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Review of the Community Framework for State Aid for Research and Development

Comments by TAFTIE task force on the Changing framework for European R&D investments
According to the European Union’s Lisbon strategy Europe aims to be the world’s most competitive and dynamic knowledge-based economy. The Barcelona objective to raise the level of R&D investments to 3 % of GDP, of which 2/3 should be funded by private companies, further elaborates the strategy with regards to R&D and innovation.
It is vital that the Europe becomes more dynamic and more innovative. Innovative and dynamic markets are characterised by competition and sophisticated demand, which continuously push companies to develop new and innovative products, processes and services.
The regulatory framework concerning competition, R&D and innovation has therefore a significant role in the development of European economy. Competition and State aid regulations should allow sufficient incentives for R&D and innovation and at the same time ensure a level playing field for European companies not only within Europe, but also globally.
The framework
It has been widely recognised that the current Community framework for State aid for R&D is in need of review. The current framework is based on an outdated linear model of innovation. It fails to address the vital issue of public-private collaboration between universities, research institutes and companies. It does not sufficiently recognise the challenges faced by start-up and small companies, nor the importance of collaboration between large companies and SMEs. There is also a need to clarify and simplify the framework to make implementation easier and more unified among Member States.
The key recommendations of the Taskforce are:
1.      Replace the outdated linear model of innovation and redefine current stages of R&D to cover a wider set of innovative activities.
Due to interconnectedness and parallel nature of modern innovation processes, it is not practical to define R&D separate from innovation, but rather see R&D in a wider context including various forms of innovative activities including those currently defined as R&D.
The distinction between fundamental research, industrial research and pre-competitive development should not be made based on the outdated linear understanding of innovation. However, the more directly innovative activities contribute to commercial activities, the more likely they are to cause market distortion. It is therefore practical to define stages (or rather types) of R&D (or rather innovative activities), which are eligible for high, medium and low levels of State aid.
It is also essential that a clear distinction between eligible and non-eligible (commercial) activities is made based on potential distortive effect of State aid.
This distinction between eligibility and non-eligibility and between eligibility for high, medium and low levels of State aid should be based on the extent in which innovative activities can directly or indirectly contribute to commercial purposes, rather than defining the eligibility of specific cost items or innovative activities as such.
2.      Allow 10% increase for medium sized, 20% increase for small and 30% increase for micro enterprises to the basic level of State aid.
New innovative firms are vital in dynamising markets, enhancing competition and ensuring the renewal of industrial structures. Europe is lagging especially USA in entrepreneurship and creation of new knowledge based firms. Competition policy should therefore support the encouragement of new start-ups and entrepreneurship by allowing higher levels of State aid for small and especially micro enterprises.
Micro enterprises are by definition very small and, in the context of R&D, innovative. It would be highly unlikely that any firm of this size would be able to cause market distortion.
3.      The issues related to public-private collaborative R&D and transfer of intellectual property should be elaborated in the new framework.
The amendments to the current framework should include further elaboration of conditions under which no direct or indirect State aid can be assumed in collaborative R&D and in transfer of IPR. They should further recognise and include rules for calculating the amount of direct or indirect State aid in cases, where State aid is present. The framework should also distinguish between exclusive and non-exclusive rights to use IPR for further R&D and for commercial purposes.
4.      The bonus structures are simplified and focused more selectively to encourage collaboration and networking within and beyond Europe and to support the development of a stronger European Research Area.
Collaboration and networking in R&D and innovation are important as demonstrated by several international and European studies. Special emphasis should be given to those forms of collaboration and networking, which (a) enhance technology transfer from academic research to industrial enterprises and other potential users of publicly funded R&D, thus speeding up innovation and eventually economic growth; and (b) enhance interaction and networking between large enterprises and SMEs, thus encouraging capability building, R&D, innovation and organisational renewal, better access to international markets and eventually improved competitiveness of European SMEs.
The European Research Area can not be developed in isolation. It must create strong networks to other leading scientific and technological areas globally. It is therefore also important to support networking beyond Europe.
While it is recognised that subcontracting R&D may not be as valuable as full co-operation, it still is a step in the right direction and should be encouraged. Providing incentives for subcontracting especially between enterprises and universities can pave the way for deeper relationship and actual collaboration in the future. Subcontracting should therefore be recognised as a form of effective co-operation.
5.      The main criteria for incentive effect in the case of large enterprises should be clearly defined. The definitions should be based on behavioural additionality and externalities, not on input additionality.
The definition of incentive effect in the case of large firms should be based on a modern understanding of additionality, which includes input, output and most importantly behavioural additionality. The current framework only refers to input additionality which in the narrow interpretation would mean that large firms are would be eligible for State aid only if they undertake projects that are secondary or insignificant to them.
The most important rationales for providing State aid for large firms are that they (1) invest sufficient resources for the really high risk projects and (2) collaborate and network with SMEs and research organisations. Innovative activities result in knowledge and skills which eventually diffuse to the rest of the economy and society, thus creating externalities which on the whole exceed private benefits. This is the basis for the first rationale. The second rationale is based on the fact that this diffusion of externalities is much faster if innovative activities are implemented in collaboration with public research and SMEs.
6.      The new framework should provide some general guidelines to the conditions in which indirect State aid elements can typically be found and which types of approaches could or should be used in calculating the respective State aid element in these cases.
The guidelines can not be exhaustive, nor should they even attempt to be. However, some general guidelines would be useful to clarify the situation and improve the predictability and consistency of notifications.
Conformity of community regulations concerning state aid for R&D and innovation
It is important that all Community regulations concerning State aid for R&D and innovation establish a consistent regulatory framework and that the practical application of these regulations is transparent, predictable and uniform over time and across Member States. It should be the attempt of the Commission to avoid any inconsistencies between various regulations and in interpreting various frameworks and guidelines.
It is important that Community regulations, especially those concerning State aid and innovation, State aid and risk capital, State aid and public procurement and Regional aid are consistent with the State aid rules for R&D. For example public procurement regulations should provide sufficient guidelines for establishing procedures for innovative procurement whereas State aid rules for R&D and innovation should provide sufficient guidelines for recognising the conditions under which companies participating in innovative public procurement could be subject to indirect State aid and when no State aid can be assumed.
June 17, 2005

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