Janez Potočnik<br> European Commissioner for Science and Research<br>Innovation and Research: SMEs are the DNA of European economy. How to support them more and better?<br> Conference "Union européenne, Recherche et PME: l'Innovation en Mouvement" (organised by the French Presidency) Paris, 15 September 2008

SPEECH/08/424

Janez Potočnik

European Commissioner for Science and Research




Innovation and Research: SMEs are the DNA of European economy. How to support them more and better?

Conference "Union européenne, Recherche et PME: l'Innovation en Mouvement" (organised by the French Presidency)

Paris, 15 September 2008

Monsieur le Ministre,

Monsieur le Président-Directeur General,

Ladies and Gentlemen.

SMEs are the D.N.A. of the European economy. They are the basis of our future growth and prosperity... Why? ... Because, in Europe, that growth and prosperity must be based on knowledge... and it is SMEs that are most capable of turning knowledge into growth, ... of turning bright ideas into commercial success, ...of turning research into rewards.

That is why they are the essential catalyst in what we call the Lisbon agenda.

We are all here today to consider how to improve the ways in which the research and innovation policies and programmes at all levels – regional, national and European - can help SMEs... Help them to innovate, improve and grow.

We are here to listen to entrepreneurs themselves about their experiences, both the good and the less good, about the strengths and the weaknesses of current research and innovation policy. And this conference will help us make real improvements, both in our specific policies for SMEs and research, but also in integrating the "SME dimension" in the wider range of policies and programmes.

In June this year, the Commission launched the Small Business Act. This sets out the overarching framework for future SME related policy. A framework – based on the principle of "think small first" - that promises to place SMEs in the mainstream of European policy making.

The SBA already includes a number of specific measures, some of which will be outlined this afternoon by Madame Le Bail. But it is also a serious political commitment to ensure that policies at EU and Member State level are designed to provide the best environment and the best opportunities for SMEs to grow and flourish.

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What is an SME? That is not really for me to tell you. But of course the Commission has a recognised legal definition.

According to our definition an SME must have less than 250 employees, a turnover less than 50 million Euros, and a balance sheet of less than 43 million Euros.

Using this definition the importance of SMEs in Europe is undeniable. I am sure you already know the figures.

• There are twenty three million SMEs in Europe... some 99% of all businesses.
• They employ 100 million people... some 70% of the workforce.

But like many convenient labels, the definition of an SME is dangerously simple. And like many statistics, the overall figures hide as much as they tells us.

SMEs come in many different sizes and in many different shapes.

Let's look at size first of all.

• 90% of SMEs are actually micro-enterprises – with fewer than 10 employees – indeed the average European company has just five workers.

Then let's look at shape: SMEs are incredibly diverse in their natures and aspirations:

• At one end of the spectrum we have the "technology pioneers" high-tech companies - perhaps 1% of SMEs - for whom research is the very life blood of entrepreneurial success. These companies often have their own research capacity and are looking to grow rapidly.
• In addition we have perhaps 30% of innovative SMEs which develop, apply or acquire new technology and commercialise it for the European and global markets... These are the companies with high growth potential that we often call "gazelles".
• And, then there is the vast majority of SMEs... who do not have in house research capacities,... who are probably not looking to bring new technologies to market,... for whom innovation is not about technological revolution, but about a permanent process of evolution, involving suppliers and customers.

We must understand this diversity. We cannot have a "one-size-fits-all" approach... And we don't. We have different policies and different instruments at different levels aimed at supporting different types of SMEs in different ways.

At the European level:

• We help "research-intensive" SMEs to participate fully in European research projects, for example in the cooperation part of the research framework programme, Joint Technology Initiatives and in EUROSTARS;
• We help SMEs that do not have any in-house research capacity to outsource research, to "acquire" the knowledge they need to solve technological problems and succeed in the market. Here we have exploratory awards, support for networks and clusters, risk capital instruments, and of course the "Research for SMEs" programme;
• And of course, we help all SMEs - micro, craft, small and medium-sized - to innovate, compete and grow... through the Competitiveness and Innovation Programme, through lead markets, through better regulation.

When we say that SMEs need research, we should be aware that that some need it more than others. But we should also be aware that research needs SMEs. SMEs transmit back important information about demand, about value chains, about global markets. Yes, research is about creating black holes and combating climate change, but it is also about creating value and winning markets. I'm sure that Andrew Dearing will have more to say on this later.

Research organisations, and research policy makers must listen to SMEs, and we must learn to appreciate the specific needs of SMEs, in particular their 'time horizon', which may be very different from that of "blue sky research".

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This conference is subtitled "How to do more and better"....

Well, it is difficult to argue against more of a good thing. But I believe that when you consider the number and variety of existing initiatives supporting research and innovation, we probably don't need any more. Indeed this very number and variety is a source of confusion for SMEs. They don't know where to start.

You cannot really argue against doing things better either, although I actually believe that most of these individual initiatives are already well designed and well targeted.

Where we really can do better is in improving the impact of these initiatives by better coordination between programmes and initiatives at regional, national and European levels.

A few days ago, a group led by Esko Aho wrote in a French paper that there are 70 different national cluster policies around Europe and hundreds of regional ones. I'm sure that each of these is doing a good job. But I agree with Mr. Aho that if we want to argue for more resources we have to improve their impact through better coordination.

In short, we need to avoid duplication of efforts. We need better, more efficient use of available resources. We need maximum synergies between public and private investment. This is what the European Research Area (the ERA) is all about. We don't just need to increase research spending to 3% of GDP, we need to make sure it is spent better.

The ways in which we can support research and innovation are different. Whereas in the 7^th Research Framework Programme we provide up to 50% of project financing, and up to 75% for SMEs, as you get closer to the market, you must be more careful that you do not distort it with public money.

That is why it is so important that we develop access to risk finance in Europe. It is for businessmen - not bureaucrats - to decide which ideas will work on the market, and for bankers and equity funds to back those risks.

Where we can help – and where we are helping through the Competitiveness and Innovation Programme in partnership with the European Investment Fund – is in leveraging that risk capital to areas where there is not enough. Where there is market failure. And that means for smaller businesses.

To help SMEs to innovate you could say that rather than more and better, we need less and better... Less obstacles and better regulation. The European Commission's efforts, in partnership with Member States, to simplify and improve regulation, and to reduce administrative burdens, are particularly important for small businesses. And our lead market initiatives, clear the regulatory way in markets with the highest growth potential, are particularly important for innovative enterprises.

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Ladies and gentlemen,

Europe has no choice. In the global economy we cannot compete on the basis of just cutting costs; we must compete on the basis of knowledge and value-added.

Whilst the European Research Area is there to effectively convert taxpayers' Euros into that knowledge at the best possible exchange rate ... It is businesses, especially innovative SMEs, that have the job of turning that knowledge back into Euros at a good rate of return.

In the global economy people, capital and companies are more-and-more mobile. It will those regions that can offer the best conditions for accessing and using knowledge that will attract and retain the companies that will make them globally competitive.

In the future let us work even more closely together between regions, countries and the EU to develop a true partnership.

Thank-you.