Commissioner Neelie Kroes: State Aid Reform: Risk Capital, Research and Development and Innovation Conference on innovation and research, Federal Ministry of Economics and Labour

Berlin, 22nd April 2005

Ladies and gentlemen,

Thank you very much for inviting me to take part in this conference, which brings together so many distinguished experts in the field of innovation and research.

The future competitive advantage of Europe depends to a large extent on two things: a highly-educated work force and an ability to put this to work to add value based on a knowledge economy. Europe has enormous capacity for innovation and entrepreneurship. We need to tap into this potential, and we need to do it now. The economic growth of Europe depends on it. And that growth is essential if we are to deliver the standard of living and the social and environmental protection which European citizens rightly expect.

This is at the very heart of the Barroso Commission’s proposals for a new partnership for growth and jobs based on innovation and entrepreneurship. Last month the European Council welcomed these proposals as the basis for the re-launch of the Lisbon Strategy. Today I would like to explain why competition policy – and state aid reform in particular – has a central role in this.

Preserving competition – a first target for a valid policy in favour of R&D and innovation

If you are serious about boosting research and innovation for growth and jobs, you have to first look at what markets can deliver, before trying to fix things through governmental intervention.

Natural pressures in the market create incentives for firms to come up with new ideas, products and services, because they can gain market share and make profits. So my first message is both simple and clear: companies competing in a fair and free market environment will naturally be spurred on to innovate and become more efficient, generating lower priced, better quality goods for consumers. And competition policy is primarily about guaranteeing a fair and free market environment so that all this potential can be released.

However it would be both naïve and irresponsible to think that the markets alone will deliver efficient outcomes in all circumstances. In some cases public intervention is both necessary and justified, on the one hand to meet specific objectives which the markets alone are not delivering, and, on the other hand, to encourage changes in markets so that these objectives can be delivered naturally in the future.

Appropriate public intervention focusing on market failures

This intervention has to be done with great delicacy and care. It is like administering a very potent medicine. For the patient to feel beneficial effects, both the drug and the dosage have to be exactly right for the specific condition of the person concerned. The wrong medicine or even too much of the right medicine implies serious risks for the well-being of the patient. And that is why we put these decisions in the hands of trained professionals – our doctors.

I am convinced that when European Heads of State and Government set the goal of less and better targeted state aid, it was in recognition that decisions on public intervention need to be fine-tuned to what their economies require. This is where you need to look at the concrete condition of markets and take account of the advice of experts, in this case economists. And the remedy they prescribe is to put more weight on economic analysis, and use state aid in a pro-active way by targeting market failures.

By market failures, I mean situations where the market by itself does not deliver an efficient outcome. In the field of risk capital, normal market conditions typically mean that small, innovative and thus risky businesses will not get funding. In these circumstances, the state is sometimes the only actor able to cover the risks of failure and to change the incentives for investors.

The same applies to research and innovation. It is well-known that the results of research and development often have the nature of public goods, meaning that anyone can potentially use and copy them. For that reason, firms may refrain from investing in research since they fear they will not be able to profit from the results of their investments. In such situations, intervention may be justified to change the incentives present in the market. Such intervention can be at national or European level; it can be regulatory – for example through upholding intellectual property rights – or financial.

The European Commission has recently proposed a new financial package for research which would double the EU research budget, allowing investment of around 70 billion euros in the next seven years. The funding is particularly targeted on Lisbon goals. But alone it is not enough: the EU Research budget only accounts for about 6% of total EU public expenditure for research. So an important aspect of the partnership for growth and jobs is to coordinate actions at European and national level, both working towards the common goals defined by the European Council.

The first point in my reform of state aid is therefore that state aid should be targeted in such a way as to improve our market economy and to make it work more efficiently. The second point is that this means better coordination of public intervention in Europe through partnership with all our Member States.

I would like to make a third and very important point. None of this means that state aid for social cohesion purposes will be stopped. Regional aid is a vital component of our strategy for growth, because it creates market opportunities for everyone, and increases the overall demand for products and services, in addition to limiting the risks of instability. But even regional aid can be better targeted and better address the specific needs of given regions to concretely improve their economic situation.

Specific measures will be the result of consultation

I hope to have given you a good idea of the ethos behind our state aid reform plans. These plans will be set out in an Action Plan which the Commission will present shortly as the basis of a wide consultation process, shaping the specific measures needed to implement the reform. Perhaps it would be helpful to touch briefly on some more concrete issues which we are considering in this context.

Firstly, I think it essential to make state aid rules simpler, clearer and more user-friendly. The governance and administration of state aid have to get better. More use could be made of block exemption regulations, which authorise granting aid without it being notified to the Commission. Focusing on the cases that really matter will reduce the administrative burden on all stakeholders. In relation to research and innovation in particular, I am in favour of broadening the Block Exemption Regulation on Small and Medium Enterprises, to increase the scope for aiding young innovative enterprises.

The Research and Development Guidelines are in need of a serious update. Right now, the Guidelines focus on a linear three-stage approach to research. It appears increasingly advantageous to allow Member States to distinguish between activities that are closer to the market and activities that are really pure research. Firms are naturally motivated to engage in research and innovation activities that can bear rapid commercial results. So it makes sense to help these activities less and to focus more on activities that relate to pure research or ‘pre-competitive’ innovative activities.

We also need to look at the relationship between public and private entities conducting research. Universities and research centres are increasingly behaving like normal market participants and it is important to clarify how state aid rules should apply to them, while at the same time taking due account of the fact that close collaboration between public research organisations and industry is one of the objectives of European research policy.

Finally, I would like to improve the rules for aid to risk capital. I know there are a variety of contrasting views about the need of an increased flexibility in the application of the rules, especially as regards the amount of the safe-harbour investment thresholds (i.e. €500,000 in non-assisted areas and up to €1 million in assisted areas). Private investors have highlighted the risk of ‘crowding them out’, which would lead to undesirable results in terms of availability of risk capital especially for young innovative SMEs. These concerns need to be addressed.

Conclusion

Ladies and Gentlemen,

Increasing research and innovation is clearly a shared objective of the Union. State aid rules must be adapted so that public intervention can play its part. But this has to be done with great care, in order not to destroy the benefits of competitive markets. It has also to be done in partnership with Member States so that not only the substance, but practice and procedures too, become more efficient and better targeted. As stakeholders in this process, I am keen to hear your views and learn from your experience.

Thank you for listening so attentively.

Item source: SPEECH/05/251 Date: 22/04/2005 Previous Item Back to Titles Print Item