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State aid: new Framework for Research, Development and Innovation – frequently asked questions

Commission Européenne - MEMO/06/441   22/11/2006

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MEMO/06/441

Brussels, 22nd November 2006

State aid: new Framework for Research, Development and Innovation – frequently asked questions

(see also IP/06/1600)

Why issue a Framework for R&D and innovation?

State aid is in principle prohibited by the EC Treaty unless it fulfils certain criteria and is authorised by the European Commission. The Commission issues guidelines and frameworks to help Member States by announcing in advance which measures it will consider compatible with the common market, thus speeding up their authorisation.

R&D is an important objective of common interest. European companies must invest more in R&D and Innovation if they are to compete globally. The most effective way of stimulating innovation is by fostering competition. Competition in free and open markets pushes firms to innovate, as this is a way for them to differentiate their products, increase their appeal to customers and thereby survive competitive pressures.

However, sometimes the market fails to deliver, either because of very high technological and/or commercial risks or because of difficulties in exploiting the results of research. This leads private firms to believe that their investments in R&D and Innovation will not be profitable and discourages them from investing in R&D&I projects. In such cases, state aid could encourage private firms to invest in R&D&I.

What are the main changes in the new R&D&I Framework as compared to the current R&D Framework?

The main changes in the new R&D&I Framework compared to the current Framework (dating from 1996) are:

  1. the inclusion for the first time of aid measures for innovation, setting out clear rules concerning the compatibility of such measures in order to facilitate their approval by the Commission. These measures are particularly important to achieve the Lisbon objectives.
  2. clear compatibility criteria, targeted at eliminating existing market failures.
  3. more legal certainty for research organisations and for collaborative research, thanks to clarifications as to the state aid character of certain measures.
  4. the introduction of a detailed assessment method for large aid amounts in order to allow for a deeper scrutiny of the cases which have the greatest potential to distort competition and trade

These changes, and in particular the introduction of the detailed assessment, are based on the Commission’s State Aid Action Plan (see IP/05/680 and http://ec.europa.eu/competition/state_aid/others/action_plan/saap_en.pdf), adopted in Summer 2005 to concentrate scrutiny on the most distortive state aid cases.

Why does the Commission not consider that state aid for R&D and innovation is always beneficial?

Aid for R&D&I can have very negative effects on competition, as well as benefits. It can be abused to protect national players, keep inefficient firms afloat, distort competition and artificially maintain costly, fragmented markets. It can lead to less investment in R&D&I because it discourages private companies from intervening alongside their subsidised competitors. Furthermore, state aid is not a ‘magic wand’ to solve Europe’s innovation problems. It is only one tool in a much bigger tool-box needed to spur R&D and innovation, including: first class universities and higher education, cutting-edge fundamental public research, research and innovation infrastructures, well-performing financial markets, efficient policies for protecting and managing intellectual property rights, general business environment supporting entrepreneurship. State aid cannot replace the structural reforms Europe badly needs – and it should certainly not delay them.

Why has the Commission kept the same aid intensities (100/50/25)?

The new Framework maintains three categories of research aid, depending on whether the type of research is more or less remote from the market: fundamental research, industrial research and experimental development. This allows governments to use different aid intensities depending on the size of the market failure which certain research projects are facing.

Although three categories of research aid have been maintained, the definitions have been modernised. The existing category of pre-competitive development has been expanded to cover research closer to market activities, such as prototypes which can be used commercially. In order to highlight this change, this category has been renamed “experimental development”.

The variations in the basic aid intensities of 100% for fundamental research, 50% for industrial research and 25% for experimental development are based on the size of the market failure that companies entering into R&D&I activities in the corresponding category are facing.

What is the purpose of the thresholds? Why have differentiated thresholds? How have you determined them?

Thresholds primarily serve to fix a ceiling above which large R&D-projects must be notified individually to the Commission, even if they come under an aid programme already approved by the Commission. Aid above the ceiling has a greater risk of distorting competition and trade, and will therefore be subject to a detailed assessment.

The new framework has introduced differentiated thresholds of €20 million for projects that are predominantly for fundamental research, €10 million for projects that are predominantly for industrial research and €7.5 million for projects that are predominantly for experimental development. The Commission considers that such differentiated ceilings best reflect the underlying risks of distortions of competition. These risks depend primarily on the amount of aid a Member State wants to grant, but also on the question how far the research project is away from the market, since aid to a close-to-the-market experimental development project has a much greater potential for distortion than aid for fundamental research.

How have you integrated 'innovation'? What measures will Member States be able to take in this area?

Although the 1996 R&D framework explicitly excluded state aid for innovation, the Commission set out its intention to authorise state aid for innovation in the Communication on State Aid for Innovation of September 2005 (http://ec.europa.eu/competition/state_aid/others/action_plan/cdsai_en.pdf - see IP/05/1169).

The Communication proposed to authorise state aid for the following measures:

  • aid to young, innovative companies;
  • aid for experimental development, expanding the pre-competitive category of research;
  • aid for innovation advisory and innovation support services;
  • aid for the loan of highly qualified personnel.

Following the public consultation, the measures outlined in the Communication were improved and two new measures were added to the final Framework, to take into account the specificities of service activities and to support innovation clusters:

  • aid for process and organisational innovation in services;
  • aid for innovation clusters.

The types of innovation measures outlined in the Framework can be used not only to support specific innovative ventures by individual companies, but also to support the build up of innovative capacities and the diffusion of innovation.

How does the new Framework treat SMEs?

The new Framework treats small and medium-sized enterprises (SMEs) even more favourably than the current Framework. In line with its new practice, the Commission has increased the uniform 10% SME-bonus to 20% for small companies and 10% for medium-sized companies. Some of the newly introduced measures for innovation are only available for SMEs, since SMEs are considered to face a greater market failure than large companies. This is strongly reflected in the new rules.

Does this Framework not place large companies at a disadvantage?
The framework clearly favours SMEs, because they are more affected by market failures than large companies. But this cannot be understood as penalising large companies. Basic aid intensities for large companies have not changed in the new Framework and remain high, compared to other state aid instruments. The collaboration bonus has been increased to 15 percentage points. The maximum aid intensities which large companies can obtain have been slightly reduced but still go up to 40% for experimental development, 65% for industrial research and 100% for fundamental research. Looking at the overall aid intensities available for large companies, the framework clearly acknowledges the important contribution of large companies to excellence in R&D&I and their role in achieving the ‘Barcelona objective’ of Member States spending on average 3% of gross domestic product on R&D by 2010.

How do you treat universities/research organisations? What about general research/innovation infrastructure? What about the 'university privilege'?

Universities and research organisations play a key role in fostering R&D. A substantive part of their funding in principle does not fall under EC Treaty state aid rules and therefore will not need to be notified to the Commission. However, where universities carry out research under contract to companies, they may be competing with private competitors. The new Framework clarifies the competition rules which apply in such situations, in order to ensure fair competition. This is in line with the state aid rules of the Treaty, where universities have never benefited from a “university privilege” which would have fully exempted them from state aid rules.

The framework also clarifies that the core activities of universities and research organisations, like teaching, independent research and dissemination of research results, normally do not fall under state aid rules. The new Framework also sets out the conditions when the building of research or innovation infrastructure and its renting out to business may imply state aid.

Will the Framework allow collaborative research between universities and companies? How does it promote collaboration?

The framework takes a very favourable view on collaborative research between public and private partners and acknowledges that companies may need additional incentives to enter into such collaboration. The aid to a company collaborating with a university or research organisation may thus be increased by 15 percentage points. For experimental development, this brings the permissible aid intensity for large companies from 25 to 40%. This ratio shows the importance attributed to collaboration in the new text.

The framework also provides for a bonus for companies collaborating with other companies. Large companies only qualify for this bonus if they collaborate with SMEs or enter into cross-border collaboration.

Which account are you taking of regional considerations? Why have you abolished the regional bonus? Is this not 'anti-cohesion'?

The state aid framework for R&D&I is not targeting regional cohesion. It is targeting economic efficiency and there are other, better placed instruments (notably the new Regional Aid Guidelines, see IP/05/1653 and MEMO/05/491) to support less developed regions in catching up with the best of the EU. The new R&D&I framework tries to focus state aid towards the most valuable projects, no matter where they are located. This is fully in line with EU Research Policy, which is supporting excellence in research. In addition, the permissible aid intensities of the R&D&I framework are already very high and have not been used to their limit by many Member States. An additional regional aid bonus would not seem necessary.

However, the new Framework takes regional considerations into account in three areas, where economic analysis shows that a differentiated treatment is desirable to better target state aid. First, differentiated funding possibilities are offered for young innovative enterprises, according to the location of the region, to account for higher risk factors for creating a research intensive company in a poor region. Second, higher aid possibilities are offered to support the creation of innovation clusters in assisted areas. Third, the detailed assessment procedure, which relates to large amounts of aid, takes regional specificities into account for the analyses of both the market failures and the incentive effect. All in all, the new framework offers clearer and more transparent possibilities for the poorest regions of the EU to enhance their competitiveness through specialisation on their critical factor of success, and to benefit from targeted support for R&D&I taking regional specificities into account.

Is this new Framework sufficiently simple and user-friendly? How does it tie in with the 'better regulation' agenda? Is this not adding administrative burdens for Member States or companies - or the Commission?

The role of frameworks and guidelines is to facilitate the design of state aid measures and their notification by Member States to the Commission. The main value added of these documents is therefore their readability and clarity. The new Framework is arguably longer than the 1996 version and more complex. However, this does not mean that it is adding to the administrative burden of Member States. On the contrary, by providing more explanations as well as a complete methodology to justify aid measures, the new Framework will increase the predictability of the Commission's assessment, and facilitate the work of Member States and of private companies alike. The new Framework offers not only more precise rules, but also enables the Commission to focus on the cases that are really problematic, for which a detailed assessment will be made. This is fully in line with the Commission initiative for better regulation.

Why have a 'detailed assessment'? Is this not too complicated for Member States/companies/the Commission? How can the new Framework ensure speedy authorisation for important projects in the common interest?

The State Aid Action Plan has established the basis for a comprehensive reform of the state aid rules, to enable the Commission to improve its scrutiny and to focus on meaningful cases. This is precisely the function of the detailed assessment: focus the scrutiny on cases that may give rise to a major risk for competition, because of their high aid amounts. Important projects will not get delayed if they are submitted to a detailed assessment, as this process will be fully transparent and linked to the aid amount. Companies and Member States will be able to prepare the notification on the basis of precise indicators, which are based on standard corporate information and which can be assembled quickly. This will ensure transparency and predictability and will facilitate a speedy authorisation if the project proves to be in the common interest.

The introduction of a detailed assessment should also be seen in the context of the increased possibilities for block exempting whole categories of aid from the notification obligation, that will be offered in the field of R&D&I. With these two developments, fewer measures should be notified to the Commission and it will concentrate its investigations on cases that may be harmful for competition and trade.

How does this Framework contribute to the Lisbon agenda for growth and jobs? Will it help Member States meet their 'Lisbon target' of 3% R&D by 2010?

The new framework for state aid to R&D&I is at the core of the Lisbon agenda for growth and jobs Fostering a more innovative Europe is one of the essential messages of the Lisbon agenda and the Framework will contribute to this, by helping Member States to better focus their state aid budgets on R&D&I and design their aid measures in the most effective way. However, the framework can only indicate ways how aid measures could be designed by Member States and approved more effectively by the Commission. It is Member States' responsibility to actually create aid measures and to move towards the target of spending 3% of gross domestic product on R&D by 2010. This target is largely detached from state aid, which is only one relatively minor instrument in a policy for R&D and innovation.

What are the market failures identified by the framework as justifications for granting state aid to R&D&I?

The Commission has identified a series of market failures, which hamper R&D and innovation and which can justify granting state aid to improve the market outcome. The following market failures were considered relevant, on the basis of the existing economic literature, consultations and dedicated studies on state aid and innovation:

  • Positive externalities: R&D&I activities generate new knowledge, which is beneficial to society because it can be used by many companies to invent or improve products and services. However, from the perspective of a single company, only the private benefits from investing in R&D&I are accounted for. As a result, R&D&I activities are sometimes not undertaken by private companies, because they consider the resulting private benefits too limited, whereas the benefits for society, due to the knowledge spill-overs of R&D&I, could be important.
  • Public goods: R&D&I activities generate new knowledge, which can not always be protected (e.g. through patents). Private companies may thus refrain from investing in R&D&I because they are afraid that the results of their investments may be used by competitors and they consequently cannot generate any profit from their investments.
  • Imperfect and asymmetric information: R&D&I activities are particularly risky and uncertain. This means that they are affected by imperfect and asymmetric information. As a result, too few human and financial resources may be invested in R&D&I projects, which would however be highly valuable for society.
  • Coordination and network failures: R&D&I activities are often unsure and complex and it is not easy for private companies to work together, identify suitable partners and coordinate R&D&I projects. As a result of these coordination and network failures, R&D&I projects that could have been conducted in common between a group of firms are sometimes not undertaken at all, whereas society as a whole would have benefited.

A specific study on “Innovation market failures and state aid: developing criteria” undertaken for the Commission is available at:

http://ec.europa.eu/enterprise/library/lib-competition/doc/innovation_market_failures_and_state_aid.pdf


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