R&D for SMEs

Discussion Paper: Towards A Dedicated European Research Programme for SMEs
to promote competitiveness, growth and employment

Proposals for the Implementation of the Seventh Framework Programme, presented by organisations associated with 500,000 SMEs in all sectors of the European economy.   

Key Proposals 
1.      More effectively engage SMEs to meet the Barcelona and Lisbon objectives
2.      Improve the targeting of R&D funding towards sustaining SME competitiveness and promoting SMEs with European and global growth potential
3.      Review the current 15% SME target and allocate half of future SME funding to a dedicated programme
4.      Capitalise on, and supplement,  the success of existing instruments: CRAFT, Collective and STREPs
5.      Strengthen the exploitation of SME research results by integrating demonstration and dissemination activities  

 

The proposals in this paper are endorsed by:

      

which together represent or are otherwise associated with 500,000 SMEs in all sectors of the European economy, including the key sectors of machine tools, leather production and manufacture, textiles and clothing, mechanical, electrical and electronic engineering and metal-working.

Europe is failing to mobilise its SME innovation and growth potential  

More effective involvement of SMEs in the Framework Programme is essential if Europe is to raise R&D investment and reach the objectives of (i) 3% of GDP (Barcelona Objective) and (ii) the globally most competitive knowledge-based economy (Lisbon Objective) [1].  

Europe’s greatest weakness compared with the USA in relation to research, innovation and competitiveness is its SMEs.  Whilst both the total public expenditure on R&D and the research activity of large companies in Europe and the USA are broadly comparable, SMEs in Europe undertake between 7 to 8 times less research than their American counterparts. An analysis by a Commission staff economist shows that this difference between their SME sectors substantially explains the R&D gap between them[2].

 Our comparative economic weakness is all the more acute when one considers that SMEs account for 65% of European GDP, but only 45% in the USA.  Another striking difference is that 75% of large firms founded since 1980 in the United States have grown from small beginnings. By contrast, 80% of similarly aged large firms in Europe are the result of mergers and acquisitions. Europe needs more innovative SMEs that grow. 

The need for European funding

 Most SMEs begin trading domestically. Many SMEs in Europe have international potential but too few of them have opportunities to gain effective connectivity for their product and service offerings into European and world markets.  In a rapidly globalising business environment, this represents a strategic weakness for Europe. Participation in European projects to develop new technology to enable innovative products and services gives SMEs an important opportunity to learn about international markets and build the transnational connectivity to supply into them.

Most regional and national SME programmes in Europe do not support the research activities or business partnering of their SMEs beyond their national frontiers. European programmes with sufficient resources are essential to fill this gap. Transnational initiatives such as Eureka have so far failed to do so for SMEs, due to inadequate budgets and coordination. It would be a strategic political failure, entirely contrary to the Barcelona and Lisbon objectives, not to provide adequate funding in support of the internationalisation of SMEs with European and global growth potential.     

Refocus efforts to better sustain competitiveness and promote growth 

A dynamic SME sector is essential to a modern economy and governments have a key role to play in setting the right conditions to ensure that SMEs receive appropriate assistance for their knowledge development and business growth. Europe’s weakness compared with the USA lies not necessarily in the volume of public support for SME research, but in its targeting. The current Framework Programme focuses 80% of its €2.25bn target for SME participation on high-tech SMEs that are capable of conducting research at a high level of excellence but that often have little or no manufacturing capability of their own. They represent just 3%1 of the total SME population and frequently are more research-driven than market-oriented or are locked into the value chains of large enterprises.  SMEs with a focus on their own products and core business growth have been largely deterred from FP6 participation by the new instruments’ emphasis on longer-term and larger-scale research. In Integrated Projects they are disadvantaged to such an extent that nearly one-third of British SMEs consider the cost-benefit ratio of participation as negative[3]. Continuing to focus the vast majority of European research funding on this tiny population of high-tech SMEs that are already research-intensive but that often lack high-growth potential is very unlikely to help progress towards either the Barcelona or Lisbon objectives.

By contrast, there is great scope, still much under-exploited, for the Framework Programme to stimulate knowledge and business growth amongst the much larger community of medium-tech SMEs (30% of the population1) able to conceive innovative, technology-enabled products and services. Whilst these firms do already participate enthusiastically in FP6, through CRAFT and to some degree STREPs, about 90% of applicants fail to get funding as the measures are more than 10 times oversubscribed. 

Build on past successes

CRAFT and STREPs have proven their value in supporting SMEs with European and global growth potential. The new Collective Research programme is proving its value in sustaining SME competitiveness. Let us build on those successes. 

The current approach of a 15% target for SMEs in the Thematic Priority Areas has not been a great success. It has created artificial pressure for the inclusion of SMEs in IPs, NoEs and thematic STREPs and become counter-productive to the interests of the research being carried out and even of the SMEs taking part3. Moreover, SMEs have been deterred by the increased emphasis on longer-term and large-scale research and by administrative burdens. A critical review is necessary. Assuming a €40bn budget for FP7, we would propose that at least half of the €6bn (15%) for SMEs should be invested in the dedicated SME programme, which would use different instruments to target the different categories of SME requiring European support:

·         Medium-tech SMEs with European and global growth potential, using an instrument like CRAFT;
·         Medium- and low-tech SMEs facing growing international competition and increasing European regulatory burdens, using an instrument like Collective Research, and
·         Hi-tech SMEs with European and global growth potential, using an instrument like STREPs (but unlike the current STREPs in the Priority Thematic Areas operated in a bottom-up manner to satisfy these SMEs’ need for shorter-term research identified from market needs).

SME funding should be provided more on the basis of the quality of the innovation and exploitation potential of the ideas than on the scientific excellence of the research proposed. Dissemination and demonstration should be an integral part of the funding regime in order to maximise the potential for research results to become integrated widely into products and services able to reach world markets more often, more rapidly and more extensively than now.

This larger, dedicated and more effective SME research programme is especially needed by the new Member States and Candidate Countries. They have many fewer high-tech firms able to participate in leading-edge research through NoEs, IPs and thematic STREPs.  Their greatest potential lies in their relatively high population of medium-tech SMEs, which need help to find their competitive place in the enlarged European market. 

Adoption of these proposals would provide the Commission, Parliament and Council of Ministers with the opportunity to promote growth, competitiveness and employment by effectively mobilising Europe’s SME potential in pursuit of the Lisbon and Barcelona objectives.

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[1] EURAB Report on SMEs & ERA – EURAB 04.028-Final
[2] Ugur Muldur: Is Capital Optimally Allocated in the Overall Process of European Innovation?, Revue d’Economie Industrielle, 2001.
[3] Impact Analysis of Framework Programme on the UK, Department of Trade & Industry, June 2004.