Neelie Kroes
Member of the European Commission in charge of Competition Policy

Innovation from a Business Perspective: the State Aid Aspects

Innovation Day organised by the European Commission
Brussels, 17th November 2005

Ladies and Gentlemen,

Welcome to the European Commission and welcome to the first Innovation Day organised by DG Competition. I am pleased to see so many of you here today.

Why has the European Commission taken this initiative for an open debate on state support to boost innovation? And why now?

State aid is in principle banned in the European internal market, to avoid unfair distortions of competition and to prevent unproductive bidding wars between our Member States. That is our starting point: as little aid as possible. However, state aid can be justified in cases where the evidence shows that there is a genuine market failure. In other words, state aid can be allowed where the overall benefit to the economy that is brought by filling a gap that markets do not meet naturally outweighs the potential distortion of competition caused. The evidence suggests that innovation may be one such area.

Europeans have for centuries been known for their resourcefulness, their readiness to embrace new ideas and trends, whether in science, art or business. To take an example close to hand, just look at some of the inventions which have come out of this country, Belgium: Bakelite, the saxophone, the first coal-gas powered internal combustion engine, the electric railway, road asphalt, ... I could go on, and this is just one Member State - multiply it by twenty-five and you really have something!

We need a modern revival of this innovative spirit in Europe, and we need it now. Look at recent developments in the global economy. The prospects for global growth are looking less optimistic than we might have wished. You all know the challenges Europe faces: slow growth, lasting budget deficits, high unemployment, poor productivity and aging populations. Reform is needed if we are to sustain growth, social cohesion and our environment for coming generations. We need to get Europe back on the right economic track.

Our task of delivering the Lisbon Agenda - strengthening the European economy, and creating new and better jobs - is therefore more pressing than ever. Boosting innovation is just one of the many objectives which are crucial for the Lisbon process.

State aid reform

Ladies and gentlemen, reforming the state aid rules is my top priority, and if we get it right, this will be an important step closer to creating the right environment for economic growth and jobs. The public consultation on the State Aid Action Plan has generated a lot of interest, and I am happy to record that there is broad support for our approach.

At the heart of it is a push for less and better-targeted State aid, as the European Council has repeatedly requested. Equally important are measures to improve efficiency and transparency, and to streamline the authorisation procedure. Our call for a refined economic approach also led to interesting comments. In particular we got the clear message that we need to clarify how this refined approach will apply in practice.

Innovation and state aid

In steering and shaping this state aid reform, I was very aware that there are few issues more burning than innovation.

A more innovative knowledge based economy is crucial for getting Europe back on the right economic track and keeping it there in a changing world. There is so much untapped potential in Europe. Let's unchain it and rise to the top!

To respond to this challenge, in September the Commission presented a detailed policy document and launched a consultation on State aid for innovation. Our aim: to raise awareness of the crucial importance of innovation and to define the right policy mix to deliver it. Today's conference is part of this process. And I hope that in all regions of Europe, policy-makers and stakeholders are thinking hard about how to make Europe more innovative.

Let's make no bones about it: maybe we are not doing badly in some areas, like transport, energy, or the environment. But we are clearly losing ground against our main international competitors (the USA, Japan) and we have to maintain a competitive edge as regards new technological powerhouses in China, India or Korea. The challenge is simple: either we embrace a more innovative growth path, or we face a slow decline.

But we must not be tempted to think that State aid is the innovation panacea. Effective competition is the most potent tool for creating natural incentives for companies to come up with new ideas and new products. Preserving competition as a driver of innovation is therefore at least as essential as government support. This is the bread and butter of competition policy, be it in antitrust, merger control or State aid.

But there are instances where markets fail to deliver an appropriate environment for innovation. These market failures have a negative impact on the risk-to-return ratio of innovative ventures. By giving State aid, it is possible to change the risk-to-return ratio and thereby encourage private actors to invest more in innovation. State aid policy therefore has a contribution to make, by laying down rules to target those market failures which hamper innovation and for which the benefits of state aid clearly outweigh competition concerns.

What sort of state aid regime for innovation? Our ideas...

In line with the economic approach which underlies the State Aid Action Plan, we propose a clear methodology for the elaboration of State aid measures for certain innovation activities:

• First, the instrument has to target a well-defined market failure;
• Second, State aid must be the appropriate policy instrument (which is not always the case - sometimes, structural policies or regulatory action may be much more appropriate);
• Third, the aid must have an incentive effect and be proportionate; and
• Fourth, distortions of competition must be limited.
• On that basis, the Communication presents six concrete measures to support innovation via state aid: The first is support for the creation and growth of innovative start-ups (through tax exemptions and subsidies);
• Our second proposal is additional flexibility for state aid to risk capital;
• Our third measure is 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);
• Subsidising SMEs to buy services from innovation intermediaries is our fourth proposal;
• The fifth is supporting SMEs to recruit highly qualified researchers and engineers and to benefit from exchange of personnel with universities and large companies; and
• Our final proposal is supporting the development of poles of excellence through collaboration, clustering, and projects of common European interest.

This is the first time that the Commission has indicated that it intends to authorise measures to support innovation. The first reactions we have heard so far are very positive, especially from regions, which are currently trying to develop regional innovation plans.

For now, the focus is mainly on rules covering technological innovation and SMEs - but a final decision on the scope of the future rules will depend on the consultation, and on what you will have to say about our ideas during the Conference today.

...and the questions we would like stakeholders to answer

In this context, I would be particularly interested to hear your views on four subjects:

First, how do we define innovation, and how do we set the limits? In Strasbourg earlier this week, I heard an interesting definition from one of our MEPs. He said that "research is about converting money into knowledge. But innovation is about taking knowledge and converting it into products."

But where do you draw the line between compensating for a market failure as concerns innovation, and unduly distorting competition by favouring certain products? Aid for innovation must never be a cover for aid for operations. But how do we define the moment when an innovative process is over and commercialisation starts?

Second, Small and Medium-sized Enterprises - in EU Jargon, companies with fewer than 250 employees. In the Commission's view, it is justified to support SMEs via State aid, because they are most affected by market failures. Very often, SMEs do not have limitless funding, they may not have the best human resource mix, and they tend to be less connected to other players and so less able to benefit from positive externalities or clustering. And the fact is that State aid to these SMEs in general has a less distortive effect on competition than some other forms of aid. Our proposals on State aid for innovation therefore essentially target SMEs.

But maybe someone will tell us that in fact big is beautiful when it comes to innovation? Or maybe we should not distinguish between small and big companies because they face the same problems? Or maybe we should have specific provisions that are tailored to different needs and that we have not yet identified?

My third question to you concerns the challenges of globalization. There is a new consensus mounting that international competition is taking activity away from Europe, even for research and innovation. Is this really the case? What evidence do you have? Countries in America and Asia are doing much better than us in developing new markets and new products - gaining the competitive edge. What causes this - and is part of their success package related to the way they support innovation?

Right now, the Commission considers that if we design the right policies, we will naturally attract Foreign Investment, because we will be competitive through our own economic potential. But maybe we need to attract Foreign Investments in Research and Innovation more aggressively? And if this is so, how should we go about it? It may be that one part of the solution is a political one: Europe needs a shared vision and commitment to a modern, dynamic, reformed economy. And we need to project that vision to those outside. We must never underestimate the damage done to Europe's image as an attractive place to invest by protectionist discourse directed primarily to domestic audiences.

Finally, I am particularly interested in your views on clustering. Innovative clusters are businesses of all sizes grouped around research facilities. State aid could be used to strengthen regional clusters and to create European poles of excellence. And in fact, many people present clustering as the magic tool to foster innovation.

But how do you build European Silicon valleys? Can such a thing be created "by decree"? Which ingredients need to be there from the start for such an initiative to succeed? How much does public money actually matter in this process? And how do you avoid feeding fat cats or picking winners?

We have tried to think about ways to support innovative infrastructures. And we want to give Member States and regions the possibility to design regional development strategies. Already now, there are provisions in our state aid rules to make sure we support regional cohesion. We will continue to do so in the future. But it would be great to hear concrete suggestions and to discuss concrete cases in order to find out how best to do that.

Conclusion

Ladies and gentlemen,

We hope to have all stakeholders' comments on the Communication on State aid for Innovation by 21 November. Thereafter, the Commission will assess the results 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. The future R&D and Innovation Framework and the new Risk Capital Guidelines should be adopted mid-2006. This will be complemented by a new instrument, the general block exemption, which will regroup all areas where the Member States will not have to notify aid to the Commission, including for research and innovation. This will make it easier and quicker for Member States to grant the right kind of State aid. We could also address the specific issue of eco-innovation in the new Environmental Aid Guidelines due for 2007.

But let me close by stating the obvious. It is national governments and not the Commission who decide how to allocate subsidies. We want to provide the best possible European framework, in which innovation can be effectively supported. But this will only be a success if Member States, regions and companies buy into it. All stakeholders need to share our ambition, and be brave enough to act on it.

I am looking forward to a day of frank exchange, vigorous debate and stimulating insights.

Ladies and gentlemen, thank you for your attention.