regarding irregular payments and diversion of public funds
which both occur almost never.

Tax regulation in Luxembourg is identified as one of the best performing in terms of administrative burden[42],
especially thanks to the very short time to prepare and file tax returns and to
pay taxes (59 hours per year as compared to the EU average of 208 hours). The
structure of the Luxembourg tax system, in terms of the share of total revenue
raised by the different taxes, is also relatively favourable to growth. Almost
one third of tax revenue is raised from consumption taxes. Both capital and
labour taxation are among the lowest in the EU.

In terms of
efficiency of the civil justice system, Luxembourg is more efficient than in
other Member States, mostly because lower costs and shorter time to enforce
contracts, which are about half the EU average.

The performance of Luxembourg in the field of public procurement is
also well above the EU average. Contracts below the thresholds are subject to
specific procedures with lighter requirements. The cost for firms per
competition, expressed as a per cent of per capita GDP is particularly low in Luxembourg (0.08 % compared to 0.19 % in the EU). A national procurement portal
where publication of tenders is mandatory provides for a wide dissemination of
procurement opportunities to potential tenderers and also for the electronic
download of tender documents.

In order to
enhance the efficiency of the public administration in the above areas, the reform of public administration is in
preparation, notably in view of increasing the efficiency of public services.

3.15.7.   Conclusions

Luxembourg scores well in the overall competitiveness
of its economy. It however faces decreasing productivity gains and increasing
unit labour costs, which may harm the long-term potential of its economy. Luxembourg also faces the challenge of achieving its national target for the reduction of
greenhouse gas emissions.

Good progress was
made towards a more knowledge-intensive economy, for instance by implementing
the knowledge triangle project (education, research and innovation) and by
strengthening links between higher education and businesses. However, the
domestic absorption capacity of research and innovation results is limited, and
further prioritisation of research and innovation activities would be
necessary.

Important measures
have been adopted in order to improve the business environment, for instance
through the simplification of administrative procedures. As a whole, the
performance of public administration is better than the EU average.

3.16.      Hungary

Sectoral specialisation of manufacturing – Hungary (2009)

Source: Eurostat

3.16.1.   Introduction

The manufacturing
sector plays a more important role in the Hungarian economy than in the EU on
average. The value added in manufacturing accounted for 24.3 % of the
total value added in 2011 at current prices (EU25: 15.5 %). About 21 %
of the total workforce is employed in this sector (EU27: 15.2 %). Hungary is specialised in technology-driven industries (production of transport equipment,
computer, electronic and optical products, food, and machinery equipment) both
in value-added and export terms and in capital-intensive industries (petroleum
refining). With respect to services, wholesale and retail trade, real estate
activities, transportation, and information and communication are the most
important market services in the Hungarian economy.

Cost
competitiveness of the Hungarian economy deteriorated over the last decade, as
reflected in the increase of the real effective exchange rate. Labour
productivity per hour worked increased again slightly after the crisis, but it
is still about 40 percentage points below the EU average – in manufacturing the
gap is much smaller. After a rebound from the trough of 2009, there has been a
stagnation in industrial production since early 2011. Exports of manufacturing
goods have contributed significantly to the GDP growth for several years.

3.16.2.   Innovative industrial policy

Based on the
Innovation Union Scoreboard 2011, Hungary belongs to the moderate innovators,
representing a below average performance. As most important weaknesses the
funding of innovation, the number of innovative SME businesses, the
insufficient inter-company cooperation in the area of innovation and a low
patent activity have been identified. On the other hand, human resources and
economic effects, such as medium-high and high-tech product exports are
considered as relative strengths. The 2012 country-specific recommendations for
Hungary called for providing specific targeted incentives to support
innovative SMEs.

The Government
elected in 2010 identified science and innovation as priorities in the New
Széchenyi Strategy Plan. The STI system went through a reorganisation in
2010-2011. Currently, the resource allocation and strategy making
responsibilities are separated at ministry level which makes the system
somewhat fragmented. This organisational instability affects policy formation
negatively which is well reflected for instance in the significant delay of the
New Innovation Strategy (2013-2020) and the reduced public support for
innovation purposes.

Among the negative
developments it should be mentioned that the budget of the Research and
Technological Innovation Fund - the main domestic financial source to support
RTDI activities - was blocked. The two most important revenues of this fund
were the contributions from medium and large enterprises[43]
and the government central budget (which has not been in place any more since
January 2012).

Similarly to some
other NMS, the Structural Funds represent a dominant share of research and
innovation policy financing. Currently, the largest support schemes are
provided in the frame of the Economic Development Operational Programme (EDOP),
where the main form of funding is through non-refundable grants: most
importantly support to market-oriented R&D activities, cluster development,
cooperation between research institutes, universities and enterprises etc.
should be mentioned. Other financial tools are also in place for innovative
enterprises, such as microloans, guarantees and venture capital schemes under
the JEREMIE scheme of the Structural Funds.

Partly due to the
changes in the funding system, negative developments can be observed in public
R&D financing: total R&D appropriations (GBAORD)[44]
decreased significantly in 2010 (0.36 % in 2010 vs. 0.47 % in 2009).
Public R&D expenditure accounted for 0.44 % of the GDP in 2010, which
is lower than in the two previous years. On the other hand, mainly due to the
rising R&D activity of large multinational enterprises, business
expenditures on R&D grew significantly during the 2000s and reached
0.69 % of the GDP in 2010. (EU27 %: 1.23 %). Nonetheless, the
total R&D expenditure didn´t grow on yearly basis (in 2010: 1.16 %
relative to GDP) and is still far from the national Europe 2020 target (1.8 %).

Patent activity in
Hungary is relatively low in European comparison. In contrast, considering
another R&D output indicator, Hungary performs well above the EU average in
terms of high-tech exports. However, this performance is mainly linked to the
activity of foreign multinationals. Innovation activity is largely concentrated
at these companies and in the most advanced regions. While in the EU 30 %
of SMEs innovate in-house, in Hungary less than 15% do so. The ratio of
innovative SMEs collaborating with others is also small in international
comparison; however this showed a slight increase last year.

The industrial
strategies (comprising 12 sectors, including automotive, electric, medicine,
industry logistics etc.) prepared by the Ministry for National economy last
year, recognize the importance of R&D in these fields and emphasize actions
in this context.

In Hungary, similarly to the majority of the European countries, also limited attention is
paid towards demand –side innovation. Alhough there have been some initiatives
in this area, for example the pre-commercial procurement initiative, no
concrete support measures have been launched yet.

Also in terms of
human resources for R&D and innovation Hungary faces some bottlenecks. The
share of science and technology graduates increased gradually from the middle
of the 2000s, however it is still well below the EU average (in 2009: HU:
7.5 %, EU27: 14.3 %). The higher education reform, which takes effect
as of 1 September 2012, ensures significant increase in the number of students
in the fields of technical, information technology and natural sciences in the
coming years.

3.16.3.   Sustainable
industry

Environmental
sustainability of the Hungarian industry is poor. The energy intensity in
industry has decreased but it is still relatively high in European comparison.
In the last decade high growth can be observed in resource productivity,
however significant efforts are still needed to ensure more efficient material
consumption. The share of renewable energy (estimated at 8.79 % in 2010)
sources in gross inland energy consumption has also grown during the last
decade and exceeded the national target (7.4 % in 2010) and the trajectory
of growth suggests meeting the 2020 target (14.65 %).

The new National
Energy Strategy 2030 was adopted in 2011 and provides guidance in resolving
energy challenges.

Measures in this
policy domain can be divided into three groups. The first set of measures is
designed to reduce greenhouse gas emission. Hungary´s Decarbonisation Pathway
2050 is currently under public consultation. It will determine the proposed
schedule for greenhouse gas emissions by 2050. This pathway will be part of the
National Climate Change Strategy (2008-2025), which is currently under review.
The wider use of environmentally friendly modes of transport, such as
development of fixed track transport is supported by the Transport Operational
Programme co-financed from EU funds.

The second set of
measures aims to increase the share of renewable energy sources. The regulatory
environment for the feed-in tariff system for renewable sources is expected to
change in 2013. The Government intends to reallocate resources from the
Transport Operational Programme (TOP) to the Environment and Energy Operational
Programme (EEOP) in order to launch new calls for investments in renewable
energy sources.

Third, the energy
efficiency programmes provide non-refundable sources for business and
households, as well as public institutions in order to reduce their energy costs.
Similarly to the second set of measures, Hungary asked the reallocation of
sources for this target under the Cohesion and Structural Funds. Thanks partly
to the EU co-financing environment protection expenditures in the manufacturing
sector have increased in the recent years.

3.16.4.   Business
environment

Access to
finance

According to the
Global Competitiveness Report 2012, access to finance has been the main
bottleneck for Hungarian enterprises. This can be explained by several factors.
Firstly, the credit supply has decreased significantly since the crisis. Tight
credit conditions and high interest rates hamper SMEs to receive loans from
commercial banks. On the other hand, partly due to the unfavourable business
climate in general, demand for credit has been also decreased.

In order to
restore normal lending to the economy several actions have been taken in the
past two years. The Széchenyi Card programme, extended in 2011, provides
credit-card based, low-interest loans for micro-, small- and medium
enterprises. Interest and guarantee fee subsidies are also offered. So far more
than 150 000 cards have been issued with a credit line of about
EUR 3.5 billion, and in 2011 the contracted amounts increased by more
than 8 %. Other financial tools such as the micro credit programme for
start-up companies and loan guarantee programmes have been also quite successful.
The Hungarian Development Bank provides sector-specific direct loans and
guarantees, e.g. for the agriculture and the food industry.

Among the most
positive developments the reallocation of the sources available from the EU
Structural Funds in favour for SMEs should be also mentioned. The JEREMIE
programme was modified during the course of 2011 in order to reach better
leverage effects. New calls are available in the area of venture capital. As a
result of this, investments financed from venture capital more than tripled in
2011. New, combined microcredit calls offering non-refundable grants (maximum
of HUF 10 million) combined with credit (maximum of
HUF 20 million) to micro-enterprises are also available.

Regulatory and
support environment

Institutional
aspects rank high among the most problematic factors for doing business in Hungary[45].
The low level of economic confidence is linked to a number of considerable
changes in the policy environment and legal and institutional systems.[46]
Hungary is clearly below the EU average on business environment indicators,
such as the legal and regulatory framework.

The high
administrative burden on enterprises, such as the wide range of reporting
obligations and other requirements have negative effects especially on SMEs.
The administrative burdens on the private sector amount to 10.5 % of the
GDP, which is almost three times higher than the European average. Yet, clear
progress has been recorded in the recent years. For example, the costs of
starting a business dropped from over 100 % of income per capita in 2002
to under 10 % in 2011. In general 4 days is needed to start up a company,
which is very close to the target set by the Council in 2011. However, costs of
establishing a business have remained high (about EUR 400). Although in the
average number of days to get licences Hungary performs better than the EU
average, it is still far from the best performing Member States.

In order to
further improve the business environment a comprehensive programme was launched
in 2011. The Simple State programme[47] is expected to ensure
administrative burden reduction on enterprises by 25 % by 2012, in total
worth of some HUF 500 billion. It contains 114 measures in ten areas
of intervention. Some of the measures have been applied already and the bulk of
the measures will have been implemented by the end of 2012. The Government set
up a high level committee led by the Minister of Public Administration and
Justice that monitors the progress. An assessment on the impacts of the first
measures is not yet available, however the first evaluation should have been
prepared already. This might suggest a slowdown of reform efforts in this area[48].
The country-specific recommendations of 2012 call for measures to reduce the
administrative burden.

3.16.5.   Services sector

While
manufacturing is dominant in the Hungarian economy, the service sector plays an
increasingly important role in terms of value added and employment, especially
in information and communication and business services.

Regarding network
services, the electricity and gas sectors have been liberalised. The market
share of the largest generator in the electricity sector is above 40 %, in
the gas sector it is above 30 %. Yet, import of electricity increased
significantly during the 2000s, while domestic production didn´t grow. This
implies regulatory and competitiveness problems of the domestic electricity market.
Increase of the cross-border capacities of the electricity network would ensure
independence of the energy regulator.

Several postal
services remain significantly shielded from competition, particularly in the
letter mail segment, despite gradual market opening introduced by the Postal
Services Directives and implemented by the Postal Act in Hungary. The full opening of the postal market is scheduled for 2013, but it should be
noticed that to achieve the full benefits of liberalisation, a considerable
amount of commitment and market monitoring is required.

The Hungarian
telecom sector is characterised by strong infrastructure based competition
driven by bundle offers from the incumbent and cable operations.

The Hungarian
telecommunications sector is characterised by competition driven by bundle
offers from the incumbent and cable operators. The structure of the mobile
market has been stable with the incumbent Magyar Telekom’s subsidiary having a 45.3%
share in 2011. In 2012, a fourth mobile operator, state-backed consortium
called MPVI Mobil, received its license. Incumbent telephone operators (Magyar
Telecom, Invitel, UPC) hold a strong position in the fixed line market, but
competition is increasing. Especially cable operators provide products that are
substitutes to fixed line services. Intensified competition has led to the
share of ‘voice over internet protocol’ operators to reach 18% at the end of
2010[49].

Competition is lacking
in many professional services and is under threat from new regulations. Among
the Member States included in the OECD regulatory index on professional
services, Hungary is ranked fourth from the bottom. Despite the judgment of the Court of Justice, Hungary has rejected the demand to abolish the nationality requirement for notaries. The
roll-back of pharmacy liberalisation has also been announced recently, and in
general the government seems prone to support measures protecting domestic
incumbents.

Regarding the
retail sector, Hungary has temporarily imposed a general ban on the establishment
of new large-scale retail stores (above 300 m2) until 31 December
2014. Exemptions may be granted on a case-by-case basis by the relevant
minister, based on the advice of an interdepartmental committee.

3.16.6.   Public administration

Public administration
reform is essential in Hungary, since the effectiveness of the government has
been rather poor in international comparison[50]. In terms of overall public administration
performance, the score of Hungary is considerably below the EU average[51].
In addition a continuous decline can be observed since 2006. Perceptions
indicate a lower quality of public services, policy formulation, its
implementation and the credibility of public servants’ commitment to such
policies.

A significant gap
can be observed for the indicator of tools for administrative modernisation
(e-government, impact assessments, performance and service orientation,
accountability) in comparison to other Member States. For instance, four out of
the eight business-related e-government services haven’t been yet fully
implemented. The use of e-government services has remained slightly below the
EU average[52]. In addition, reliance
on tools for modernisation of human resource management such as the
implementation of flexible modes of public employment is also low.

Corruption is also
considered as a problematic factor in Hungary.[53] According to the Government Effectiveness
Indicator bribery is still a major issue with a share of 20 % of
respondents reporting an incidence whereas the EU average is only 10 %.
For this reason the Government approved and launched a new anti-corruption
programme[54] on the integrity
approach with the involvement of all partners.

Tax regulation in Hungary is identified as one of the main problematic factors. For the business sector, the
time it takes to prepare, file
and pay corporate income tax, value added tax and social contributions is 277
hours per year. According to the ʻWorld Bank Doing Business 2012ʼ, on
average firms need to make 13 tax payments a year. On the other hand, Hungary’s tax administration operates more efficiently than the EU average. The Simple State administrative burden reduction programme aims to improve electronic tax
submission and reduce the number of tax obligations.

A new public
procurement law was adopted in July 2011 with the aim of streamlining the rules
making the framework more transparent. The law also aims to improve the chances
of SMEs to successfully participate in the public procurement procedures. However,
the requirement that small-value contracts are exclusively reserved for SMEs
seems to break Hungary’s WTO commitments and harms competition.

Hungary also exhibits a slightly better score in
terms of payment delays from public authorities than the EU average. The same
holds true for the indicator of starting business and licencing.

In terms of
efficiency of civil justice Hungary shows a performance marginally above the EU
average. Whereas costs and time necessary for the enforcement of contracts are
significantly lower than the EU average, in terms of the perceived level of
judicial independence Hungary’s judicial system is assessed as less independent
compared to the EU average.

Overall profile of public administration

Source: WIFO

In order to
enhance the efficiency of the public administration in the above areas, several
initiatives have been launched recently. After the change of the government in 2010 as a first
step, the total number of public administrative bodies was reduced significantly,
mainly through integration. The Magyary Programme launched in 2011 initiated
several measures to improve the efficiency of the public administration sector.
For instance, it simplifies administration for citizens, including
establishment of one-stop shops for citizens, it introduces an anti-corruption
programme and develops a new career model for public servants. Electronic
government is considered a key tool for modernising the Hungarian public
administration. In order to support official administration with IT solutions,
provide remote and electronic access to services and create comprehensive
customer identification and delivery system several projects have been launched
in 2012. Further developments will be gradually implemented from 2012 on.

3.16.7.   Conclusions

Several factors harm
the industrial competitiveness of Hungary. These include tight credit
conditions, in particular for SMEs, low level of innovation in SMEs, weak
competition in certain services, and low effectiveness of the public administration.

While there have
been positive developments in some of these areas  (government sponsored SME
financing, adopting a National Energy Strategy, decreasing the administrative
burden and increasing the government’s effectiveness), frequent changes in
policy, and legal and institutional systems have created an unpredictable
economic environment for enterprises, which reduces investment and growth. It
also reduces the ability of the financial sector chanel savings to the most
productive uses.

In addition to the
urgent need to create a stable and predictable economic policy framework,
further efforts are required in a number of areas including the reform of
public administration and in reducing the administrative burden. Access to
finance for SMEs also remains a major challenge. To achieve the Europe 2020
targets of R&D investment, and employment, policies that create a more
business-friendly environment, and support for innovative SMEs are also
essential.

3.17.      Malta

3.17.1.   Introduction

Over the past
decade, the Maltese economy has diversified from manufacturing to services. The
manufacturing share of value added decreased from 22.4 % in 2000 to
12.9 % in 2011, although some segments of it recorded significant growth,
in particular pharmaceuticals (chemical products above) and the aviation
maintenance industry (transport or electrical equipment, and other
manufacturing above).

The services
economy, traditionally dominated by tourism (about one third of GDP) is now
significantly more diversified as other activities are growing among which
financial intermediation, business services (including auditing and legal
services), entertainment (film production), on-line gaming and other
computer-related activities. Export market shares in a number of these emerging
industries are also increasing.

Growth in Malta is strongly driven by foreign investment and exports. Thus improving external trade
as well as a pickup in business investment contributed to a strong rebound in
economic activity in 2010, after a relatively mild GDP contraction in 2009. In
2011 as a whole, real GDP is estimated to have expanded by 2.1 %, compared
to 1.5 % in the euro area.

The performance of
the Maltese economy is conditioned by competitiveness challenges. The
authorities are aware that efforts towards attracting more investment in high
value-added activities (including in manufacturing) are a key to improve Malta’s productivity record. Growth relies strongly on SMEs (73 % of value-added in
2010, against 58 % for the European Union) for which access to finance,
access to foreign markets, enhanced entrepreneurial skills, operating in a
business-friendly environment, as well as efficient relations with public
administrations are essential ingredients of prosperity.

3.17.2.   Innovative industrial policy

Health and
biotechnology, value-added manufacturing, environment and energy resources and
ICT were identified as national research priorities in Malta’s National Research & Innovation (R&I) Strategic Plan 2007-2010.

One of the largest
projects aimed at fostering life science innovation in Malta is the BioMalta campus. This EUR 38 million project is co-financed between
the Government of Malta, Malta Enterprise and the European Regional Development
Fund (ERDF). It will seek to attract foreign direct investment into research,
technological development and innovation in the biotechnology and life sciences
sectors as well as support the development of the local industrial community
helping them to grow and internationalise. It is also aimed at creating a
knowledge cluster. Investment is backed by a business angel investment fund
working closely with the University of Malta and with Malta Enterprise as well
as by a Malta-based private investment fund.

3.17.3.   Sustainable industry

The Maltese
economy heavily depends on oil supplies for the provision of energy, which is
an issue for the competitiveness of Maltese businesses. Electricity prices for
medium to small size firms in Malta are among the highest in the European
Union. To improve the situation, the country-specific recommendations of the 2012
European Semester for Malta include the need to prioritise the completion of
the electricity link with Sicily.

The
interconnection to the European Energy Grid via the laying of a submarine cable
linking Malta to Sicily was originally expected to be completed by August 2012.
The project has been delayed for administrative reasons and the new target for
commissioning the interconnector is end 2013.

The completion of
the Delimara power station extension project by May 2012 was delayed
essentially due to permit procedures. The project is expected to supply the
expected electrical output power to the Maltese electrical grid in the summer
of 2012.

Malta intends to achieve its 2020 renewable
energy targets through a couple of identified major projects of large scale
wind, and waste to energy projects. However a great share of renewable energy
will be generated from a relatively higher number but smaller capacities of
renewable energy sources distributed across all the Maltese Islands. The contribution from photovoltaics could potentially be much larger than that
estimated in the National Renewable Energy Action Plan especially if the costs
of this technology continue to decrease.

3.17.4.   Business environment

Malta is engaged in a number of structural
reforms and measures that foster the importance of SMEs in order to enhance
growth and competitiveness.

Malta’s Small Business Act

Malta is one of the few EU countries that have
enacted a Small Business Act (SBA – in June 2011, within a package of Euro-Plus
pact measures). Parts of the Act that are now into force include the setting up
of an Enterprise Consultative Council (EEC), created with the aim to hold a
regular dialogue between the regulatory authorities and business organisations
in order improve the business environment, particularly for SMEs. The setting
up of the EEC has been welcomed by business organisations. They regard it in
particular as a potentially effective tool to improve access to markets to
SMEs, provided that it can meet regularly and take the time to take into
account specific sector-related issues. In the view of government authorities
stakeholders should be proactive in defining the agenda of the Council. In
promoting the role of SMEs, The Malta envoy has a natural key role to play in
it.

Parts of the Act
still having to come into force include (i) a vetting of all new proposed
legislation to identify potential impact on enterprise and suitable measures
taken to mitigate or remove any identified negative impacts especially on the
smaller firms, as far as possible ("SME test") as well as (ii) time
compliance with new legislation (standstill period of eight weeks between the
publication and the coming into force of such legislation).

These two
proposals are expected to come into force in the third quarter 2012. The
implementation of the SME test requires putting in place an independent entity
which would assist government authorities in analysing and interpreting the
economic impact assessment of new legislation, - in particular mitigating
possible negative effects on SMEs and minimising administrative burden - taking
into account consultation with SME representatives. The central entity has been
set up and has been given a wider role as indicated by its name – Small
Business Act Implementation Unit – although the main role will be that of
overseeing and assisting in the application of the SME Test.

Stakeholders have
welcomed the forthcoming introduction of the SME test from which they expect
substantial improvement towards more business friendly legislation.

Consultation
exercises with stakeholders on new legislation

In 2011, Malta also introduced guidelines for the Maltese public administration for consultation
exercises with stakeholders (Directive no. 6 ‘Consultation Exercises with
stakeholders in terms of Article 15 of the Public Administration Act). The
Directive makes reference to the document ‘Parameters for Consultation
Exercises with Stakeholders’ which stipulates that each new secondary
subsidiary legislation text is to consider its effect on SMEs. This action is
backed by an on-going training programme for public employees in consultation
exercises and the Maltese impact assessment framework.

Access to
finance

SMEs in Malta can be considered to have adequate access to finance. Business representatives
commend government for coming up with a good portfolio of enterprise support
schemes that facilitate access to finance, such as micro finance, loan
guarantees and JEREMIE.

The Micro Credit
Scheme (another commitment under the Euro Plus Pact), facilitates the financing
of new start-ups through the provision of a government guarantee of up to
90 % of the total loan value.

In addition,
through the MicroInvest tax credit scheme (also a Euro Plus Pact commitment),
enterprises benefit from a tax credit of up to 40 % (with a limit of
EUR 25 000) when investing in innovation implementing compliance
directives and/or expansion, including through new hires. The take-up of the
scheme so far has exceeded expectations and this has been linked to the low
level of bureaucratic requirements. Following its success, the scheme has been
extended to the end of December 2012. It is flanked by a number of other financial
instruments including a micro-guarantee scheme.

Under the JEREMIE
initiative, a First Loss Portfolio Guarantee instrument that caters for loans
from EUR 25 000 to EUR 500 000 was launched under an
agreement signed between the European Investment Fund and Bank of Valletta.
JEREMIE was well received by SMEs and take-up steadily increased over time. In
April 2012, about a year after the first loans were granted, total investment
amounted to approximately EUR 35 million with a loan amount of approximately
EUR 23 million.

The implementation
of the late payments directive in Malta has been delayed due to legal issues.
These delays are considered to be a serious problem by stakeholders, but last
June the implementation of the Late Payments Directive (recast) in Malta was nearing completion and was to be transposed within a few weeks following
submission to the Cabinet of Ministers.

Improving
industrial infrastructures

With an investment
of EUR 16 million, the Malta Industrial Parks (MIP) agency has
started an extensive programme of upgrading works in a number of industrial
zones, comprising upgrades of the road network and general service
infrastructure, establishment of community facilities and the improvement of
estate environment. This investment is a key requirement to the daily
operations of enterprises and is expected to enhance Malta’s competitiveness as
an industrial location and to sustain its growing knowledge based economy.

3.17.5.   Public administration

Malta committed, under the Euro Plus Pact, to
reduce administrative burden on businesses by 15 % by 2012. In this
respect a number of simplification initiatives have already been implemented to
date resulting in a EUR 7 million p.a. reduction in administrative
burdens. Additionally, a number of further simplification initiatives have been
identified.

The government is
developing a Code of Practice for Regulatory Institutions so as to improve the
regulatory framework and ensure more consistency and collaboration between
different regulators. The Code of Practice is expected to be officially
launched before the end of this year.

Court procedures
on trade litigation are perceived by some business stakeholders as a
bureaucratic burden for SMEs in particular.

Malta Enterprise
launched its one stop shop ‘Business First’ at the end of January 2012. Apart
from the schemes and services offered by Malta Enterprise, more than 50
services from various Government departments and entities are being provided
through Business First (some of which though on-line forms), with the aim of
facilitating the day to day operations of local enterprises, whether starting
or being in operation. The authorities are committed to a delivery time frame
of 10 days maximum for most cases submitted to ‘Business First”. Smaller offices
are expected to be eventually opened in Gozo and at Smart City Malta.

Business
representatives have welcomed the operation of this new government service
which has received good feedback from its first users.

Malta already provides a number of government
services on-line and has launched its next platform at the end of 2011. The
Management Efficiency Unit advises on priorities for offering new services
(including paying bills) on the platform.

As regards
Business Statistics on Malta and most notably those on Malta’s SMEs, the situation is bad and has not improved since the last visits of the
Commission in 2009 and 2010. This hampers adequate policy monitoring. A
business register unit has recently been created with a view to improve data
compilation and to make better use of administrative data. In addition, Malta will join the annual Doing Business survey of the World Bank in 2013.

3.17.6.   Conclusions

A number of
positive developments with positive feedback from stakeholders have occurred
since the last version of this chapter. Delays are still experienced in a few
areas (for example oil dependency) and the new services provided to businesses
(Enterprise Consultative Council, one stop-shop) will have to be adjusted with
time in cooperation with the stakeholders. Progress with making regulation more
business friendly will have to be sustained in the coming years.

3.18.      Netherlands

Sectoral specialisation of manufacturing – Netherlands (2009)

Source: Eurostat

3.18.1.   Introduction

While the
manufacturing sector plays a significant role in the Netherlands, with 12.9 %
of total value added, it is slightly below the EU average (15.5%). The Netherlands is specialised in capital intensive manufacturing such as man-made fibres and
refined petroleum as well as industries such as prepared animal feeds and
tobacco. With respect to exports, the main manufacturing industries are
technology driven industries such as computers, radio and TV transmitters.
Other important high value added industries relate to computers, software,
R&D and business services.

3.18.2.   Innovative industrial policy

According to the
Innovation Union Scoreboard 2011, the Netherlands is an ‘innovation follower’ with
above-average performance. It excels in terms of frequently-quoted scientific
publications and patent revenues from abroad. It is quickly catching up
regarding non-R&D innovation expenditure. However, SMEs are still less
innovative than the EU average.

The Dutch government
reaffirmed its intention to reach an R&D intensity of 2.5 % of GDP in
2020, in spite of a slight cut in the public R&D budget in 2012/2013 due to
gradual expiration of temporary crisis measures. The main challenge for the Netherlands is to increase private R&D expenditure.

The new enterprise
policy ‘To the Top’ has three main pillars: a sectoral approach for
public-private partnerships in the area of research and education ('top sector
approach'), generic measures to stimulate private R&D-expenditure (tax
deductions of R&D-costs as well as access to risk capital via a revolving
Innovation Fund) and further administrative burden reduction and additional
mechanisms for innovation.

The ‘top sector
approach’ addresses a weakness in the Dutch innovation system by bringing
researchers closer to businesses and putting businesses in the drivers’ seat
for designing public-private partnerships for innovation. ‘Top teams’ involving
various stakeholders from nine top sectors have developed sectoral ‘innovation
contracts’ (including human capital agendas) which have been signed between the
government, research organisations and the top sector associations in April
2012. However, a coherent rationale that would support such a sector-based
approach has not been provided.

The top sector
approach is promising as it could constitute a ‘smart specialisation’ strategy
on the basis of the most innovative sectors which can create positive
externalities for the rest of the economy. It recognises that innovation also can
take place in sectors without traditional ‘white coat R&D personnel’ and
fosters the economic use of publicly funded research results in market-related
innovation activities. There is potential to mobilise additional private
R&D funding, but the effectiveness of the approach chosen is difficult to
assess at this stage.

The impacts of the
top sector approach should be carefully monitored. It is important to clarify
whether additional private R&D investments are mobilised, as intended,
rather than a re-labelling of current R&D expenditures under the new
headings of the top sectors. So far, industry has committed
EUR 1.8 billion for private R&D under the top sector approach
which is no more than a first step towards the 2.5 % target.[55]
It should also be monitored whether difficulties arise within fast-growing industries
that do not participate in one of the ‘top sectors’. Finally, it remains to be
seen whether the top sector approach will be able to address possible skills
gaps. By international comparison, the Netherlands has a relatively low share
of graduates in math, science and technology.

The strategy
implies a 10 % shift in R&D investment to the specified themes as defined
by the teams. As this approach has the potential to bring needed focus to
research efforts, create cross-discipline synergies, and improve the
commercialisation of research, it can enhance the societal benefits of R&D
investments without endangering the long-term growth prospects of the economy.

However, the focus
on top sector regions has the potential to widen regional disparities and new
skills gaps could arise in other sectors. Fast-growing firms that do not fall
under one of the top sectors might find it difficult to benefit from the
approach. Although medium-sized enterprises are prominently represented in all
top teams, it is unclear how effectively individual small and micro-enterprises
will be involved.

A more general
concern is whether shifting specific subsidies towards generic income and
profit tax deductions for R&D expenditure is effective to promote SME
innovation. Although the approach significantly reduces administrative
complexity, enterprises may not generate sufficient profit to benefit from tax
reductions in the same way as from a subsidy scheme.

It is particularly
important for the Netherlands to continue investing in education and research.
Although nominal education budgets have slightly risen in recent years, real
expenditures for education are under pressure, threatening the quality of
future human capital resources which are a precondition for sustainable growth.

There is close
co-operation between Dutch authorities and the European Investment Fund for a
pilot project involving pension funds in the provision of venture capital for
innovative enterprises.

3.18.3.   Sustainable industry

Environmental
sustainability does not feature prominently in the policy initiatives of the
current government, but the topic is officially mainstreamed in all ‘top
sectors’ and taken up by the cross-cutting theme of ‘bio-economy'.

The main
sustainability initiatives of the current government are (i) in the ‘top sector
approach’ activities regarding the ‘energy’ sector, (ii) the specific subsidy
scheme SDE+ for renewable energy investments (electricity and heat) and (iii) ‘green
deals’ for energy efficiency and other environmental projects.

In the ‘top sector’
approach, SMEs confronted with a dominance of large enterprises in the
renewable sector may find it hard to see how to benefit from the sectoral
approach. A level-playing field between renewable energy and fossil fuels
regarding sustainability criteria and indirect subsidies is absent. Currently,
there is a policy debate on whether public support for Carbon Capture and
Storage (CCS) technologies should be phased out to ensure that these costs are
borne privately in line with the polluter pays principle.

In a broader sense, the effectiveness of the integration of
environmental aspects and resource efficiency in all top sectors and in the
cross-cutting theme of a ‘bio-based economy’ needs to be evaluated.

The Netherlands’ share of renewable energy in total energy use is much lower than the EU
average (only 3.8 % in 2010, compared to an EU average of about
12 %). The SDE+ subsidy incentive scheme promotes the use of cost-effective
technologies, including renewable sources of heat. It is meant to help the
country catch up quickly with the cheapest available technology to reach about
8 % of renewables by 2015. A midterm review of the renewable energy policy
is planned in 2014 and various options, including a mandatory quota system for
energy suppliers, are studied by the government and in parliament. It is
recognised that the current measures are probably not sufficient to reach the
2020 target of 14 % renewables.

The SDE+ scheme
has a maximum of EUR 1.4 billion Euro available annually from 2015
onwards to support investment in renewables. It can also be used in the second
round in 2012 to invest in renewable heat which is highly cost-effective.

Some
energy-intensive or emissions-intensive sectors and activities (e.g. vans, red
diesel and the partially free allocation of CO2 emission allowances)
benefit from subsidies. Phasing out environmentally harmful subsidies could
improve energy efficiency, reduce emissions and increase government revenues.

A positive
development is that nearly 60 ‘Green deals’ have been signed since 2011
according to the National Reform Programme 2012. The scheme has now been
broadened beyond energy issues. However, a simplification of rules that would
also help SMEs could be a more effective way to overcome the obstacles arising
from stringent rules on environmental permits.

The Netherlands is
one of the few countries in the EU with a non-negligible contribution of
pollution taxes to overall tax revenue, based on a tax on pollution of surface
waters and sewerage charges (0.7 % of GDP, EU27 0.1 %).

3.18.4.   Business environment

Regulatory and
support environment

The Netherlands ranks among the Member States with a legal and regulatory environment that
highly encourages the competitiveness of enterprises. Starting a company will
become even easier, once a law reducing the minimum capital requirements for
limited companies enters into force, expected early 2013. Yet, the Netherlands records the second highest costs in the EU when it comes to starting a business[56].

Ambitious
administrative burden reduction programmes are in place since 2003. Since 2007
the Netherlands gradually enlarged the scope to incorporate other regulatory
costs (such as substantive compliance costs and inspection costs) and
qualitative service-oriented indicators (such as ICT related measures).
Inspections are now more risk-based, relaxing the frequency of controls for
those enterprises which were found in good compliance in previous inspections.
In 2011 the Dutch Government formally introduced one single national ex-ante
framework to systematically assess substantial impacts of new policy and
legislation for a better decision-making process. A new Impact Assessment
Commission started in 2011 as coordination and quality control body, chaired by
the Ministry of Economic Affairs, Agriculture and Innovation.

With respect to
resolving insolvency, the key philosophy of the government seems to be
preventive, by encouraging entrepreneurs to be cautious in their expansion
plans and to set up a good credit and debit management. While this might come
at the price of having less fast-growing companies, the slower growing cautious
enterprises are expected to be more stable and less at risk of insolvency. In
case of imminent insolvency, entrepreneurs can turn to an informal sounding
board of retired entrepreneurs which offers advice to entrepreneurs in serious
difficulty.

A major review of
the Insolvency Act started in 2007 has not advanced much. Some stakeholders
argue that the rights of creditors could be improved and that legal curators in
simple bankruptcy cases are not needed because the costs are not proportionate.

An important
development is the new draft SME-friendly public procurement law which has
passed Parliament and is now discussed by the Senate. It encompasses all public
procurement rules in one single document. A key aspect of the draft law is that
SME access is made easier due to a ban on clustering smaller lots into bigger
bundles, with limited exceptions. The draft also promotes the award criterion
of ‘best value for money’ rather than cheapest price, which should help
high-quality SMEs.

Green public
procurement criteria have been revised in 2011 upon the advice of MVO, the main
Dutch corporate social responsibility organisation. For simplicity, the number
of environmental aspects for award criteria has been reduced from 85 to 45. The
use of functional requirements instead of detailed technical requirements is
encouraged, but requires qualified public procurers and evaluators. By 2015, all Dutch public authorities aim to purchase
100 % sustainable products.

Access to
finance

Access to finance
for innovative SMEs seems to be problematic. While the government is studying
access to finance problems in detail, it is working on opening the SME
loan guarantee scheme BMKB for financers other than banks, and opening the
guarantee facilities GO and Groeifaciliteit to also finance new providers of
SME-finance. Also a loan will be provided for the start-up of Credit Unions in
the Netherlands, and the innovation fund Innovatiefonds MKB+ has been
introduced, which will also consist of a fund-of-fund for the later stage
market that is now under construction. A recent evaluation suggests that the
scheme is very effective.[57]

The Ministry has
set up an expert group in 2011 to study key problems based on surveys among
1 500 enterprises. One key result is that more than 80 % of
enterprises have no extra financing needs. Small enterprises, young enterprises
and high-grow enterprises encounter problems, in particular regarding loans
between EUR 500 000 and EUR 3 million. The top sector
agenda should provide further insight into the sectoral problems of access to
finance and may envisage sector specific solutions.

New policy ideas
currently studied by the government aim to tap the potential of pension funds
for venture capital. Some pilot projects with pension funds could start in 2012
while mapping credit unions and crowd financing are further ideas.

The new revolving
innovation fund (Innovatiefonds MKB+) was launched in January 2012 and can
provide innovation loans of EUR 95 million in 2012 (twice the amount
of 2011) for SMEs and mid-cap companies. The total budget is
EUR 500 million until 2015.

The Business Loan
Guarantee Scheme (GO) is continued in 2012 and 2013, although initially
intended as an anti-crisis measure. However, the maximum guarantee of 50 %
will be lowered from EUR 75 million to EUR 25 million.

3.18.5.   Services sector

Several important components
of the services sector are included in the ‘top sector’ approach and therefore
receive significant policy attention (e.g. energy, transport/logistics and
creative industries). However, most regulation and competition policy in services
is largely governed by EU legislation, including emission trading and transport
liberalisation.

Competition policy
in the area of electricity seems to work well in the Netherlands. Changing the
supplier is relatively easy, unbundling has worked well and the information
provision by suppliers to consumers is carefully supervised by the Competition
Authority NMa. Still, the rate of consumers switching supplier is quite low
(about 10 % per year). A review of the certificate system could lead to
more innovative investment in the national green energy market.[58]

The Netherlands has managed to maintain a very good network infrastructure and a high level of
service quality in public transport, without overtly high levels of subsidies. Further,
consumers have a large choice among telecommunication providers and different
formulas. However, for consumers the market lacks transparency due to
frequently changing service packages and prices.

The regulation of
professional services is not a major bottleneck for competitiveness in the Netherlands.[59]

3.18.6.   Public administration

The overall public
administration performance of the Netherlands, according to the World Bank’s
Government Effectiveness Indicator, is better than the EU average. Perceived
quality of public services, including quality of the civil service and policy
implementation in the Netherlands is relatively high.

The use of tools
to improve public administration (e-government, performance and service
orientation, accountability) is more widespread than average in Member States.
This is mainly due to the use of impact assessments, as well as to the use of
monitoring and assessment instruments.

Corruption and
fraud indicators show a significantly better than average performance.
Perceptions based measures for ‘diversion of public funds’ as well as for ‘irregular
payments and bribes’ indicate that corruption-related problems are very rare.
This is confirmed by the individual experience of corruption, only 1 % of
all cases, which is a very good score compared to the EU average of 10 %.

The composite
summary indicator for the efficiency of the civil justice system is above the
EU average. While the days to enforce contracts is slightly below the EU
average, measuring 514 calendar days as compared to 556 days in the EU, the
cost for enforcing contracts is 3.3 % higher than the EU average. The time
for resolving insolvency is well below the EU average and the judiciary is
considered as highly independent.

The performance of
the Netherlands on the tax compliance and tax administration indicator is
better than average since it only takes 127 hours yearly to prepare and file
tax returns and to pay taxes as compared to 208 hours in the EU average. The
administrative costs of the taxation sub-indicator are slightly below the EU
average.

The Dutch tax
system is rather complex, due to many possibilities for exemptions and
deductions to cater for special circumstances and ensure social justice. SMEs
complain that often, several rounds of questions from tax authorities need to
be answered. The current administrative burden arising from the tax system is
estimated to be EUR 3.5 billion annually, mainly due to VAT rules,
wage taxes and income taxes. The government’s aim is to reduce this by
25 % by 2015. One step is the abolishment of seven smaller taxes from
2012/2013 onwards. Another step is the introduction of one single point of
contact, with different units for SMEs and for bigger companies.

Further recent
positive developments are slightly simpler income tax rules, the frequent use
of digitalised tax forms,
e-invoices and recycling of financial information for statistical purposes
("Standard Business Reporting"). Tax inspections will in the future
be more risk-oriented.

The government is
verifying whether the payments of taxes and social security contributions can
be merged, to save administrative burden. This would mean that the tax
authorities would in the future also collect the social security contributions.
The idea of a block payment of social security contributions for all employees
in one single, easy to calculate, monthly payment is envisaged for 2016.

The performance
indicator for starting a business and obtaining the necessary licenses in the Netherlands is slightly below EU average, as opposed to its performance in the other indicators
of the spider diagram. This is mainly due to the fact that the one-stop shop to
start up a company is not fully operational. While the time required to start a
company is well below the EU average, the costs are higher than the EU average.
The index of total licencing complexity is similar to the EU average.

The composite
public procurement index is slightly above average. The average delay in
Government payments is almost 10 days less than in the EU average and the average
cost per firm per competition is equally lower than the EU as a whole.

Overall profile of public administration

Source: WIFO

The Netherlands has a tradition of policies promoting reliability of the public administration
and reductions in the administrative burden. Over the last decade, the Netherlands has been a front-runner in terms of e-government, and it scores well above the
EU average in the share of business using e-government services.

Since 2010 the
government has merged several ministries, centralised functions for public
procurement and human resource management and improved its IT systems. In the
future, a single agency (Agentschap NL) will be responsible for administrating
the few remaining subsidies for enterprises. The collection of any fines for
disregarding legal obligations will also be done by a single agency.

The government
wants to reduce the number of public officials in central government by
10-15 % and announced further cuts in operational and programme budgets.
About 20 inter-ministerial committees were set up to discuss possibilities for
further streamlining and budgetary savings. Out of the total consolidation
effort foreseen over the government term, at least a third will be achieved through
savings in the size of the government and administration. Although this
reduction has a potential for efficiency gains, it may pose a risk to retaining
the high quality standards of public services.

3.18.7.   Conclusions

In the area of
sustainable industry, the official ambition of the government is not very high.
The current measures are probably insufficient to reach the legally binding
14 % renewable energy target in 2020. A national energy efficiency target
has not yet been set.

As regards short-term
fiscal efforts, it is crucial to safeguard investments in long-term growth
drivers like education and research from possible additional spending cuts.

Although the Dutch
research and innovation system has managed to maintain and in some areas
improve its innovative capacity, resting on a historically strong educational
base, the underperformance of the Netherlands in private R&D expenditure
may reduce future economic growth and weaken the competitiveness of the Dutch
economy to an extent that cannot be offset by the use of licences and know-how
transfer from other countries.

The
revised policy recommendation of the Council of the European Union is to
promote innovation, private R&D investment and closer science-business
links, as well as foster industrial renewal by providing suitable incentives in
the context of the enterprise policy, while safeguarding accessibility beyond
the strict definition of top sectors and preserving fundamental research.[60]

3.19.      Austria

Sectoral specialisation of manufacturing – Austria (2009)

Note : No data available for sectors C12 (tobacco products) and C19 (coke and refined petroleum products) Source: Eurostat

3.19.1.   Introduction

Manufacturing
contributes 18.7 % to the total value added in Austria against 15.5 %
in the EU on average and labour productivity is clearly above the EU average.
At the detailed manufacturing industry level, Austria features value added and
export specialisation in mainstream manufacturing (manufacture of railway and
rolling stock, electric motors) and labour-intensive industries (builders’ carpentry
and joinery, sawmilling, machine-tools) as well as in capital-intensive
industries (man-made fibres) regarding value added and in marketing-driven
industries (sports goods, beverages) regarding exports. At the more aggregated
sector level, Austria is specialised in highly innovation-intensive sectors
such as machinery and, in exports, in medium-innovation sectors (such as wood,
basic and fabricated metals), but also in sectors with low innovation and
education, such as in hotels and restaurants and auxiliary transport
activities. Austria’s R&D intensity considering its industrial structure is
very high and its position on the quality ladder is high across industries and
quality segments. Overall, Austria shows that competitiveness can be sustained
in structures which are not markedly knowledge-intensive, if sectoral upgrading
in terms of R&D and quality takes place, i.e. if a country moves to the
knowledge-creating parts of the value chain.

3.19.2.   Innovative
industrial policy

According to the Innovation Union Scoreboard 2011, Austria stays an innovation follower, with a developed innovation system and
an above average innovation performance.

Austria’s economy exceeds the EU average in
R&D intensity. The overall investment in R&D grew from 1.93 % in
2000 to 2.76 % of GDP in 2010, which was faster than in most other EU
countries. The share of private sector amounted to a remarkable 60 % of
the total, including a significant portion of R&D investment coming from
abroad.

The share of Austria’s innovative businesses accounts for 2/3 of total enterprises with most of them
specialising in sectors demanding high and low-intermediate labour skills.
After several years of incremental improvement, the number of science and
technology graduates nearly reached the EU average in 2009 (14 % vs.
14.3 %). Nonetheless, Austria gradually begins to face shortage of skilled
workforce and the number of researchers seems insufficient. To facilitate
immigration of highly qualified labour the government introduced the so-called
‘red-white-red card’ as from July 2011. An initial analysis of applications
seems to indicate a good uptake and a wide range of professions and countries
of origin. Since September 2011 applicants can access information through a new
migration website in German and English[61].

A recent measure
to increase indirect public R&D expenditure is the increased tax bonus on
corporate R&D investments (from 8 % to 10 %; with no
conditionality of profits made through the investment) since January 2011, with
an expected impact of EUR 100 million. This incentive is particularly
important for the sizeable investments coming from abroad and for companies with
high R&D investments relative to turnover. Another measure which is working
well is an innovation voucher scheme for SMEs[62].

In view of the
recent decline in the private sector share of R&D expenditure from
49 % in 2007 to 44 % in 2010 the relative underdevelopment of venture
capital (VC) for financing innovation appears as a weakness. This seems to be
the result of a strong tradition of bank financing of enterprises but also of a
comparably unfavourable legal framework and fiscal treatment of VC.

In terms of
governance the Austrian system suffers from a complex division of competences
involving several ministries plus a number of public and semi-public agencies
and bodies. A high-level inter-ministerial Task Force for Research, Technology
and Innovation has been established recently to coordinate the activities of
government bodies, discuss reform projects and consult stakeholders.

The strategy
document from March 2011 ‘Becoming an Innovation Leader’ outlines a series of
challenges of the Austrian innovation system, such as strengthening links with
the education system, increasing the share of tertiary graduates, promoting
high quality research infrastructure and fundamental research and using public
procurement to promote innovation. The strategy addresses all major challenges
and formulates feasible objectives. Though, an effective implementation and in
particular a stronger prioritisation of R&D&I activities and
corresponding streamlining of the governance structure will be crucial to
achieve higher returns on the considerable investments.

3.19.3.   Sustainable industry

The energy and
carbon intensity of Austrian industry has been declining over the last decade
and remains below the respective EU averages for 2010. While sectors falling
under the ETS will reduce CO2 emissions by 21 % by 2020 Austria is aiming at a 16 % reduction for the
other sectors.

The key policy
document to address this and other challenges in the area of energy is the
national Energy Strategy from 2010 with three pillars aiming at increasing
energy efficiency, energy security and the share of renewables; the latter with
an ambitious target of 34 % by 2020.

The Strategy sets
out a mix of horizontal and sector specific measures of regulatory, financial
and information campaign nature. About 18 out of a total of 42 measures have so
far been implemented. Two of the funding measures appear particularly
effective: one for the ‘greening of industries’ supporting sustainable
management measures in enterprises with funding of about EUR 90 million
in 2011 and a reinforced and prolonged instrument for thermal insulation of
residential (70 %) and industrial (30 %) buildings with an annual
budget of EUR 100 million until 2014. In 2011, more than 18 000
projects (residential and industrial buildings) with a total investment volume
of EUR 860 million have been funded. A key measure to increase the
share of renewables is the ‘Green electricity act’ that will enter into force
in July 2012.

Since October 2010
an action plan for Green Public Procurement is implemented at federal, state
and municipal level. It foresees among others stronger inclusion of social
criteria. There are 16 groups of procured goods and services with different
criteria. They are fully applied since May 2011, e.g. for electricity.

Several
environmental tax measures (increased mineral oil tax, airline ticket tax, and
car registration tax reform) have entered into force recently and are expected
to substantially reduce CO2 emissions; first evaluations are
expected in late 2012.

Based on a broad
consultation process in 2011 and the reports of 9 working groups a strategy
paper with a number of short term measures has been prepared to promote
electromobility and to exploit the related opportunities for businesses and
technology development in Austria. Austria has adopted in 2010 a plan on
primary raw materials and recently in 2012 a resource efficiency action plan
(REAP) as well on secondary resources. A challenge for its implementation is
that territorial planning is a Länder competence with the latter having to
integrate the mineral resources plan into their respective regional laws.

3.19.4.   Business environment

Austria has a favourable business environment and scores well in the overall
competitiveness of its economy[63]. To further facilitate running a business Austria continues to implement its administrative burden reduction program after the
intermediate target of a reduction of EUR 564 million has been
achieved in 2010. The largest envisaged reduction measures in the pipeline to
achieve the full EUR 1 billion reduction target by 2012 are the
second phase of the one-stop e-government  portal for businesses
Unternehmensserviceportal (estimated reduction of EUR 200 million;
see also below), the introduction of e-billing (making them legally equivalent
to paper bills; as well estimated reduction potential of up to
EUR 400 million) and the so called SME initiative including measures
in trade law (e.g. establishment of a new trade register). During the second
and third quarter of 2012 a package of measures should be adopted by the
Government and presented to the Parliament.

The initiative on
the reduction of administrative burdens on citizens is as well progressing with
about one third out of 183 planned measures in implementation (i.a. on the
register of births, marriages and deaths and introduction of electronic tickets
for pupils for school buses). These account for a reduction of about
4.5 million hours out of estimated 8.9 million for all measures.

Austria’s SME sector resembles the EU average,
both in terms of employment (67.1 %) and contribution to valued added
(61.4 %). As regards its structure though, the small and medium-sized
companies play a more prominent role. The business demography indicators show,
on one hand, lower-than-EU-average birth and exit rate of enterprises, and one
of the highest survival rates after two years on the other hand.

There is room to
further improve start-up conditions. In spite of gradual reduction over recent
years, the number of administrative procedures (8 among which licensing,
registration, certification, announcement), minimum capital and time (28 days
for a limited liability company[64]) required for setting up a business is far above EU average for most
of these indicators and would benefit from further reduction. A reform of the
limited liability company has been discussed since several years but is still
not proposed. It would foresee a reduction of the required (paid-in) minimum
capital and of the costs for notarial certification in certain cases. Though,
the announcement requirements and other procedures would remain unchanged.

In most aspects of
access to finance, Austria continues to fare better than the EU average.
Building upon a diverse and overall stable banking system, Austria maintains particular strengths in debt financing for SMEs. On the other hand,
weaknesses persist as regards access to and supply of equity finance. The
relatively underdeveloped stock market and venture capital industry do not
generate sufficient alternatives of raising capital, and notably the size and
depth of the venture capital market remain well below the EU average. Improving
the legal framework for venture capital thus remains a challenge for 2012, e.g.
by increasing the attractiveness and transparency of legal forms used for (i)
venture capital funds and for (ii) investments vehicles, including measures
mitigating possible tax disincentives.

3.19.5.   Services sector

Austria has progressively reduced restrictions in
service professions over the past years[65]. Though, there is still room for improvement for more competition and
better choice for businesses and consumers in professional service,
apothecaries and some medical professions (e.g. optometrists, dental
technicians). In particular possibilities to set up ‘interdisciplinary’ companies
including notaries and lawyers are still limited and more restrictive than in
many other Member States. Such services from a ‘one stop shop’ would offer
substantial efficiency gains and reduction of transaction costs for professional
and private clients. Demand for them has been confirmed by a survey conducted
by the Chamber of Commerce among businesses and their associations in 2009.

In some of the
network services and industries there is room for further market opening. High
network access prices and distortive behaviour by incumbent firms that deter
market entry, competition and innovation can still be observed. For rail
freight services the degree of competition is among the lowest in the EU. As
regards rail market opening, the market share of new entrants in total
transport performance (December 2010) amounts to 14.6 % for freight
transport and 5.8 % for passenger transport. The infrastructure manager
and the incumbent rail transport operators are controlled by the same holding.
The market shares of the state-owned railway carrier OeBB are still 80 %
in freight and 93 % in passenger services[66]. Similarly access to postal infrastructure still
remains an issue. Considerable progress with the replacement of delivery boxes
has been made and further is planned for 2012; though many such boxes are still
only accessible to the incumbent operator. Competition in electronic
communications would benefit from increased flexibility in spectrum management
and access to spectrum.

3.19.6.   Public administration

Austria’s overall public administration
performance, as depicted by the World Bank’s Government Effectiveness
Indicator, is well above the EU average.[67] Perceived quality of public services, including
quality of the civil service and policy implementation in Austria are high.

The use of tools
to improve public administration (e-government, impact assessment,
performance and service orientation, accountability) performance is slightly
more intense than the average in the Member Countries. This is mainly due to
the comprehensive provision of business-related e-government solutions, where Austria is well above the EU average. On the other hand, reliance on human resources
management instruments such as performance-related instead of seniority pay
or measures to increase the internal flexibility of the civil service, is
slightly below the EU-average, i.e. Austria still follows predominantly a more
traditional role of steering and managing its administrative staff.

Corruption indicators show a slightly better than
average performance. Perceptions based measures for ‘diversion of public funds’
as well as for ‘irregular payments and bribes’ indicate that Austria is not
free of corruption-related problems but that it still fares better than the
average. As regards the individual experience of corruption (11 % of all
cases), it is worse than the EU-mean (10 %), albeit only to a minor
degree.

The composite
summary indicators for tax compliance and tax administration are better
than average. The time required for preparation of tax files is 170 hours per
year, as compared to the EU-mean of 208 hours. Administrative costs of taxation
in percent of total revenue amount to 0.85 % as compared to 1.32 %
across the EU Member Countries.

Two composite link-level
indicators show figures below the EU-average. As regards the link starting a
business and obtaining licenses, this is due to especially to the longer it
takes time to start up a business, as measured by Doing Business model company
procedures. Although Austria already provides a fully operational one-stop shop
for starting up a business, the time required to start up the model company is
higher than the EU-mean of 13.7 days. While the costs of starting up are
slightly below the average, licensing procedures appear to be more complex than
average.

The composite public
procurement index is also signalling some scope for improvement for
reducing the time but especially for cutting the cost to take part in
government procurements. Whereas on EU average the typical costs of taking part
in a tender amount to 0.19 % of the respective domestic GDP per capita,
participation in Austria causes cost of 0.26 % of GDP per capita. Payment
delays of public authorities are less problematic than at the EU-average, as
payment delays amount to 14 instead of 28.2 days (EU-mean)[68].

The efficiency of
the civil justice system is better than average. All sub-indicators of
this link are better than the mean so that there are no notable weaknesses. For
example, the time of enforcing contracts is 397 days in Austria as compared to the EU mean of 556 days. Resolving insolvency issues takes 1.1 years
as compared to an EU-mean of almost 2 years.

Austria scores
about average at EU level for the time needed by businesses to comply with tax
obligations (67 vs. 68 hours for a benchmark model company[69]) as well as the number of payments to be
made (14 AT vs. 17 EU average[70]). The portal ‘Finanz online’ that will be
integrated in the e-Government Business Service Portal[71] (see below for details) exists already for many
years; it has been progressively extended and is widely accepted by enterprises
and the public. It offers a one stop shop for all kinds of taxes for businesses
and also the possibility to submit individual questions online. An example for
extension is the property acquisition tax (Grunderwerbsteuer) that used to be
paid via the notary and has recently been integrated in ‘Finanz online'.

While about
95 % of all taxes are calculated and raised through the federal tax
administration some tax payments have to be made to the regional (Länder) or
municipal level, such as the municipal tax (Kommunalsteuer).

Overall profile of public administration

Source: WIFO

While there have
been no recent initiatives for a major institutional reform to change the
distribution of competences between federal and state level with a view to
better aligning management of public spending and revenues there are examples
of more limited reforms. The reform of the system of administrative courts[72] was announced in June 2012. It would
streamline the system to one with only two instances (9 first instance courts
at state level plus 2 at federal level) with the aim to speed up procedures.
The administration of long term care benefits has basically been federalised
since January 2012, reducing the number of involved administrations from more
than 300 (280 at state and 23 at federal level) to 8. Construction law (a state
competence) remains a difficult area for businesses. In order to lighten
burdens on them the procedures for construction permits and licenses for
production facilities (Betriebsanlagegenehmigung) are done in parallel where
possible, e.g. for construction of waste treatment plants. The planned reform
of the federal competition authority (BWB) can as well be regarded as an
administrative reform.

Austrian
administrations offer a broad and increasing range of e-government solutions to
businesses which contributes positively to the latters’ environment. Since May
2012  the e-government one-stop-shop Business Service Portal (USP)[73] is offering its full functionality based on a
single-sign-on for the most important administrative procedures at federal
level, e.g. tax declarations (FinanzOnline), e-billing to federal public
authorities, management of a virtual company dossier, data exchange with social
insurance bodies. One focus of the next phase envisaged until 2014 is the
avoidance of multiple declarations, which also contributes to administrative
reform. Key advantages for businesses are also less paper use and partly direct
interfaces between the USP and companies’ software. The reduction in
administrative costs is estimated at up to EUR 300 million depending
upon the services provided.

From 2013 Austria is planning to introduce a more comprehensive impact assessment system consisting
of seven tests focusing on different types of impacts (budgetary,
administrative burdens, SMEs, gender equality, consumer protection, climate
change etc.). Through an IT tool which is under development all relevant test
modules will be selected for a given case and the results integrated in an
output report that will be attached to the policy proposal (Vorblatt).

3.19.7.   Conclusions

Austria scores well in the overall competitiveness
of its economy, labour productivity remains clearly above the EU average, and
it need not cope with any major bottlenecks in the short run. In the context of
a developed high-income country however, it faces relative structural
weaknesses in some areas, which may harm the long-term potential of its
economy.

The knowledge
triangle (education, research and innovation) is one of the areas in need of
priority action as appropriately reflected in the ‘Becoming an Innovation
Leader’ strategy. A dedicated implementation of this strategy, better
interaction with the education system, and more prioritised and thereby more
efficient public spending in these policy areas will be instrumental to fully
exploit the potential contribution of R&D to the competitiveness of its economy,
and thus facilitate the structural shift towards more skill-intensive
higher-value-added activities.

The favourable
business environment could be made even more attractive by streamlining
administrative procedures for start-ups and by increasing availability of
non-banking financing.

[1]     OECD (2011), OECD Economic Surveys: Estonia 2011,
OECD Publishing.

http://dx.doi.org/10.1787/eco\_surveys-est-2011-en,
page 123-124.

[2]     A considerable number given Estonia’s size.

[3]     The World Bank Global Logistics Performance Index
ranks Estonia as 43rd, weakest point being infrastructure.

[4]     http://www.djei.ie/publications/science/2011/
SSTI\_Indicators\_December2011.pdf .

[5]     See the chapter on Innovative industrial policy.

[6]     Energy in Ireland 1990-2010, http://www.seai.ie/Publications/Statistics\_Publications/Energy\_in\_Ireland/Energy\_in\_Ireland\_1990\_-\_2010.html
.

[7]     European Commission and European
Central Bank Survey of Access to Finance of Small and Medium Enterprises (SAFE)
http://ec.europa.eu/enterprise/policies/finance/files/2011\_safe\_analytical\_report\_en.pdf;
the Mazars SME lending demand survey commissioned by the Irish Department of
Finance http://www.finance.gov.ie/documents/publications/reports/2012/mazerssme.pdf

[8]     http://www.djei.ie/publications/2012APJ.pdf
.

[9]     http://per.gov.ie/wp-content/uploads/eGovernment-2012-2015.pdf
.

[10]    World Bank indicator in ‘Doing Business’ — here Ireland is weighted down by the duration of the due diligence performed by the lawyers of
the contracting parties. On the other hand, high-value commercial cases are
dealt with by specialist judges in the Commercial list of the High Court, which
can be quick.

[11]    More competitive legal services should reduce the
time spent in registering property (World Bank indicator).

[12] ‘ Public Service Reform’, Department of Public
Expenditure and Reform, 17 November 2011.

[13]    Entrepreneurship in Greece 2010-2011 –
‘Small’ Entrepreneurship in a period of crisis, Foundation for Economic &
Industrial Research (IOBE), 2012.

[14]    http://www.weforum.org/reports/global-competitiveness-report-2011-2012
.

[15]    http://www.doingbusiness.org/reports/global-reports/doing-business-2012
.

[16]    http://ec.europa.eu/enterprise/policies/innovation/facts-figures-analysis/innovation-scoreboard/index\_en.htm .

[17]    Law 4014/2011, adopted on 13 September
2011.

[18]    Second Quarterly Report (March 2012),
Task Force for Greece, http://ec.europa.eu/commission\_2010-2014/president/news/speeches-statements/pdf/qr\_march2012\_en.pdf

[19]    Law 3919/2011, in force since 2 July
2011.

[20]    Second Quarterly Report (March 2012),
Task Force for Greece, http://ec.europa.eu/commission\_2010-2014/president/news/speeches-statements/pdf/qr\_march2012\_en.pdf.

[21]    Second Quarterly Report (March 2012), Task Force
for Greece,

      http://ec.europa.eu/commission\_2010-2014/president/news/speeches-statements/pdf/qr\_march2012\_en.pdf.

      For more details, see the OECD functional review
of the Greek public administration (Dec 2011).

[22]    Joint European Resources for Micro to Medium
Enterprises: initiative of the European Commission together with the European
Investment Fund to promote the use of financial engineering instruments to
improve access to finance for SMEs via Structural Funds operations.

[23]    A growth agenda for Spain, McKinsey and FEDEA,
2009.

[24]    World Bank’s Government Effectiveness Indicator.

[25]    Commission Staff Working document
‘In-Depth Review for France’, SWD(2012) 155 final, http://ec.europa.eu/europe2020/pdf/nd/idr2012\_france\_en.pdf
.

[26]    2011 Innovation Union Scoreboard .

[27]    Between 2008 and 2011,
EUR 5.4 billion were invested in R&D projects accredited by Pôles
de competitivité. On average, 900 projects have been funded each year between
2008 and 2010, with almost 800 projects being funded in 2011. During this
four-year period, 2 500 innovations and almost one million patents have
been generated by Pôles de competitivité.

[28]    France Brevets is a EUR 100 million
investment fund specialised in industrial property. It builds upon the existing
financial system of valorisation of patents. The objective of France Brevets is
to enable research laboratories and SMEs to rapidly bring their inventions to
market, to organise patents by technological clusters, and to make them more
widely available to enterprises.

[29]    Contrary to what was observed in most Member
States.

[30]    The 2010 increase has been less strong in France than in the EU on average and in comparable Member States such as Germany and the United Kingdom.

[31]    EUR 5.1 billion out of 35 can be
considered to benefit to ‘green’ projects.

[32]    18 out of 71 of these ‘competitive clusters’ are
specialised on eco-technologies and resource efficiency (energy and natural
resources).

[33]    In particular, credit > 1 year and
EUR 50 million.

[34]    The total tax rate measures the amount of taxes and
mandatory contributions payable by businesses after accounting for allowable
deductions and exemptions as a share of commercial profits. Taxes withheld
(such as personal income tax) or collected and remitted to tax authorities
(such as value added taxes, sales taxes or goods and service taxes) are
excluded. Source: the World Bank http://data.worldbank.org/indicator/IC.TAX.TOTL.CP.ZS.

[35]    In June 2012, the Cypriot authorities revised the
method of calculation of this figure. The new data would point to a value of
2.7%, which, although lower, is still higher than the EU average.

[36] In 2010.

[37] The seed and start-up capital instrument has made
approximately a quarter of the investments proposed for 2010-2016, whereas the
venture capital instrument has invested 21 % of the funds planned for
2010-2016. Of the mezzanine instrument launched in November 2011, 2
applications have been approved (approximately 6.3 % of the total financing).
The micro-credit programme granting loans for current assets and/or investment
has disbursed about 38 % of the available funds to SMEs.

[38] See Sauka, A. and Putniņš, T. (2011), Shadow
Economy Index for the Baltic countries 2009 and 2010, Stockholm School of
Economics in Riga, May 2011.

[39]    Currently, there are two holding funds in operation
funded by the ERDF with a total allocation of EUR 228 million, one
fund administered by the EIF (EUR 170 million from ERDF) and one
administered by INVEGA (EUR 58 million from ERDF). Implementation on
the ground started to take off already in 2011 and further progress is expected
in 2012. Based on stakeholder consultation, the products offered through the
INVEGA-managed holding fund have been well received by industry.

[40]    Source : Statec.

[41]    National Reform Programme 2012, p.33.

[42]    World Bank Doing Business 2012.

[43]    Until 2012, as an incentive to encourage R&D
activities firms were allowed to reduce their so-called ‘innovation
contribution’ to the central budget by the amount of direct costs of in-house
R&D activities, as well those of commissioned from public research and
non-profit institutes, or universities financed by own sources of enterprises.
It is likely that some of these activities were fictitious.

[44]    Government budget appropriations or outlays on
research and development (GBAORD) are funds allocated to R&D in central
government or federal budgets and therefore mean budget provisions, not actual
expenditure.

[45]    Global Competitiveness Report 2012.

[46]    SWD (2012) 157, In-depth Review for Hungary.

[47]    Government Decree 1405/2011 XI.25.

[48]    SWD (2012) 157, In-depth Review for Hungary.

[49]    ‘Hungary – Telecommunication Market and
Regulatory Development’, DG Connect, 2011.

[50]    IMD World Competitiveness Yearbook 2011.

[51]    World Bank’s Government Effectiveness Indicator.

[52]    For businesses the figure was 71% (EU
76%), for privete citizens 38% EU : 41%).

[53]    According to Transparency International, Hungary ranks 54th out of 183 countries in the corruption perception index list.
Furthermore, in 2011 no or little enforcement was reported on the progress of
the OECD anti-bribery convention. .

[54]    Government Decree 1104/2012 (IV.6.)

[55]    According to the innovation contract signed on 2
April 2012 between the top sector representatives and the government: http://www.rijksoverheid.nl/onderwerpen/ondernemersklimaat-en-innovatie/nieuws/2012/04/02/innovatiecontracten-ondertekend-2-8-miljard-naar-topsectoren.html.
For details see http://www.rijksoverheid.nl/onderwerpen/ondernemersklimaat-en-innovatie/documenten-en-publicaties/kamerstukken/2012/04/02/kamerbrief-over-het-bedrijvenbeleid-in-uitvoering.html
and

http://www.rijksoverheid.nl/onderwerpen/ondernemersklimaat-en-innovatie/documenten-en-publicaties/convenanten/2012/04/02/nederlands-kennis-en-innovatie-contract.html.

[56]    The conclusions of the Competitiveness Council of
31 May 2011 included a call for Member States to reduce the start-up time for
new enterprises to 3 days at a cost of EUR 100. While the Netherlands adheres to the target to set up a company within the stipulated time frame
(currently 2 days), the cost to start up a company is EUR 1 050.

[57]    http://www.rijksoverheid.nl/documenten-en-publicaties/rapporten/2011/06/20/evaluatie-borgstellingsregeling-voor-het-midden-en-klein-bedrijf-bmkb.html

[58]    http://www.ecn.nl/nl/nieuws/newsletter-nl/archief-2008/november-2008/groene-stroom/

[59]    http://ec.europa.eu/europe2020/pdf/nd/swd2012\_belgium\_en.pdf

[60]    http://register.consilium.europa.eu/pdf/en/12/
st11/st11275.en12.pdf

[61]    www.migration.gv.at.

[62]    Innovationsscheck.

[63]    Austria ranked 19th in the 2011-2012
Global Competitiveness Report of the World Economic Forum, and 32nd
in the 2012 Doing Business Survey of the World Bank.

[64]    2012 Doing Business Survey of the World Bank;
according to information provided by Austrian authorities the required time
across all types of companies is 11 days.

[65]    See for instance OECD data on Product Market
Regulation from 1996, 2003 and 2008.

[66]    Rail Market Monitoring Survey 2012.

[67]    As many data are unavailable, we decided to
calculate EU-wide averages without Malta.

[68]    Source: Study on Excellence in public
administration for competitiveness in EU Member States (WIFO, ZEW and IDEA
consult 2012; not yet published).

[69]    Paying taxes Survey of the World Bank.

[70]    dito.

[71]    www.usp.gv.at .

[72]    BGBl.
I Nr. 51/2012.

[73]    Unternehmensserviceportal (USP) — http://www.usp.gv.at .

CONTENTS

4.    Annex: Methodology and
indicators used. 223

4.1.      Definitions of the
indicators. 223

4.2.      Public administration. 229

4.3.      Data sets. 234

4.           Annex:
Methodology and indicators used

4.1.        Definitions of the indicators

TABLE: Indicators

Name of Indicator || Definition

Innovative industrial policy

|| Labour productivity per hour worked || Gross Domestic Product in Purchasing Power Standards per hour worked relative to EU-27 (EU-27=100) Source: Eurostat

|| Labour productivity per person employed || Gross Domestic Product in Purchasing Power Standards per person employed relative to EU-27 (EU-27=100) Source: Eurostat

|| Labour productivity in manufacturing    per person employed || Gross value added in Purchasing Power Standards per person employed Source: Eurostat

|| Unit labour costs in manufacturing || Development (2000=100) of the following ratio: Total compensation of employees in manufacturing (in nominal values) divided by total valued added in manufacturing (in constant prices). Source: OECD

|| Percentage of employees in manufacturing with high educational attainment || Data are calculated from the annual labour force survey using the International Standard Classification of Education (ISCED), levels 5 and 6 – i.e. employees in manufacturing with first and second stages of tertiary education. Source: Eurostat

|| Tertiary graduates in science and technology per 1000 of population aged 20-29 || Number of new science and technology graduates (levels 5 and 6 of the International Standard Classification of Education-ISCED97) divided by 20-29 years old population and then multiplying by 1000. The term ‘science’ includes the following fields of education (ISCED): life sciences, physical sciences, mathematics, statistics and computing, while technology refers to graduates in engineering, manufacturing and construction. The indicator includes new tertiary graduates in a calendar year from both public and private institutions completing graduate and post graduate studies compared to the age group of 20-29 years old population that corresponds to the typical graduation age in most countries. Source: Eurostat

|| R&D performed by businesses || The indicator covers all expenditures for R&D performed within the business enterprise sector (BERD) on the national territory during a given period, regardless of the source of funds. The data on this indicator are gathered by Eurostat which applies the guidelines laid out in the Frascati Manual, the ‘Proposed standard practice for surveys of research and experimental development’ (OECD, 2002). Note: Gross domestic expenditure on R&D is composed of Business enterprise expenditure on R&D, Higher education expenditure on R&D, Government expenditure on R&D and Private non-profit expenditure on R&D. Source: Eurostat

|| Public R&D expenditure || The indicator covers all R&D expenditures in the government sector (GOVERD) and the higher education sector (HERD).

|| Country share of total EU goods exports || International trade in goods covers both extra- and intra-EU trade. Extra-EU trade statistics cover the trading of goods between Member States and non-member countries. Intra-EU trade statistics cover the trading of goods between Member States. ‘Goods’ means all movable property including electricity. Source: Eurostat.

|| Share of high-tech exports || Share (in %) of intra- and extra-EU27 exports of all high technology products in total intra- and extra-EU27 exports. High technology products comprise: Aerospace, Computers office machines, Electronics-telecommunications, Pharmacy, Scientific instruments, Electrical machinery, Chemistry, Non-electrical machinery, Armament. Source: Eurostat.

|| Trade balance of goods (% of total exports of goods) || Net exports (exports minus imports) of goods divided by total exports of goods (all in current prices). The aggregate EU trade balance includes trade with third countries only. Source: Eurostat.

|| Trade balance of services (% of total exports of services) || Net exports (exports minus imports) of services divided by total exports of services (all in current prices). The aggregate EU trade balance includes trade with third countries only. Source: Eurostat.

|| Real effective exchange rate || Nominal effective exchange rate deflated by nominal unit labour costs (total economy) relative to a panel of 36 countries (EU-27 + 9 other industrial countries: Australia, Canada, United States, Japan, Norway, New Zealand, Mexico, Switzerland, and Turkey). 1999=100 for all countries. A rise in the index suggests deterioration in competitiveness. The figure for each country is calculated against the rest of the countries belonging to the panel. The EU aggregate figure is calculated against the non-EU-27 countries belonging to the panel. Source: European Commission (DG ECFIN)

|| Key enabling technologies (KETs) || KETs are composed of six core technologies: micro-/nanoelectronics, nanotechnology, photonics, advanced materials, industrial biotechnology and advanced manufacturing technologies. Source: Calculations by European Commission/ZEW/NIW based on Patstat and UN Comtrade data

Sustainable industry

|| Energy intensity in industry (including construction) and the energy sector || Energy consumption in kg of oil equivalent per euro of gross value-added (chain-linked volumes, reference year 2000, at 2000 exchange rates). Energy consumption refers to: B\_101800 - Final energy consumption in industry (including construction) + B\_101600 - Final Non-energy consumption + B\_101300 - Consumption in Energy Sector. GVA refers to NACE sections C: Mining and Quarrying, D: Manufacturing, E: Electricity, Gas and Water Supply and F: Construction. Source: Eurostat (“environment and energy’ and ‘national accounts”)

|| CO2 intensity in industry (including construction) and the energy sector || CO2 emissions in kg per euro of gross value-added (chain-linked volumes, reference year 2000, at 2000 exchange rates). Sources: European Environment Agency for the figures on the CO2 emissions. The relevant categories are 1.A.1. (Energy Industries) + 1.A.2. (Manufacturing Industries and Construction) + 2. (Industrial Processes) + 3. (Solvent and Other Product Use).Eurostat for the figures regarding GVA. GVA refers to NACE sections C: Mining and Quarrying, D: Manufacturing, E: Electricity, Gas and Water Supply and F: Construction.

|| Environment Protection Expenditures in industry (% of GDP) || The Classification of Environmental Protection Activities (CEPA 2000) distinguishes nine environmental domains: protection of ambient air and climate; wastewater management; waste management; protection and remediation of soil, groundwater and surface water; noise and vibration abatement; protection of biodiversity and landscape; protection against radiation; research and development and other environmental protection activities. Industry excludes recycling. Source:Eurostat

|| Exports of environmental goods || Intra- and extra-EU27 exports of goods from ‘eco-industries’ divided by total intra- and extra-EU27 exports of goods (in nominal values). The notion of ‘eco-industry’ refers to sectors whose products measure, prevent, limit, minimise or correct environmental damage. The trade codes considered to cover eco-industry goods are those identified in the Ecorys study on the ‘Competitiveness of the EU eco-industry‘ (pages 190/191) of 22 October 2009, carried out for DG Enterprise and Industry. Due to the reclassification of the Comext products codes, please find the updated list below (TABLE: Comext eco-products codes and descriptions) Source: European Commission (DG Enterprise and Industry) calculations on the basis of Eurostat/COMEXT data.

Business Environment and entrepreneurship

|| Starting a business (days) || Time needed to start a business, recorded in calendar days. It is the median duration that incorporation lawyers indicate as nec­essary. It is as­sumed that the minimum time required for each procedure is one day. Source: World Bank Doing Business.

|| Business environment score || Score calculated from Doing business data with seven indicators: Starting a business, Dealing with construction permits, Registering property, Getting credit, Protecting investors, Enforcing contracts and Resolving insolvency. Each indicator is normalised to a figure between 0 and 1, where 0 is the worst possible member State performance and 1 the best one. The country score for a given year is the simple average of the seven figures. Source: World Bank Doing Business

|| Enterprise survival rate after 2 years || Number of enterprises started in year t and which still existed in year (t+2), divided by the total number of enterprises that started in year t Source: Eurostat

|| Business churn || Sum of the number of enterprise starts and exits (“births’ plus ‘deaths”) in the reference period (year t), divided by the total number of enterprises active in year t. Source: Business Demography (Eurostat).

|| Share of high-growth enterprises || Enterprises with average annualised growth greater than 20 % in the number of employees, over a three-year period, and with ten or more employees at the beginning of the observation period, divided by the total number of active enterprises at the beginning of the three year period. Source : Eurostat

|| Early stage financing || The indicator measures early stage financing as % of GDP. Venture capital investment data are broken down into ‘early stage’ (seed and start-up) and ‘expansion and replacement’ capital. Seed capital is defined as financing provided to research, assess and develop an initial concept before a business has reached the start-up phase. Start-up is defined as financing provided for product development and initial marketing, manufacturing and sales. Source: Eurostat, using data from the European Private Equity and Venture Capital Association (EVCA).

|| Access to Bank Lending for SMEs || Score calculated from the Eurobarometer survey data with six indicators expressed as the percentage of respondents to the following questions: Net increase in the need for bank loans in the past six months; Not applying for a loan in the past six months for fear of rejection; Applying for a loan in the past six months but being rejected, or rejecting the offer because of too high costs; Net improvement in the availability of loans in the past six months; Net increase in the size of bank loans in the past six months; Net improved willingness of banks to provide a loan in the past six months. 0 indicates the worst possible situation and 1 the best possible one. Source: Flash Eurobarometer

|| Duration of payments by public authorities || Effective payment duration in days. Source: European payment Index by Intrum Justitia.

|| Venture capital || Venture Capital: Data measure all venture capital investment as a percentage of GDP. Source: European Private Equity and Venture Capital Association (EVCA)

|| Licenses || The indicator measures the time (in days) required to obtain licenses following the Commission’s methodology and models, i.e.: the licenses required for 5 ‘benchmark’ model companies: Hotel with a restaurant, Plumbing company, Wholesale or retail distributor, Manufacturer of steel products, Manufacturere of small IT devices. Source: Graph adapted by the European Commission based on the study: Business Dynamics: Start-ups, Business Transfers and Bankruptcy, Final Report, January 2011

|| Number of Hours to Comply Across the European Union || Time is recorded in hours per year. The indicator measures the time taken to prepare, file and pay three major types of taxes and contributions: the corporate income tax, value added or sales tax, and labour taxes, including payroll taxes and social contributions. Source: European Commission based on the study PWC, Paying Taxes 2012, The Global Picture

Services sector

|| Electricity prices for medium-sized enterprises || Average national price in Euro per kWh excluding taxes, applicable for the first semester of each year for medium-sized industrial consumers (annual consumption between 500 and 2000 MWh). The indicator does not cover small enterprises for reasons of data availability, nor large enterprises, since the latter often have individual contracts with energy providers. Prices refer to the second half of the year. Source: Eurostat

|| Infrastructure expenditures per inhabitant || Sum of investment and maintenance expenditures on rail, road, inland waterways, maritime ports and airports infrastructure. Source: OECD International Transport Forum Statistics.

|| Satisfaction with the quality of infrastructure || Average mark given by business executives in a World Economic Forum survey to the quality of rail, roads, ports and airports (1 = underdeveloped; 7 = extensive and efficient by international standards). Source: Global Competitiveness Report 2011-2012 of the World Economic Forum.

|| Availability of high-speed broadband infrastructure || Percentage of broadband lines with speed above 10 MBps Source: European Commission, DG INFSO Communications Committee Working Document

|| Services in the overall economy || Share of economic sectors in total gross value added (at basic prices) belonging to the NACE categories: A+B; C+D+E; F; G+H+I; J; K; L+M+N+O+P+Q Source: Eurostat, National Accounts

Public administration

|| Legal and regulatory framework || Average evaluation (0 = negative; 10 = positive) of the statement ‘The legal and regulatory framework encourages the competitiveness of enterprises’ in an IMD survey of businesspeople. Source: IMD (International Institute for Management Development).

|| Burden of government regulation || Average mark given by business executives in a World Economic Forum survey to the question ‘How burdensome is it for businesses in your country to comply with governmental administrative requirements (e.g., permits, regulations, reporting)?’ (1 = extremely burdensome; 7 = not burdensome at all) Source: Global Competitiveness Report 2011-2012 of the World Economic Forum

|| E-government usage by enterprises || Share of enterprises using the internet to interact with public authorities (i.e. having used the Internet for one or more of the following activities: obtaining information, downloading forms, filling-in web-forms, full electronic case handling). Data are expressed in % of enterprises with 10 or more persons employed and belonging to the NACE 2.0 sections C, D, E, F, H, I, J, L, division 69-74 and group 95.1. Source: Eurostat, Survey on ICT usage and e-commerce in enterprises

TABLE: Comext eco-products codes
and descriptions

OLD Comext code || NEW Comext code || Product description ||

84 10 11 00 || 84 10 11 00 || HYDRAULIC TURBINES AND WATER WHEELS, OF A POWER <= 1.000 KW (EXCL. HYDRAULIC POWER ENGINES AND MOTORS OF HEADING 8412) ||

84 10 12 00 || 84 10 12 00 || HYDRAULIC TURBINES AND WATER WHEELS, OF A POWER > 1.000 KW BUT <= 10.000 KW (EXCL. HYDRAULIC POWER ENGINES AND MOTORS OF HEADING 8412) ||

84 10 13 00 || 84 10 13 00 || HYDRAULIC TURBINES AND WATER WHEELS, OF A POWER > 10.000 KW (EXCL. HYDRAULIC POWER ENGINES AND MOTORS OF HEADING 8412) ||

84 10 90 90 || 84 10 90 00 || PARTS OF HYDRAULIC TURBINES AND WATER WHEELS N.E.S.; HYDRAULIC TURBINE REGULATORS ||

84 13 70 21 || 84 13 70 21 || SUBMERSIBLE PUMPS, SINGLE-STAGE ||

84 17 80 90 || 84 17 80 30 || OVENS AND FURNACES FOR FIRING CERAMIC PRODUCTS ||

84 17 80 50 || OVENS AND FURNACES FOR FIRING CEMENT, GLASS OR CHEMICAL PRODUCTS ||

84 17 80 70 || INDUSTRIAL OR LABORATORY FURNACES, INCL. INCINERATORS, NON-ELECTRIC (EXCL. FOR THE ROASTING, MELTING OR OTHER HEAT TREATMENT OF ORES, PYRITES OR METALS, BAKERY OVENS, OVENS AND FURNACES FOR FIRING CERAMIC PRODUCTS, OVENS AND FURNACES FOR FIRING C ||

84 17 80 10 ||

84 17 90 00 || 84 17 90 00 || PARTS OF INDUSTRIAL OR LABORATORY FURNACES, NON-ELECTRIC, INCL. INCINERATORS, N.E.S. ||

84 19 11 00 || 84 19 11 00 || INSTANTANEOUS GAS WATER HEATERS (EXCL. BOILERS OR WATER HEATERS FOR CENTRAL HEATING) ||

84 19 19 00 || 84 19 19 00 || INSTANTANEOUS OR STORAGE WATER HEATERS, NON-ELECTRIC (EXCL. INSTANTANEOUS GAS WATER HEATERS AND BOILERS OR WATER HEATERS FOR CENTRAL HEATING) ||

84 21 29 90 || 84 21 29 00 || MACHINERY AND APPARATUS FOR FILTERING OR PURIFYING LIQUIDS (EXCL. SUCH MACHINERY AND APPARATUS FOR WATER AND OTHER BEVERAGES, OIL OR PETROL-FILTERS FOR INTERNAL COMBUSTION ENGINES AND ARTIFICIAL KIDNEYS) ||

84 21 39 30 || 84 21 39 20 || MACHINERY AND APPARATUS FOR FILTERING OR PURIFYING AIR (EXCL. ISOTOPE SEPARATORS AND INTAKE AIR FILTERS FOR INTERNAL COMBUSTION ENGINES) ||

84 21 39 71 || 84 21 39 60 || MACHINERY AND APPARATUS FOR FILTERING OR PURIFYING GASES (OTHER THAN AIR), BY A CATALYTIC PROCESS (EXCL. ISOTOPE SEPARATORS) ||

84 21 39 51 || 84 21 39 80 || MACHINERY AND APPARATUS FOR FILTERING AND PURIFYING GASES (OTHER THAN AIR AND EXCL. THOSE WHICH OPERATE USING A CATALYTIC PROCESS, AND ISOTOPE SEPARATORS) ||

84 21 39 55 ||

84 21 39 99 ||

84 21 99 00 || 84 21 99 00 || PARTS OF MACHINERY AND APPARATUS FOR FILTERING OR PURIFYING LIQUIDS OR GASES, N.E.S. ||

85 41 40 00 || 85 41 40 10 || LIGHT EMITTING DIODES ||

85 41 40 90 || 85 41 40 90 || PHOTOSENSITIVE SEMICONDUCTOR DEVICES, INCL. PHOTOVOLTAIC CELLS ||

85 41 40 91 ||

90 26 80 91 || 90 26 80 20 || ELECTRONIC INSTRUMENTS OR APPARATUS FOR MEASURING OR CHECKING VARIABLES OF LIQUIDS OR GASES, N.E.S. ||

90 26 80 99 || 90 26 80 80 || NON-ELECTRONIC INSTRUMENTS OR APPARATUS FOR MEASURING OR CHECKING VARIABLES OF LIQUIDS OR GASES, N.E.S. ||

90 27 10 10 || 90 27 10 10 || ELECTRONIC GAS OR SMOKE ANALYSIS APPARATUS ||

90 27 10 90 || 90 27 10 90 || NON-ELECTRONIC GAS OR SMOKE ANALYSIS APPARATUS ||

4.2.        Public administration

4.2.1.     Indicators used in the
spider diagram illustrating the links between public administration and
competitiveness (section on public administration in country chapters)

The spider diagram
illustrates, for each country, a summary assessment of the performance against
the EU average by public administration – competitiveness link, highlighting
the weaknesses/strengths. It is based on the framework to assess the quality of
public administration for competitiveness purposes developed by the 2012 Study
on Excellence in public administration for competitiveness in Member States
realised for DG Enterprise and Industry by WIFO (Austrian Institute of Economic
Research).

The high number of
(potential) interactions between the public administration and enterprises, as
well as the various channels of transmission through which administrative
quality impacts a country’s competitiveness, make it difficult to fully capture
the complexity of this relationship. Nevertheless, the aim was to construct an
assessment framework that covers the characteristics of excellence in public
administration and its links to competitiveness in a concise and comparable way
with a tractable number of indicators.

Three general
links were distinguished, which cover overarching influences that affect the
quality of the public administration and its relation to the business
environment:

A.           General
governance

B.           Tools
for administrative modernisation

C.           Corruption
and fraud.

'General
governance’ captures the
multi-dimensional concept of administration quality. ‘Tools for
administrative modernisation’ refers to the use of instruments to enhance
the capacities of the administration and maps developments in the general
sophistication of service provision. ‘Corruption and fraud’ captures
assessments of the extent to which the powers of government and administration
are exercised for private gain. The link covers all forms of corruption,
including state capture by vested private interests.

In addition, four
more specific links were considered, concerning issues of:

D.           Starting
a business and licensing

E.            Public
procurement

F.            Tax compliance and tax administration

G.           Efficiency
of civil justice.

These links
explicitly relate the quality of an administration to the business environment,
capturing the most important interactions and contact points between the public
administration and private companies. The analyses do not focus on
industry-specific interactions between public administration and certain
branches. Rather, the links have been selected with the intention of drawing a
broad and at the same time concise picture of the degree of excellence of
public administration at the Member State level.

The broadness of
the links requires the selection of more than one representative indicator in
order to comprehensively capture the different aspects of how the quality of
public administration affects the overall business environment. Although the
selection of the indicators for each of the links is driven by the intention to
draw a broad and comprehensive picture of the quality of public administration,
it should be noted that the selection of any one indicator is restricted by the
availability, quality, country coverage, timeliness and representativeness of
the data. Thus, certain prudence is required when interpreting the results.

The selected
indicators are described in the following table:

TABLE: The assessment framework: links,
indicators and data sources

EPA-competitiveness link || Unit || Data source

A) General governance || ||

1) Government effectiveness || Index range -2.5 to +2.5, higher values indicate better performance || World Bank ‑ Worldwide Governance Indicators

B) Tools for administrative modernisation || ||

1) Availability of 8 business related E-Government services || % of total of 8 services || European Commission:    E-Government Benchmarking Reports

2) Use of Evidence-Based Instruments || Index 0 to 10, high values indicate intensive reliance || Bertelsmann Stiftung ‑ Sustainable Governance Indicators

3) Post-bureaucracy Index || Index 0 to 100, high values indicate intensive reliance || Demmke and Moilanen (2010)

C) Corruption and fraud || ||

1) Diversion of public funds || Index on a scale from 1 (very common) to 7 (never occurs) || WEF Global Competitiveness Report 2011-12

2) Irregular payments and bribes || Index on a scale from 1 (very common) to 7 (never occurs) || WEF Global Competitiveness Report 2011-12

3) Experience of corruption || % share of respondents reporting an incident || European Commission: Special Eurobarometer

D) Starting a business and licensing || ||

1) Fully operational one stop shop to start up a company || does not exist =0, does exist = 1 || European Commission:    Monitor start-up procedures

2) Time required to start up a company || number of calendar days || World Bank – Doing Business

3) Cost to start up a company || % of income per capita || World Bank – Doing Business

4) Index of total licensing complexity || range 1 to 26, high values indicate high complexity || European Commission (DG Enterprise):    Business Dynamics

E) Public procurement || ||

1) Total person-days per individual firm per competition || authority days + (firm days \* average number of bids) || European Commission:    Cost and effectiveness of Public procurement

2) Typical cost of a competition for firms per competition || % of per capital GDP || European Commission:    Cost and effectiveness of Public procurement

3) Average delay in payments from public authorities || days || Intrum Justitia ‑ European Payment Index

F) Tax compliance and tax administration || ||

1) Time to prepare and file tax returns and to pay taxes || hours per year || World Bank ‑ Paying Taxes

2) Administrative costs of taxation || per 100 units of revenue collection || OECD – Tax Administration in OECD and Selected Non-OECD Countries

G) Efficiency of civil justice || ||

1) Enforcing contracts: Time || Calendar days || World Bank – Doing Business

2) Enforcing contracts: Cost || Percentage of claim || World Bank – Doing Business

3) Resolving insolvency: Time || Calendar days || World Bank – Doing Business

4) Independent judiciary || Index from 1 to 7, high values indicate independence || WEF - Global Competitiveness Report 2011-12

4.2.2.     Normalisation and
computation of composite indicators

Except for link (A) all links are described by more than one indicator.
This requires constructing composite indicators in order to compare the
performance of member states at the ‘link-level'. The construction of
indicators relies on the good practice outlined in the Handbook on
Constructing Composite indicators: Methodology and User Guide (OECD/EC JRC,
2008). In a first step, raw indicator values were normalized into the [0,1]
range using the min-max method. Higher scores represent a better performance,
or, in the case of tools, the enhanced use of instruments associated with a
modernised public administration:

For indicators where high values indicate better performance, e.g. index
for independent judiciary

.

For indicators where low values indicate better performance, e.g.,
experience of corruption,

.

'Minimum’ refers to the minimal value of an indicator, ‘maximum’ to its
maximum value. We considered also other normalization techniques (z-scores).
Results using different methods of normalization did not lead to different
results.

Potentially problematic indicators that could bias the composite
indicators as those having skewness greater than 2 and a kurtosis greater than
3.5 were identified using the normalized data. Two problematic indicators were
identified:

·
In
the case of indicator (F.2) Administrative costs per 100 units of revenue
collection the observation for Cyprus was winsorised (the country value for
Greece was assigned the next highest value).

·
For
(G.1) Enforcing contracts: Time, das was leaved as it is. This entails
the risk that composite indicator for Efficiency of Judicial Systems for Italy and Slovenia may be biased.

In addition, a limited number of indicators are unavailable for some
countries. For the purpose of computing composite indicators, the missing
values were imputed (using cross-sectional regression based imputation). The
following indicators were concerned:

·
(B.2)
Use of Evidence-Based Instruments - 8 missing values

·
(E.3)
Average delay in payments from public authorities (in days) – one
missing value for (Luxembourg), and

· (F.2) Administrative
costs per 100 units of revenue collection, one value missing for Greece.

4.2.3.     Methodological note on the
introductory graph in the country chapters

The graphs
present, for each indicator, the distance of the respective Member State from the EU average. This distance is expressed in terms of standard deviations,
which is a common measure of the spread of observations in a distribution (in
this case, a measure of the variation of Member State performance around the EU
average). This enhances the comparability of the presentation of indicators
with different measurement units and distributions across Member States.

The data are
presented in the country graphs in such a way that a bar pointing to the right
always indicates a positive performance. Likewise, a bar pointing to the left
always indicates a performance below average. This is straightforward for
indicators, e.g. labour productivity, where high values are strived for.
However, for those indicators where low values are the objective, the data bars
in the graph have been converted so that a positive deviation from the average
(bar pointing to the right) represents a lower value of the indicator
than the average. These conversions enable an easy reading of the country
profiles, since all bars presenting positive values in the country profile
suggest a level of performance of the respective Member State which is better
than the EU average and all bars presenting negative values suggest a level of
performance of the respective Member State which is below EU average.

The indicators for
which such conversions have been carried out are: (1) energy intensity in
industry in kg of oil equivalent per euro of gross value-added at constant
prices; (2) carbon intensity per ton of oil equivalent of energy consumption;
(3) electricity prices for medium-sized enterprises, (4) time required to start
a business; (5) duration of payments by public authorities.

The indicators
presented in the above table (under 1.2) for which the distance from the EU
average would not be meaningful (exchange rates and trade balances) are quoted
in the text.

The EU averages
used to show the respective standard deviations in the country profiles are the
values for the EU as a whole and, hence, weighted averages of Member States
performance. For the following indicators, however, unweighted arithmetic
averages have been used due to missing EU totals: share of science and
technology graduates, satisfaction with quality of infrastructure, legal and
regulatory framework, time required to start a business, business environment
score, enterprise survival rate, business churn, early stage financing, access
to bank lending, duration of payments by public authorities, share of
high-growth enterprises as percent of all enterprises.

Data used to show
the respective standard deviations in the country profiles are the values for
the EU as a whole and, hence, weighted averages of Member States performance
where data are available. For the following indicators, however, unweighted
arithmetic averages have been used due to missing EU totals: share of science
and technology graduates, satisfaction with quality of infrastructure, legal
and regulatory framework, time required to start a business, business
environment score, enterprise survival rate, business churn, early stage financing,
access to bank lending, duration of payments by public authorities, share of
high-growth enterprises as percent of all enterprises.

4.3.        Data
sets

              Data tables underlying
graphs in section 3 and introduction of country chapters

TABLE: The country codes used in the tables
are:

Country || Code

Belgium || BE

Bulgaria || BG

Czech Republic || CZ

Denmark || DK

Germany || DE

Estonia || EE

Ireland || IE

Greece || EL

Spain || ES

France || FR

Italy || IT

Cyprus || CY

Latvia || LV

Lithuania || LT

Luxembourg || LU

Hungary || HU

Malta || MT

Netherlands || NL

Austria || AT

Poland || PL

Portugal || PT

Romania || RO

Slovenia || SI

Slovakia || SK

Finland || FI

Sweden || SE

United Kingdom || UK

TABLE: Innovative industrial policy

Policy objective / indicators || Labour productivity per hour worked (EU27=100; 2010) Source: Eurostat || Labour productivity per person employed (EU27=100; 2010) Source: Eurostat || Labour productivity per person employed in manufacturing (1000 PPS; 2011) Source: Eurostat || % of employees in manufacturing with high educational attainment (2011) Source: Eurostat || Unit labour costs, level in manufacturing (2005 = 100; 2010) Source: OECD || Tertiary graduates in science and technology (% of 20-29 years old population; 2010) Source: Eurostat || R&D performed by businesses (% of GDP; 2010) Source: Eurostat || Share of high-tech exports in total exports (2009) Source: Eurostat || Real effective exchanges rates deflated by nominal unit labour costs (total economy) against a panel of 36 countries (1999=100; Q4 2010) Source: DG ECFIN || Trade balance of goods as % of total exports of goods (2010) Source: Eurostat || Trade balance of services as % of total exports of services (2010) Source: Eurostat ||

BE || 136 \* || 128 || 75 || 29.1 || 107 || 12.2 || 1.3 || 8.8 || 107 \* || 4 || 10 ||

BG || 41 || 41 || : || 14.0 || 133 \* || 11.4 || 0.3 || 4.6 || 146 || -23 || 39 ||

CZ || 68 || 73 || 37 || 8.9 || 89 || 16.5 || 1.0 || 15.2 || 166 || 5 || 19 ||

DK || 120 || 112 || 53 || 22.8 || 99 || 16.5 || 2.1 || 12.3 || 116 || 13 || 14 ||

DE || 124 || 105 || 68 || 23.0 || 108 || 14.8 || 1.9 || 14.0 || 88 || 16 || -11 ||

EE || 61 || 69 || 30 || 22.5 || 114 || 11.3 || 0.8 || 6.9 || 142 || -6 || 38 ||

IE || 126 || 137 || 153 \* || 39.4 || 72 || 20.1 || 1.2 || 22.1 || 119 || 48 || -10 ||

EL || 78 || 95 || 49 || 15.5 || 137 || 12.8 || 0.2 \* || 6.6 || 109 || -195 || 47 ||

ES || 108 || 109 || 69 || 32.5 || 112 || 13.9 || 0.7 || 4.7 || 113 || -28 || 30 ||

FR || 134 || 116 || 55 || 26.8 || 110 || 20.4 \* || 1.4 || 19.7 || 108 || -16 || 9 ||

IT || 102 || 109 || 48 || 8.6 || 116 || 11.3 \* || 0.7 || 6.8 || 114 || -8 || -12 ||

CY || 81 || 90 || 33 || 18.3 || 116 \* || 5.1 || 0.1 || 20.1 || 115 || -511 || 59 ||

LV || 47 || 55 || 28 || 16.8 || 178 \* || 10.7 || 0.2 || 5.3 || 132 || -23 || 40 ||

LT || 55 || 62 || 43 || 23.9 || 123 \* || 18.7 || 0.2 || 5.8 || 121 || -13 || 31 ||

LU || : || : || 52 \* || 23.1 || 109 || 3.1 || 1.2 || 41.8 || : || -22 || 45 ||

HU || 60 || 71 || 39 || 11.1 || 101 || 8.3 || 0.7 || 22.3 || 133 || 8 || 20 ||

MT || 83 \* || 91 || 48 || 8.7 || 103 \* || 8.0 || 0.4 || 43.8 || 117 || -66 || 39 ||

NL || 136 || 113 || 75 || 21.5 || 103 || 9.2 || 0.9 || 18.4 || 111 || 10 || 10 ||

AT || 115 || 115 || 73 || 15.3 || 103 || 15.5 || 1.9 || 11.7 || 96 || -4 || 32 ||

PL || 54 || 67 || 33 || 16.2 || 83 || 15.8 || 0.2 || 5.7 || 107 || -11 || 9 ||

PT || 65 || 77 || 32 || 7.5 || 104 \* || 14.4 || 0.7 || 3.7 || 111 || -55 || 38 ||

RO || 43 || 49 || 27 \* || 11.7 || 134 \* || 15.6 || 0.2 || 8.2 || 173 || -25 || -8 ||

SI || 80 || 80 || 40 || 14.9 || 106 || 14.8 || 1.4 || 5.5 || 111 || -3 || 28 ||

SK || 75 || 81 || 50 || 9.7 || 105 || 18.3 || 0.3 || 5.9 || 177 || -1 || -17 ||

FI || 110 || 112 || 66 || 31.6 || 95 || 24.2 || 2.7 || 13.9 || 106 || 2 || 1 ||

SE || 116 || 115 || 69 || 17.1 || 102 || 14.0 || 2.4 || 14.8 || 99 || 6 || 27 ||

UK || 105 \* || 107 || : || 28.5 || 117 || 18.7 || 1.1 || 18.2 || 89 || -38 || 33 ||

weighted EU27 || 100 || 100 || 51 \* || 19.8 || || 12.5 || 1.2 || 13.7 || 110 || || 11

EU27 unweighted || 89 || 92 || 54 || 19.2 || || 13.9 || 1.0 || 13.6 || || ||

max || 136 || 137 || 153 || 39.4 || 177 || 24.2 || 2.7 || 43.8 || 177 || 48 || 59

min || 41 || 41 || 27 || 7.5 || 72 || 3.1 || 0.1 || 3.7 || 88 || -511 || -17

Standard deviation || 31 || 25 || 26 || 8.4 || || 4.7 || 0.7 || 10.3 || || ||

|| Note: Labour productivity per hour worked - BE, MT & UK (2009) Labour productivity per person employed in manufacturing – IE & EU (2010); RO (2009); LU (Source: STATEC) Unit labour costs, level in manufacturing - BG, CY, LV, LT, MT, PT & RO (2008) Share of science and technology graduates – FR (2009),  IT (2008) R&D performed by businesses - EL (2007) Real effective exchanges rates - BE & LU values together ||

TABLE: Sustainable industry

Policy objective / indicators || Energy intensity in industry  and the energy sector (kg oil eq. / euro GVA; reference year 2000; 2010) Source: Eurostat || CO2 intensity in industry and the energy sector (kg CO2 / euro GVA; reference year 2000; 2009) Sources: EEA, Eurostat || Environmental protection expenditure in Europe (Euro per capita and % of GDP; 2009) Source: Eurostat || Exports of environmental goods as % of all exports of goods (2011) Source: Eurostat (COMEXT)

BE || 0.35 || 0.9 || : || 0.54

BG || 0.83 || 7.6 || 0.8 || 0.19

CZ || 0.42 || 2.9 || 0.8 || 1.11

DK || 0.11 || 0.8 || 0.4 || 0.47

DE || 0.19 || 1.0 || : || 1.24

EE || 0.35 || 5.8 || 0.7 || 0.20

IE || 0.04 || 0.4 || : || 0.29

EL || 0.25 || 2.6 || 0.4 || 0.43

ES || 0.22 || 1.0 || 0.3 || 0.60

FR || 0.24 \* || 0.6 \* || 0.2 || 0.48

IT || 0.18 || 0.5 || : || 0.50

CY || 0.17 || 2.5 || 0.4 || 4.66

LV || 0.39 || 4.1 || 0.7 || 0.15

LT || 0.44 || 0.6 || 0.5 || 0.20

LU || 0.23 || 7.8 || 0.1 || 1.63

HU || 0.36 || 0.1 || 0.4 || 0.76

MT || || || 0.7 || 0.02

NL || 0.35 || 0.4 || 0.3 || 1.03

AT || 0.19 || 3.5 || 0.3 || 0.78

PL || 0.32 || 0.4 || 0.9 || 0.31

PT || 0.29 || 1.2 || 0.3 || 0.42

RO || 0.57 || 3.0 || 0.7 || 0.25

SI || 0.19 || 1.1 || 0.8 || 1.06

SK || 0.50 || 2.0 || 0.6 || 0.23

FI || 0.29 || 0.8 || 0.4 || 0.55

SE || 0.19 || 0.3 || : || 0.54

UK || 0.14 || 0.8 || 0.3 || 0.64

weighted EU27 || 0.21 || 1.0 || 0.4 || 0.77

EU unweighted || 0.30 || 2.0 || 0.5 || 0.71

max || 0.83 || 7.8 || 0.9 || 4.66

min || 0.04 || 0.1 || 0.1 || 0.02

Standard deviation || 0.16 || 2.2 || 0.2 || 0.87

Note: Energy intensity in industry - FR (2009) CO2 intensity in industry - FR (2008)

TABLE: Business Environment and entrepreneurship

Policy objective / indicators || Time required to start a business (days; 2010/11) Source: World Bank Doing Business 2012 || Business environment score (1= best 0 = worst; 2010/11) Source: Calculation done by European Commission based on data from World Bank Doing Business 2012 || Enterprise survival rate after two years (2009) Source: Eurostat || Business churn (enterprise entries and exits as % of existing stock; 2008) Source: Eurostat || Share of high-growth enterprises as % of all enterprises (2009) Source: Eurostat || Early stage financing (% of GDP; 2011) Source: EVCA || Access to bank lending for SMEs (1 = best 0 = worst; 2011) Source: Calculation done by European Commission || Duration of payments by public authorities (days; 2011) Source: European Payment Index 2012 by Intrum Justitia

BE || 4 || 0.72 || 75 || 16 \* || : || 0.019 || 0.64 || 73

BG || 18 || 0.53 || 68 || 31 || : || 0.000 || 0.59 || 52

CZ || 20 || 0.54 || 68 || 13 || 4.1 || 0.002 || 0.63 || 42

DK || 6 || 0.75 || : || : || : || 0.023 || 0.59 || 37

DE || 15 || 0.65 || 63 || : || : || 0.017 || 0.68 || 36

EE || 7 || 0.60 || 52 || 26 \* || 5.7 \* || 0.008 || 0.52 || 25

IE || 13 || 0.83 || : || : || : || 0.030 || 0.19 || 48

EL || 10 || 0.40 || : || : || : || 0.004 || 0.15 || 174

ES || 28 || 0.60 || 65 || 17 || 2.9 || 0.007 || 0.39 || 160

FR || 7 || 0.60 || : || 22 \* || 7.7 || 0.013 || 0.47 || 65

IT || 6 || 0.52 || 76 || 15 || 3.1 || 0.003 || 0.53 || 180

CY || 8 || 0.53 || : || 5 || : || : || 0.59 || 83

LV || 16 || 0.67 || 57 || 30 || : || 0.012 || 0.74 || 38

LT || 22 || 0.64 || 31 || 54 || : || : || 0.62 || 56

LU || 19 || 0.49 || 79 || 17 || 3.8 || 0.014 || 0.57 || :

HU || 4 || 0.53 || 62 || 22 || 3.7 || 0.031 || 0.45 || 57

MT || 17 \* || : || 96 \* || 11 \* || : || : || 0.62 || :

NL || 8 || 0.65 || 69 || 22 || : || 0.019 || 0.45 || 44

AT || 28 || 0.60 || 77 || 13 || : || 0.018 || 0.70 || 44

PL || 32 || 0.47 || : || : || : || 0.003 || 0.70 || 39

PT || 5 || 0.70 || 49 || 34 || 3.3 || 0.005 || 0.34 || 139

RO || 14 || 0.56 || 74 || 25 || 0.5 || 0.000 || 0.58 || 45

SI || 6 || 0.60 || 81 || 19 || 3.6 || 0.003 || 0.38 || 45

SK || 18 || 0.60 || 50 || 30 || : || : || 0.65 || 62

FI || 14 || 0.74 || 67 || 17 || : || 0.028 || 0.79 || 24

SE || 15 || 0.73 || 87 || 13 || 5.0 \* || 0.033 || 0.72 || 35

UK || 13 || 0.84 || 78 || 24 || : || 0.017 || 0.43 || 43

weighted EU27 || || || || || || 0.014 || ||

EU unweighted || 14 || 0.62 || 68 || 22 || 3.9 || 0.013 || 0.54 || 66

max || 32 || 0.84 || 96 || 54 || 7.7 || 0.033 || 0.79 || 180

min || 4 || 0.40 || 31 || 5 || 0.5 || 0.000 || 0.15 || 24

Standard deviation || 8 || 0.11 || 14 || 10 || 1.8 || 0.011 || 0.16 || 46

Note: Time required to start a business: MT (Source: MT’s National Statiscical Office) Enterprise survival rate after two years: MT (Source: MT’s National Statiscical Office) Business churn - BE, EE, FR (2009); MT (Source: MT’s National Statiscical Office) Share of high-growth enterprises as % of all enterprises - EE (2008); SE (2008)

TABLE: Services sector and Public
administration

Policy objective / indicators || Electricity prices for medium size enterprises (euro per kWh; 2011) Source: Eurostat || Infrastructure expenditures (euro per inhabitant; 2010) Source: OECD, Eurostat calculation || Satisfaction with quality of infrastructure (rail, road, port and airport) (1=underdeveloped / 7=extensive and  efficicient by int'l standards; 2010-11) Source: The Global Competitiveness Report 2011-2012 || % of broadband lines with speed above 10 MBps (2011) Source: DG INFSO || Legal and regulatory framework (0= neg. / 10=pos.; 2011) Source: IMD World Competitiveness Center || Burden of government regulation (1 = burdensome 7 = not burdensome; 2010-11) Source: The Global Competitiveness Report 2011-2012 || % of e-government usage by enterprises (2010) Source: Eurostat, Survey on ICT usage and e-commerce in enterprises

BE || 0.1147 || 296 \* || 5.9 || 57 || 3.9 || 2.5 || 77

BG || 0.0667 || 55 || 3.3 || 74 || 3.7 || 3.1 || 64

CZ || 0.1082 || 231 || 4.7 || 28 || 3.8 || 2.6 || 89

DK || 0.0927 || 241 || 6.1 || 48 || 6.5 || 4.0 || 92

DE || 0.1243 || 236 || 6.1 || 31 || 5.7 || 3.0 || 67

EE || 0.0751 || 154 || 4.5 || 10 || 5.9 || 4.3 || 80

IE || 0.1294 || 243 || 4.9 || 13 || 5.8 || 3.4 || 87

EL || 0.1111 || : || 4.0 || 54 || 2.9 || 2.3 || 77

ES || 0.1156 || 410 || 5.8 || 34 || 4.1 || 2.8 || 67

FR || 0.0809 || 279 || 6.2 || 55 || 3.8 || 2.6 || 78

IT || 0.1668 || : || 4.1 || 9 || 2.9 || 2.1 || 84

CY || 0.2109 || : || 5.4 || 5 || : || 3.9 || 74

LV || 0.1101 || 98 || 4.2 || 41 || : || 3.3 || 72

LT || 0.1038 || 168 || 4.6 || 42 || 4.0 || 2.8 || 95

LU || 0.1000 || : || 5.5 || 27 || 6.2 || 3.6 || 90

HU || 0.0995 || 116 || 4.1 || 41 || 3.9 || 2.3 || 71

MT || 0.1800 || 86 \* || 4.9 || 12 || : || 2.8 || 77

NL || 0.0936 || : || 6.1 || 57 || 6.0 || 3.5 || 95

AT || 0.1072 \* || : || 5.5 || 13 \* || 5.4 || 3.5 || 75

PL || 0.0941 || 193 || 3.0 || 12 || 4.1 || 2.6 || 89

PT || 0.1011 || 202 || 5.3 || 73 || 3.5 || 2.5 || 75

RO || 0.0803 || 160 || 2.7 || 60 || 4.3 || 2.8 || 50

SI || 0.0964 || 182 || 4.4 || 26 || 3.1 || 3.0 || 88

SK || 0.1261 || 127 || 3.8 || 25 || 3.3 || 2.7 || 88

FI || 0.0750 || 256 || 6.0 || 33 || 6.7 || 4.4 || 96

SE || 0.0828 || 335 || 5.8 || 48 || 6.6 || 3.9 || 90

UK || 0.1044 || 213 || 5.5 || 45 || 5.0 || 3.1 || 67

weighted EU27 || 0.1117 || 190 || || 39 || || || 76

EU unweighted || 0.1093 || 204 || 4.9 || 36 || 4.6 || 3.1 || 80

max || 0.2109 || 410 || 6.2 || 74 || 6.7 || 4.4 || 96

min || 0.0667 || 55 || 2.7 || 5 || 2.9 || 2.1 || 50

Standard deviation || 0.0324 || 86 || 1.0 || 20 || 1.3 || 0.6 || 11

Note: Electricity prices for medium size enterprises - AT (2008) Infrastructure expenditure - BE (2009); MT (MT’s National Statiscical Office) % of broadband lines with speed above 10 MBps - AT (2010)

TABLE: Public administration dataset

|| Composite Indicator || original || Composite Indicator || original values || normalized values

country || A. Governance || A. Governance || B. Tools for administrative modernisation || B.1 EGOV-8 || B.2 Evidence-based || B.3 PBI || B.1 EGOV-8 || B.2 Evidence-based || B.3 PBI

AT || 0.84 || 1.89 || 0.62 || 100.00 || 6.33 || 23.70 || 1.00 || 0.64 || 0.22

BE || 0.71 || 1.59 || 0.30 || 88.00 || 1.00 || 18.60 || 0.76 || 0.00 || 0.15

BG || 0.00 || 0.01 || 0.33 || 75.00 || || 28.90 || 0.50 || 0.19 || 0.29

CY || 0.67 || 1.50 || 0.38 || 75.00 || || 9.70 || 0.50 || 0.60 || 0.03

CZ || 0.45 || 1.01 || 0.84 || 100.00 || 6.33 || 73.00 || 1.00 || 0.64 || 0.89

DK || 0.97 || 2.17 || 0.87 || 100.00 || 7.67 || 68.20 || 1.00 || 0.80 || 0.82

EE || 0.54 || 1.22 || 0.76 || 100.00 || || 38.30 || 1.00 || 0.85 || 0.42

FI || 1.00 || 2.24 || 0.87 || 100.00 || 9.33 || 53.40 || 1.00 || 1.00 || 0.62

FR || 0.64 || 1.44 || 0.41 || 88.00 || 4.00 || 16.30 || 0.76 || 0.36 || 0.12

DE || 0.64 || 1.44 || 0.64 || 100.00 || 7.67 || 16.60 || 1.00 || 0.80 || 0.13

EL || 0.23 || 0.52 || 0.13 || 63.00 || 2.00 || 7.20 || 0.26 || 0.12 || 0.00

HU || 0.31 || 0.70 || 0.18 || 50.00 || 3.70 || 22.90 || 0.00 || 0.32 || 0.21

IE || 0.58 || 1.31 || 0.58 || 100.00 || 6.33 || 13.60 || 1.00 || 0.64 || 0.09

IT || 0.23 || 0.52 || 0.54 || 100.00 || 4.67 || 20.40 || 1.00 || 0.44 || 0.18

LV || 0.31 || 0.70 || 0.65 || 100.00 || || 40.20 || 1.00 || 0.51 || 0.44

LT || 0.32 || 0.72 || 0.36 || 75.00 || || 24.30 || 0.50 || 0.34 || 0.23

LU || 0.76 || 1.71 || 0.18 || 75.00 || 1.33 || 7.20 || 0.50 || 0.04 || 0.00

MT || 0.52 || 1.16 || || 100.00 || || 29.30 || 1.00 || || 0.30

NL || 0.77 || 1.73 || 0.74 || 88.00 || 8.67 || 47.10 || 0.76 || 0.92 || 0.54

PL || 0.31 || 0.71 || 0.49 || 88.00 || 4.67 || 27.70 || 0.76 || 0.44 || 0.28

PT || 0.46 || 1.04 || 0.53 || 100.00 || 5.00 || 16.30 || 1.00 || 0.48 || 0.12

RO || 0.06 || 0.14 || 0.29 || 75.00 || || 19.70 || 0.50 || 0.19 || 0.17

SK || 0.38 || 0.85 || 0.54 || 88.00 || 3.33 || 51.00 || 0.76 || 0.28 || 0.59

SI || 0.46 || 1.03 || 0.46 || 88.00 || || 29.50 || 0.76 || 0.31 || 0.30

ES || 0.43 || 0.98 || 0.47 || 100.00 || 3.00 || 19.10 || 1.00 || 0.24 || 0.16

SE || 0.90 || 2.02 || 0.88 || 100.00 || 6.33 || 81.40 || 1.00 || 0.64 || 1.00

UK || 0.70 || 1.57 || 0.92 || 100.00 || 9.33 || 64.10 || 1.00 || 1.00 || 0.77

HR || 0.27 || 0.62 || || 88.00 || || || 0.76 || ||

|| Composite Indicator || original values || normalized values ||

country || C. Corruption || C.1 Diversion || C.2 Irreg || C.3 Experience || C.1 Diversion || C.2 Irreg || C.3 Experience ||

AT || 0.69 || 5.30 || 5.80 || 0.11 || 0.71 || 0.72 || 0.67 ||

BE || 0.81 || 5.20 || 5.70 || 0.03 || 0.69 || 0.69 || 0.93 ||

BG || 0.14 || 2.90 || 3.60 || 0.25 || 0.14 || 0.03 || 0.20 ||

CY || 0.68 || 4.70 || 5.00 || 0.06 || 0.57 || 0.47 || 0.83 ||

CZ || 0.25 || 2.30 || 3.90 || 0.18 || 0.00 || 0.13 || 0.43 ||

DK || 0.98 || 6.50 || 6.70 || 0.02 || 1.00 || 1.00 || 0.97 ||

EE || 0.74 || 4.80 || 5.50 || 0.05 || 0.60 || 0.63 || 0.87 ||

FI || 0.92 || 6.20 || 6.50 || 0.04 || 0.93 || 0.94 || 0.90 ||

FR || 0.80 || 5.10 || 5.60 || 0.03 || 0.67 || 0.66 || 0.93 ||

DE || 0.82 || 5.60 || 5.90 || 0.05 || 0.79 || 0.75 || 0.87 ||

EL || 0.29 || 2.70 || 3.50 || 0.15 || 0.10 || 0.00 || 0.53 ||

HU || 0.26 || 2.60 || 4.30 || 0.20 || 0.07 || 0.25 || 0.37 ||

IE || 0.87 || 5.40 || 6.10 || 0.02 || 0.74 || 0.81 || 0.97 ||

IT || 0.42 || 3.20 || 4.10 || 0.12 || 0.21 || 0.19 || 0.63 ||

LV || 0.36 || 3.30 || 4.20 || 0.16 || 0.24 || 0.22 || 0.50 ||

LT || 0.19 || 3.00 || 4.50 || 0.27 || 0.17 || 0.31 || 0.13 ||

LU || 0.92 || 6.10 || 6.40 || 0.03 || 0.90 || 0.91 || 0.93 ||

MT || 0.66 || 4.20 || 4.80 || 0.04 || 0.45 || 0.41 || 0.90 ||

NL || 0.93 || 6.00 || 6.20 || 0.01 || 0.88 || 0.84 || 1.00 ||

PL || 0.50 || 4.10 || 4.90 || 0.14 || 0.43 || 0.44 || 0.57 ||

PT || 0.65 || 3.90 || 5.10 || 0.05 || 0.38 || 0.50 || 0.87 ||

RO || 0.07 || 2.80 || 4.00 || 0.31 || 0.12 || 0.16 || 0.00 ||

SK || 0.09 || 2.50 || 3.70 || 0.27 || 0.05 || 0.06 || 0.13 ||

SI || 0.57 || 3.40 || 4.90 || 0.07 || 0.26 || 0.44 || 0.80 ||

ES || 0.68 || 3.90 || 5.00 || 0.03 || 0.38 || 0.47 || 0.93 ||

SE || 0.97 || 6.40 || 6.60 || 0.02 || 0.98 || 0.97 || 0.97 ||

UK || 0.87 || 5.70 || 5.90 || 0.02 || 0.81 || 0.75 || 0.97 ||

HR || || 2.90 || 3.80 || || 0.14 || 0.09 || ||

|| Composite Indicator || original values || normalized values

country || D. Starting Business || D.1 One stop shop || D.2 Time start up || D.3 Cost start up || D.4 Licencing compl. || D.1 One stop shop || D.2 Time start up || D.3 Cost start up || D.4 Licencing compl.

AT || 0.42 || 1 || 28.00 || 5.20 || 22.00 || 1.00 || 0.14 || 0.74 || 0.09

BE || 0.78 || 1 || 4.00 || 5.20 || 13.80 || 1.00 || 1.00 || 0.74 || 0.51

BG || 0.60 || 1 || 18.00 || 1.50 || 20.40 || 1.00 || 0.50 || 0.93 || 0.17

CY || 0.61 || 1 || 8.00 || 13.10 || 15.20 || 1.00 || 0.86 || 0.35 || 0.43

CZ || 0.57 || 0 || 20.00 || 8.40 || 4.00 || 0.00 || 0.43 || 0.58 || 1.00

DK || 0.83 || 1 || 6.00 || 0.00 || 14.60 || 1.00 || 0.93 || 1.00 || 0.46

EE || 0.89 || 1 || 7.00 || 1.80 || 8.00 || 1.00 || 0.89 || 0.91 || 0.80

FI || 0.73 || 1 || 14.00 || 1.00 || 15.00 || 1.00 || 0.64 || 0.95 || 0.44

FR || 0.83 || 1 || 7.00 || 0.90 || 13.00 || 1.00 || 0.89 || 0.96 || 0.55

DE || 0.43 || 0 || 15.00 || 4.60 || 21.20 || 0.00 || 0.61 || 0.77 || 0.13

EL || 0.30 || 0 || 10.00 || 20.10 || 18.60 || 0.00 || 0.79 || 0.00 || 0.26

HU || 0.77 || 1 || 4.00 || 7.60 || 12.40 || 1.00 || 1.00 || 0.62 || 0.58

IE || 0.71 || 0 || 13.00 || 0.40 || 7.40 || 0.00 || 0.68 || 0.98 || 0.83

IT || 0.54 || 1 || 6.00 || 18.20 || 16.20 || 1.00 || 0.93 || 0.09 || 0.38

LV || 0.59 || 0 || 16.00 || 2.60 || 11.20 || 0.00 || 0.57 || 0.87 || 0.64

LT || 0.59 || 1 || 22.00 || 2.80 || 17.00 || 1.00 || 0.36 || 0.86 || 0.34

LU || 0.65 || 1 || 19.00 || 1.90 || 15.60 || 1.00 || 0.46 || 0.91 || 0.41

MT || || 0 || || || 21.50 || 0.00 || || || 0.12

NL || 0.58 || 0 || 8.00 || 5.50 || 14.80 || 0.00 || 0.86 || 0.73 || 0.45

PL || 0.21 || 0 || 32.00 || 17.30 || 12.00 || 0.00 || 0.00 || 0.14 || 0.60

PT || 0.73 || 1 || 5.00 || 2.30 || 20.00 || 1.00 || 0.96 || 0.89 || 0.19

RO || 0.63 || 1 || 14.00 || 3.00 || 19.40 || 1.00 || 0.64 || 0.85 || 0.22

SK || 0.54 || 0 || 18.00 || 1.80 || 14.00 || 0.00 || 0.50 || 0.91 || 0.49

SI || 0.73 || 1 || 6.00 || 0.00 || 21.60 || 1.00 || 0.93 || 1.00 || 0.11

ES || 0.40 || 1 || 28.00 || 4.70 || 23.80 || 1.00 || 0.14 || 0.77 || 0.00

SE || 0.69 || 1 || 15.00 || 0.60 || 17.20 || 1.00 || 0.61 || 0.97 || 0.33

UK || 0.81 || 1 || 13.00 || 0.70 || 9.80 || 1.00 || 0.68 || 0.97 || 0.71

HR || || || 7.00 || 8.60 || 21.80 || || 0.89 || 0.57 || 0.10

|| Composite Indicator || original values || normalized values

country || E. Procurement || E.1 Person unit costs || E.2 Cost competition || E.3 Pay delay || E.1 Person unit costs || E.2 Cost competition || E.3 Pay delay

AT || 0.53 || 20.00 || 0.26 || 14.00 || 0.58 || 0.10 || 0.91

BE || 0.71 || 14.00 || 0.18 || 28.00 || 0.83 || 0.50 || 0.78

BG || 0.54 || 25.00 || 0.20 || 22.00 || 0.38 || 0.40 || 0.84

CY || 0.41 || 29.00 || 0.24 || 23.00 || 0.21 || 0.20 || 0.83

CZ || 0.77 || 15.00 || 0.16 || 12.00 || 0.79 || 0.60 || 0.93

DK || 0.68 || 18.00 || 0.19 || 12.00 || 0.67 || 0.45 || 0.93

EE || 0.73 || 16.00 || 0.18 || 10.00 || 0.75 || 0.50 || 0.95

FI || 0.90 || 10.00 || 0.14 || 4.00 || 1.00 || 0.70 || 1.00

FR || 0.88 || 10.00 || 0.12 || 21.00 || 1.00 || 0.80 || 0.85

DE || 0.71 || 17.00 || 0.18 || 11.00 || 0.71 || 0.50 || 0.94

EL || 0.14 || 25.00 || 0.27 || 114.00 || 0.38 || 0.05 || 0.00

HU || 0.73 || 15.00 || 0.16 || 27.00 || 0.79 || 0.60 || 0.79

IE || 0.82 || 15.00 || 0.13 || 13.00 || 0.79 || 0.75 || 0.92

IT || 0.27 || 20.00 || 0.28 || 90.00 || 0.58 || 0.00 || 0.22

LV || 0.74 || 14.00 || 0.18 || 18.00 || 0.83 || 0.50 || 0.87

LT || 0.78 || 13.00 || 0.15 || 26.00 || 0.88 || 0.65 || 0.80

LU || 0.91 || 11.00 || 0.08 || || 0.96 || 1.00 || 0.79

MT || || 34.00 || 0.23 || || 0.00 || 0.25 ||

NL || 0.76 || 13.00 || 0.17 || 19.00 || 0.88 || 0.55 || 0.86

PL || 0.84 || 11.00 || 0.14 || 19.00 || 0.96 || 0.70 || 0.86

PT || 0.41 || 16.00 || 0.25 || 79.00 || 0.75 || 0.15 || 0.32

RO || 0.67 || 15.00 || 0.21 || 20.00 || 0.79 || 0.35 || 0.85

SK || 0.34 || 30.00 || 0.26 || 32.00 || 0.17 || 0.10 || 0.75

SI || 0.87 || 12.00 || 0.12 || 15.00 || 0.92 || 0.80 || 0.90

ES || 0.60 || 14.00 || 0.15 || 80.00 || 0.83 || 0.65 || 0.31

SE || 0.69 || 17.00 || 0.20 || 7.00 || 0.71 || 0.40 || 0.97

UK || 0.61 || 17.00 || 0.23 || 18.00 || 0.71 || 0.25 || 0.87

HR || || || || || || ||

|| Composite Indicator || original values || normalized values

country || F. Tax compliance & tax administration || F.1 Time pay tax || F.2 Administrative cost || F.1 Time pay tax || F.2 Administrative cost

AT || 0.86 || 170.00 || 0.85 || 0.78 || 0.94

BE || 0.83 || 156.00 || 1.40 || 0.81 || 0.86

BG || 0.49 || 500.00 || 1.37 || 0.11 || 0.86

CY || 0.78 || 149.00 || 7.37 || 0.82 || 0.73

CZ || 0.42 || 557.00 || 1.46 || 0.00 || 0.85

DK || 0.90 || 135.00 || 0.67 || 0.85 || 0.96

EE || 0.97 || 85.00 || 0.40 || 0.95 || 1.00

FI || 0.93 || 93.00 || 0.87 || 0.93 || 0.93

FR || 0.86 || 132.00 || 1.31 || 0.85 || 0.87

DE || 0.81 || 221.00 || 0.79 || 0.67 || 0.94

EL || 0.70 || 224.00 || || 0.67 || 0.73

HU || 0.72 || 277.00 || 1.20 || 0.56 || 0.89

IE || 0.93 || 76.00 || 1.08 || 0.97 || 0.90

IT || 0.72 || 285.00 || 1.20 || 0.55 || 0.89

LV || 0.71 || 290.00 || 1.14 || 0.54 || 0.89

LT || 0.83 || 175.00 || 1.18 || 0.77 || 0.89

LU || 0.95 || 59.00 || 1.13 || 1.00 || 0.90

MT || || || 0.48 || || 0.99

NL || 0.88 || 127.00 || 1.11 || 0.86 || 0.90

PL || 0.67 || 296.00 || 1.72 || 0.52 || 0.81

PT || 0.71 || 275.00 || 1.44 || 0.57 || 0.85

RO || 0.81 || 222.00 || 0.72 || 0.67 || 0.95

SK || 0.68 || 231.00 || 2.41 || 0.65 || 0.71

SI || 0.76 || 260.00 || 0.90 || 0.60 || 0.93

ES || 0.83 || 187.00 || 0.97 || 0.74 || 0.92

SE || 0.94 || 122.00 || 0.40 || 0.87 || 1.00

UK || 0.90 || 110.00 || 1.14 || 0.90 || 0.89

HR || || 196.00 || || 0.72 ||

|| Composite Indicator || original values || normalized values

country || G. Effective Civil justice || G.1 Enforcing time || G.2 Enforcing cost || G.3 Insolvency time || G.4 Indep. judiciary || G.1 Enforcing time || G.2 Enforcing cost || G.3 Insolvency time || G.4 Indep. judiciary

AT || 0.77 || 397.00 || 18.00 || 1.10 || 5.54 || 0.88 || 0.64 || 0.81 || 0.74

BE || 0.74 || 505.00 || 17.70 || 0.90 || 5.27 || 0.77 || 0.66 || 0.86 || 0.67

BG || 0.34 || 564.00 || 23.80 || 3.30 || 2.94 || 0.72 || 0.39 || 0.19 || 0.07

CY || 0.66 || 735.00 || 16.40 || 1.50 || 5.29 || 0.55 || 0.71 || 0.69 || 0.68

CZ || 0.29 || 611.00 || 33.00 || 3.20 || 3.70 || 0.67 || 0.00 || 0.22 || 0.27

DK || 0.78 || 410.00 || 23.30 || 1.00 || 6.55 || 0.87 || 0.42 || 0.83 || 1.00

EE || 0.58 || 425.00 || 22.30 || 3.00 || 5.51 || 0.85 || 0.46 || 0.28 || 0.73

FI || 0.89 || 375.00 || 13.30 || 0.90 || 6.41 || 0.90 || 0.85 || 0.86 || 0.96

FR || 0.69 || 331.00 || 17.40 || 1.90 || 4.90 || 0.94 || 0.67 || 0.58 || 0.58

DE || 0.85 || 394.00 || 14.40 || 1.20 || 6.33 || 0.88 || 0.80 || 0.78 || 0.94

EL || 0.50 || 819.00 || 14.40 || 2.00 || 3.33 || 0.46 || 0.80 || 0.56 || 0.17

HU || 0.63 || 395.00 || 15.00 || 2.00 || 3.92 || 0.88 || 0.77 || 0.56 || 0.32

IE || 0.71 || 650.00 || 26.90 || 0.40 || 6.27 || 0.63 || 0.26 || 1.00 || 0.93

IT || 0.29 || 1210.00 || 29.90 || 1.80 || 3.99 || 0.08 || 0.13 || 0.61 || 0.34

LV || 0.48 || 369.00 || 23.10 || 3.00 || 3.81 || 0.91 || 0.42 || 0.28 || 0.30

LT || 0.57 || 275.00 || 23.60 || 1.50 || 3.39 || 1.00 || 0.40 || 0.69 || 0.19

LU || 0.85 || 321.00 || 9.70 || 2.00 || 6.09 || 0.95 || 1.00 || 0.56 || 0.88

MT || || || || || 5.13 || || || || 0.63

NL || 0.73 || 514.00 || 23.90 || 1.10 || 6.35 || 0.76 || 0.39 || 0.81 || 0.95

PL || 0.52 || 830.00 || 12.00 || 3.00 || 4.33 || 0.45 || 0.90 || 0.28 || 0.43

PT || 0.62 || 547.00 || 13.00 || 2.00 || 3.93 || 0.73 || 0.86 || 0.56 || 0.33

RO || 0.31 || 512.00 || 28.90 || 3.30 || 3.11 || 0.77 || 0.18 || 0.19 || 0.12

SK || 0.21 || 565.00 || 30.00 || 4.00 || 2.66 || 0.71 || 0.13 || 0.00 || 0.00

SI || 0.43 || 1290.00 || 12.70 || 2.00 || 3.78 || 0.00 || 0.87 || 0.56 || 0.29

ES || 0.62 || 515.00 || 17.20 || 1.50 || 3.92 || 0.76 || 0.68 || 0.69 || 0.32

SE || 0.60 || 508.00 || 31.20 || 2.00 || 6.47 || 0.77 || 0.08 || 0.56 || 0.98

UK || 0.74 || 399.00 || 24.80 || 1.00 || 6.20 || 0.88 || 0.35 || 0.83 || 0.91

HR || 0.47 || 561.00 || 13.80 || 3.10 || 3.05 || 0.72 || 0.82 || 0.25 || 0.10

TABLE: Average number of days to get
licenses in Europe

Country || days

AT || 68.5

BE || 49.1

BG || 93.4

CY || 105.4

CZ || 8.5

DE || 79.6

DK || 82.7

EE || 55.1

EL || 78.2

ES || 116.1

FI || 49.9

FR || 48.9

HU || 53.2

IE || 75.8

IT || 34.3

LT || 84.1

LU || 65.1

LV || 46.0

MT || 108.5

NL || 53.2

PL || 57.6

PT || 81.5

RO || 85.2

SE || 72.1

SI || 72.5

SK || 52.8

UK || 27.9

EU 27 || 67.04

HR || 71.9

TABLE: Sectoral specialisation of
manufacturing (2009)

Code / Sector / Country || BE || BG || CZ || DK || DE || EE || IE || EL || ES

C || Manufacturing || 44,746.5 || 3,883.3 || 26,175.3 || 24,846.9 || 381,547.6 || 1,582.0 || 28,407.9 || 16,901.2 || 100,824.6

C10 || Manufacture of food products || 5,574.3 || 554.7 || 2,026.8 || 3,761.1 || 27,911.0 || 218.4 || 4,514.5 || 3,336.6 || 14,819.4

C11 || Manufacture of beverages || 1,352.3 || 205.7 || 787.8 || 427.7 || 4,842.5 || 62.3 || 442.6 || 1,072.9 || 4,634.1

C12 || Manufacture of tobacco products || c || 63.5 || c || c || 1,253.8 || 0.0 || c || 309.8 || 467.1

C13 || Manufacture of textiles || 1,071.9 || 68.2 || 456.5 || 236.4 || 3,077.2 || 53.3 || 90.9 || 399.2 || 1,454.2

C14 || Manufacture of wearing apparel || 280.9 || 386.0 || 231.3 || 108.7 || 2,074.1 || 56.5 || 40.7 || 625.9 || 1,986.4

C15 || Manufacture of leather and related products || c || 53.0 || 71.0 || 21.4 || 680.7 || 11.8 || 7.4 || 108.0 || 984.4

C16 || Manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw and plaiting materials || 772.9 || 73.9 || 801.0 || 521.6 || 5,073.4 || 212.7 || 18.5 || 295.1 || 2,199.3

C17 || Manufacture of paper and paper products || 1,829.1 || 75.3 || 499.0 || 412.0 || 9,131.5 || 32.6 || 142.0 || 376.3 || 3,036.9

C18 || Printing and reproduction of recorded media || 1,258.4 || 90.9 || 500.0 || 528.1 || 7,612.9 || 52.8 || 461.9 || 414.9 || 3,206.8

C19 || Manufacture of coke and refined petroleum products || 753.6 || c || 83.3 || c || 2,391.9 || 47.8 || c || 1,287.9 || 1,509.7

C20 || Manufacture of chemicals and chemical products || 5,558.7 || 141.9 || 889.1 || 1,346.0 || 29,790.5 || 55.1 || 743.3 || 815.9 || 5,986.0

C21 || Manufacture of basic pharmaceutical products and pharmaceutical preparations || 3,647.8 || c || 394.0 || 2,832.3 || 15,273.4 || 8.1 || 13,075.4 || 640.6 || 3,907.1

C22 || Manufacture of rubber and plastic products || 1,773.8 || 184.4 || 2,378.8 || 1,293.6 || 19,406.4 || 50.2 || 380.8 || 674.1 || 4,921.0

C23 || Manufacture of other non-metallic mineral products || 2,385.6 || 359.6 || 1,596.6 || 1,016.3 || 12,529.2 || 68.6 || 503.7 || 1,415.8 || 7,514.8

C24 || Manufacture of basic metals || 2,263.2 || 211.5 || 824.2 || 217.4 || 15,991.8 || -0.7 || 26.0 || 805.8 || 3,244.0

C25 || Manufacture of fabricated metal products,  except machinery and equipment || 3,397.0 || 350.5 || 2,714.1 || 2,205.6 || 35,276.0 || 188.2 || 519.5 || 1,586.3 || 11,636.9

C26 || Manufacture of computer, electronic and optical products || 1,715.4 || 75.1 || 630.3 || 1,493.6 || 18,155.3 || 83.3 || 2,841.8 || 139.9 || 1,872.9

C27 || Manufacture of electrical equipment || 1,067.4 || 179.8 || 1,728.4 || 810.6 || 31,084.1 || 85.3 || 224.1 || 382.8 || 4,348.3

C28 || Manufacture of machinery and equipment n.e.c. || 2,928.9 || 213.0 || 2,653.8 || 4,397.3 || 59,825.1 || 58.3 || 819.5 || 573.3 || 5,897.4

C29 || Manufacture of motor vehicles, trailers and semi-trailers || 2,391.4 || 58.1 || 4,033.7 || 241.9 || 43,639.2 || 43.0 || 159.6 || 126.5 || 7,071.4

C30 || Manufacture of other transport equipment || c || 49.0 || 488.8 || 124.0 || 8,118.0 || 12.5 || 184.0 || 394.3 || 3,135.0

C31 || Manufacture of furniture || 703.1 || 109.9 || 385.2 || 713.9 || 5,972.0 || 80.8 || c || 441.0 || 2,506.9

C32 || Other manufacturing || c || 52.1 || 637.8 || 1,171.2 || 10,720.3 || 35.2 || 2,800.6 || 253.1 || 1,462.9

C33 || Repair and installation of machinery and equipment || 1,005.0 || 179.7 || c || 593.6 || 11,717.3 || 65.9 || 153.3 || 425.1 || 3,021.7

Code / Sector / Country || FR || IT || CY || LV || LT || LU || HU || MT || NL

C || Manufacturing || 180,452.0 || 180,256.8 || 1,188.6 || 1,230.5 || 2,178.4 || 1,126.8 || 15,447.7 || n.a. || 54,156.7

C10 || Manufacture of food products || 26,759.9 || 17,761.8 || 333.3 || 258.8 || 508.0 || c || 1,540.5 || n.a. || 8,126.0

C11 || Manufacture of beverages || 5,007.1 || 2,701.4 || 89.9 || 55.1 || 122.9 || 54.7 || 367.2 || n.a. || 1,144.0

C12 || Manufacture of tobacco products || 595.7 || 273.7 || c || c || c || c || 53.6 || n.a. || 1,657.6

C13 || Manufacture of textiles || 1,991.5 || 5,354.3 || 11.3 || 23.3 || 70.0 || c || 89.8 || n.a. || 631.3

C14 || Manufacture of wearing apparel || 2,249.9 || 6,628.0 || 16.5 || 47.7 || 115.2 || c || 189.1 || n.a. || 131.6

C15 || Manufacture of leather and related products || 1,363.3 || 4,369.2 || 2.3 || 1.7 || 6.9 || 0.0 || 83.3 || n.a. || 97.2

C16 || Manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw and plaiting materials || 3,020.7 || 4,127.6 || 80.0 || 221.1 || 169.7 || 41.2 || 173.4 || n.a. || 928.8

C17 || Manufacture of paper and paper products || 4,001.3 || 3,603.3 || 21.8 || 24.8 || 50.7 || c || 284.6 || n.a. || 1,350.3

C18 || Printing and reproduction of recorded media || 3,799.9 || 3,942.9 || 46.3 || 34.2 || 37.6 || c || 215.5 || n.a. || 1,873.9

C19 || Manufacture of coke and refined petroleum products || 2,304.5 || 1,185.1 || c || 0.2 || c || 0.0 || 1,153.5 || n.a. || 1,148.2

C20 || Manufacture of chemicals and chemical products || 12,652.9 || 7,736.2 || 27.2 || 38.9 || 129.5 || c || 452.2 || n.a. || 6,112.5

C21 || Manufacture of basic pharmaceutical products and pharmaceutical preparations || 8,728.3 || 7,231.9 || 50.1 || c || 25.1 || c || 967.5 || n.a. || 2,166.8

C22 || Manufacture of rubber and plastic products || 10,347.6 || 8,895.3 || 45.2 || 30.6 || 110.8 || c || 848.1 || n.a. || 2,158.4

C23 || Manufacture of other non-metallic mineral products || 8,095.1 || 10,066.6 || 182.6 || 51.9 || 79.4 || c || 595.6 || n.a. || 1,998.9

C24 || Manufacture of basic metals || 4,922.7 || 5,542.6 || 24.6 || 38.6 || 5.2 || c || 270.2 || n.a. || 1,363.9

C25 || Manufacture of fabricated metal products,  except machinery and equipment || 16,321.2 || 23,394.8 || 121.5 || 81.3 || 109.7 || 177.5 || 909.3 || n.a. || 5,832.6

C26 || Manufacture of computer, electronic and optical products || 8,979.6 || 6,087.3 || 4.6 || 37.2 || 51.1 || c || 1,427.4 || n.a. || 2,418.5

C27 || Manufacture of electrical equipment || 8,077.6 || 8,644.2 || 20.5 || 27.0 || 26.1 || c || 705.5 || n.a. || 1,956.4

C28 || Manufacture of machinery and equipment n.e.c. || 11,879.6 || 23,952.6 || 16.9 || 37.0 || 62.0 || c || 2,128.7 || n.a. || 5,158.9

C29 || Manufacture of motor vehicles, trailers and semi-trailers || 10,914.0 || 7,602.4 || 10.2 || 10.9 || 13.9 || c || 2,129.0 || n.a. || 1,497.5

C30 || Manufacture of other transport equipment || 10,530.0 || 5,163.1 || 0.5 || 21.6 || 47.5 || c || 114.1 || n.a. || 1,322.6

C31 || Manufacture of furniture || 2,440.6 || 5,747.7 || 36.6 || 47.1 || 180.1 || 8.9 || 175.4 || n.a. || 1,174.3

C32 || Other manufacturing || 4,419.3 || 4,433.4 || 20.7 || c || 59.7 || 21.1 || 236.0 || n.a. || 983.3

C33 || Repair and installation of machinery and equipment || 11,049.7 || 5,811.6 || 19.4 || 84.8 || 82.3 || 34.9 || 338.2 || n.a. || 2,923.3

Code / Sector / Country || AT || PL || PT || RO || SI || SK || FI || SE || UK

C || Manufacturing || 41,218.4 || 45,725.8 || 16,686.8 || 11,454.9 || 5,320.7 || 6,279.1 || 22,713.7 || 39,112.9 || 143,494.1

C10 || Manufacture of food products || 3,308.2 || 6,770.9 || 2,180.4 || 1,474.3 || 351.5 || 493.2 || 1,938.9 || 2,746.1 || 20,485.9

C11 || Manufacture of beverages || 1,098.1 || 2,023.5 || 691.2 || 639.7 || 101.5 || 160.5 || 388.0 || 436.6 || c

C12 || Manufacture of tobacco products || c || 352.6 || c || c || 0.0 || c || c || c || c

C13 || Manufacture of textiles || 416.6 || 611.1 || 730.5 || 200.3 || 111.9 || 56.0 || 193.0 || 233.2 || 2,032.3

C14 || Manufacture of wearing apparel || 313.4 || 790.8 || 1,003.6 || 805.2 || 83.7 || 119.6 || 112.5 || 64.9 || 729.5

C15 || Manufacture of leather and related products || 187.7 || 234.5 || 581.6 || 313.4 || 59.1 || 112.2 || c || 38.5 || 265.1

C16 || Manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw and plaiting materials || 1,746.6 || 1,499.0 || 601.9 || 461.6 || 158.2 || 131.8 || 826.5 || 1,635.9 || 2,230.6

C17 || Manufacture of paper and paper products || 1,552.1 || 1,416.3 || 641.0 || 147.0 || 178.7 || 261.9 || 1,929.5 || 2,952.8 || 2,933.2

C18 || Printing and reproduction of recorded media || 1,092.6 || 671.4 || 524.0 || 228.2 || 137.9 || 114.7 || 559.1 || 820.4 || 5,565.3

C19 || Manufacture of coke and refined petroleum products || c || 114.7 || c || c || c || c || c || 386.2 || 1,424.1

C20 || Manufacture of chemicals and chemical products || 1,727.3 || 2,255.9 || 605.2 || 500.6 || 249.3 || 155.7 || 1,259.3 || 1,944.3 || 10,480.9

C21 || Manufacture of basic pharmaceutical products and pharmaceutical preparations || 1,333.7 || 1,092.6 || c || 197.2 || 621.1 || c || c || c || 8,746.1

C22 || Manufacture of rubber and plastic products || 1,758.8 || 3,193.9 || 811.6 || 623.8 || 374.9 || 497.8 || 846.0 || 1,086.5 || 7,444.1

C23 || Manufacture of other non-metallic mineral products || 2,153.9 || 3,146.1 || 1,537.3 || 924.9 || 232.7 || 414.4 || 951.7 || 1,018.8 || 3,954.7

C24 || Manufacture of basic metals || 3,298.1 || 1,247.2 || 168.9 || 191.1 || 148.0 || 366.1 || 684.9 || 1,428.7 || 3,506.7

C25 || Manufacture of fabricated metal products,  except machinery and equipment || 4,424.1 || 4,458.8 || 1,996.2 || 796.2 || 683.1 || 535.6 || 2,147.1 || 3,606.5 || 13,213.5

C26 || Manufacture of computer, electronic and optical products || 1,689.0 || 1,227.9 || 280.5 || 395.8 || 137.3 || 330.0 || 2,771.7 || 3,721.2 || 7,989.4

C27 || Manufacture of electrical equipment || 3,331.3 || 2,246.7 || 719.6 || 426.4 || 505.9 || 307.2 || 1,339.6 || 1,687.0 || 4,534.0

C28 || Manufacture of machinery and equipment n.e.c. || 5,129.8 || 3,091.2 || 561.6 || 616.6 || 385.6 || 507.0 || 3,275.1 || 4,002.3 || 11,852.5

C29 || Manufacture of motor vehicles, trailers and semi-trailers || 2,448.1 || 3,794.8 || 932.5 || 1,251.8 || 394.7 || 1,115.7 || 303.7 || 2,265.6 || 6,565.1

C30 || Manufacture of other transport equipment || 542.8 || 1,134.7 || 148.1 || 437.1 || c || 83.6 || 387.8 || 1,128.0 || 8,944.1

C31 || Manufacture of furniture || 1,164.0 || 1,941.2 || 492.3 || 419.7 || 158.3 || 159.4 || 339.3 || 703.5 || 2,740.4

C32 || Other manufacturing || 933.0 || 596.8 || 267.3 || 92.5 || 93.9 || 81.8 || 243.1 || 1,053.7 || 4,193.0

C33 || Repair and installation of machinery and equipment || 1,173.9 || 1,812.9 || 540.8 || 274.7 || 134.2 || 219.8 || 830.3 || 1,023.3 || 5,828.7

Code || Sector || Group

C10 || Manufacture of food products || Food, beverages and tobacco

C11 || Manufacture of beverages

C12 || Manufacture of tobacco products

C13 || Manufacture of textiles || Textiles, apparel and leather

C14 || Manufacture of wearing apparel

C15 || Manufacture of leather and related products

C16 || Manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw and plaiting materials || Wood, paper and printing

C17 || Manufacture of paper and paper products

C18 || Printing and reproduction of recorded media

C19 || Manufacture of coke and refined petroleum products || Chemicals, pharma, petroleum, minerals and rubber

C20 || Manufacture of chemicals and chemical products

C21 || Manufacture of basic pharmaceutical products and pharmaceutical preparations

C22 || Manufacture of rubber and plastic products

C23 || Manufacture of other non-metallic mineral products

C24 || Manufacture of basic metals || Metals

C25 || Manufacture of fabricated metal products,  except machinery and equipment

C26 || Manufacture of computer, electronic and optical products || Electronics, electrics and machinery

C27 || Manufacture of electrical equipment

C28 || Manufacture of machinery and equipment n.e.c.

C29 || Manufacture of motor vehicles, trailers and semi-trailers || Cars and transport

C30 || Manufacture of other transport equipment

C31 || Manufacture of furniture || Other

C32 || Other manufacturing

C33 || Repair and installation of machinery and equipment

Source: Eurostat

CONTENTS

3.20.    Poland. 173

3.21.    Portugal 180

3.22.    Romania. 186

3.23.    Slovenia. 193

3.24.    Slovakia. 199

3.25.    Finland. 205

3.26.    Sweden. 212

3.27.    United Kingdom.. 218

3.20.      Poland

Sectoral specialisation of manufacturing – Poland (2009)

Source: Eurostat

3.20.1.   Introduction

Manufacturing is
relatively more important in Poland than in the EU, accounting for some 18 %
of GDP (EU average 15.5%). However, Polish industry is still more specialised
in marketing-driven, labour intensive and mainstream manufacturing sectors.
Consequently, the shift to more R&D intensive and knowledge based economy
that would offer more sustainable growth in the future is an outstanding challenge
which the Polish government tries to address in its various policy proposals.

Due to relatively
strong internal demand and good export performance (facilitated by currency
depreciation) Polish companies managed to fare through the crisis and even continue
to grow. However, the future performance of industry will to a large extent
depend on boosting innovation and technological specialisation of companies.

3.20.2.   Innovative industrial policy

The latest
Innovation Union Scoreboard 2011 ranks Poland among the weaker performers in
the ‘moderate innovator’ group of countries. In addition, the annual growth in
innovation performance of Poland was very moderate and translated into a very
modest improvement in the last five years.

Poland has maintained its target for R&D
intensity at 1.7 % of GDP by 2020. Over the last years R&D
expenditures have grown continuously, but nevertheless the level of R&D
expenditures in 2011 was at 0.75 % GDP which is one of the lowest in the
EU. The 2012 research budget was increased by around 10 % and is the
highest annual budget for R&D so far. This increase, though, is mainly
funded through structural funds and national co-funding. What remains to be the
most concerning issue is the underinvestment of private sector in R&D which
accounts for less than one third of all Polish R&D expenditures (with the
continuing downward trend). It creates the main challenge related to
feasibility of achieving the national target which assumes equal contribution
from public and private funding sources.

There is a strong
awareness of this challenge at national level and many support mechanisms have
been launched recently to induce science-industry cooperation. However, all
these efforts have still not led to a creation of well functioning, innovation-friendly
framework conditions that would stimulate collaboration of public institutions
with private business and stimulate growth of innovative companies. In
addition, investments from the structural funds in innovation have been mainly
directed towards purchase and absorption of new technologies, which has enabled
some catching-up, but also left more necessary support for indigenous
innovation projects underdeveloped. What is more, also the measures to support
demand side have been very limited.

Concerning the
framework conditions, Polish R&D system has undergone major restructuring
in the last years. The recent reforms of the science and higher education
systems spurred significant changes, including the move towards competitive
funding, creation of two R&D agencies for applied (NCBiR) and basic
research (NCN) and efforts on tackling fragmentation through concentration of
funding on strategic projects and best performing institutions. The two
research agencies are now fully operational and have seen increases of their
budget and competencies. Still their successful functioning will require
coherent strategic management as well as clear evaluation procedures of
projects.

In 2011 the 2020
National Research Programme (KPB) was adopted listing seven strategic R&D
priority areas that are to be implemented by the NCBiR in its strategic
programmes. In parallel, the technological foresight for industry InSight
2030 was also completed, identifying key lead markets and technologies.
Much as these documents are important for further actions, the outstanding
issue is linking entrepreneurship, innovation and science policies to have
common priority areas and instruments supporting whole innovation cycle.

The currently
developed Strategy for Innovativeness and Effectiveness of the Economy is an
attempt at an integrated approach to research and innovation embedded in a
wider economic context. As the Strategy is rather general and requires
follow-up implementation plan, the currently prepared Enterprise Development
Programme will be crucial for assuring coherence between science and industrial
policies. It is supposed to propose a coherent and more effective set of
instruments aimed at supporting all the stages of the innovation process and
all the stages of a company development. The Programme should also introduce
measures incentivising private research and innovation investments, in
particular for young innovative companies and SMEs.

3.20.3.   Sustainable industry

Polish economy has
managed to reduce its energy intensity, but has still not reached the European
average. The biggest improvements in energy efficiency have been registered in
industry and the lowest in transport. Consequently, Poland exceeded its
intermediate target for energy efficiency in 2010 of 2 % reaching a
6 % reduction. The main potential for further efficiencies is in
construction, industry and households sector, but a 20 % reduction in 2020
will be difficult to achieve. The Energy Efficiency Plan adopted in 2011 set a
new scheme of white certificates that are the main instrument to stimulate
further efficiencies also in the end user sectors. There is a visible rise in
social awareness reflected in the improvements mainly taking place in
households’ sector. However, Poland has still not fully transposed the energy
labelling directive which is a key for the promotion of energy efficient
behaviour among consumers.

With some effort Poland is likely to reach its target of 15 % share of renewables in the total
consumption of energy in 2020. In 2010 it already reached a 10 % share.
The main source of renewable energy is bio-mass, including co-firing, and wind.
Nonetheless, Poland has not managed up to now to fully implement the Renewable
Energy Directive which led to an infringement procedure being launched by the
Commission in 2012. The new national legislation that should also set some
support mechanisms for investments in renewables for SMEs has been delayed due
to controversies around the proposed support mechanisms for investments in
renewable energy sources.

There are several
initiatives prepared by the government aiming at modernisation of energy
sector, such as improvement to energy networks, economic support to
diversification of energy sources and non-legislative measures to promote use
of local renewable energy sources. Moreover, the National Programme for the
Development of Low-Emission Economy is under preparation, following the
adoption of the Programme’s guidelines in 2011. The comprehensive action plan,
referring to all sectors of the economy, with a time frame up to 2050, should
be ready by mid-2013. By now however, the incentives to encourage the uptake of
low-carbon emitting technologies in the energy sector seem still insufficient.
Furthermore, in spite of the fact that road freight emissions are rising
sharply (increase by 33 % from 1995 to 2007), there are no specific
measures to reduce emissions in this area.

Furthermore,
despite gradual modernisation, underdeveloped transport infrastructure
continues to be a serious obstacle for industry’s growth. There is still a lot
to do in rail transport where poor condition and aging network is not
sufficiently accompanied by urgently needed investments. Poland has not fully used cohesion funds available for this purpose due to lack of experience
and properly elaborated projects. Continuation of road network’s upgrading
remains one of the government’s priorities, but despite significant progress
made in the last 5 years and constructing over 1 000 km of new
motorways and expressways, the network remains fragmented. Air transport
infrastructure has been improving following a number of investments, but still
lacks effective connections to other transport modes, especially railways.
Similar situation also concerns port infrastructure.
Some progress has been made, especially in modernization of transport
connections between the neighboring countries and the host cities of the 2012
European Football Championships, but more investments are needed to remove the
infrastructure gaps.

In 2010 Poland had a small negative trade balance in environmental goods and the balance has been
marginally deteriorating since 2006. In order to foster development and
international transfer of Polish innovative environmental technologies an
Accelerator of Green Technologies (GreenEvo) was initiated end of 2009. As a
part of the project an analysis of the Polish potential and of foreign markets
for environmental technologies has been conducted. A selection of companies to
be supported by the programme was completed in 2010 (28 companies selected in
total), but the final impact of the project is still not known.

Aging
infrastructure, limited competition in the energy market and domination of coal
in energy mix continue to pose a potential threat of undersupply and increases
of energy costs for industry. There are still some uncertainties around the
currently developed nuclear programme and the potentials of the shale gas
extraction. Current low CO2 prices have reduced the pressure from
coal generation facilities, but the situation might change in the future. On
the positive side, the progress in construction of the LPG terminal in
Świnoujście is according to schedule and it should be open in 2014.
Besides a new gas interconnection with the Czech Republic has been opened and new
ones are planned with Germany.

3.20.4.   Business environment

According to the
World Bank Doing Business 2012 report Poland continues to be among the worst
performers in the EU concerning business environment. The main issues are high
administrative compliance costs, slow legislative processes and unstable
legislation. As regards judicial and other legal actions, both the duration of
procedures and their number are relatively high.

The Polish
government sees the improvement of business environment as its priority, but
the pace of the reforms is rather moderate. The reforms proposed up to now go
in the right directions but are not ambitious enough. More reforms are
expected, but the frequent changes in legislation, even if positive, are not
well received by business organisations that would welcome a holistic and
well-thought reform of regulation. Better implementation of impact assessments
and timelier stakeholder consultations of proposed regulatory changes are
required to improve the entire law making process.

In 2011 three
legislative packages were adopted to improve the business environment. The
first package focussed on the freedom of entrepreneurship act (entering into
force 1st July 2011) has made one-stop-shop more operational and
reduced the time of starting the business. Next, the act on reduction
administrative barriers (so-called deregulation Act I, entering into force 1st
July 2011), has limited the administrative constraints on business activity,
decreased significantly the number of procedures and administrative obligations
imposed on businesses, and replaced administrative certificates with own
statements. The third package (so-called deregulation Act II, adopted on 16th
September 2011, mostly entering into force on 1st January 2012)
aimed at reducing information obligations and administrative barriers for
citizens and businesses. Currently, a proposal of draft legislation guidelines
to the next deregulation act is being discussed within the government. It will
concentrate on the solvency enhancement and investments support as well as
further reduction of the information obligations and reduction of the cost of
running a business.

There has also
been some progress in the simplification of legal procedures involved in
enforcing contracts. In September 2011 separate legal proceedings for business
cases were eliminated and rules on the submission of evidence are to be
simplified. The effects of these changes are still to be seen in future.
Besides, the government plans to move forward the digitalisation of courts
which should shorten the duration of proceedings.

Poland performs similarly with the EU average in
access to finance. Decline in demand and number of loans to SMEs has been
observed following the crisis. However, the latest ECB lending survey shows
that in 2011 net change in willingness of banks to provide a loan improved in Poland in contrast to the negative developments in the majority of the Member States. It
also seems that Poland is one of the few countries where collateral requirements
for loans to SMEs have not increased much. Thus restoring normal lending to the
economy is not a major issue for the government to deal with at the moment.

Nonetheless some
challenges still remain. SMEs also complain about the high collateral requirements
that limit their ability to get a bank or other type of loan. The venture
capital market is still not very developed which limits availability of risk
capital for innovative companies at early stages of development. The National
Capital Fund only became operational in 2010 so it is too early to assess its
impact on development of start-ups and seed capital funds. On the positive side
– the Polish growth stock market NewConnect continues to be a best practice
example on the European level. It is important for growth oriented SMEs as a
direct financing source or as en exit possibility for the venture capital funds
investing in SMEs.

3.20.5.   Services sector

Over-regulation in
the field of professional services is a significant regulatory barrier for economic
growth. Poland has notified to the Commission 368 regulated professions
(32 % in construction and industry, 21 % in the transport sector and
20 % in the health sector). Recently, Poland has announced a plan to scale
down by 50 % regulation in professional services regarding both
educational requirements and licensing. Two legislative initiatives are to be
adopted in 2012 following ongoing public consultations.

Concerning
services provided by network industries, the functioning of telecommunication
market is positively assessed by the majority of the institutional customers. A
strong position of the Office of Electronic Communications (UKE) helps
maintaining access to infrastructure and competition on the market.

Rail freight
services are among the most liberalised markets in Europe, but there are still
obstacles to an efficient functioning of the internal market. Poland is working on full implementation of the railway package and on the ways to decrease
the current level of railway infrastructure charges which is posing a
substantial obstacle for operators. It also intends to strengthen the position
of the rail regulator (UTK). Additionally, the existing problems with access  
to the freight terminals and rail-related services by new entrants have negative
impact on the functioning of the market.

In contrast, the
liberalisation of the gas market is not progressing fast enough. The government
plans to facilitate the competition on the market by introducing gas release
programme on commodity exchange. The withdrawal of obligation to approve
tariffs for commercial customers is expected in 2013. The relevant legislation
is under consultation, but with no specific adoption day has been set. There
are still no plans for liberalisation of the market for households or proper
impact assessment of liberalisation on prices.

3.20.6.   Public administration

As measured by the
World Bank’s Government Effectiveness Indicator, the overall public
administration performance scores for Poland are considerably below the EU
average. Perceptions of the respondents to the World Bank survey point to a
relatively lower quality of public services, policy implementation and
commitment of public servants compared to the EU average.

In terms of tools
for administrative modernisation (e-government, impact assessment,
performance and service orientation, accountability) the composite indicators
also highlight a performance slightly below the average for Member States.
Various initiatives to improve electronic contacts with administration have
been undertaken, but the general problem is insufficient coordination of these
initiatives resulting in a lack of integrated system. A major change was the
introduction of the central electronic register (CEIDG) in July 2011, which
allowed electronic registration of a business for natural persons. However, the
government itself has noticed that the system required improvement and further
extension of functionalities, and announced to upgrade the register still this
year. Registration of limited liability companies (registered in the National
Court Register) is also to be improved, following amendments to the legislation
that are envisaged for the second half of 2012.

The composite
indicator on corruption exhibits a notably lower score compared to the
EU average indicating that corruption is still an issue in Poland. Whereas diversion of public funds due to corruption and the commonness of irregular
payments and bribes by firms are assessed at similar level to this of EU
average, the experience of corruption in interaction with public authorities is
more common.

Measured by the
composite indicator on starting a business and licensing, Poland’s performance is significantly worse than EU average. It is mainly a consequence of
relatively much longer time as well as higher costs needed for incorporation
compared to the EU average. Furthermore, Poland still lacks a fully operational
one stop shop for start-ups and obtaining licenses is assessed as more complex
than the EU-benchmark.

Concerning tax compliance
and tax administration our composite indicator reports a score that is
lower than the EU average. This holds true for both the time requirements to
prepare tax returns as well as tax administration costs which are substantially
higher than on average in the EU. Although tax burden on labour is relatively
low compared to other EU countries, it is the complicated tax system that is
perceived as a serious burden by Polish companies. What is worse, the World
Bank Doing Business Report 2012 indicates that there has been no improvement in
the Polish Paying Taxes indicator compared to 2011.

In terms of efficiency
of civil justice, Poland again performs slightly below the EU average
according to the World Bank analysis. While the costs of enforcing contracts
are estimated to amount to 12 % of the claim, which is below the EU
average, the time requirements exceed by some 50 % the EU average for both
enforcing contracts and resolving insolvencies. Moreover, the WEF’s Executive
Opinion Survey indicates that the judiciary is also perceived to be less
independent from political influence compared to the EU average.

In contrast, the
composite public procurement index shows a significantly better
performance than the EU average. This holds true for all three aspects covered
in the composite indicator. For instance, while on average time requirements
for the competition for public tenders amount to more than 16 days and payments
by public administrations are delayed up to 28 days, for Poland these values are only 11 and 19 days, respectively. Nonetheless, Polish companies
complain about restrictive criteria, stringent conditions and inefficient
appeal procedures in the area of public procurement.

Overall profile of public administration

Source: WIFO

3.20.7.   Conclusion

In 2011 Poland managed to prepare and implement some additional reforms that should lead to an
improvement of business environment and help industry boosting its
competitiveness. Thanks to relatively good situation of the economy and the
implementation of the EU cohesion funds Poland has also been able to maintain
its growth and investments in infrastructure. What is more, despite the
underdeveloped capital market, Poland has avoided credit crunch and access to
finance is not as serious problem as it is the case in some other member
states.

However, there are
concerns that without further structural reforms the current growth model might
not be sustainable. Despite the reform of education and science system, the innovation
performance of companies is poor. Without better strategic linkages between
industrial, education and innovation policies the existing instruments might
not improve the situation. Furthermore, sustainability needs to be better
incorporated in the energy and transport policies to avoid future adjustment
costs and encourage companies to adopt environmental technologies.

In addition, the
approach of public administration to regulation and law making does not
sufficiently engage and consider the voice of business stakeholders. While the
proposed changes seem to be relevant, lack of efficient control and monitoring
mechanisms weakens the chances of proper implementation. Similarly, the
deployment of e-administration and e-services is rather slow and lacks
coherence. Finally, despite recent deregulation proposals there is a clear need
for a better regulation agenda that would be implemented in a more elaborated
and systematic manner.

3.21.      Portugal

Sectoral specialisation of manufacturing – Portugal (2009)

Note : No data available for sectors C12 (tobacco products), C19 (coke and refined petroleum products) and C21 (basic pharmaceutical products and pharmaceutical preparations) Source: Eurostat

3.21.1.   Introduction

Manufacturing
plays a broadly similar role in Portugal than in the EU as a whole (13.1 %
against 15.5 %). At the detailed manufacturing industry level, Portugal has a relatively high degree of specialisation in low-skills (labour-intensive)
industries (wood and cork, cutting and finishing of stone, made-up textile
articles) as well as in capital-intensive (cement, refined petroleum) and
marketing-driven industries (footwear). Sectors of medium and high
technological intensity are still under-represented in parallel with a still
relatively high specialisation in low technology sectors.

The series of
economic reforms that are being implemented should facilitate and speed-up
structural change and contribute to foster productivity and competitiveness.
Portuguese exports are relatively concentrated in the EU markets. The share of
exports to the BRIC countries is low but it is increasing, taking advantage of
the opportunities offered by these and other high-growth emerging economies.

3.21.2.   Innovative industrial policy

R&D
expenditure weakened slightly (from 1.64 % in 2009 to 1.59 % of GDP
in 2010) but Portugal continued to be one the leading countries in the group of
‘moderate innovators’ in the IUS 2011, reinforcing its relative strengths in
areas such as the research system or the number of SMEs introducing
innovations. Main relative weaknesses are still in business R&D and in the
outputs and economic effects of innovation (measured e.g. by the relative
importance of exports of high tech products and knowledge intensive services or
intellectual assets).

A new strategic
programme promoting entrepreneurship and innovation ‘+ e + i ‘
was adopted in December 2011 and some measures have already been implemented
such as: the National Council for Entrepreneurship and Innovation was created
for policy coordination and steering at the highest level of the government;
R&D and innovation vouchers were merged into a single instrument (an
incentive of up to EUR 25 000 is granted for innovation and R&D
projects done by micro and SMEs in cooperation with a number of universities
and research institutes) and new competitions were launched for this
instrument.

Standards on
innovation management systems and manuals on best practices for the protection
and valorisation of Industrial Property and for the evaluation of Intangible
Assets are being developed by the Standards and the IPR offices, in cooperation
with COTEC. A ‘highway’ project streamlining decision making for bilateral
patent applications was agreed between the Iberian countries.

Portugal is committed to implement the Digital
agenda 2015 (adopted in 2010) and will align it with the forthcoming mid-term
review of the Digital Agenda for Europe.

Portugal needs to sustain and improve the efficiency
of the research and innovation investments and their contribution to foster
productivity and speed-up structural change, fully exploiting budget and
project re-allocations and the temporary high EU co-financing rates.

3.21.3.   Sustainable industry

A number of
contracts were signed and new competitions launched for the exploration of
several metallic minerals (Portugal has known important deposits of copper,
silver, uranium and several critical raw materials such as tungsten).

The National Plan
for Dams involves six investments and projects (including the capacity
reinforcement of some existing hydropower plants). Smart grids and other
innovative eco-products and services are being promoted (within an energy
technology and competiveness pole and other ‘eco-clusters"). The pilot
project ("InovGrid") in the city of Évora reached 30 000
households and businesses in 2011 and was chosen by the Commission and
Euroelectric as a case study for smart grids in Europe.

The Energy Audit
Scheme and rationalisation action plan in industry covers more firms and energy
intensive industrial installations. On-line energy audit tools and a study with
technical industrial/sectoral energy efficiency measures were made available.
The ‘+ e + i’ programme foresees several eco-innovation actions
(such as an ‘energy voucher’ promoting energy efficiency and green business
models). Awareness and communication campaigns on eco-innovation were
organised, trainings and certifications were given in the management of energy
in industry and buildings and 500 ‘energy and carbon local managers’ were
nominated for public administration installations (within the ECO.AP programme
promoting energy efficiency in public administration, aiming to reduce the
State’s Energy bill in 30 % by 2020).

The green public
procurement programme is being revised (raising the number of green categories,
the use of green awarding criteria, the green coverage target -from 50 %
to 65 %- and the coverage of regional and local entities).

 The powers and
independence of the water and waste-treatment regulator are being reinforced
and the state-owned enterprises in these sectors will be rationalised. The
national low carbon roadmap to 2020-2050 is being finished and the two National
Action Plans i) for renewable energy and ii) for energy efficiency were
revised.

The revision of
the National Renewable Energy Action Plan included reviewing the weight of the
objective of each renewable energy source in the national energy mix to achieve
in 2020 and estimate, per renewable energy source technology, the stages of
adoption, promotion and entry into the system.

The revised
National Energy Efficiency Action Plan has the horizon 2020 and establishes
targets in terms of primary energy (namely a 25 % reduction of energy consumption
until 2020).

The effective
improvement of energy efficiency in industry remains an issue.

3.21.4.   Business environment

Access to
finance

A series of
measures have been adopted to mitigate the increasing constraints on credit and
lending conditions faced by SMEs: extension (for an additional year, until
December 2012) of the existing credit insurance instruments for exports;
deferral of capital reimbursements by one year – from October 2011 to October
2012 (for existing PME INVESTE credits, potentially involving
EUR 1.85 billion and more than 50 000 SMEs); creation of a new
credit line ‘PME CRESCIMENTO’ (of EUR 1.5 billion, primarily for
SMEs); adoption of a plan for the gradual normalisation of late payments in the
public sector.

Remaining Structural
Funds have also been reprogrammed to facilitate access to finance. Over EUR 500
million will be allocated to this purpose, in particular by using a significant
part of a framework loan of EUR 1.5 billion from the ECB.

Some other actions
can help in lowering SMEs high leverage levels and dependency on bank loans:
the public system of venture capital was reorganised into a single fund
(allowing for a greater coordination of public intervention and offering SMEs
new, innovative forms of finance); there are plans to develop the stock
exchange for small caps, ‘the Alternext Lisbon”; commitment in the MoU for
presenting a proposal aimed at diversifying the financing channels of the
corporate sector.

Regulatory and
support environment

Business conditions
and the functioning of markets are improving through the implementation of a
large number of structural reforms, encompassing labour and products markets,
network industries and business services[1].

The performance of
Portugal on the share of fixed broadband lines at 10 Mbps and above was
77.5 %, the 3rd highest in the EU. Portugal is addressing broadband with a
national plan, under which tenders were signed by the Government for the
deployment of NGA networks in rural areas (providing a minimum guaranteed
download speed of 40 Mbps. The roll out of the contracted services started
in December 2011 and is underway until December 2013[2].

Many other reforms
are targeted at improving competition and insolvency laws or the efficiency of
the judicial system. Competition law procedures and enforcement regimes were
strengthened and two new specialized courts were created for competition and
IPR cases (respectively). Court fees were simplified and harmonised (penalising
frivolous litigation and promoting voluntary out-of-court settlements). A new
law was adopted on voluntary arbitration and fast-track resolution of debt
enforcement cases (close to ¾ of the total number of pending cases in courts).
Forthcoming reforms include the revision of the Code of Civil procedure (aimed
at simplifying and accelerating court procedures) and introduction of
mediation.

The conciliation
framework facilitating early (extrajudicial) corporate debt restructuring and
the insolvency laws and procedures were streamlined and a ‘second chance’ mechanism
was introduced (aimed at proactively enhance rescue and firm restructuring;
e.g. firms are granted protection from creditors for 60 days).

On-going
simplifications of administrative procedures include: the ‘Zero Authorisation’ project
(offering simplified/tacit licensing and services for setting up businesses
such as shops, restaurants and bars) and the ‘sistema de indústria responsável’
(a simplified licensing regime for a large number of industrial activities) are
being implemented; a simplified uniform regime for mobile retailers is being
drafted; the ‘simplex Autárquico’ reached a 75 % implementation rate
(complete coverage of all 308 municipalities is foreseen for 2013); the ‘simplex
Export’ programme simplifying export procedures for firms is almost completed.

Further actions
are being planned such as: extension of the ‘Zero Authorisation’ project to
other sectors; a new ‘simplex Export’ with additional simplifications; a ‘simplex
Mar’ for sea related activities; a ‘Guichet Ambiente’ for environmental
protection services and authorizations.

Exports and the
internationalisation of SMEs continued to be promoted by QREN and by a large
set of measures (e.g. visits of importers; participation of SMEs in trade fairs
and missions and information about IPR protection and enforcement in some high
growth markets).

Following the
adoption of ‘+ e + i’ programme, a national entrepreneurship
competition ("concurso INOVA") was launched for lower and upper
secondary students; there is an action plan for developing a common platform
for entrepreneurship education and its inclusion in the curricula; the program
‘Academia das PME’ organizes training courses and workshops for the development
of managerial skills in SMES (and had targeted actions in specific sectors such
as creative industries or agro-businesses).

3.21.5.   Services sector

A series of
measures are being implemented to liberalise services, easing barriers to entry
and restrictions to cross-border activities. A Commission was created in order
to review and reduce the number of regulated professions (around 120 regulated
professions had been analysed until March 2012). An ambitious draft framework
law has been prepared to remove unjustified restrictions on the access to and the
exercise of highly regulated professions (where professional bodies are
involved, such as lawyers or doctors). The draft has been submitted to the
Parliament following a public consultation. The proposal aims to ensure that
the national rules are in conformity with EU rules.

3.21.6.   Public administration

As measured by the
World Bank’s Government Effectiveness Indicator, the overall public
administration performance scores for Portugal are lower than the
EU-average. Perceptions point to a relatively lower quality of public services,
policy implementation and commitment of public servants to those when compared
to the EU-benchmark.

The use of tools
to improve public administration (e-government, impact assessments, performance
and service orientation, accountability) is close to the average use in the
Member States. On the one hand, all eight business related e-government
services are available in Portugal and the use of evidence based
instruments is quite widespread, but there is some scope for improvement by
using modern human resource management tools (performance-related pay,
flexibility, skills development) as these are not used to the same extent than
in most other Member States.

On the
dimension corruption and fraud Portugal is performing slightly better
than EU Member countries on average, although irregular payments and bribes and
diversion of public funds are to a minor extent more common than average. This
is however in contrast with the individual experience or respondents of
corruption, which is better in Portugal than in the EU.

The civil
justice system is almost similar to the EU average in terms of global
value. Both the time to enforce contracts and to resolve insolvency is very
close to the EU-average, but the cost to enforce contracts (as a percentage of
the claim) is almost 8 % lower in Portugal. However, the judiciary system
is considered to be less independent than in other EU countries.

The performance of
Portugal on the tax compliance and tax administration indicator is
slightly worse than average. In Portugal it takes 275 hours yearly to
prepare and file tax returns and to pay taxes as compared to 208 hours in
the EU. The performance of Portugal on the administrative costs of taxation
sub-indicator is equally situated slightly below the EU average level.

The tax compliance
costs for firms, in particular for SMEs, are high due in great part to the
complexity and the too frequent changes of the tax code provisions and
procedures. However, the tax administration has been progressively developing e-government
procedures: a large number of services is available on-line; an ‘electronic
invoice plan’ was adopted aimed at fighting the informal economy and easing tax
compliance costs for firms; a specific accounting regime was introduced in 2012
exempting micro-entities from filing certain VAT tax forms, but a simplified
corporate tax regime for SMEs was abolished (the simplified taxation scheme was
kept only the self-employed or micro-firms subject to the personal income tax,
with up to EUR 150 000 of annual income) and certified invoicing
software was made mandatory. Further, an integrated reform and simplification
of the tax codes are issues to consider for the future.

Overall profile of public administration

Source: WIFO

Starting a
business and obtaining licenses is globally slightly easier in Portugal than in the EU on average. One
stop shops to start up a company are fully operational and the time required to
start up a company is clearly better than average (5 calendar days as compared
to 14 calendar days in the EU). To a lesser extent, the cost to start up is
also more than half of the average amount in the EU (expressed as a percentage
of GDP per capita). Nevertheless, licensing complexity is higher in Portugal than on average in the EU.

The performance of
Portugal on the public procurement indicator is well below EU average.
It is mainly due to important payment delays from public authorities (79 days
in Portugal as compared to 28 days in the EU, being almost 3 times higher than
the EU average. The typical cost of competition in terms of percent per capita
GDP for firms in competition is also 6 percentage point higher than average.
The cost in terms of person-day units per individual firm is however slightly
above EU average.

A comprehensive
set of measures has been adopted or is being implemented to reform Public
Administration. Many of these reforms were set out in the MoU and encompass
central, regional and local Administrations and in some cases state-owned-enterprises
(examples of horizontal measures involving all these sectors include reductions
in the number of management positions and administrative units -avoiding
duplications and inefficiencies-; adoption of a rationalisation program for ICT
and e-Government infrastructures and ICT services; a public consultation was
launched for reducing the number of parishes).

Many other reforms
are targeted at specific parts of the public sectors, such as the tax
administration, the judicial system, network industries and state-owned
enterprises. An independent Fiscal Council and a new ‘Autoridade Tributária e
Aduaneira’ (merging the tax, customs, and IT services) were created and a plan
to fight Fraud and Evasion for 2012-2014 was adopted.  Tax compliance
management was reinforced with the creation of a large tax payer office and the
creation of a task force of judges to speed-up and clear high-value tax cases
in courts. Transparency will increase with the decision to publish quarterly
reports on recovery rates, duration and costs of tax cases in courts and an
annual report on tax expenditures.

A roadmap for
improving efficiency of the court system is being implemented, reducing the
number of court districts and closing down underutilised courts and improving
personnel management systems and the mobility of court officials.

A comprehensive
set of measures are being taken in order to rationalise transport enterprises
and networks, promoting competition, energy efficiency
and integrated logistic conditions (for road, rail, ports, airports).

Vocational
training and employment services are being reformed enhancing job-skills
matching and employability outcomes of active labour market policies.

Portugal has a track record of sustained investment
in a number of simplification and E-government programmes. Some landmark
examples include: the Simplex
Program (with around 2 250
simplification projects as from 2006); the ‘Enterprise Portal’ (providing
about 670 services on-line by 100 public entities, including the ‘Enterprise
Online”, a one-stop- shop for the creation of enterprises); the Port and
Logistic Single Window (for port and logistic services); the Public
Procurement System (a best practice example in E-procurement, leading in
the EU with a rate of 75 % in 2010).

3.21.7.   Conclusions

Portugal is actively engaged in the implementation of a series of reforms,
improving key areas such as competition and the functioning of labour and several product markets,
business conditions, efficiency in
public administration and the stability and resilience of the financial sector.

It is important to
complement these reforms with the development of effective alternative funding
and recapitalisation mechanisms for firms, easing credit constraints for SMEs
and facilitating the reduction of their high leverage levels and dependency on
bank loans.

It is equally
important to sustain and improve the efficiency of the investments in research,
innovation, entrepreneurship, education and overall skills development.

3.22.      Romania

Sectoral specialisation of manufacturing – Romania (2009)

Note : No data available for sectors C12 (tobacco products) and C19 (coke and refined petroleum products) Source: Eurostat

3.22.1.   Introduction

Manufacturing
plays a bigger role in Romania than in the EU on average (22 % vs.
14.5 % of total value added in 2009). As a consequence, Romania ranks among the EU Member States with the highest share of manufacturing in GDP and
the lowest share of market services. At the detailed manufacturing industry
level, Romania is highly specialised in labour-intensive industries
(preparation and spinning of textile fibres, sawmilling, wearing apparel and
accessories), as well as in capital-intensive industries (cement), and
marketing-driven ones (value-added only; footwear). At the more aggregated
sector level, Romania features specialisation in low innovation and education
sectors (wearing apparel, leather), but also in medium-high innovation sectors
(textiles, basic metals). Overall, Romania is catching up with respect to
competitiveness, but needs to pay attention to sectoral upgrading in terms of
quality and R&D.

3.22.2.   Innovative industrial policy

Romania is classified as a modest innovator
according to the Innovation Union Scoreboard 2011, with a performance well
below the EU average (24 out of 27 EU Member States).  Still, its growth rate
makes Romania one of the growth leaders in the ‘catching–up’ group of
countries.

This situation is
due to a large extent to chronically low public and private R&D and
innovation expenditures. At the same time, innovation and industrial policies
are not coordinated and integrated due to the absence of national strategies as
well as to the insufficient cooperation and consultation at inter-institutional
level between the institutions responsible for policy design and implementation
in these fields.

A functional
review of the Romanian R&D and innovation system was performed by the World
Bank in 2011, in the framework of the IMF/EC assistance. The review identified
four key priorities to improve the performance of the R&D and innovation
over the short and medium term: strengthening the governance of the R&D and
innovation system, improving the management of public R&D, accelerating the
transmission of R&D, and encouraging the demand for R&D.

While steps are
being taken to improve the performance of R&D activities within the public
sector, more efforts should be directed to foster private sector R&D and
innovation, which is key for the country’s longer term competitiveness and
growth.

In this respect,
the functional review undertaken by the World Bank identified several key
challenges. To improve the climate for private sector R&D and innovation,
targeted fiscal and regulatory actions are needed, as well as a revision of the
overall intellectual property rights framework with the view of removing the
barriers for the private sector to undertake research and innovation activities
and attracting R&D-intensive FDI. Another key aspect is the support of
knowledge-based start-up companies. Nurturing services (consultation, business
and technologically related services) are of particular importance to
facilitate the transition of ideas to the market. Also, funding for innovative
product development and launch – almost non-existent in Romania - should be adequately addressed. Moreover, the private sector should be better
connected to the public research efforts to accelerate the translation of
R&D into innovation, and the existing emerging clusters should be supported
to develop into fully fledged industrial clusters.

A cross-cutting
problem is the shortage of a medium and highly skilled labour force. The
relative high share of science and technology graduates compared to other EU
Member States and the quality of math and science education are not converted
into competitive advantages, partly due to the higher-education system
suffering from repeated institutional changes, and substantial brain drain.
Therefore it is fundamental to improve the R&D and university career
prospects to retain and repatriate human capital.

3.22.3.   Sustainable industry

The sluggish
restructuring of the industrial base which, prior to 1989, was characterised by
a high-share of energy-intensive and non-sustainable industries and a poor
energy-saving culture, has resulted in out of date technologies and equipment
which does not meet contemporary environmental standards. In addition, foreign
direct investment in manufacturing industries has shown a clear preference for
low-technology and energy-intensive sectors. As a consequence, the
environmental performance of the Romanian industry remains relatively poor.
Although considerable improvements can be noted, energy-intensity in industry
is still the second highest in the EU.

The main funding
instrument for environmental policy is the OP Environment.
Funding for the development of eco-efficient production, for increasing energy
efficiency and for promoting renewable energy sources is also provided through
the OP Increase of Economic Competitiveness. Recent measures with
direct relevance to industry are the state aid scheme to promote high
efficiency cogeneration operation since April 2011, the support scheme for the
promotion of electricity produced from renewable energy, and the information
and raising awareness campaigns on the importance of increasing the energy
efficiency. Also, the 2011 – 2013 National Energy Efficiency Action
Programme was adopted in May 2012.

On an
institutional level, main developments include the government decision to
implement the various Regulations and Directives on eco-design requirements for
the energy performance of energy-using products as well as the on-going
development of the National Climate Change Strategy for 2013-2020. The National
Action Plan on Green Public Procurement (GPP) setting multi-annual green
procurement targets for different categories of products and services was
planned to be finalised by the end of 2011, but no specific measures have been
taken so far, partly because a more thorough knowledge of the green products
and services available on local market would be needed.

Several
controversial foreign investment projects – such as the cyanide gold mining at
Roșia Montană, the planned sale of the copper mining company ‘CupruMin
Abrud’, or the projects to exploit the shale gas – are currently being
discussed by the Romanian government. Projects approvals have been delayed as
they raise serious concerns in terms of environmental consequences as well as
huge environmental costs.

As one of the most
energy-intensive economies in Europe, improving energy efficiency and
developing complementary actions in energy efficiency and renewable energy
should be a key priority in Romania. Moreover, complying with environmental
standards, which is essential for industrial competitiveness, will require
significant financial efforts to support the adoption of standards, upgrade
productive processes, and implement environmentally friendly, eco-efficient
technologies.

3.22.4.   Business environment

Romania has a cumbersome business environment,
characterised by a lack of transparency in the decision-making process,
insufficient cooperation and consultation at the inter-institutional level and
with the relevant stakeholders, and significant red tape. At the same time, the
underdeveloped road (particularly motorways) and rail infrastructure act as a
drag on economic competitiveness.

Institutionally,
reform efforts are underpinned by the functional review of the Ministry of
Economy, Energy Sector and Business Environment (MECMA) led by the World Bank
in framework of the IMF/EC assistance. The review, finalised in 2011,
identified the fragmented institutional set-up and the rapidly changing
governance arrangements for business environment as being the major bottlenecks
to a sound business environment. The nomination of a minister delegate for
business environment in May 2012 should contribute to increasing the high level
political support to the business environment issues. However, further efforts
are needed to improve coordination at inter-institutional level and
consultation with stakeholders, in particular SMEs.

Access to
finance

In a general
context dominated by uncertainties in financial markets and sovereign debt
developments in the euro-area periphery, access to finance is a pressing
problem facing Romanian SMEs. Financial support to SMEs is primarily being
provided via multi-annual national programmes and guarantee instruments. The
risk facility of the JEREMIE programme became operational at the end of 2011,
but its success is rather limited. Other recent initiatives started in 2011
include the Mihail Kogalniceanu Programme for financing the SMEs,
aiming at facilitating the access of SMEs to guarantees and credit by granting
a credit line with subsidized interest and, if need be, partially guaranteed by
the state under certain conditions, and the Programme for Young
Entrepreneurs, aiming at stimulating young entrepreneurs to set up and
develop small business, with a target group of young entrepreneurs under 35.
However, existing public measures should be made easier to obtain, in
particular through providing assistance on the application procedures and
cutting red tape.

Entrepreneurship

A number of
measures have been taken to promote entrepreneurship. During the school year
2011-2012, a new curriculum comprising entrepreneurship learning has been
introduced in secondary level. A program aiming at increasing the number of
business incubators throughout the eight development regions was started in
2011. Finally, a new law regarding non-fraudulent bankruptcy and duration of
fiscal criminal record was approved in 2011, reducing - in some cases and under
some conditions - the period of full discharge after bankruptcy and non-payment
of fiscal obligations from five years to one year.

Regulatory and
support measures

In the area of
regulatory tools and mechanisms to improve the business environment, no major
advancement has been achieved so far. Currently, there are several strategies
containing provisions for the business environment and better regulation: the Strategy
for the improvement and development of the business environment until 2014
and the Strategy for the development of the SMEs sector until 2013 were
elaborated, but not yet approved; the Strategy for Competitiveness until
2020 is currently in work; and the Strategy for Better Regulation
2008-2013, the implementation of which has been very slow.

These different
strategies are uncoordinated, unarticulated and overlapping; they cover some
aspects of the business environment, but none of them is comprehensive and
intends to align the whole administration in coordinated efforts. The challenge
is to integrate the strategies currently in place in just one single, explicit,
coordinated, efficient and effective strategy to deal with the business
environment and regulatory reform issues, with clear principles, objectives,
targets and monitoring indicators, to be applied to the whole government
sector.

The need for
fiscal consolidation left little room for manoeuvre to launch costly supporting
measures. There are several actions, financed by the OP Increase of Economic
Competitiveness and the OP Regional Operational Programme. Related
to this, increasing support to enterprises, particularly SMEs, in accessing EU
funds through more simple and transparent procedures remains a key challenge.

To offset the
decline in domestic demand, more efforts should be made to facilitate the
access of Romanian companies to markets. In this respect, using public
procurement in a more proactive manner and further supporting the
internationalisation of SMEs could be important steps. A National Export
Strategy for the period 2012-2016 has been drafted, but not yet
approved. It identifies a number of sectors with comparative advantages (e.g.
creative industries, renewable energy, ICT, manufactured products but also some
raw materials). Notwithstanding this, a number of challenges remain to support
SME internationalisation, in particular providing training and practical
guidance on procedures as well as enabling access to financing instruments.

3.22.5.   Services sector

The transition to
a market economy since the early 1990 resulted in a complex change of the
economic structure characterised by an increased importance of the service
sector in employment and value added. The services sector grew to account for
51.6 % of the gross value added (GVA) in 2011 (from 28.8 % in 1990).
The rapid growth of the ICT-related services - supported by the valorisation of
local skills and the good quality of math and science education – is one of the
country’s major competitive advantages, making Romania an attractive location for software out-sourcing and
research.

In the area of
professional services, Romania adopted in February 2012 a memorandum for a one
year pilot project that aims to liberalise tariffs on public notaries, and to
foster competition between notary offices.

In the area of
network industries, the MoU concluded in June 2011 in the framework of the
precautionary EU medium-term financial assistance for Romania has a strong focus on product market reforms, in particular in the energy and
transport sector.

3.22.6.   Public administration

The reform of
public administration is a key concern in Romania since the early 1990s.
Insufficient structural and institutional reforms have resulted in a
chronically weak administrative capacity for policy design, strategic planning,
analysis, enforcement, monitoring and evaluation of the public policies. Under
these circumstances, it is not surprising that in terms of overall public
administration performance, Romania scores significantly below the EU
average.

To improve the
efficiency, effectiveness and independence of the public administration, a
functional review of the central public administration led by the World Bank
(and financed by the European Commission) was carried out between 2010 and May
2011. Based on its outcomes, both the government and the individual
institutions under investigation have adopted action plans on how to streamline
decision making processes and strengthen strategic planning. However, the
implementation of the action plans remains challenging. Although an
inter-ministerial group was set-up to coordinate and monitor the implementation
of the action plans, there is little progress, mainly due to the lack of
commitment and reform ownership.

Overall profile of public administration

Source: WIFO

In terms of the
use of tools for administrative modernisation (e-government, performance
and service orientation, accountability), Romania’s performance is below the EU
average, principally due to a lower availability of business related
e-government services as well as to existing limitations in the implementation
of modern human resource management tools.

The National
Agency of Civil Servants (ANFP) is implementing several training projects to
enhance the administrative capacity in areas like strategic management, human
resources, and project management. However, further efforts are needed to
professionalise the civil service at all the layers of the public
administration, in particular through ensuring a transparent and merit-based
recruitment process and improving the career prospects for civil servants
(including remuneration and training), making the civil service independent
from the political cycle, and combatting the political interference in the
administrative practices.

Romania has committed to modernise and streamline
the relations between different levels of government and between the government
and citizens and businesses by greater reliance on electronic data exchange and
online interfaces. Some progress has been made regarding the completion of the
Point of Single Contact, tax e-filling and online services provided by the
Business Registry of Romania, so that entrepreneurs can now request for data to
be sent via email. Although ambitious objectives for e-government and
e-business have been set through the Governmental Strategy for Broadband
Communications Development in Romania for the period 2009-2015, adopted in
2009, very little progress has been made in the implementation of this Strategy
and the adoption of another strategy for broadband communication is planned for
2012.

In the area of starting
a business and licensing, Romania’s performance is fairly equal to the EU
average. Although obtaining licenses is considerably more complex than the EU
average, the time needed for starting a business is equivalent to the EU
average, and the corresponding costs are lower.

In the area of public
procurement, the indicator used here is driven by the average payment
delays by public authorities. While short delays are a positive sign, the
indicator does not capture the fundamental problems of public procurement in Romania. The Commission has noted[3] that weak implementation
of public procurement legislation leads to corruption and misuse of public
funds. Romania has not addressed the systematic shortcomings in this area,
including institutional capacity, effective control, and conflicts of interest.
Public procurement rules are often circumvented through practices like
establishing the tender criteria according to the specificities of a
participant company or providing confidential information to a participant to
the tender[4].

In the area of tax
compliance and tax administration, Romania’s performance is slightly
better than the EU average, mainly due to lower costs of tax administration.  A
number of measures were taken recently to reduce the tax compliance burden on
companies. The number of taxes and tariffs in the area of para-fiscality has
been reduced substantially from 491 in early 2009 to a total of 237 today. The
single statement regarding social contributions and record of insured persons
was implemented by January 2011. ‘Ghiseul.ro’, the
electronic system for the payment of taxes, duties and fines, was launched in
March 2011; at present it is operational only in several local administrations
(and only for individuals). In spite of these developments, the key challenge
remains to significantly reduce the number of payments and the time spent to
pay taxes, notably through establishing an efficient and fully functional
electronic filling and payment system.

In terms of efficiency
of civil justice, Romania performs worse than the EU average. While the
time required to enforce contracts is below the EU average, the corresponding
costs, the perceived level of judicial independence and the time necessary to
resolve insolvency all indicate a weaker performance. Furthermore, in the area
of corruption, the performance of Romania is significantly lower
compared to the EU average, the key issue being the diversion of public funds
due to the influence of vested interests.

Romania has undertaken a number of measures to
pursue judicial reform and the fight against corruption in response to the
Commission’s recommendations under the Cooperation and Verification Mechanism.
In spite of these developments, further efforts are essential. [5]
Improvements need to be made concerning state capture and other forms of
administrative corruption, notably through establishing transparent lobbying
rules, controlling the revolving doors between the public and the private
sectors, guaranteeing comprehensive access to information legislation (in
particular by municipal authorities), and ensuring transparency and integrity
of the procurement process.

3.22.7.   Conclusions

To improve its
competitiveness, Romania faces the challenge of setting and implementing
national strategies for industry and innovation defining clear, coherent and
coordinated policies and priorities, and refocusing the scattered national
resources on areas of comparative scientific and economic advantage.

Further, an
effective reform of the public administration at central and local levels would
be essential since weak administrative capacity limits reforms, hinders the
absorption of EU funds and is dissuasive for investors. Moreover, transparency
in decision-making processes and greater accountability in financial and
political institutions are essential cross-cutting issues to consider.

At the same time,
it is important to improve the governance in the area of business environment
and the quality of regulations. Mitigating further the high financing costs and
overcoming the scarcity of credit, including through developing strong and
liquid local capital markets are of particular importance to facilitate access
to finance for businesses. Furthermore, developing the weak transport and
communication infrastructure would be critical to improving competitiveness and
attracting investments.

In the long term,
the challenge will be to ensure a paradigm shift away from unskilled labour and
energy intensive sectors towards more smart, low-carbon and resource-efficient
activities.

3.23.      Slovenia

Sectoral specialisation of manufacturing – Slovenia (2009)

Note : No data available for sectors C19 (coke and refined petroleum products) and C30 (other transport equipment) Source: Eurostat

3.23.1.   Introduction

On average,
Slovenian manufacturing has a higher contribution to total value added than the
EU average (20.3 % compared to 15.5 % in 2011). At the detailed
manufacturing industry level, Slovenia is specialised in labour-intensive
industries (sawmilling and planning of wood, made-up textile articles) and
mainstream manufacturing (domestic appliances, other non-metallic mineral
products). Specialisation in labour intensive industries has decreased
considerably in the last decade. At the more aggregated sector level, Slovenia is specialised in highly innovation-intensive sectors (machinery, electrical
machinery) and in the low to medium range innovation sectors (e.g. wood and
cork).

3.23.2.   Innovative industrial policy

According to the
Innovation Union Scoreboard 2011, Slovenia is one of the innovation followers
with a below average performance. Relative strengths are in human resources and
linkages and entrepreneurship. Relative weaknesses are in intellectual assets
and innovators. High growth is observed for community trademarks and
International scientific co-publications. A strong decline is observed for
non-R&D innovation expenditure. Growth performance in open, excellent and
attractive research systems and intellectual assets is well above average.

As stated in the
Research and Innovation Strategy of Slovenia 2011-2020 (RISS) and in the
National Programme for Higher Education (NPHE), Slovenia sees research as a key
driver to economic development. Therefore, Slovenian authorities are willing to
foster closer links between Public-funded Research Organizations (PROs) and
private enterprises and to allow for more autonomy and responsibility of the
stakeholders in the R&D area.

In this context,
the civil servant status of researchers and their subsequent restrictions to
being transferred to PROs represent a major obstacle to the development of
synergies between research and business. Greater flexibility in the researchers’
status would be a step in the right direction.

The former Ministry
of Higher Education, Science and Technology together with the Ministry of
Economy, following the goals RISS 2011-2020, launched the call for proposals ‘strengthening
the research departments in companies’ in July 2011. The aim of the call was to
ensure effective inter-institutional mobility of researchers, to support the
employment of researchers or developers in the economy, to increase the number
of PhDs and ‘young researchers’ in companies and to increase the number of
inter-disciplinary research departments. The funding available for the call was
EU 20 million. More than 60 companies and more than 500 researchers
(100 PhD students) will be financed until the mid-2014.

Since the
beginning of 2012, the ministries with responsibilities in innovation are going
through a process of restructuring and some reorganization of the
implementation agencies is also expected.

It is expected
that the on-going process of reorganisation of the public administration will
not have any impact on the activities of Excellence-, Competence- and
Development centres, since public agencies are not directly involved in the
implementation activities of these centres.

Competence Centres
deal with R&D in areas considered strategic by the Slovenian government.
Development Centres, on the other hand, work as networking clusters with the
aim of bringing innovation to traditional industries. Finally, Centres of
Excellence are defined as multidisciplinary group of researchers both from
academic and business spheres. All these Centres have carried out their
activities with the support of the European Regional Development Fund. Thus,
for the next financial period 2014-2020, follow up of the funding could be
considered.

Although the
Slovenian government has reaffirmed its intention to reach an R&D ratio of
3 % of GDP by 2020, the background of economic crisis and fiscal austerity
implies a lower availability of resources which can hinder the attainment of
this target.

Progress has been
made in 2012 with respect to stimulation of private R&D investments through
changes in tax legislation. R&D tax allowance was increased to 100 %
of the amount invested. At the same time a special state aid scheme was
abolished. Abolishment of that scheme allowed for reduction of administrative
burden connected with implementation of R&D tax allowance. Also, tax
allowance for other investments has been increased from 30 to 40 % and the
maximum fixed amount of the allowance per year has been abolished. It is
expected that these changes, in connection with the reduction in general tax
rate of corporate income tax will have positive impact on the level of new
investments in general and in investments into R & D in particular.

3.23.3.   Sustainable industry

Slovenia’s energy infrastructure could be further improved. Its geographical
location involves a central role as an area of transit. The transit of
electricity flows is increasing and the national transmission grid is starting
to become a bottleneck. No legal framework is in place yet for the rollout of
smart metering.

For reasons of both trade and environmental impacts, Slovenia’s transport infrastructure requires special attention. Existing gaps in railway
infrastructure and the still low quality of the network hold back business
potential. By contrast, motorway density is high compared to the EU average.
Transit transport is even expected to increase due to Croatia accession to EU in 2013. It will result in a considerable rise in Green House
Gasses (GHG) emissions.

GHG emissions from transport accounted for 27.6 %
of Slovenia’s total emissions in 2009, the third highest share in the EU. The
share of renewable energy sources (RES) in transport was 1.9 % in 2009,
against a target of 10 % in 2020. However, progress has been limited.
While Slovenia supports new design of fuel taxation at EU level, distortions
generated by differential taxation across fuel types are still in place as the
new legislation has not been adopted yet.

Energy efficiency measures on the other hand seem to
have yielded positive results: capital to support investors in the public and
private sectors, as well as households, in order to promote efficient energy
use will continue to be provided by ‘Eko Sklad’ and structural funds. The
Decree on Green Public Procurement sets minimal mandatory environmental
requirements. Currently, the decree covers environmental criteria for 11 groups of products and
services that could be updated in the future. To encourage the use of wood and
materials on its bases in public buildings, the decree stipulates that
30 % of materials used in the building should be made out of wood, widely
available in Slovenia. As for smart grids, they will be obligatory and will be
collected through the network fee.

In compliance with the EU directive and the national action
plan all energy suppliers must achieve 1 % annual energy savings. In 2010
the final-consumer fuel-prices started to be charged with fees for the use of
fossil energy. These fees constitute funds that are used for programs aimed at
achieving energy savings. Through the new charge, available funds for efficient
energy use programs have been greatly increased (to around
EUR 20 million yearly).

However, Slovenia has not set any quantitative energy
efficiency target for 2020, and therefore its contribution to the overall
Europe 2020 target for energy efficiency remains unclear.

Investment in renewables has grown with the share of
renewable energy in gross final energy consumption reaching 16.9 % in 2009
and an estimated 19.9 % in 2010, compared to a Europe 2020 target of
25 % by 2020. The total installed photovoltaic power plants in 2011 grew
from 25 MW to 90 MW, representing an annual increase of 260 %.
The total installed biogas power plants in 2011 grew from 11 MW to 25 MW,
representing an annual increase of 127 %. Resources needed to implement
support scheme for renewable electricity in 2011, grew from
EUR 48.6 million to EUR 69.5 million, representing a
43 % annual growth. The directive on the promotion of the use of energy
from renewable sources has only partially been transposed.

Given Slovenia´s wealth in terms of biomass and wood, Slovenia could develop a comparative advantage in these areas. In addition, a lot of logs
have been exported, which means less value added and unexploited development potential.
So far, contacts and sharing of good practises have been established with Austria and Finland. An Action plan for increasing the competitiveness of forest and wood sector in Slovenia by 2020, which has been adopted by the Government on June 27, 2012, foresees many
measures.

Slovenia faces challenges in the field of waste. The level of landfilling is
still relatively high (58 %) but, with a recycling rate that stands at
39 %, Slovenia is making progress towards its recycling target of
50 % by 2020.

In June 2012, SID
Bank (Slovene Development and Export Bank) has allocated
EUR 44 million for financing of green technologies in Slovene SMEs
(e.g. waste or water treatment, reducing of air pollution, renewable energy,
greening the business).

3.23.4.   Business environment

According to the
World Bank´s ‘Doing Business Report 2012', Slovenia occupies the world rank 37
in terms of ease of doing business and 28 in terms of starting a business.
Indeed, Slovenia has already significantly simplified and shortened procedures
for starting a business: it takes only up to 6 days and it does not cost any
money and registration can be done online through well-established e-VEM
portal.

Nevertheless, with
the deepening of the economic crisis, some components of Slovenian business
environment and its competitiveness have deteriorated. The structural aspects
of the business and competition environment in Slovenia still hold back foreign
direct investment. The country also does not have an active strategy for
attracting foreign capital, in particular in light of worsened competitiveness.
In addition, the lack of an industrial policy further weakens business
prospects.

Access to bank
loans is extremely difficult in Slovenia, and many viable firms – especially
SMEs – face tightened borrowing conditions due to banks’ past overexposures and
current risk aversion. In particular, firms that lack collateral struggle to
obtain funding – not  only for investment projects but also for working
capital. Large enterprises have enjoyed better access to credit than SMEs.
However, the financial engineering products of the Slovenian Enterprise Fund
(SPS) and SID Bank have worked well and have significantly helped in providing
public guarantees and venture capital to innovative firms. The Slovene
Enterprise Fund has also emphasised the importance of start-up firms by
supporting them in the first three years of their life. The results have been
promising.

On thee Small
Business Act issues, implementation remains partial although an SME test was
prepared in 2011 and will be integrated into the rules of legal procedures.
Each legislative proposal will have to be accompanied by a special form with
SME-test-checked areas (economic impact, administrative impact and financial
impact). Previous tests conducted by the Ministry of Economy showed promising
results. The SME test is due to be introduced to other line ministries in 2012.

Moreover, other
legislative measures that should have resulted in a more efficient business
regulation, like the Law on Payments Discipline and the act amending the
Financial Operations, Insolvency Proceedings and Compulsory Dissolution Act, seem
to have generated unforeseen side effects. In fact, criticisms have been raised
that these legislative measures are not encouraging payment discipline. Lengthy
judicial procedures are also hindering the revival of the business sector and
are indirectly delaying cleaning of banks’ balance sheets.

In addition, legal
and regulatory issues such as rigid spatial planning and related lengthy permit
procedures (as every municipality has its own approach to spatial planning) are
working as an obstacle to investment. The renewal of legislative acts in this
area is currently underway.

3.23.5.   Services sector

In Slovenia, the number of regulated professions or professional activities registered amounts
to 319, one of the highest rankings in the EU. A study on this topic was
completed at the end of March 2012. On the basis of its recommendations, the
line ministries will need to change the relevant legislation. For example, the Ministry
of Economic Development and Technology has started with the process of
deregulation of craft services.

3.23.6.   Public administration

According to the
World Bank’s Government Effectiveness indicator, which can be
interpreted as an overall assessment of perceived public administration
quality, Slovenia scores slightly below the EU average.

Information on the
use of novel tools for public administration modernisation
(e-government, impact assessments, performance and service orientation,
accountability) is only available on two out of three indicators.[6]
Among the 8 business-related e-government services under consideration, Slovenia implemented 7, which is also the average of all Member States. On the use of modern
human resources management (performance-related pay, flexibility, skills
development), Slovenia’s performance is close to the average.

As regards corruption,
Slovenia also ranks somewhat below the EU-mean. Not all sub-indicators,
however, point into the same direction. The individual experience of corruption
has been recorded in 7 % of the cases, as compared to 10% in the EU. The
most important weakness in this field is the perceived high diversion of public
funds, which is related to the problem of state corruption.

In contrast, Slovenia performs reasonably well in the policy-link of starting up a business. A
fully operational one-stop-shop to start up a company is active, the time
required to start a company is only 6 calendar days (EU-average is 13.7 days).
The costs to start up a business are virtually none. However, a high complexity
of licensing procedures other than at the start-up phase of a business
leads to lower composite index. In this respect, there is obviously some scope
for improvement.

With respect to public
procurement, Slovenia’s administrative regulations are also strictly more
business-friendly than the EU-average. Both the time and the costs required to
take part in a competition are far lower than EU-mean. Payment morale of public
authorities is also far better than average: In 2012, average payment delays
were 15 days in Slovenia, 28.3 days in the EU. However, problems remain in
public procurement implementation, notably as regards payment discipline of
contractors using subcontractors to complete the public contract and the skill
level of staff of the contracting authority. A Public Procurement Agency was
established by the end of 2010 to professionalise and harmonise procurement,
but it is now due to be abolished. Its competencies will be transferred to the
Ministry of Finance.

The data for tax
compliance and tax administration show that the firms’ time required to
fulfil their tax duties is higher than average (260 hours per year in Slovenia
vs. 208 hours on EU-average), but administrative costs of 0.9 % of total
revenues are below the EU-average of 1.3 %. Regarding excessive tax
compliance burden, Slovenia conducted its own study in 2010 as part of the
on-going programme of ‘25 % reduction of the administrative burden”.

As a consequence
of this study, changes in procedures and legislation were implemented. For
example, since October 2011, electronic tax declarations are available to
Slovenian taxpayers alongside a new payment regime. Similarly, the VAT system
was simplified with specific tax regimes for SMEs. Administrative burden has
also been reduced in the area of application of tax allowances for R&D
investments as a special state aid scheme was abolished and replaced with
general allowance for R&D investments at the level of 100 % of the
amount invested.

Scope for
improvement also exists in the efficiency of the civil justice system. A
major problem is the time required for enforcing contracts, calculated at
1 290 days as compared to an EU-mean of 556 days. This lack of speed in
the judicial system can only in part be compensated through comparably lower
costs of enforcement of 12.7 % per claim (EU-average is 20.6 %). With
a time to resolve insolvency issues of 2 years, Slovenia’s system of dealing
with bankruptcy issues is at the EU-mean. In general, the perceived
independence of the judiciary is significantly below EU-average, confirming
these weaknesses.

Overall profile of public administration

Source: WIFO

In July 2011
legislation was passed in order to transform the Competition Protection
Office (CPO) into an independent agency that was supposed to become
operative as of 1 January 2012. However, in November 2011 an amendment to this
law was introduced whereby CPO will not achieve its independent status as long
as procedural conditions will not be completely fulfilled.

Due to political
changes at the beginning of 2012, the directive bodies of the CPO have not been
appointed, and hence the independent status has not been granted. Moreover, the
CPO continues to have inadequate resources and funding for carrying out its
tasks.

In other areas,
policy developments have taken place that amount to a modernisation of public
administration. Besides the modernisation of tax administration, mentioned
above, the ‘minus 25 % administrative burden’ programme (co-financed from
EU Social Fund), has identified areas where savings could be achieved, easing
administrative burdens on businesses and citizens. This programme encompasses
nearly 300 measures in 14 priority areas.

A new special web
portal was set up. The portal enables a two-way communication between the users
and line ministries, whereby the former can monitor impact on legislative
changes.

Moreover, in
reducing administrative burden for start-ups, Slovenia has achieved significant
progress in establishing one-stop-shops for businesses and a well-functioning
web portal eVEM that is offering several services with no costs for businesses.

3.23.7.   Conclusions

The impact of the
economic downturn has clouded the perspectives of the Slovenia business sector and its competitiveness. Besides, budget constraints have the
potential to slow down the development of an innovative industrial policy, including
the promotion of a more sustainable economy. As required by the
country-specific recommendations of the European Semester 2012, inproving the
framework conditions for competition could attract investment, also from
abroad, thus strengthening the internationalisation prospects of Slovenian
businesses.

The deepening of
the economic crisis has resulted in weaker demand and narrower borrowing
conditions for SMEs. Although the financial instruments provided by the SID
bank and the financial engineering tools of the Slovenian Enterprise Fund have
helped in relieving the pressure faced by viable businesses and SME, access to
finance remains a problem, as noted by the country-specific recommendations.

The business
environment would benefit from a full implementation of the Small Business Act,
including applying the SME test to all relevant legislation. Businesses would
also benefit from achieving the aim of shorter payment times, and from a
streamlined spatial planning system.

3.24.      Slovakia

Sectoral specialisation of manufacturing – Slovakia (2009)

Note : No data available for sectors C12 (tobacco products), C19 (coke and refined petroleum products) and C21 (basic pharmaceutical products and pharmaceutical preparations) Source: Eurostat

3.24.1.   Introduction

Mainly due to
external demand and strong manufacturing activity, Slovak economy continues
successfully recovering. Accounting for 25.9 % of total value added
against the EU25 average of 15.5 %, manufacturing plays an important role.
Specialized in capital-intensive and technology driven industries, such as
automotive, electronics or steel, labour productivity is relatively high in
particular when compared to its catching-up peers. However, Slovakia still has to face several challenges to complete its catching up process. In order
to foster its long-term growth potential, Slovakia needs to improve innovation
capacity and business environment, in particular through more efficient public
administration.

3.24.2.   Innovative industrial policy

As a moderate innovator, Slovakia has an
underdeveloped R&D system. Since 2006, its below-average innovation
performance improved only modestly. The total R&D expenditure still ranks
amongst the lowest in the EU, although after a decade of gradual decline[7] it has recovered to 0.63 % of GDP in
2010. Similarly, the share of private R&D expenditure remained low.
Generation of intellectual assets and patent revenues stayed at low levels,
although strong growth was observed for community trademarks. As demonstrated
for instance by the low number of frequently-quoted scientific publications,
excellence in research and quality of tertiary education remain a major
challenge.

Large companies as
well as SMEs collaborate with the domestic research facilities only to a
limited extent. Innovations in the production system and productivity gains
have mainly been driven by technology imports. However the potential for
further productivity surge is evaporating due to the declining inflows of FDIs.
In recent years, Slovakia has increased its relative value added share in high
innovation sectors and decreased its specialisation in labour-intensive
low-skill industries. Overall however, Slovak economy has yet to significantly
move towards more knowledge-intensive economic activity and employment
structure.

Slovakia’s innovation policy mix relies to a large
extent on direct financial measures. The Innovation Strategy for 2007-2013 sets
the general framework for policy intervention, while the Innovation Policy
2011-2013 specifies actions in three areas: infrastructure; quality of human
resources; support for innovation. The priority ‘Infrastructure’ includes
support to industrial clusters for which first calls are planned by the end of
2012. Funded mainly by the Operational Programme Competitiveness and Growth,
the innovation support for industry is the biggest priority in financial terms.
The innovation vouchers are yet to be launched.

Lack of
coordinated intervention in the policy areas of research, education and
innovation tends to negatively affect the innovation system. Responsibilities
are fragmented as is demonstrated by the existence of several strategic policy
documents. In 2011 Slovakia adopted two strategy documents: ‘FENIX and the ‘MINERVA
2.0’ both aimed at science, technology, and knowledge-based economy. They
proposed a range of measures for increasing the quality of higher education and
the research system, and connected them to knowledge-based economy. The main
measures included (i) new techniques for project evaluation; (ii) re-allocation
of research funding towards strategic projects; (iii) national system for
technology transfers; (iv) support for new technology-based firms; and (v)
co-operation with multinational companies through the creation of top-notch
research infrastructure. The FENIX Strategy also proposed replacing current
research and innovation priorities by a demand-driven bottom-up approach. The
strategies identified the main problems in the knowledge triangle polices, and
also addressed interaction between the key actors. Their coordinated
implementation could bring about better innovation capacity.

In April 2012, the
new government announced further measures to improve collaboration between the
public and private sector. It wants to set up a scheme to attract exiled
researchers, and plans an adaption of the internationally successful Small
Business Innovation Research programme.

3.24.3.   Sustainable industry

Structural and technological changes within the industrial sectors[8] were the main driver of reductions in
energy intensity in recent years. Nevertheless, owing to the very minor
progress since 2007, in 2010 Slovak industry remained the third most energy
intensive in the EU.

In May 2011,
government adopted the National Energy Efficiency Plan 2011-2013, targeting
energy savings of 8 362 TJ. This would represent a 2.7 %
reduction in final energy consumption compared to the 2001-2005 average. With
priorities on technology transfers and energy efficiency, most savings are to
be achieved by industry (30 %), public sector (27 %) and buildings
(21 %). In early 2012, the National Energy Efficiency Monitoring System
became operational. As regards energy audits, agricultural and industrial
enterprises are obliged to conduct audits by the end 2011. In order to analyse
possible carbon leakage, government sent out a questionnaire to 200 Slovak
companies.

To work out waste
management policies was included among government priorities. Apart from the
recycling fund, in 2011 however there were no specific policies assisting
industry to re-use or recycle their waste. Similarly, little progress was
achieved in diverting waste from landfill or increasing energy recovery, as Slovakia landfills more than 80 % of its municipal waste, while recycling only
4 %.

Slovakia failed so far to implement the third
Internal Energy Market package, triggering an infringement procedure in October
2011. Electricity prices for industry are the third highest in the EU and the
highest for a continental Member State. This appears to be less due to taxes or
production prices, but rather because of high distribution and transmission
tariffs. These cover not only costs and profit margin of the state-owned grid
company, but comprise support for renewable energy, domestic coal production,
co-generation, and also support for the new electricity spot market. Moreover,
the end price includes a levy financing the phasing out of nuclear facilities.
Recent savings at the grid company enabled to lower the tariffs somewhat. In
2011, government also reduced the level of feed-in tariffs for renewables to
ensure their sustainability and lesser impact on prices. In March 2011, the
Network Industries Regulator (URSO) adopted the Regulatory Policy for
2012-2016, whereby it chose the price cap method as main regulatory instrument,
and suggested it could stop regulating electricity prices for the SMEs.

As regards the
construction works on two new reactor blocks at nuclear power plant in
Mochovce, it is expected that they will be operational by the end of 2013 and
2014 respectively, with an installed capacity of 440 MW each.

3.24.4.   Business environment

Business-relevant legislation in Slovakia remains complex and is subject to frequent changes. In July 2011, the
government adopted the strategy ‘sINGAPUR’ aimed at improving the business
environment. The strategy contains 94 short- and mid-term measures for the
period 2011-2015, out of which 64 cover the Action programme on administrative
burden reduction adopted in 2007. With many measures still to be implemented,
the strategy risks to fall short of achieving the targeted 25 % reduction
of administrative burdens. In 2011 the government took steps to boost the
analytical capacities at ministries dealing with economic and social policies.
In spite of improvements, the regulatory impact assessments are in practice
often conducted formally.

As from January
2012, the electronic point-of-single-contact became operational. The
administrative fees for electronic filings were abolished. The time to start a
business was shortened up from 5 to 3 days to facilitate business activity
within the scope of the Trade Licensing Act. To facilitate the creation of a
private limited company however further reforms are needed. In 2011, the
Ministry of Economy launched the ‘Economic Register of Slovak Entities"[9]. In a user-friendly fashion, this online
service provides all public legal, economic and financial information[10] on entities registered in Slovakia.

The indicators
measuring various aspects of entrepreneurship score clearly below EU average.
The attitude of population towards entrepreneurship and school education that
insufficiently encourages sense of business initiative poses the main obstacles
for higher business dynamics.

As regards the
access to finance, the situation deteriorated in the period 2009 - 2011[11]. The rate of rejected loan applications
went up, while the number of SMEs using debt financing increased from 61 %
to 74 %. Although the amount of loans to non-financial firms[12] naturally followed the downward path of
the economic cycle that occurred in 2009, with the subsequent recovery it has
continued growing at a moderate pace in 2010 – 2011. With an underdeveloped
stock exchange and venture capital market, equity financing remained very
limited.

In 2011, the
JEREMIE initiative was finally set up. With a holding fund amounting to
EUR 100 million, it is made of a First Loss Portfolio Guarantee
scheme and a Risk Capital instrument. First calls for both instruments were
launched in January 2012, whereas calls targeting SMEs should be launched later
in 2012. The OP C&G is also considering a microfinance scheme for SMEs
(EUR 12 million).

The specialisation
in export-oriented manufacturing places increasing demands on the quality of
infrastructure. In eastern regions however, the lack of adequate transport
infrastructure remains an obstacle to growth, dragging the catching-up process
already evident in western Slovakia. In 2010 - 2011, the government stepped up
efforts to prepare motorway and railway projects. Difficulties postponing
actual construction however persist, mainly due to public procurement and
environmental issues.

3.24.5.   Services sector

With 60 %
share in 2010 compared to the EU average of 74 %, the services sector is
relatively less important for Slovak economy. Except tourism and network
industries, services receive only little policy attention.

The competition
improved somewhat in the network industries in recent years, and retail
consumers start benefiting from the liberalized energy sector. The gas market
is dominated by the distributor and network company SPP, which is almost
100 % dependent on imports of Russian gas. The dominance of the incumbent
telecom operator slows down the spread of broadband internet. On the other
hand, competition among mobile operators improved, owing to the arrival of the
third operator in 2007. Following the adoption of the Postal Service Act, the
postal market had fully been liberalized as of 2012.

Professional
services are subject to entry and to a lesser extent conduct regulations which
tend to restrict competition and push up prices. There are no quotas or
economic need tests, however legal professions, architects, engineers or
accountants face strict licencing and educational requirement before exercising
their profession. Lawyers also cannot be partners of commercial companies and
have to comply with rules prohibiting advertising or disclosure of prices.
Dismantling compulsory memberships in professional chambers and removing
unnecessary restrictions would increase competition in this sector.

3.24.6.   Public administration

Indicators of
governance and institutional quality show that Slovakia needs stronger
institutions and more efficient public administration. The Government
Effectiveness indicator[13] ranks Slovakia 19th out of EU27, whereas its score has been sliding since 2006. The
overall functioning of public administration is impaired by weaknesses in
analytical capacity, hampering policy implementation as well as the quality of
public services. Slovak administration relies to a greater extent on flexible
modes of public employment. However, modern human resources management
(performance-related pay, flexibility, skills development) remains
underdeveloped, whereby high turnover of staff impedes capacity building and policy
continuity.

Slovakia has a low score on corruption. Perceptions
of diversion of public funds due to corruption, and irregular payments and
bribes by firms are seen as quite common. Results for the experience of
corruption also indicate that it is a major issue with 27 % of respondents
reporting an incidence of corruption compared to the EU average of 10 %.

Measured by a
composite indicator on starting a business and licensing, Slovakia’s performance is slightly below the EU average. This result is mainly driven by
time requirements for incorporation, although the related costs are
significantly lower. As shown by the indicator on the complexity of obtaining
permits, licensing procedures are assessed as rather convenient.

The composite
public procurement index for Slovakia reveals a considerably weak performance.
While on average time requirements and costs for the competition for public
tenders amount to more than 16 days and 0.19 % of per capita GDP, for Slovakia these values are 30 days and 0.26 % respectively. Furthermore, average
duration of payments by public bodies is higher than the EU average.

Overall profile of public administration

Source: WIFO

Compliance costs
stemming from tax obligations can have significant impact on enterprises. In
2011, a model business company in Slovak had to make 31 payments and spend 231
hours to pay taxes, which is slightly higher than the EU average of 208 hours.[14]
Moreover, the efficiency of tax administration appears low as suggested by the
ratio of costs of tax administration per revenue collected.

According to the
composite indicator on the efficiency of civil justice, Slovakia again performs worse than the EU average. For instance, it takes more than twice
as long to resolve insolvency, and the judicial system is perceived to be
significantly less independent when compared to the EU average. Due to the
existing backlog of cases in courts, the overall time needed for a trial and
the enforcement of judgement impair the access of businesses to legal recourse,
leaving many commercial disputes unsolved. The alternative dispute resolution
systems, which could improve contract enforcement, are still underdeveloped.

In 2010/2011, the
availability[15] of basic e-government
services for enterprises (87.5 %) was close to EU average (89.5 %).
On the other hand, the availability of e-government services for citizens
remains underdeveloped (45.8 % against EU average of 80.9 %). Areas
for improvement include government-to-government services and use of electronic
signature that remains cumbersome.

In 2011, Slovakia successfully put in place several transparency-enhancing measures in the area of
public procurement and judicial efficiency. All courts decisions in civil,
commercial, and criminal cases had to be published on the internet as from
January 2012. Recruitment procedures for new judges were made more transparent
and regular performance assessment of judges was introduced. The Insolvency
register and the Commercial register are now available on the internet.

In February 2011, Slovakia amended the Public Procurement Act, aiming to increase competition and
transparency. The amendment significantly lowered the national limits for
under-threshold contracts, which were often abused. The use of electronic
auctions is more obligatory. As of late 2010, an electronic central registry of
contracts and invoices has become operational. All contracts awarded and
invoices paid by public authorities at all levels must be published on the
online registry to be legally valid. This reform in terms of reporting can be
considered a good practice that significantly increased transparency and
control of public spending.

To address the
problem of high tax compliance burden and to improve the overall tax collection,
in 2011 Slovakia launched a major restructuring[16]
of the Tax Administration. As from 2013, the tax and customs authorities shall
merge into one institution – the Financial Directorate. The reform will unify
the collection of taxes and customs duties and later on also social security
contributions, whereby it shall simplify the filing of tax returns. In early
2012, the implementation of this reform encountered major technical problems,
causing additional administrative burden on businesses. Nevertheless, if
successfully implemented, the reform could bring about better tax collection as
well as significantly ease the tax compliance burden.

A key priority in
2011 was to set up the legislative framework for universal electronic access to
basic public services, enabling uniform implementation of e-services and full
electronic exchange with public authorities. The main funding source of
e-government is the Operational Programme Information Society (OPIS)[17],
with 71 % of its funds allocated for e-government projects. In spite of
stepped-up efforts, public procurement, coordination and technical issues delay
major projects, whereby overall absorption of OPIS stays very low.

3.24.7.   Conclusions

Technology imports
were source of major productivity gains in past years, however this potential
is evaporating due to declining inflows of FDIs. Specialised in few
manufacturing industries, Slovak economy could benefit from diversifying to
services sectors. As innovation capacity has improved only modestly, it has yet
to significantly move towards more knowledge-intensive economic activity. Transparency of public procurement and judicial authorities improved
in 2011. Nevertheless, the overall efficiency of public administration still
drags productivity of enterprises, and remains important priority for improving
business environment. The combination of very high energy prices with one of
the highest energy-intensity in the EU poses another challenge for Slovak
economy. The government’s policy response to many of the identified challenges
was well formulated and translated into action plans with specific measures. To
bring about tangible improvement, efforts need to concentrate on
implementation.

3.25.      Finland

Sectoral specialisation of manufacturing – Finland (2009)

Note : No data available for sectors C12 (tobacco products), C15 (leather and related products), C19 (coke and refined petroleum products) and C21 (basic pharmaceutical products and pharmaceutical preparations) Source: Eurostat

3.25.1.   Introduction

Finland belongs to the group of EU Member States,
which is characterised by higher income and a specialisation in knowledge
intensive sectors. The contribution of manufacturing to total value added is
higher in Finland than in the EU on average (17.3 % against 15.5% in
2011).

At detailed
manufacturing industry level, Finland is specialised in capital-intensive
industries (manufacture of pulp, paper and paperboard), both in terms of value
added and exports, as well as in mainstream manufacturing (agricultural and
forestry machinery, electric motors) and labour-intensive industries
(sawmilling and planning of wood, steam generators, building and repairing of
ships).

As regards export
and technology-driven industries (apparatus for line telephony), Finland specialises in high-value added activities such as design and marketing. At the
more aggregated sector level (NACE 2-digit), Finland is specialised in highly
innovation-intensive sectors (communication equipment) and, in exports, also in
medium innovation-intensive sectors (pulp and paper, wood and cork).

Finland does not seem to demonstrate
specialisation in sectors requiring high education due to the low relative
share in R&D and in business services. Given its industrial structure, Finland’s R&D intensity and position on the quality ladder for technology-driven
industries are well above the EU average.

3.25.2.   Innovative industrial policy

The Innovation
Union Scoreboard 2011 ranked Finland as one of four innovation leaders in the
EU showing an innovation performance well above that of the EU27 average. The
Finnish national research and innovation system shows strengths in a well
educated work force, R&D&I funding and support, and linkages and entrepreneurship.
High growth in innovation performance is observed for community trademarks and
knowledge-intensive services exports, and growth performance in open, excellent
and attractive research systems, finance and support and Intellectual assets is
well above EU average.

Finland is the top performer in the EU27 in terms
of business R&D spending (2.69 % of GDP, 2010). Total R&D
expenditure (BERD and public R&D spending combined) reached 3.87 % of
GDP[18], which is well above the
EU average and close to Finland’s national target for 2020 at 4 %. Direct
public R&D expenditure is however expected to slightly decline in 2012
compared to 2011, while the ongoing major structural change in the ICT sector
may have an impact on business R&D intensity at least in the short term.
The Government intends to exploit the opportunities for renewal and growth
offered by the structural change and has set up a high-level task force, Finnish
ICT Cluster 2015, in 2012.

The national
innovation system is being reformed and strategic steering is provided by a
government working group, which has been set up to coordinate research
assessment and foresight activities. The goal is to improve the efficiency of
the innovation system and refocus its priorities. The most important reforms
relate to streamlining, enhancing the efficiency and refocusing the priorities
of the innovation system, as well as internationalisation, which was identified
as a weakness in the Finnish innovation system[19]. The focus of
public research and innovation funding is being shifted to growth orientated,
job creating and internationalising SMEs. The current demand and user-driven
innovation policy action plan 2011-2013 will be assessed in a mid-term review
in 2012.

Independent
evaluations of the activities of Tekes, Finnvera, SHOKs, and the Academy of Finland (to be completed by 2013) will provide additional insights into the
effectiveness of the national innovation system. Important research and
innovation related decisions were also taken in March 2012 in the context of
Central Government Spending Limits for 2013-2016. The planned introduction of
an R&D tax incentive in 2013 is representative of the on-going refocusing
from direct to indirect R&D aiming at improving the leverage effect of
public investments.

Finnish innovation
policy and measures are in general geared towards speeding up the development,
commercialisation and take up of new technologies. Key Enabling Technologies
(KETs) are an integral part of the public technology and innovation programmes funded
by the Finnish Funding Agency for Technology and Innovation (Tekes). The
technical research center of Finland (VTT) and Finnish Universities have
competencies in all KETs.

The share of
science and technology graduates among 20-to-29 year olds in Finland is well
above the EU average (19 % vs. 14 %, 2009). The knowledge-intensive
sectors in the economy in which Finland specialises require high-intermediate
skills. In view of emerging new skills requirements and the demographic changes
there is however a need to ensure an adequate provision of especially STEM
(Science, Technology, Engineering, Mathematics) skills also in the future.

3.25.3.   Sustainable industry

The Finnish
industrial sector is more energy-intensive compared to the EU average. Some
sectors in Finland are at risk of carbon leakage, such as, the paper and pulp,
iron and steel, non-ferrous metals, chemical and petrochemical industries.
Although compliance costs have not been very high during the first and the
second period of the EU ETS, a majority of new investments in these industries
have been made outside of Finland.

Compared to many
other industrial nations Finland has low overall emissions in relation to GDP
and per capita. In industry and the energy sector, CO2 intensity is
slightly better than the EU average. The power generation mix is diversified
with nuclear and renewable energy as dominant sources. Electricity prices are
among the most affordable for medium size enterprises in EU comparison.
Regarding other costs, environmental protection expenditure in the
manufacturing industry represents a small percentage of GDP, corresponding to
0.31 % of GDP for Finland and close to the EU average.

The Government’s
goal is to develop Finland into a leading position in environmental technology.
In 2012 a new Strategic Programme for Cleantech Business Development has been
initiated, which will promote growth, business activity, innovations and the
internationalisation of the cleantech sector in Finland. The programme will
establish strategic targets for Finland’s cleantech business and coordinate
operators in the sector. The growth potential of the sector is promising as the
environmental technology sector in Finland has steadily been growing by
5-10 % annually since 2005. There are more than 2000 Finnish firms in the
cleantech sector of which 95 % are SMEs. Since growth prospects are mainly
in international markets (e.g. Russia, India, China), internationalisation of
SMEs is an important issue.

Tekes provides
funding for environmental technologies and a new interesting initiative in this
context is the ‘Green Growth Programme 2011-2015”. The programme’s objective is
to identify potential new growth areas for a sustainable economy based on lower
energy consumption and sustainable use of natural resources. Although Finland is not specialised in automotive industries, there is also noteworthy developments
in electrical vehicles. In 2011 Tekes launched a programme on Electrical
Vehicle Systems 2011-2015 (EVE) aimed at companies and research institutes.
Another green project funded by Tekes is the Green Mining Programme, whose
objective is to make Finland a global leader in sustainable mineral industry by
2020 by increasing the number of SMEs that target the export market in the
mineral cluster.

A majority
(87 %) of Finnish SMEs selling green products and services are active only
in the domestic market.[20] Green exports are mostly
destined for other EU Member States. In 2010, Finland’s trade balance of
environmental goods was positive reaching 0.06 % of GDP. However exports
of environmental goods as a percentage of all exports of goods were clearly
below the EU average (0.53 % vs. 0.77 % of GDP, 2011).

The Government has
also launched a new four-year Strategic Programme for the Forest Sector, whose
key objective is to promote the forest sector’s competitiveness and renewal.
The programme will monitor and anticipate changes in the forest sector while
coordinating measures. A National Wood Construction Programme 2011-2015 will be
implemented as part of the Strategic Programme for the Forest Sector.

3.25.4.   Business environment

Finland scores clearly above the EU average on all
business environment indicators, except high-speed broadband lines. The Finnish
business environment shows strengths in a stable legal and regulatory framework
and relatively low level of administrative burdens. Finland also scores high on
the indicator measuring satisfaction with the quality of infrastructure related
to rail, road, port, and airport facilities.

Since July 2010 Finland is implementing an ambitious national broadband strategy ‘Broadband for all 2015”,
which pledges to connect everyone to a 100 Mbps connection by 2015. Telecom
operators defined as universal service providers must be able to provide every
permanent residence and business office with access to reasonably priced
service by 2015. Although Finland scores below the EU average on the
availability of high-speed broad band lines, e-government usage by Finnish
enterprises is the highest in the EU27 (96 %, 2010).

Finland scores above the EU average on all
entrepreneurship and SMEs indicators, except business churn. Finland shows strengths in early stage financing and access to finance, as well as duration
of payments by public authorities.

The Finnish small
businesses sector is similar in structure to that of other EU Member States.
Microenterprises dominate the sector and most Finnish SMEs are active in the
service sector, where SMEs account for almost 61 % of all jobs and almost
55 % of SMEs value added. The small businesses sector has been growing
rapidly. The number of enterprises and the value added they produce have
increased much more dynamically in Finland than in the EU in the past decade.[21]

Since 2007, a
website ‘Enterprise Finland’ provides a one-stop shop for information on
assistance available to companies and entrepreneurs, especially SMEs.[22]
There is still room for improvement with respect to the Finnish point of single
contact. The amount of information available through the portal is generally good,
but improvements should be made to increase the possibility of online
completion of procedures.[23]

Finland implements a long standing active SME
policy, which is reflected in an outstanding Small Business Act profile. While Finland’s performance across the ten Small Business Act principles is above the EU average
in general, overall progress has been stagnating, but at a higher level than in
comparison with other Member States.

The current
integrated Impact Assessment system assesses the impacts on SMEs. Government
plans to strengthen the impact assessments are welcome, in particular the
assessment of business impacts and the cumulative impacts of legislation.

There has been
considerable progress in e-procurement. A new law on electronic auctions and dynamic
procurement procedures is expected to reduce bureaucracy, while speeding up
public procurement procedures. Access for SMEs is promoted through guidance,
which is one of the priorities for a public procurement advisory unit funded
partly by the Ministry of Employment and the Economy. However, Finland scores moderately well for use of e-procurement in the stages before the award of
contracts.

The overall birth
rate of new firms and overall exit rate is lower in Finland than in other
Member States, implying that business churn is low. Relatively few SMEs grow to
become larger companies in Finland. There are less than 700 high-growth
companies, predominantly in knowledge-intensive services.[24]
Despite Finland’s technological sophistication, its current performance in
nurturing high-growth companies could be improved. Promoting innovative
high-growth companies remains a key policy priority in the new Government
Programme. Several growth venture policy measures have been taken, such as:

-
A new joint service Growth
Track provided by business development organisations has been established,
which is intended for enterprises aiming at rapid growth and
internationalisation.

-
Finnvera’s (Export
Credit Agency of Finland) export financing schemes have been renewed;

-
The Vigo Accelerator
Programme has been expanded and currently covers six areas.

-
Tekes new strategy is
focusing one third of company funding on young innovative enterprises;

-
Following the
Government decision on the Central Government Spending Limits 2013-2016 in
March 2012, tax incentives for growth entrepreneurship will be introduced,
starting in 2013.

3.25.5.   Services sector

Though
manufacturing remains important as a generator of process and product
innovation, export income and prosperity in Finland, the economy is
increasingly a service economy. In the private services sector, especially
business services account for an increasing share of growth and are expected to
continue to rise in parallel with further technology developments and IT
investments in the sector. In Finland public and private services amount to
only about 68 % of GDP indicating that there is growth potential to be
exploited. In comparison, services account for more than 73 % of GDP in
the EU27 (2010).

Promoting
competition in shielded service markets remains a challenge because of the need
to restore productivity growth and diversify the Finnish economy.  In 2011 and
2012 the Council recommended Finland to continue enhancing competition in
product and service markets, especially in the retail sector. Finland has stepped up its pace of reform to address the concerns expressed by the
Commission and other fora regarding increasing competition. In 2011 a new
Competition Act was adopted, which brings amendments to merger control, penalties,
and the procedure adhered to in the review of competition issues and damages.
In 2012 the Government has launched a new programme on promoting healthy
competition, which aims at identifying and addressing structural barriers
harmful to competition. The programme will also evaluate impacts of purchasing
power in Finnish retail trade, especially in the food sector. Retailers tend to
use their strong position with respect to suppliers in several ways that may be
considered questionable for sound and effective economic competition.[25] The
Government is exploring merging the Finnish Competition Authority with the
Finnish Consumer Agency and possibly the National Consumer Research Center, which would help increasing the impact of competition and consumer issues in Finland.

3.25.6.   Public administration

Finland is one of the top performers in public
administration according to the World Bank’s Government Effectiveness Index,
and displays the highest value of the EU Member States.[26]
This indicates a high perceived quality of public service provision in Finland.

The country’s
performance is above the EU average in all tools to improve public
modernisation (e-government, impact assessments, performance and service
orientation, accountability). Finland is one of the top performers for
e-government and has increased the online availability of services for
enterprises considerably in the past years. Also, the usage of a comprehensive
evidence-based impact assessment has been improved since its implementation in
2004, while the application of tools that facilitate a strategic management of
public sector employees was slightly more intense than average.

The Finnish
government is implementing an action plan to reduce the administrative burden
on businesses by 25 % by 2012, where developing e-government plays a key
role. Transactions between businesses and the authorities will be brought
together to operate in line with the ‘one-stop-shop’ principle and all key
business services will be covered by 2013. There has been progress in some
priority areas towards the 25 % reduction target, but overall progress is
slow. A follow-up study will be finalised in spring 2012 and a government
decision on continuing the action plan is expected in autumn 2012.

The composite
summary indicators for corruption and fraud are significantly above the
average performance. With only 4 % of individual corruption experiences, Finland outperforms the majority of other Member States and the perception of irregular
payments and bribes as well as the diversion of public funds is significantly
lower than the EU average.

The composite
index on starting a business and obtaining licenses is slightly above
the average, with the exception of the time required to start up a company,
which takes approximately as long in Finland as in the average Member State, as stated in the World Bank’s Doing Business report. In spite of the
comparatively good performance in setting up a fully operational one-stop shop
to start up a company, there is still potential for improvement.

The composite
link-level indicator for public procurement is well above average, with
the average delay in payments (only 4 instead of the EU average of 28.3 days)
as well as the cost to participate in government procurements (0.14 %of
GDP per capita as typical costs of taking part in a competition, while the EU
average amounts to 0.19 % of GDP per capita) being lower than the
EU-average.

Finland also observes an extraordinary good
performance as regards its civil justice system. The time required to
enforce contracts (375 days) is far shorter than the EU average (556 days), and
the costs thereof are substantially lower (13.3 % of a claim in Finland as compared to the EU average of 20.6 %). Resolving bankruptcy issues is
similarly faster (0.9 years) than in most other EU Member States (average of
1.95 years). Perceived independence of the judiciary is one of the highest of
all Member States with a score of 6.41 on a scale from 1 to 7.

Finland’s performance on tax compliance and tax
administration indicators are above the EU average. The good scores reflect
especially a far better than average performance in the time to prepare and
file tax returns and to pay taxes (only 93 days), whereas the administrative
costs of taxation are only slightly better than the EU average.

Although Finland scores high on the quality of its public administration, Finland faces a number of
challenges, in particular in relation to population ageing. The Finnish authorities are implementing
several reforms to redesign public services structures and boost productivity
at both the central and local government level.

Overall profile of public administration

Source: WIFO

3.25.7.   Conclusions

Finland remains one of the most competitive Member
States in the EU and is identified as one of the innovation leaders. However
the Finnish economy needs to become more diversified both in terms of companies
and in terms of exports in order to develop multiple strong export-oriented
firms in the future.

Notwithstanding
the past strong Finnish R&D and innovation performance, without a
significant increase in the number of innovative high-growth firms, Finland’s ranking as an EU innovation leader risks declining. This requires facilitating
innovation, enabling the transformation from R&D into marketable products,
and encouraging the penetration of fast growing export markets. In the short
term, it will also be crucial
to exploit and disseminate the extensive ICT know-how also in other industries
in Finland, including the public sector. Finland should also continue enhancing
competition in product and service markets, especially in the retail sector,
and take further measures to achieve productivity gains and cost savings in
public service provision in response to the challenges posed by the ageing population. The new Strategic Programme for Cleantech
Business Development is a step in the right direction in terms of endowing Finland with an explicit strategy for greener business growth and for a strategic positioning
in the emerging environmental technology sector.

3.26.      Sweden

Sectoral specialisation of manufacturing – Sweden (2009)

Note : No data available for sectors C12 (tobacco products) and C21 (basic pharmaceutical products and pharmaceutical preparations) Source: Eurostat

3.26.1.   Introduction

While
manufacturing remains important as a generator of process and product
innovation, export income and prosperity in Sweden, the Swedish economy is
gradually shifting away from manufacturing and towards a service economy, as it
is in a number of other Member States. The contribution of manufacturing to
total value added in Sweden was 16% in 2011, similar to the EU as a whole (15.5%).
Swedish manufacturing specialises in capital-intensive industries such as
processing of iron and steel, pulp and paper; in mainstream manufacturing such
as isolated wire and cable, general and special-purpose machinery; and in
technology-driven industries such as TV/radio transmitters and receivers. High
relative export shares in computer and information services, research and
development, and royalties and license fees, indicate that Swedish also has
export specialisation in high-education sectors.

Apart from the gradual
shift towards services, the last decade has also seen some important structural
changes in Swedish manufacturing, notably away from motor vehicles, aerospace
and other technology-driven industries. Sweden has increased its relative share
of value added and exports from labour-intensive industries such as sawmilling
and bodies for motor vehicles, and in high-education and high-innovation
sectors such as computers, research and development, and information services.

In the first
decade of the century, nominal unit labour costs rose by 16 % in Sweden, slightly more than in the EU as a whole (14 %) but less than in the euro area
(20 %). Labour productivity in manufacturing is among the highest of all
Member States. While Sweden continues to enjoy an enviable competitiveness
position overall, there are fluctuations in the relative competitiveness
position of the various sectors.

3.26.2.   Innovative industrial policy

According to the
Innovation Union Scoreboard 2011, Sweden remains one of four innovation leaders
in the EU. Using a composite of 24 separate innovation indicators, it ranks Sweden as the best innovation performer in the EU, outperformed only by Switzerland. Sweden ranks particularly high on human resources, finance and support, firm investments and
intellectual assets, but does less well on output-oriented indicators such as
innovators, economic effects, linkages and entrepreneurship.

The Swedish
national innovation system benefits from a stable macroeconomic environment, a
well-educated workforce, appropriate infrastructures, ambitious R&D
policies, venture capital, and state-of-the-art scientific performance. Until
recently, Sweden also benefitted from the presence of a number of
R&D-intensive multinational companies, but in recent years several of those
have chosen, for various reasons, to relocate their R&D activities to other
countries.

Partly because of
this outflow, and partly due to the economic crisis, business expenditure on
research and development (BERD) has fallen back to its lowest share of GDP in
five years. Reinforced public spending on R&D has to some extent
compensated for the drop, but the overall R&D intensity fell in 2010 to
3.4 % of GDP, its lowest share since 2007. Further, large investments in
R&D have failed to lead to sustainably higher economic growth or levels of
innovation.

Against this
backdrop, the government has announced its intention to present a new
innovation strategy in 2012, to coincide with the presentation of the next
research and innovation bill. In parallel, the country-specific recommendations
of the 2012 European Semester have urged Sweden to take further measures in the
research and innovation bill to continue improving the excellence in research
and to focus on improving the commercialisation of innovative products and the
development of new technologies.

The new innovation
strategy is expected to take a broad approach to innovation, going beyond
technological development and academia-industry interaction. It will shift away
from sectoral innovation policies in favour of an integrated, needs-driven and
holistic policy.

3.26.3.   Sustainable industry

Sweden continues to make good progress towards
green growth. A comprehensive policy mix with a focus on sustainable growth,
energy and transport, climate change, innovative environmental technologies,
carbon taxation and other green taxes, has been gradually rolled out over
several years and has proved fruitful.

Sweden has achieved one of the lowest carbon
emissions per capita in the EU and is on track to meet its national target on
emission reductions. Several measures have been adopted recently to further
reduce emissions in the transport sector, second only to the agriculture sector
in terms of emitting greenhouse gases. Sweden has set itself a target of at
least 10 % renewable energy in the transport sector by 2020 and a vision
of a fossil-free vehicle fleet by 2030.

Using a range of
different instruments – legislative, voluntary, fiscal, financial, information
– aimed at all sectors of the economy, Sweden has achieved high levels of
energy efficiency and its target of a reduction in energy intensity by
20 % from 2008 to 2020 appears to be within reach.

Taxation is seen
in Sweden as a powerful tool to incentivise consumers and enterprises to change
their consumption and production patterns in the direction of a green economy,
away from environmentally harmful alternatives. A case in point is the CO2
tax, which Sweden was among the first to introduce and remains one of
relatively few Member States to apply. Along with higher energy taxes, CO2
taxes were adjusted up in 2011. Measures of a general scope – energy taxes, CO2
taxes, emission trading – are widely regarded as drivers of sustainable
development as well as important for the development of new environmental
technologies.

3.26.4.   Business environment

By international
standards, Swedish businesses benefit from adequate access to private and
public risk capital. The 2011 survey on access to finance showed that only
8 % of companies in Sweden report access to finance as being the most
pressing problem. Their use of debt financing in the surveyed six-month period
was close to the EU average, whereas 31 % of the Swedish companies
surveyed used equity financing. This is a much higher proportion than in the EU
as a whole. Furthermore, fewer Swedish companies applied for a bank loan,
overdraft or trade credit than in the rest of the EU. At the same time, Swedish
SMEs are more likely than elsewhere in the EU to receive the amount requested
when applying for loans or bank overdrafts, and the willingness of banks to
provide such loans was perceived more favourably by SMEs in 2011 than in the
previous survey (2009).

Last year, the
share of early-stage financing to GDP was higher in Sweden than in any other Member State, but slightly lower than in 2009. On the other hand, international comparisons
suggest that early-stage financing makes up a smaller share of total risk
capital in Sweden than in other countries. To address this problem, as well as
some other shortcomings, the government intends to reform the public system for
risk capital, including by merging Innovationsbron and
Almi Företagspartner. The government also intends to streamline tasks,
mandates and investment policies of existing agencies and instruments with a
view to a comprehensive risk capital system with no overlapping elements.

In parallel with
the reforms, the newly appointed Corporate Tax Committee will examine different
alternatives for reducing the taxation of risk capital in the corporate sector
and for neutralising differences between equity financing and loans. Its remit
also includes the preparation of proposals to broaden the corporate tax base in
order to finance a lower corporate tax rate from January 2013. Moreover, the
committee will consider the possibilities of intro­ducing tax incentives for
research and development, review the rules on group contributions and
underpriced transfers, and analyse whether a withholding tax on interest
payments should be introduced. In January 2012, the committee presented the
first of two interim reports, concerning tax incentives for stimulating the
supply of risk capital. In its interim report the committee presented two
proposed models for tax deductibility of own capital additions.

Corporate bankruptcies in Sweden, 2009 to April 2012 (monthly number of bankruptcies and 7-month moving average; personal bankruptcies excluded)

Source: Statistics Sweden

Corporate
bankruptcies have risen from their low level in 2010 and 2011: in the first
four months of 2012 there were 2 453 registered corporate bankruptcies in Sweden, more than the same period 2010 (2 387 bankruptcies) and the first four months
of 2011 (2 411 bank­ruptcies). At the same time, the two-year survival
rate of firms started in 2007 was considerably higher in Sweden than in other Member States.

Sweden has not achieved the targets of the Small
Business Act on the time and cost of setting up a business. It is in the bottom
half of Member States in terms of the time needed to set up a business: 15 days
is longer than the EU average and five times as long as the agreed target of 3
days by 2012. At EUR 186, the cost of setting up a company is lower in Sweden than the EU average but remains higher than the agreed target of EUR 100.

3.26.5.   Services sector

Though
manufacturing remains important as a generator of process and product
innovation, export income and prosperity in Sweden, the economy has for some
time been a service economy, both in terms of employment and value added.
Services account for around 62 % of hours worked and 65 % of gross
value added across all businesses. These shares are more or less similar to the
shares in most OECD countries, but Sweden has a higher share of societal,
personal and IT services than the OECD average, while services such as hotels,
restaurants, communications, financial services and real estate services are
underrepresented in Sweden.

In the services
sector, business services have seen the most rapid growth in recent years,
followed by education, healthcare, and societal and personal services. As in
other countries, the knowledge and technology content of services has risen
dramatically and is set to continue to rise in parallel with further technology
developments and IT investments in the sector. As a consequence, employment in
knowledge-intensive service sectors has more than doubled in the last 20 years
and its share is above the median share in the EU and the OECD. These
developments go hand in hand with the gradual integration of manufacturing and certain
services, rendering the distinction between services and manufacturing less
clear as producers offer packages of goods and services to their customers.

3.26.6.   Public administration

As illustrated by
the figure, Sweden’s public administration is better than in most Member
States, scoring higher than the EU average in six categories and around average
in the seventh. According to a recent study, particularly good results were
obtained for Sweden in government effectiveness, tools for administrative
modernisation, corruption and fraud, and tax compliance and tax administration.

Overall profile of public administration

Source: WIFO

According to the government
effectiveness index of the World Bank, the Swedish public administration
provides better services and scores higher in user satisfaction surveys than in
most other Member States.

As in neighbouring
Member States, the use of tools for public administration modernisation (e-government,
impact assessments, performance and service orientation, accountability) is
widespread. In addition to a full online availability of business-related
services, the use of regulatory impact assessments is sophisticated, and
instruments targeting the strategic management of public administration staff
are used intensely.

Also in terms of corruption
and fraud, Sweden outperforms most other Member States. Irregular payments,
bribes and misuse of public funds are perceived to be significantly less common
in Sweden than on average in the EU.

Sweden has one of the most efficient tax
administrations in the world, with high tax compliance rates and low tax
collection costs. The average time needed to prepare and file tax returns and
pay taxes is 122 hours per year, much less than the EU average of
208 hours. Further­more, the cost of the tax administration is only
0.4 % of tax revenues, whereas the EU average is 1.3 % of revenues.
The VAT system could be made more efficient though, notably by streamlining the
VAT structure away from the current regime of reduced rates. Even where the
current reduced rates (12 %, 6 % or 0 %) were originally
introduced to address specific policy concerns, a reduced VAT rate is typically
not the most effective or efficient policy measure to take in order to achieve
a certain objective.

The only category
in which the performance of the public administration is average in an EU
context is the efficiency of civil justice in Sweden. The time to
resolve insolvency cases (two years) and to enforce contracts (508 days)
are around or only slightly better than the average across Member States. The
cost of enforcing contracts is considerably higher in Sweden (31.2 % of the claim) than on average in the EU (20.6 % of the claim).

The overall goal
of Swedish administrative policy, as formulated by the government, is ‘an
innovative and collaborative public administration that adheres to the rule of
law and is efficient, has well developed quality, service and accessibility and
that consequently contributes to the development of Sweden and to efficient EU
activity’. To that end, the government has proposed a comprehensive use by
government agencies of e-procurement by 2013; simplified contacts with public
administration through better coordination at national and regional level;
possible outsourcing of certain public administration support functions in
order to improve efficiency and reduce administrative costs; and scaling back
the provision by public entities of goods and services on markets in order to
keep market distortions to a minimum and grant private sector providers a level
playing field.

In order to make
it ‘as simple as possible for as many as possible’, work is going on to step up
and expand e-government. A new strategy is currently being formulated, setting
out e­government targets to be reached by 2015 and a long-term vision for 2020.
To that end, the Delegation for e-govern­ment will report by March 2014 with
proposals for the longer-term development of e-government. The Delegation will
first analyse the implementation of e-government in other countries, such as in
the 2012 study of e-government in Denmark, Finland and Norway. In parallel, the Delegation is working on a study to identify regulatory obstacles
to information sharing.

The Swedish
government undertook in 2006 to reduce the administrative burden for businesses
by 25 % by 2010 (subsequently pushed back to 2012). The reduction achieved
by 2010 was just over 7 % (approximately EUR 800 million).
Recognising the need to step up its efforts, the government has taken a series
of initiatives recently, notably a simplification programme for 2011-2014, the
scope of which has been extended to local and regional authorities. The main
focus of the programme is to intensify the work on rules perceived by companies
as particularly burdensome and important. Moreover, the government has
commissioned an inquiry into the scope for reducing reporting requirements for
companies by more extensive cooperation between authorities, exchange of
information, and shared databases. The purpose of the inquiry is to reduce the
total number of information requirements from their current level (around
4 600). Ideally, companies should need to submit their information only
once, possibly through a single point of entry. However, the inquiry will also
look into the potentially negative consequences of such a reduction.

The Swedish Better
Regulation Council, set up in 2009 with a mandate to ensure the quality of
impact assessments and promote administrative burden reduction, has had its
mandate extended to 2014. In addition, last year the government widened the
scope of the mandate, empowering the Council to intervene at an earlier stage
in the legislative process and assist in the scrutiny of impact assessments
produced by the Commission. Moreover, since 2008 administrative government
agencies must consult the Better Regulation Council before adopting regulations
with a potential impact on the business environment or the competitiveness of
companies.

As far as taxation
is concerned, efforts have been made to simplify tax procedures for businesses
and individuals. There have also been changes recently to simplify the taxation
of foreign experts.

In order to ease
the administrative burden this year, the Swedish government has decided to
cancel until 2013 the annual assessment of administrative costs and in the
meantime look for alternative, less burdensome ways of measuring administrative
costs.

3.26.7.   Conclusions

Sweden has consolidated its position as one of
the most competitive economies in the world and remains an innovation leader in
the EU. In the short term no particular threats to its competitive edge can be
identified, but in the medium to long term it needs to consider how to address
its skills needs, in particular in science, technology, engineering and
mathematics (STEM) and how to avoid shortages while at the same time addressing
gender imbalances among STEM graduates. Secondly, while corporate R&D
investments (BERD) are still high by international standards, in recent years
they have fallen as a result of the relocation of multinational corporations.
Moreover, the poor take-up and commercialisation of research results remains a
weakness of the Swedish R&D system. As recommended under the 2012 European
Semester, the forthcoming research and innovation bill needs to address these
shortcomings.

3.27.      United Kingdom

Sectoral specialisation of manufacturing – United Kingdom (2009)

Note : No data available for sectors C11 (beverages) and C12 (tobacco products) Source: Eurostat

3.27.1.   Introduction

The manufacturing sector in the United Kingdom contributes 10.8 % of the value added, compared to the EU average of 15.5 %
in 2011. The UK is specialised in high-technology manufacturing industries such
as aerospace, pharmaceuticals and electronics.

The crisis has posed challenges to the growth and
competitiveness of the UK economy, made more acute by the need for a
simultaneous budget consolidation. However, the Government is implementing
policies aiming at delivering long-term growth and increasing competitiveness.

The UK has one of the best-rated business environments
in Europe, which contributes to its competitiveness. The UK service exports have continued to perform well, although a negative net export position
in trade in goods continues, despite a significant fall in the pound in 2008. Currently
UK firms do not export enough to the fastest-growing markets for goods. There
is potential to address these challenges through policies focusing on
innovation, access to finance, infrastructure, skills and planning reform that would
address many of the competitiveness bottlenecks in the UK economy.

3.27.2.   Innovative industrial policy

Based on the Innovation Union Scoreboard 2011, the UK is classified as the best of the innovation followers. It is ranked sixth, which places
it well above the EU average performance. The indicators show that UK’s strengths in the research and innovation system are in human resources, in its open,
excellent and attractive research system; in finance and support; and in
innovative SMEs collaborating with others. On the other hand, its position is
weaker in R&D expenditure by businesses; patent and trademark applications;
and the extent of innovations in SMEs.

Spending on public
sector science and innovation has remained a top priority despite the
Government’s commitment to pursue fiscal consolidation. Consequently, public
sector research expenditure has not been strongly affected by the expenditure
cuts. Whilst defence R&D has fallen, the main science budget and R&D in
the health services have been maintained. Moreover, private sector
R&D has been maintained even in the face of slower economic growth. The
Government has also increased R&D tax incentives for small firms.

The Government
published its new Innovation and Research Strategy in December 2011. Key
aspects of the strategy are the development of seven new technology and
innovation centres – so-called ‘Catapults’[27] – and a focus
on developing pilot and demonstration projects. Catapult centres will be set up
to create a network of world-leading technology and innovation centres and to
act as a bridge between academia and businesses. Thus they should help to
improve the commercialisation of the strong science base. Through the creation
of these centres the Technology Strategy Board (TSB) aims at transforming the UK’s capability for innovation in specific technology areas and to spur future economic
growth. Several of these centres are in sectors that support the green economy,
for example the High Value Manufacturing Catapult, opened in October 2011, and
an Offshore Renewable Energy Catapult, due to open by summer 2012. The first
Catapult centre focuses on High Value Manufacturing and it will attract
investment from the TSB for GBP 140 million over a six years period.

The Small Business
Research Initiative for pre-commercial public procurement is now in its third
year and is considered to have been very successful. The programme is designed
to bring innovative solutions to specific needs of the public sector by
engaging SMEs in an open competition for funds to bring new ideas and undertake
innovation projects.

Despite its good
ranking, the UK has scope to improve its innovation performance. It should be
acknowledged that the Government policies are targeting the identified
deficiencies in business research and innovation, and in SMEs’ ability to
introduce new and innovative products to the markets.

3.27.3.   Sustainable industry

Structural reforms that seek to make the economy
greener are necessary to improve the sustainability of the UK economy, but they also provide important growth opportunities. The UK is well-placed to further benefit from this. Its energy intensity fell slightly between
2000 and 2010, and its energy consumption is relatively low when compared to
many other Member States, which is reflected also in the slightly lower than
average CO2 emissions. This partly reflects the low share of
manufacturing, and any increase in manufacturing and exports could put upward
pressure on carbon emissions.

Although the UK scores well overall in the indicators
related to sustainable industry, the relative performance of exports of
environmental goods[28] could be examined as in
2011 their share of total exports was 0.63 % for the UK against an EU
average of 0.71 %. In addition, investments in environmental protection
are relatively low, though this may reflect the low share of manufacturing
industry in GDP and hence be a consequence of the UK’s industrial composition.

The UK Government is committed to moving the economy
onto a greener footing. It has taken a range of actions to achieve this,
underlining the growth opportunities available. In the publication ‘Enabling
the transition to a green economy’[29] the Government sets out
its initiatives and emphasising the necessary dialogue with businesses to draw
the benefits from the new opportunities that greening will open up.

The Green Investment Bank[30],
which will have borrowing powers from 2015-16, is one of these initiatives. The
overall operational remit of the Bank will be to focus on green infrastructure,
including energy efficiency and subject to State Aid approval at least
80 % of the funds committed by the Bank over the next Spending Review period
will be invested in the following priority sectors:

•     Offshore wind power
generation;

•     Commercial and industrial
waste processing and recycling;

•     Energy from waste;

•     Non-domestic energy
efficiency including on-site renewables;

•     Support for the Green
Deal[31].

The Government emphasises that the transition to a
green economy must involve the heavy industries. In order to do so, the Energy
Intensive Industries package, worth GBP 250 million, will offer
support to a wide range of energy intensive industries to help them to remain
competitive in the UK and to reduce emissions where possible, while waiting for
innovations that will significantly contribute to decarbonising the sectors.

Last year the Government published a white paper on
Electricity Market Reform[32] outlining its intentions
in energy policy, in particular proposing a set of policy measures to ensure an
energy mix that enables the UK to achieve its 15 % renewables target, at
the same time attracting investment, and limiting its impact on consumers. A large
part of the existing electricity generation capacity is nearing the end of its
life, or needs upgrading over the next ten years. The challenge is to install
adequate new generation capacity, to meet climate change obligations, and to
avoid excessive rises in energy costs for industry and consumers.

3.27.4.   Business environment

The UK is rated as
the most attractive country in the EU to do business in, and the World Bank ‘Doing
Business’ report ranks it high in almost all the areas of the business environment
(including insolvency procedures, legal framework for finance, investor
protection). However, a widely recognised weakness is access to finance as the
crisis-stricken banks have restricted access to credit, especially for SMEs.
Improving the availability of bank and non-bank financing to the private sector
is therefore a priority, and it has been included in the country-specific
recommendations of the European Semester 2012 for the UK[33].
At the same time, the UK’s export position has remained persistently negative,
reflecting the problems of external competitiveness to which the relatively low
skills base, lack of investment, and problems in the planning system have
contributed.

Further, a general
improvement for the business environment could be also achieved enhancing the
quality and the capacity of UK’s network infrastructure[34],
in particular in transport and energy. To this end the Government published a
National Infrastructure Plan in November 2011, which establishes a new strategy
for meeting the infrastructure needs of the UK economy and sets out a pipeline
of over 500 public and private infrastructure projects worth in excess of
GBP 250 billion.

The Government is
aiming to boost private infrastructure investment, in part to offset a sharp fall
in the public sector net investment caused by the fiscal consolidation efforts.
The plan aims to develop appropriate financing mechanisms, improve investment
confidence and to enable increased efficiencies from complementary investments.
This included a Memorandum of Understanding with the National Association of
Pension Funds to develop a pension investment platform and the establishment of
an Insurers’ Infrastructure Investment Forum.  The Government is also targeting
institutional investors, including Sovereign Wealth Funds and overseas pensions
funds, to draw investment for major UK projects. The effectiveness of this
approach in attracting private investment remains to be seen.

It is widely
recognised that problems in the spatial planning system have been a barrier to
investment. The long delays and suboptimal investment decisions raise both the
costs for new construction and the prices of existing property. Simplifying and
streamlining the planning system could make capital allocation more efficient
and provide a boost for growth and competitiveness.

Access to
finance

Access to finance
is an area of major concern in the UK, especially with regard to SMEs. The
difficult situation in the financial markets has contributed to a striking
deterioration of SMEs’ access to bank lending.

The Government has
adopted a series of measures to tackle the problem. In November 2011 it
introduced an initiative to provide up to GBP 21 billion for
businesses that have no access to credit. In March 2012, it launched the
National Loan Guarantee Scheme (NLGS) in order to provide cheaper bank
financing to small and medium enterprises.

Furthermore, the
Government is looking at restructuring the banking sector based on the
recommendations of the Independent Commission on Banking (ICB). In particular,
the proposals include a structural separation between retail banking and
wholesale/investment banking.

In June 2012, the
Bank of England and the Government announced a ‘funding for lending’ scheme
that would provide funding to banks for an extended period of several years, at
rates below current market rates and linked to the performance of banks in
sustaining or expanding their lending to the UK non-financial sector during the
period of heightened uncertainty.

On the equity
investment side, the Government is building on the UK’s pre-eminent position in
the European venture capital markets by using public funds for venture capital
investments, and through the Enterprise Capital Funds for capital requirements
under GBP 2 million. The private sector Business Growth Fund makes
investments between GBP 2 million and GBP 10 million.

Regulatory and
support environment

The Government has
sought to improve the regulatory environment, in particular by giving
derogations for micro-enterprises and introducing the ‘one in, one out’ principle
whereby the introduction of new regulatory burdens on business means the
removal of regulations currently on the statute books which have equivalent
costs to business. The Government has also launched the ‘Red Tape Challenge’ website,
which aims to tackle the current stock of regulation by inviting the public,
business and the voluntary and community sector to comment on which regulations
should stay, be improved, or be scrapped altogether. Around 1 500
regulations have been examined through the Red Tape Challenge, over half of
which will be scrapped or improved.

For
micro-enterprises, the most important outcome could be that Government
departments pay appropriate attention to the needs of micro-enterprises when
designing legislation. Moreover, the ‘one in, one out’ policy was seen as being
useful in getting ministries to seriously examine the burden of existing
legislation whenever they were considering new measures.

Further, the new ‘Growth
Accelerator’ programme (BCG), aims to support the most promising high-growth
SMEs and boost their growth. It is designed to increase the number of
businesses that achieve genuine high growth; the Government aims to invest
around GBP 200 million in the programme to achieve these objectives.
The programme is to be coordinated nationally but be delivered at a local
level, aiming to provide high-quality coaching and support for up to
10 000 SMEs a year. The coaching is aimed, in particular, for senior
management teams to help them to develop and implement their strategies.
Overall, this should help SMEs with high growth potential to overcome the
challenges of growth in areas like sales, finance or exploiting innovation.

3.27.5.   Services sector

The UK level of market regulation in professional
services is not an obstacle to entry[35].
It should be noted that the UK practice is to regulate professional
titles rather than access to the professions themselves.

A Services Policy
Unit has been established in the Business, Innovation and Skills Department
(BIS) to work with professional and business services in order to guide
government actions over the next decade. The interim report ‘Professional and
Business Services: a 2020 Vision for Growth’ was published in March 2012, and
highlights the impact and opportunities created by the changes in the global
markets, climate change and sustainability, and improvements in information and
communication technologies. A broad-based programme to improve the business
environment for business services was set out.

3.27.6.   Public administration

The UK public administration scores well above the EU average according to the World Bank’s ‘Government
Effectiveness Indicator’. The perceived quality of the public services
including the quality of the civil service and of policy implementation is also
well above the EU average.

The indicator on
the use of regulatory impact assessments is high above the average. In
addition, all the eight main business-related services included in the index
are available online. Thus, the public administration can be classified as a ‘modern’
public administration.

Corruption and
fraud are not perceived to be major problems and individual experiences of
bureaucratic corruption related to the use of public services are limited to
2 % of cases, compared to an average of 10 % across the EU.

To start a
business and obtain licenses is also easier, slightly faster and far less
expensive in the UK than in the Member States on average. The average cost of
starting a business is a bit more than 5 % of per capita income in the
Member States on average; in the UK it is only 0.7 %.

The composite
public procurement index is slightly below average, signalling some scope for
improvement. The sub-indices show that especially the firms’ cost to take part
in government procurements are higher than average.

The time required
to prepare tax returns is substantially lower than the EU average. It amounts
to only 110 hours per year for the model companies, as compared to the EU
average of 208 hours per year. Further, the Government seeks to make taxes even
simpler and easier to pay. The remit of the Office of Tax Simplification (OTS),
set up in July 2010, is to address specifically these issues, particularly from
the viewpoint of smaller firms. They have published a report called ‘The Small
Business Tax Review’, providing advice on how to simplify the tax system.

The score
measuring the efficiency of the civil justice system is also above the EU
average. However, although the time to enforce contracts is far shorter than
the EU average (399 days vs. 556 days), the typical costs are higher requiring
24.8 % of the claim value, compared to the average of 20.6 %.
Insolvency procedures are substantially faster than the EU average and the perceived
independence of the judiciary is very high.

Overall profile of public administration

Source: WIFO

The Government’s efforts to consolidate its budget
have led to actions to reduce expenditure in the public administration and at
the same to time streamline management. Public sector employment numbers have
been reduced and the Regional Development Agencies have been abolished, which
led to the closing of regional ‘Business Link’, a valuable source of
information for small businesses. The replacement, the national ‘Business Link’
website has been launched towards the end of 2011, providing on-line support,
guidance and advice for businesses; it also allows companies to register a
legal status online for just GBP 18.

3.27.7.   Conclusions

Overall, the UK has an excellent business environment that is strengthened by the quality of its public
administration. However, the crisis that hit the UK banking sector hard has
created a major challenge in access to finance, in particular for SMEs. To
improve the situation, the Government has adopted a series of policy
initiatives seeking to get the banks to lend again, but only time and the start
of the upturn will tell how successful these efforts have been in facilitating
the financing of SMEs.

The productivity
is lower compared to main competitors, which is reflected in the persistently
negative net export position. This reflects underlying weaknesses in skills,
investment and the planning system. UK businesses could also benefit from
improvement in energy and infrastructure networks. However, given the difficult
macroeconomic context and the commitment to fiscal consolidation, a further
decrease in public sector investment in infrastructure is expected for
2014-2015. The cumulative effects of low investment in the quality and capacity
of the infrastructure have the potential to increasingly hamper the ability of
businesses to rely on it in their operations and planning. To enable private
infrastructure investment, as foreseen by the National Infrastructure Plan is
therefore essential.

[1]     See http://ec.europa.eu/economy\_finance/publications/occasional\_paper/2012/pdf/ocp95\_en.pdf
and

http://www.portugal.gov.pt/media/424132/compromisso\_crescimento\_competitividade\_emprego.pdf.

[2]     http://ec.europa.eu/information\_society/digital-agenda/scoreboard/countries\_2012/country\_pt.html.

[3]     ‘On Progress in Romania under the Cooperation and Verification Mechanism’, COM(2012) 410 final, http://ec.europa.eu/cvm/docs/com\_2012\_410\_en.pdf

[4]     Transparency International, Money, Politics,
Power: Corruption risks in Europe (2012). .

[5]     ‘On Progress in Romania under the Cooperation and Verification Mechanism’, COM(2012) 410 final, http://ec.europa.eu/cvm/docs/com\_2012\_410\_en.pdf

[6]     The respective composite indicator partly rests
upon imputed values for the use of evidence-based instruments-indicator and
should therefore only be interpreted cautiously.

[7]     from 0.66 % in 1999 to 0.48 % in 2009.

[8]     e.g. the aluminium
industry.

[9]     http://www.madeinslovakia.net/eng/
.

[10]    e.g. statutes, ownership, tax ID and VAT numbers,
payment discipline, annual accounts, ongoing insolvency procedures, bailiff
executions.

[11]    Commission/ECB Survey on SMEs’ access to finance
2011.

[12]    National Bank of Slovakia — Statistics on granted
loans.

[13]    Worldwide Governance
Indicators 2010.

[14]    World Bank — Doing Business 2012.

[15]    EU Digital Agenda Scoreboard 2011.

[16]    project UNITAS.

[17]    EUR 820 million for 2007-2013 period.

[18]    Eurostat, 2010.

[19]    Innovation Union Scoreboard, February 2012. http://ec.europa.eu/enterprise/policies/innovation/files/ius-2011\_en.pdf
.

[20]    Eurobarometer on SMEs, resource efficiency and
green markets 2012:

http://ec.europa.eu/public\_opinion/archives/flash\_arch\_344\_330\_en.htm#342
.

[21]    SBA Fact Sheet 2010-2011 Finland.

[22]     http://www.yrityssuomi.fi/web/enterprise-finland
.

[23]    SWD(2012)148 final.

[24]    Kasvuyrityskatsaus 2012, Ministry of Labour and the
Economy.

[25]    Finnish Competition Authority http://www.kilpailuvirasto.fi/cgi-bin/english.cgi?luku=news-archive&sivu=news/n-2012-01-10.

[26]    As many data are unavailable, EU-wide averages are
calculated without Malta.

[27]    http://www.innovateuk.org/deliveringinnovation/
catapults.ashx.

[28]    According to the Eurostat definition, Eco-industries
are: ‘activities which produce goods and services to measure, prevent, limit,
minimise or correct environmental damage to water, air and soil, as well as
problems related to waste, noise and eco-systems’.

[29]    http://www.businesslink.gov.uk/bdotg/action/
detail?itemId=1096705244&type=ONEOFFPAGE.

[30]    http://www.bis.gov.uk/greeninvestmentbank.

[31]    The Green Deal is a government
initiative that is designed to get business and home owners to employ more
green measures in their buildings.

[32]    http://www.decc.gov.uk/en/content/cms/legislation/
white\_papers/emr\_wp\_2011/emr\_wp\_2011.aspx .

[33]    http://ec.europa.eu/europe2020/pdf/nd/csr2012\_uk\_en.pdf
.

[34]    As also included in the country-specific
recommendations of the 2012 European Semester for the UK.

[35]    Product Market Regulation Database, OECD (2011),
using data from 2008.

[Top](#document1)