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Consultation document on state aid for innovation – frequently asked questions

European Commission - MEMO/05/333   21/09/2005

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MEMO/05/333

Brussels, 21 September 2005

Consultation document on state aid for innovation – frequently asked questions

(see also IP/05/1169)

Do you think state aid is an appropriate answer to Europe's competitiveness problems?

It is clear that state aid is not a miracle solution to Europe’s competitiveness problems. First and foremost, it is through effective competition in the Single Market that Europe will improve its competitiveness on world markets. However, everything should be done to create growth and jobs; state aid policy can be used pro-actively to support innovation, by tackling the market failures that prevent markets from naturally delivering innovation.

The Communication on State aid for Innovation is based on an analysis of the current problems affecting innovation in Europe. There are many diverse situations: some European countries are doing rather well and Europe has achieved global leadership in a number of sectors. Nevertheless, it is hard to deny that Europe has a competitiveness problem, which is related in part to a lack of innovation. The Commission has identified a series of problems: lack of common rules and standards, weaknesses in financial and labour markets, non-functioning product markets, insufficient policy coordination, general “systemic” inefficiencies. While most of these issues require a global policy approach (e.g. education, regulation, strategic planning etc.), some of them are also related to market failures that hamper Europe’s potential for innovation. In such cases, state aid can be a solution to change the incentives of the market participants so that they invest more in innovation.

Why is the European Commission launching a consultation instead of simply writing new rules covering state aid for innovation?

Until now, the European Commission has not developed specific rules covering state aid for innovation. Such aid has been assessed on the basis of rules covering other fields of state aid (e.g. regional aid, training, risk capital, aid to SMEs) or directly on the basis of the Treaty (Articles 87 and 88). This has sometimes led to delays in approving useful state aid for innovation and to legal uncertainty. At the same time, such aid does require careful scrutiny because innovation relates to activities close to the market, which have the potential to significantly distort competition and trade. In addition, the Commission has had limited experience assessing which types of state aid for innovation should be authorised. Instead of pretending it knows best, and in a spirit of transparency and partnership, the Commission has therefore decided to consult stakeholders before deciding which specific state aid measures could be authorised on the basis of ex-ante rules.

Will the Commission relax the rules on state aid?

The aim is to improve the state aid rules, not to relax them. As explained in the State Aid Action Plan, the objective of state aid reform is ‘less and better targeted aid’. This objective remains valid for all kinds of state aid. The consultation on state aid for innovation does not aim at increasing state aid overall, but rather at facilitating a better targeting of state aid towards measures that really contribute to innovation. In the Communication, the Commission has followed a rigorous economic approach to identify activities for which state aid is the right policy instrument to address clearly identified market failures hampering innovation. The rules governing state aid for these innovation-related activities are framed so that they produce incentive effects, are proportionate and limit the distortions to competition and trade so that on balance the common interest is enhanced. Similar measures as some of those foreseen in the Communication have been authorised in individual cases notified by Member States. At this stage, it is only foreseen to grant aid to SMEs and for technological innovation.

What are the precise measures the Commission is considering?

Six measures are put forward in the consultation document:

1) support for the creation and growth of innovative start-ups. Innovative start-ups are most affected by the market failures hampering innovation. In order to limit the bureaucratic burden they face, and to limit the risk of supporting failing projects for too long, the Commission proposes to authorise state aid to support innovative start-ups for a limited duration through tax exemptions and subsidies of up to €1 million over three years.

2) additional flexibility for state aid to risk capital: it is already possible to give state aid for risk capital. The Commission considers making the rules more flexible, notably for the very early project stages (where private investors are extremely reluctant to invest), and for the development phase (where additional funding in Europe is often missing to help start-ups grow).

3) expanding the scope of current state aid rules for Research and Development and authorising state aid for SMEs engaged in innovation activities (such as commercially-usable prototypes, technological design or feasibility studies)

4) subsidies for SMEs to buy services from innovation intermediaries. These innovation intermediaries operate generally on a regional basis and help identify and support innovative ventures through a series of services (strategic advice, training, networking, consultancy for IPR) and facilities (office space, data banks, testing and certification). SMEs could benefit from vouchers of €200,000 to buy such services from innovation intermediaries.

5) subsidies for SMEs to recruit highly qualified researchers and engineers and to benefit from exchanges of personnel with universities and large companies

6) supporting the development of poles of excellence. State aid could be authorised for the provision of certain infrastructures, to help build a critical mass around research centres and to support collaboration and clustering between firms of all sizes and between public and private entities. The objective is to create, in a series of technological sectors, poles of excellence that are globally competitive and attractive for investors.

Why do you limit the proposals to small and medium-sized enterprises (SMEs) and to technological innovation? Should the Commission not also allow aid to large companies?

At this stage, the Commission only has evidence to justify ex-ante rules for technological innovation and for SMEs. But the document does not exclude aid to large companies. It contains open questions, and the Commission will decide on the best approach to take on the basis of the results of the public consultation. Again, the difficulty is to strike the right balance between addressing market failures hampering innovation and avoiding excessive distortions to competition and trade.

What about innovative start-ups?

The measures foreseen are actually quite generous for start-ups. In order to limit the bureaucratic burden on these companies, the Commission is suggesting simple types of aid: tax exemptions and lump sum subsidies. This departs from the practice in state aid policy to only authorise state aid for clearly identified eligible costs. In addition, the amount foreseen of €1 million over three years is ten times the amount of the current de minimis threshold, the only type of state aid (apart from risk capital) which can be authorised without reference to specific costs.

What about the 'regional dimension' of innovation?

The Communication underlines the geographical dimension of innovation, notably through the role of innovative clusters, which are groups of businesses of all sizes grouped around research facilities. State aid could be used to build up or strengthen regional clusters and to create European poles of excellence. In addition, there are a series of provisions in the existing state aid rules, to make sure that regional cohesion is enhanced. The Commission’s intention is to maintain these rules, in addition to the new provisions foreseen by the Communication on State Aid for Innovation. Altogether, this will give considerable possibilities for Member States and regions to design regional development strategies.

What do you think about recent initiatives in favour of innovation (e.g. Beffa report/poles of competitiveness etc.). Could they be supported under your proposal?

The Communication on State Aid for Innovation shares the view of many Member States that more needs to be done in favour of innovation. Supporting innovative projects and poles of competitiveness is therefore in principle welcomed. To a certain degree, such initiatives can already be supported under the current state aid rules. The Communication also proposes new initiatives, subject to a rigorous methodology, in order to avoid that public money is wasted where it is not needed. This is why the Commission invites comments from stakeholders on the Communication. This is also why it has to wait and see concrete proposals in the framework of the newly created Agency for Innovation, before it can comment any further on concrete initiatives.

What about the "international dimension" of innovation?

Innovation can be very mobile in today’s economy. Europe should not close its doors to partnerships with other countries outside the Union. Many technological leaders do not originate in Europe, and could be willing to invest in Europe. But to attract such investments, Europe needs to create a favourable environment for innovation, not only to authorise state aid.

The measures presented in the Communication aim at supporting Member States in creating favourable conditions for innovation through state aid. But this is not enough. A whole set of policies are needed to allow Europe to enhance its international competitiveness and its ability to attract investments for innovation (e.g. education, research, infrastructures, minimal red tape, efficient protection of intellectual property rights etc.). Many of these policies are in the hands of Member States and do not involve state aid.

What about eco-innovation?

The Communication recognises the importance of environment-friendly technologies and innovation, as laid down in the Environmental Technologies Action Plan (ETAP). Promoting eco-innovation is essential for an environmentally sustainable future, and well-targeted economic incentives can contribute to this process. Existing state aid rules (the Environmental Guidelines), as well as the rules foreseen in the Communication, can benefit eco-innovation. Moreover, when revising the Guidelines (in 2007), the Commission will consider whether additional measures could benefit from state aid.

What about innovation in the services area?

The document fully recognises the importance of unblocking Europe’s innovative potential, not only in the area of goods, but also as regards services. Nevertheless, the Commission has to recognise that, at this stage, the statistical tools which it has at its disposal do not allow it yet to fully appreciate the extent to which innovation in the services sector might be affected by market failures. Work is underway to improve the financial reporting on non-technological R&D expenditure in the services sector.

What are the basic rules of state aid policy?

State aid policy is an important part of EU competition policy. State aid control comes from the need to maintain a level playing field for all undertakings active in the Single European Market, irrespective of the Member State in which they are established, and to avoid Member States getting locked into a contest where they try to outbid each other to attract investment. Preserving competitive markets is the best way for European citizens to get the products they want, at low prices and to foster innovation and growth in the EU.

The EC Treaty prohibits any aid granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain firms or the production of certain goods in so far as it affects trade between Member States. A number of exceptions are however allowed. The Commission has the exclusive power to declare state aid compatible with the Treaty provided it fulfils clearly defined objectives of common interest and does not distort intra-EU competition and trade to an extent contrary to the common interest.

What are ex-ante rules in the field of state aid?

State aid policy is based on the EC Treaty (notably Articles 87 and 88). The Commission can authorise state aid on the basis of notifications from Member States. However, in recent years, the Commission has also developed a series of ex-ante rules (guidelines, frameworks, block exemptions) to clarify its practice. Aid granted in conformity with all the conditions set out in these rules is automatically considered compatible with the EC Treaty rules.

The Commission has adopted a number of "guidelines" or "frameworks” in the following areas:

  • Regional aid
  • Research & Development
  • protection of the environment
  • risk capital
  • Rescue and restructuring of firms in difficulty.

The Commission has also adopted a number of "block exemption" regulations, which authorise state aid without requiring formal notification in the following areas:

  • small and medium-sized enterprises
  • aid for training
  • aid for employment.

The consultation on state aid for innovation foresees to include additional provisions authorising state aid for innovation in several of these existing ex-ante rules: R&D, risk capital, protection of the environment, and the future general block exemption.

What is the 'methodology' adopted by this paper?

The consultation document on state aid for Innovation builds on the refined economic analysis outlined in the State Aid Action Plan. State aid for innovation can be authorised by the Commission on the basis of Article 87.3 c) of the EC Treaty. In line with the principles set out in the State Aid Action Plan, a general test for the approval of a State aid measure for innovation has to address the following issues:

a) a well-defined market failure has to exist

b) the aid instrument has to target the identified market failure, in which case:

  • state aid must be the appropriate policy instrument
  • the aid measure must have an incentive effect, i.e. it must generate additional innovation-related activity
  • the aid measure has to be proportionate to the problem addressed

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

On the basis of that methodology and of past experience, the Commission has identified a series of market failures that specifically affect innovation. A “market failure” occurs when the market on its own does not lead to an economically efficient outcome. Examples are innovation as a public good and externalities; inefficient dissemination of information; shortcomings in the capital markets; mismatches on the labour market and coordination problems. These market failures lead to unfavourable risk/return ratios for innovative ventures, discouraging private companies and investors from engaging in innovation. In such cases, state aid can address the market failures by providing direct support to undertakings, to improve the risk/return ratio and stimulate the innovation process.

What is the calendar for this consultation and its follow-up?

The deadline to respond to the Communication is 21st November 2005. Thereafter, the Commission will assess the results of this consultation and start drawing up future rules. A first exchange of views with Member States should take place at the end of 2005/beginning of 2006, with a view to adoption of the future R&D and Innovation Framework and the new Risk Capital Guidelines in the first half of 2006, the general block exemption by the end of 2006, and the future Environmental Aid Guidelines in 2007.


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