Smart Instruments for a Smarter Europe: The CIP in Perspective

Nicholas S. Vonortas

Center for International Science and Technology Policy & Department of Economics The George Washington University

European Parliament EPP-ED Hearing on the Competitiveness and Innovation Framework Programme (2007-2013) [CIP]

What is the Proposed CIP?

 The CIP promotes competitiveness through innovation  The CIP supports the innovative implementation of RTD results by enterprises. It addresses the grey area between research and application  The CIP supports primarily SMEs  The CIP supports collaboration  The CIP emphasizes two broad sectors C ENTER FOR I NTERNATIONAL S CIENCE AND T ECHNOLOGY POLICY T h e G e o r g e W a s h i n g t o n U n i v e r s i t y

Sectoral Systems of Innovation (SSI)

A sector is a

set of activities

that are unified by some related product group for a given or emerging demand and that share some basic knowledge A sectoral system of innovation (and production) is composed of a

set of agents

engaged in market and non-market interactions for the creation, production, and sale of sectoral products. Interaction among agents is shaped by

institutions

.

Sectoral systems have a

knowledge base

, technologies, inputs, and potential or existing

demand

.

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SSI Building Blocks

1.

Knowledge and Technology

– A sector is characterized by a specific knowledge base, technologies and inputs.

Accessibility

,

opportunity

and

cumulativeness

are key dimensions of knowledge and are related to the notion of technological and learning regimes. These regimes differ across sectors.

The specificities of technological regimes and knowledge bases provide a powerful restriction on the patterns of firms’ learning, competencies, behaviors and organization of innovative and production activities.

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2.

SSI Building Blocks Actors and Networks

– A sector is composed of heterogeneous agents, connected in various ways through market and non-market relationships.

3.

Institutions

– Cognition, actions and interactions of agents are shaped by institutions, which include norms, routines, common habits, established practices, rules, laws, standards and so on.

National institutions may have major effects on sectoral systems, as, e.g., the patent system, property rights, or antitrust regulations.

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Key Levers for Sectoral Innovation Policies



Agents/actors, networks

 Market and

non-market interactions

 Potential or existing demand 

Knowledge base

, technologies, inputs (

accessibility

, opportunity, cumulativeness) 

Institutions (national, regional,

global)  Element co-evolution leads to sectoral transformation C ENTER FOR I NTERNATIONAL S CIENCE AND T ECHNOLOGY POLICY T h e G e o r g e W a s h i n g t o n U n i v e r s i t y

Why Direct Intervention?

The major support for business innovation projects in Europe is at the national and sub-national levels. The programmes are still fragmented along national and regional lines and cannot exploit synergies.

ONE COULD ARGUE  Such programmes must remain at the national/local levels. Federal governments are just too distant from regions to know their needs for innovation. [US example] Arguably, the role of the Commission could be to: (1) maintain/enhance the Research Framework Programme; and (2) maintain open channels of communication with the regions to ensure cohesiveness so that the sectoral innovation systems in “critical areas” can be defined at the European, rather than just national, level. [A European Innovation Area?]  The CIP addresses only parts of the innovation systems. What ensures co-evolution of elements – i.e., how is policy coordination achieved?

 How connected will the CIP be with national/regional programmes and other European programmes for regional support (such as the Structural Funds)?

 Why the CIP cannot be delivered in the same general manner as Structural Funds?

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Valley of Death

To successfully move from a scientific breakthrough to a market ready prototype involves bridging three gaps:  A

financing gap

between funds that support more basic research and the investment funds to turn the idea into a market-ready prototype.

 A

research gap

between the scientific or technical breakthrough and the basis for a commercial product.

 An

information and trust gap

between the scientist/ technologist and the investor, each with a different perceptions of the innovation and different expectations of what it is to accomplish.

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CIP Financial Instruments

The CIP Financial Instruments address the first gap by facilitating access to finance for SMEs: seed, start-up, expansion and business transfer. Investments in technological development, innovation, and technology transfer are within the scope of the instruments:  The

High Growth and Innovative SME Facility

: GIF1 for early stage (seed, start up) and GIF2 for expansion stage investments.

 The

SME Guarantee Facility

: debt financing via loans or leasing, microcredit financing, guarantees for equity fund investments in SMEs, and securitization of SME debt finance portfolios.

The CIP Financial Instruments address, to some extent, the third gap:  The

Capacity Building Scheme

to (a) stimulate the supply of private venture capital to innovative SMEs (b) provide technical assistance to improve the credit appraisal procedures of financial intermediaries for SME debt financing.

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CIP Financial Instruments

All this is fine. But it is basically a supply-side approach. One ought to pose for a minute and ask what is the reason for the reportedly sub-optimal levels of risk capital and new technology based firms (NTBFs) in Europe.

To the extent that the reasons have to do with supply, then the policy will help. But what if the reasons have to do with demand? E.g.,  What if equity risk capital does not exist because investors are constrained in “unloading” companies? (IPOs)   What if corporate risk capital is insufficient because large European corporations still avoid such strategies?

What if large institutional investors that handle insurance and pension funds are not allowed to invest in risky activities?

  What if small innovative firms are not created in Europe for mainly other reasons such as heavy regulatory burden, lack of entrepreneurial culture, or fear of “failure”?

What if the problem is lack of demand for the SME output? (private sector and public sector/procurement) If such reasons are present, supply-side policies that require co-investment by private investors will have limited effect.

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Pay Attention to the Demand Side

Successful SMEs are acutely focused on the customer’s needs. Studies have shown time and again that an excellent way to understand the degree of innovativeness of a company is through its customers: technologically advanced SMEs supply demanding larger customers or sophisticated market niches.

The policy implication is that a critical factor in establishing technologically advanced SMEs is the creation of opportunities to sell their products. This can mean one of three things: (i) Making entrepreneurs aware of sophisticated market niches; (ii) Linking small companies with sophisticated large contractors; (iii) Create public procurement for the products of innovative SMEs.

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Example: SBIR

Small Business Innovation Research (SBIR) Program Model Social and Government Needs PHASE I Feasibility Research Private Sector Investment PHASE II Research towards Prototype PHASE III Product Development for Gov ’t or Commercial Market $100K $750K Tax Revenue Federal Investment

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CIP Financial Facilities

The description of the financial facilities in the document of the Commission already sounds quite complicated even without the arcane details that typically accompany such programmes. Are there provisions to create “single-stop shops” in all Member States for the comprehensive provision of information to interested parties? (the facilitation of transactions is also relevant here) C ENTER FOR I NTERNATIONAL S CIENCE AND T ECHNOLOGY POLICY T h e G e o r g e W a s h i n g t o n U n i v e r s i t y

CIP Sectoral Focus

The discussion earlier on implied the need for a more holistic approach to address as many sectoral factors as possible (demand, institutions, agents, networks, market and non-market interactions, the knowledge base, and so forth).

The CIP calls for an ICT Policy Support Programme and an Intelligent Energy-Europe Programme. Both consist of demand-side measures primarily, and other measures for actors, interactions, and the knowledge base.

The

ICT Policy Support Programme

will provide for:  The development of the Single European Information Space and strengthening the internal market for ICT products and services;   The stimulation of innovation through a wider adoption of and investment in ICTs; The development of an inclusive information society and more efficient and effective services in areas of public interest, and improvement of the quality of life.

The

Intelligent-Energy Europe Programme

will provide for:  Fostering energy efficiency and the rational use of energy resources;   The promotion of new and renewable energy sources and energy diversification; The promotion of energy efficiency and the use of renewable energy sources in transport.

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CIP Sectoral Focus

Each of these two hugely worthy, as well as complex, areas will be supported to the tune of roughly € 800m. for 7 years, or about € 100m. per year (basically excluding programme administration).

This level of support appears inadequate to address the sectoral objectives, as sketched out earlier in this presentation, in all Member States.

Since there is no room for growth, however, this money could, in my view, be best utilized to coordinate across Europe the relevant existing national and regional programmes, also including those supported by the European Structural Funds. (a European Innovation Area in parallel to the European Research Area) C ENTER FOR I NTERNATIONAL S CIENCE AND T ECHNOLOGY POLICY T h e G e o r g e W a s h i n g t o n U n i v e r s i t y

Exclusive Focus on SMEs

The CIP focus on SMEs is encouraging given:  The fact that the Research Framework Programme has never really resonated with the majority of SMEs which: (i) are too busy to find out what is going on with the Commission; (ii) are too secretive and protective of their single idea to accept to collaborate on it with others; (iii) have felt that the RFP is a game for the big boys; (iv) are much more into innovation (implementation) than pure research; (v) continuously face cash flow constraints; (vi) often are not that innovative even though they have no trouble with implementing new technologies.

 The emphasis in FP6 and seemingly in FP7 on larger projects – for “Technology Platforms” and “Joint Technology Initiatives” – resulting in the concentration of power in the hands of large organizations (systems integrators).

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Agent Interactions

The CIP emphasizes the innovative implementation of RTD results by enterprises. In other words, it keeps very close to the market. For that reason exactly, it should not focus exclusively – or, even, mainly – on collaboration.  Small innovative companies are fiercely protective of their ideas and would not like to share the best of them with others, even if that means risking death.

 Collaboration is necessary in occasions of systemic products. Perhaps more important than pairing SMEs in this case would be to pair innovative SMEs to larger, sophisticated contractors, thus also opening a demand channel.

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Collaboration

To the extent that collaboration is encouraged, it must not follow the style of the RFP (many partners, many countries) ( E.g., the Commission Proposal several times indicates collaboration involving at least three partners which is the RFP prototype.)  Innovative product collaborations involve few organizations, most typically only two.

 If the EU is truly interested in internationally competitive innovation, then it must break the old political barriers and go for true excellence. This would require opening the possibility that, under certain conditions, collaboration may involve partners from one country only.

[There is, of course, the possibility that the quest for excellence will end up with a very skewed allocation of funds. Monitoring is required] C ENTER FOR I NTERNATIONAL S CIENCE AND T ECHNOLOGY POLICY T h e G e o r g e W a s h i n g t o n U n i v e r s i t y

Flexibility – Grant Procedures

  CIP programmes must be flexible.

They address SMEs whose biggest strength is presumably flexibility in addressing the market.

They address very dynamic technology areas where we can expect rapid and frequent changes. Two other issues also deserve serious consideration:  Standardizing grants (say, 50% co-funding)  Establishing a 2-step evaluation procedure for proposals in order to decrease the application cost to SMEs.

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Thank you!

CISTP

www.gwu.edu/~cistp Center for International Science & Technology Policy Elliott School of International Affairs The George Washington University