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BENCHMARKING OF NATIONAL POLICIES

PUBLIC AND PRIVATE INVESTMENTS IN R&D
FINAL REPORT
EXPERT GROUP
June 2002
Neither the European Commission nor any person acting on behalf of the
Commission is responsible for the use, which might be made of the following
information. The views in this document are those of the authors and do not
necessarily reflect the views and policies of the European Commission
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Acknowledgements:
The members of the expert group would like to express their sincere thanks to
the many people who assisted their deliberations and discussions. Each member
has utilised his/her personal network of contacts and the wealth of information
supplied from these sources is greatly appreciated. A range of people from the
European Commission services have attended group meetings and contributed
to the groups understanding of the task and its context. These include, Clara de
la Torre, Dimitri Corpakis, Sen OReagain, Peter Lwe, Brian Sloan and
Marianne Paasi. The administrative support of Catherine Weisswange was also
greatly appreciated by the group.
The High Level Group on Benchmarking National R&D Policies have also
provided valuable information and insights.
A special thanks and appreciation is due to Arnaud Borchard, the person
responsible for organising the groups activities and support. His energy and skill
in furnishing the group with wide ranging relevant information has been
exceptional and his assistance to the Chairman and rapporteur in reviewing
drafts of reports, case studies and analyses has been incisive and timely.
Members of the Group:
Appointed by the European Commission
Gonzalo Len, Chairman Universidad Politcnica de Madrid. Spain
Eamon Cahill, Rapporteur IPC Dublin. Ireland
Jan Annerstedt Copenhagen Business School &
Interlace.ie (Ltd.)
Denmark
Patrizio Bianchi Universit di Ferrara. Italy
Jean-Michel Chasseriaux Institut de recherche pour le
dveloppement. Paris
France
Luk Van Langenhove UNU/CRIS. Belgium
Alberto Mazzola Finmeccanica. Belgium
Jrgen Wst Karlsruhe Research Centre. Germany
Additional experts appointed by Member States
Johan Hauknes STEP. Norway
Heinz-Werner Hetmeier Federal Statistical Office. Germany
Jeremy Howells PREST, University of Manchester. UK
Gernot Hutschenreiter WIFO. Austria
Maria Angeles Martinez Ministerion de Ciencia y
Tecnologia, Madrid.
Spain
Rui Santos Observatorio das Ciencias e das
Tecnologias, Lisbon
Portugal
Reinhilde Veugelers Katholieke Universiteit Leuven Belgium
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TABLE OF CONTENTS
ACKNOWLEDGEMENTS: ............................................................................................. II
MEMBERS OF THE GROUP: ........................................................................................ II
TABLE OF CONTENTS................................................................................................ III
TABLE OF FIGURES.................................................................................................... IV
EXECUTIVE SUMMARY................................................................................................ 1
1. INTRODUCTION: R&D AND INNOVATION............................................................ 13
2. OUTLINE OF THE REPORT.................................................................................... 16
3. METHODOLOGICAL APPROACH.......................................................................... 18
3.1. QUANTITATIVE ELEMENTS .................................................................................... 18
3.2. QUALITATIVE ELEMENTS....................................................................................... 19
4. GENERAL TRENDS IN INVESTMENTS IN R&D:.................................................... 21
4.1 EXPENDITURE ON R&D......................................................................................... 21
4.2 PERFORMANCE OF R&D ....................................................................................... 24
4.3 FUNDING OF R&D................................................................................................. 30
4.3.1 Public Sector Funding .................................................................................. 31
4.3.2 Private Sector Funding................................................................................. 38
4.3.3 Funding from abroad.................................................................................... 40
4.3.4 Funding of science based innovation, risk capital......................................... 41
4.4. FUTURE TARGETS FOR R&D SPENDING ................................................................ 44
4.5. CLUSTERING AND TRENDS OF MEMBER STATES .................................................... 45
5. RATIONALE FOR SUPPORT FOR R&D................................................................. 49
5.1 THE CHALLENGE OF ADVANCEMENT OF KNOWLEDGE............................................... 51
5.2 THE COMPETITIVENESS CHALLENGE....................................................................... 53
5.3 OTHER SOCIETAL CHALLENGES ............................................................................. 54
5.3.1 Defence Related R&D.................................................................................. 54
5.3.2 Health related R&D...................................................................................... 58
5.4 INSTRUMENTS ...................................................................................................... 60
5.4.1 Direct Supports ............................................................................................ 61
5.4.2 Indirect supports .......................................................................................... 65
5.4.3 Framework conditions .................................................................................. 67
6. THE EVOLVING FRAMEWORK .............................................................................. 70
6.1 GLOBALISATION.................................................................................................... 70
6.2 BEHAVIOUR OF PUBLIC AND PRIVATE ACTORS......................................................... 72
6.3 THE INCREASING IMPORTANCE OF MEASURING AND ASSESSING INTANGIBLES. .......... 75
7. CROSS-CUTTING ISSUE: BIOTECHNOLOGY....................................................... 78
8. THE WAY FORWARD.............................................................................................. 81
8.1. ON INDICATORS................................................................................................... 81
8.2. ON THE NEXT CYCLE OF THE BENCHMARKING EXERCISE......................................... 83
9. POLICY FINDINGS AND ORIENTATIONS.............................................................. 85
9.1. HOW TO INCREASE PUBLIC AND PRIVATE INVESTMENTS IN R&D?............................ 85
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9.2. HOW TO UTILISE MORE EFFICIENTLY AND EFFECTIVELY THE AVAILABLE RESOURCES?86
9.3. HOW TO GAIN A BETTER UNDERSTANDING OF THE BEHAVIOUR OF MAJOR PLAYERS? 87
9.4. PRACTICES EXTRACTED FROM CASE STUDIES AND NATIONAL REPORTS.................. 87
REFERENCES:............................................................................................................ 93
ANNEX I. CASE STUDY: INNOVATION AND VENTURE CAPITAL (VC). .................. 98
ANNEX II. CASE STUDY: EUROPEAN SYNCHROTRON RADIATION FACILITY... 109
ANNEX III CASE STUDY: BIOTECHNOLOGY IN TWO EUROPEAN REGIONS.... 123
BIO REGION HEIDELBERG (GERMANY) ....................................................................... 123
BELGIAN CASE......................................................................................................... 128
ANNEX IV. DEFENCE R&D....................................................................................... 135
ANNEX V. THE ROLE OF STRUCTURAL FUNDS FOR R&D................................... 145
ANNEX VI. CASE STUDY: IMPACT OF NON RTD POLICIES ON R&D POLICIES . 160
ANNEX VII: TRENDS IN R&D EXPENDITURE IN RELATION TO GDP DURING THE
90S:............................................................................................................................ 165
Table of Figures
FIGURE 1: SCOPE OF THE BENCHMARKING EXERCISE ..................................................................... 14
FIGURE 2: THE FOCUS OF THE EXPERT GROUP ON PUBLIC AND PRIVATE R&D INVESTMENTS ............... 15
FIGURE 3: IDENTIFIED ISSUES AND THEIR INTERACTION.................................................................... 20
FIGURE 4: RESEARCH INTENSITY V GDP PER CAPITA 2000 ............................................................. 21
FIGURE 5: GERD PER RESEARCHER (PPP$).................................................................................. 22
FIGURE 6: R&D TO SALES TRENDS IN MANUFACTURING 1983-1998................................................ 23
FIGURE 7: PUBLIC R&D PERFORMANCE........................................................................................ 24
FIGURE 8: REGIONAL RESEARCH INTENSITY VERSUS REGIONAL GDP PER CAPITA .......................... 28
FIGURE 9: GLOBAL FUNDING OF R&D IN OECD COUNTRIES............................................................ 30
FIGURE 10: SHARE OF GOVERNMENT BUDGET ALLOCATED TO R&D.................................................. 31
FIGURE 11: RELATIVE IMPORTANCE OF PROJECT FUNDING............................................................... 35
FIGURE 12: R&D FUNDING BY SOURCE ......................................................................................... 39
FIGURE 13: R&D FUNDING BY SOURCE - EUROPEAN COUNTRIES..................................................... 40
FIGURE 14: SEED AND START-UP VENTURE CAPITAL INVESTMENT PER 000 OF GDP ......................... 41
FIGURE 15: R&D EXPENDITURE PER CAPITA VERSUS GDP PER CAPITA ............................................ 46
FIGURE 16: GBOARD PER 000 OF POPULATION VERSUS GDP PER CAPITA ...................................... 48
FIGURE 17: FUNDING OF BASIC RESEARCH.................................................................................... 52
FIGURE 18: CLASSIFICATION OF DEFENCE COMPANIES ................................................................... 55
FIGURE 19: HEALTH R&D AS A % OF GDP 2000 ........................................................................... 58
FIGURE 20: R&D IN THE PHARMACEUTICAL INDUSTRY .................................................................... 59
FIGURE 21: A ROUGH TAXONOMY OF SUPPORTS FOR R&D............................................................ 61
FIGURE 22: PRACTICE EXAMPLES ................................................................................................. 65
FIGURE 23: R&D FUNDING BY SOURCE......................................................................................... 70
FIGURE 24: SHARE OF SMES IN PUBLICLY FUNDED R&D EXECUTED BY THE BUSINESS SECTOR........... 73
FIGURE 25: INTERDEPENDENCY OF PUBLIC-PRIVATE TECHNOLOGY ASSETS; BIOTECHNOLOGY........... 80
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Executive Summary
Introduction
In the Barcelona summit Heads of Governments in the EU reiterated the Lisbon
commitment to boost R&D and innovation in the EU by increasing expenditure in this
area, aiming to approach 3% of GDP by 2010, 2/3 of which should be funded by the
business sector. In the EU, only Sweden and Finland exceed this target figure at
present while the EU average is just below 2%. The current level of Business
Expenditure on R&D (BERD) at 1.1% of GDP, also indicates the depth of the challenge
that EU countries need to address during this decade.
This Final Report is the result of the work carried out by the Expert Group on
Benchmarking National R&D Policies: Public and Private Investment. The
benchmarking exercise has been undertaken within the context of supporting the
improvement of R&D policy design and implementation, and furthermore of promoting
the development of synergies and co-ordination of research efforts in Europe.
Benchmarking is understood here as a mechanism for learning good practice in
managing R&D from others through active exchange of ideas and positions amongst
experts and policy makers, starting from the analysis of some agreed indicators and
through the exchange of experiences and practices on policy measures.
Objectives
Therefore, through the identification of key factors that may help to improve R&D in
Europe, the aim of the Expert Group was to address the issues concerning:
how to increase public and private investments in S&T,
use of resources in a more efficient and effective manner,
understanding of the behaviour of major players in R&D investment,
and the identification of successful policy instruments at national and European level to
improve R&D investments.
The work of the Group has been focused on providing, in the area of public and private
investment in R&D, a consolidated basis of evidence on the performance of R&D
efforts in Europe. However, while no strong policy recommendations are included,
important general orientations for future debate and analysis at the national or regional
level and mutual learning at the EU level.
Policy findings and orientations
Strong policy recommendations to be applied as recipes are in most case hazardous.
The following orientations drawn from the groups analyses have to be observed and
discussed within the specific national context, which depends first and foremost on the
overall national policy objectives but also on the structure of the business sector, the
strength and weaknesses of the S&T and innovation settings and the historical and
cultural background.
According to the analysis of these issues and findings, policy orientations in the area of
public and private R&D investment must cover three complementary dimensions.
Globally, they could generate the necessary context for fostering steady growth in R&D
investments.
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How to increase public and private investments in R&D?
The stability and sustainability of public policies related to R&D activities are important
features for building the confidence of the private sector so that substantial long-term
commitments in R&D can be programmed and increased.
While SMEs are important actors in increasing innovation and policies need to be
oriented towards them, large companies remain essential actors in R&D and
innovation funded by the private sector and links between large companies and SMEs
are important. Public policies need to address the support to both types and promote
links between large firms and small businesses to increase investment from the private
sector. Problems of dead weight losses (where research would have taken place in
any case without government intervention) need to be addressed in that context.
It has been observed that both the private and the public sector tend to reduce R&D
funding in times of downturn in the economic cycle. The necessary maintenance of
overall R&D investment and especially that from the private sector for competitiveness
points to the need to foresee adaptable schemes for increasing public support contra-
cyclically.
Long-term co-operation among R&D and innovation actors, between public and private
actors but also among private actors, appears increasingly fundamental for raising
R&D investment and improving its effectiveness. Therefore, measures promoting
networking need to be explicitly looked for and enforced.
Attraction and development of high-tech businesses are crucial for the future
competitiveness of economies. Such businesses need a good environment for
development, easy networking with research centres, good infrastructures and access
to VC. The concentration of resources and policy measures in specific locations, to
meet these requirements appears an efficient way to increase R&D investment from
the private sector and to invest public money. In Europe there is room for more S&T
parks and places where the best conditions can be established should be looked for.
Focussing of the parks on some priority domains where specialisation is a requirement
appears to be a feature for increasing chances of success.
Highly skilled human resources are a crucial factor in stimulating R&D activities and
innovation, particularly in SMEs linked to traditional sectors. Provision of these
resources calls for more investment in this area, for example through specific
programmes partly funded by public or private agencies to provide qualified people in
R&D activities to SMEs.
More uniform regulation at European level on risk and venture capital could facilitate
their extension and use. Cross border VC needs to be developed and improved.
Measures to facilitate the use of existing VC, especially by start-ups and spin-offs, for
example, through guarantee schemes, should be explored further. Greater co-
operation among ministries (in charge of research, innovation, education and finance)
in VC management may also help providing commercial seed finance to early stage
companies without distorting the market.
Increased flexibility in the management of programmes and public R&D centres could
help in generating more spin-offs from public R&D activity and in capturing more
external funding for public R&D activities.
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How to utilise more efficiently and effectively the available resources?
Collaborative R&D projects are an efficient way to improve public-private and private-
private partnerships and to avoid duplication of effort. This approach, followed by the
Framework Programme, is not the main mechanism at national or regional levels and
although funding of such projects is increasingly emphasised, the greatest part is still
devoted to single topic projects.
Public policies on innovation should have their own goals and indicators, apart from
considerations made for the long-term goals of basic research prioritised in national or
European R&D programmes. The tendency to fix only short-term priorities should be
resisted strongly. Sharing programmes and the funding of research in those scientific
fields where no immediate benefit return can be expected has to be a priority in order
to use scarce resources more efficiently.
In terms of new knowledge creation, strong interaction between higher education and
infrastructures should be promoted by specific policy measures. In the long run,
investing in human resources appears much more efficient than investing in tangible
infrastructures to improve the absorption rate of advanced technologies.
A European Research and Innovation Area and a possible European Education Area
should not be developed as completely separate elements. The European Commission
and the Member States should reflect on the creation of effective links between them.
Public R&D policies should not be isolated from other policies, especially when R&D
investments made in other policy domains are important contributors to total
investments. Close co-operation among decision-makers or even integration should be
explored to guide prioritisation processes and to better exploit synergies.
Policy measures need to be flexible at the various administrative levels, especially
between national and regional levels. This implies more co-ordination but also
possibilities of adaptation to local specific R&D investment needs in order to better
aggregate the various complementary local actors.
There is a strong regional aspect to investment in R&D. The top 10 regions in terms of
research intensity in Europe, account for 20% of the total expenditure on R&D and 28
of the total 211 regions account for 50% of the expenditure. This concentration reflects
both historical strength and conscious public policy action to maintain local capabilities.
Increasingly, initiatives are being taken involving cross-border groups of actors to
promote and advance innovation networks, which respond to local needs and
opportunities with the support of different public authorities. By devolving
responsibilities for public R&D from central to local or regional governments additional
funding for R&D could be raised.
Evaluation to assess the efficiency and effectiveness of measures is fundamental
although time lag difficulties need to be overcome. In that latter respect relevant and
up to date indicators are important. Evaluation needs to be more than just
administrative and involve cost/benefit analyses. More resources should be devoted to
such follow-up activities. For an efficient investment, a systematic evaluation of
networking and collaboration impact at all levels needs to be carried out.
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How to gain a better understanding of the behaviour of major players?
Private policies on R&D investments are always based on effort-benefit trade-offs.
Public authorities need to better understand societal needs and to enhance their
technology appraisal capacity. This calls for the participation of all stakeholders
(scientific community, business sector, administration and society) in the priority setting
decision process to better target public investment.
Progressive opening of national programmes, cross fertilisation measures and
mobilisation of human resources need to be promoted. The idea is to facilitate co-
operation and to boost diffusion and uptake of knowledge by increasing the efficiency
of the resources used. Some overlapping is however necessary to keep constructive
emulation, to create critical mass and to address specific secondary goals.
Methodology
A reduced number of indicators applicable to benchmarking of public and private
investment in R&D were selected by Commission and made available to the group:
Total research and development expenditure in relation to GDP and breakdown by
source of funding
Research and development expenditure financed by industry in relation to
industrial output
Share of the annual government budget allocated to research
Share of SMEs in publicly funded R&D executed by the business sector
Volume of venture capital (VC) investment in early stages (seed and start-up) in
relation to GDP
The group also used other statistical data and reports from the OECD, the European
Commission and other sources, complementing them with their own discussions and
reports.
The context of R&D investments
There is wide consensus that high levels of research and technological development
(R&D) intensity constitute one of the main factors contributing to strong and lasting
economic growth in a knowledge-based economy. For the foreseeable future the
creation, diffusion and exploitation of knowledge will be the key elements of
development and competitive success. Therefore, the ability to produce, distribute and
exploit knowledge effectively will be the main priorities for future investors.
The analysis carried out by the group, by comparing trends in Member States in GDP
(per capita) and R&D expenditures (also per capita) during the last decade, shows the
difficulties of changing the situation. The exception in the period was Ireland, which
experienced a very high rate of growth in GDP per capita. More discrepancies can be
found in the relationship between GDP and government budget appropriations (both
per capita). In this last case, the general advances on GDP during the 90s have not
resulted in similar advancements in the government budgets because the strong
differences in public and private system structures.
It is also clear that while countries with higher GDP are both more able to allocate
more government funding to R&D and more flexible in their choices for allocating
resources. However, the less productive countries have had to rely on sustained, albeit
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comparatively scarce, government effort to be able to achieve whatever moderate
absolute growth they could generate.
To meet the Barcelona targets, stimulation of business investment in R&D and high
levels of technology diffusion are needed to unlock the EUs innovation potential. It is
important to appreciate that in all economies only a small number of high tech sectors
have high research intensities. In these sectors, such as pharmaceuticals and ICT,
typically, research expenditure is between 8 and 12% of net sales and countries, which
have a strong representation of these sectors in their industrial structures, will as a
consequence register high levels of overall research intensity. For the rest of
enterprise sectors, emphasis is placed on fostering innovation activities aiming at
absorbing new products or processes fed by R&D efforts in order to increase
competitiveness.
Government resources for R&D have remained stable in most EU countries although
their internal composition and goals have changed. Generally, most efforts of
European governments in recent years were oriented towards mobilising private sector
resources in order to stimulate economic growth and competitiveness. As a
consequence, public research entities have been encouraged to look for new sources
of funds. The EU Framework Programmes and Structural Funds have provided
additional resources. So too have charitable foundations in some countries, industry
and valorising research results (through licensing or spin-off creation, for example)
although this last element is a minor contributor to funding in the majority of EU
countries.
Public and private investments play complementary roles in these endeavours and the
context and conditions that apply are very different to those that governed previous
development investments. The role and attitude of governments (national and regional)
have also changed in recent decades, passing from direct involvement in the S&T
process to becoming a facilitator whose role is to improve the general context than to
be an investor in priority areas.
The group in setting out to address its overall task sought:
to determine the context,
to understand the motivations behind the constraints faced by public and
private actors in investing in R&D,
to extract practices and propose future areas for policy action.
Accordingly the following aspects were studied:
Role of public policy: The focus was to understand ways in which public policy
interacts with research and the impact it has on investment. The group
explored, for example, the extent to which public policy influences the balance
between support for basic and applied research; and examined the spill-over
effects of direct and indirect state aids to specific sectors (e.g. aerospace and
defence), as well as the effect of regionalisation and other non R&D policies.
Behaviour of public and private actors: The central issue here is to understand
whether there has been a shift towards applied research in response to the
growth of the knowledge based economy and what the response of institutions
has been. Aspects explored include, among others, the impact of such a shift,
the importance of networking to create knowledge and recent trends towards
outsourcing, and their implications for scienceindustry relations.
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Contextual concerns: The increasing globalisation of economic activities is
impacting on R&D investment in a number of ways. For example, multinational
companies are tending to concentrate investment in countries where markets
are most developed and where the regulatory environment is most favourable.
The internationalisation and the increasing variety and sophistication of capital
markets have implications for the volume and direction of investment flows. The
increasing importance of intangibles and services sector on public and private
institutions was also addressed. These trends raise issues as regards the
appropriate geographical level (international, national or regional) for
intervention to encourage investment in R&D.
Rationale for public investments on R&D
The importance of public investments
Public investments in R&D are considered a responsibility in modern societies in order
to contribute to the advancement of knowledge through basic research and to help in
the creation of an efficient and competitive society.
Nowadays, technology is a critical contributor to productivity and economic growth,
and, because most technology results from R&D spending by the private sector, both
the amount and composition of this investment are important policy variables. Implicit
in the public funding of basic research is the expectation that the research will lead to
intellectual advances, and that, over the long term, these advances, either directly or
indirectly, will benefit citizens. Basic research may well lead to a variety of benefits,
including training, social, environmental or economic impacts, etc., in the longer or
shorter term, even if these are not the primary objectives of the research.
Many larger companies in specific sectors allocate a percentage of research funds to
basic research but usually with possible relevance to particular applications.
Increasingly as these companies are funding research programmes and projects in
higher education institutions, some allocations to fundamental research are being
made. In some areas, where strong and direct connections between scientific
discoveries and commercial applicability are clear, raising funds for basic research
seems easier than in other sectors. However, research for the advancement of
knowledge will tend to remain heavily dependent on public funding.
Public institutional funding is changing, however, with increasing emphasis on
commercial exploitation of results and increasing interaction of higher education based
research with industry. This process is still in the early development stage in Europe
compared to the US.
The percentage of public project funding in the total of public R&D investment varies
considerably from one country to another (from only 7% in France to 41% in Finland)
with a European average of 22%. This relatively low figure indicates that many
countries with an important public sector have problems in freeing resources for open
calls for research proposals. Only through extensive internal restructuring can this
percentage grow substantially.
The group has also observed that the public effort of European countries in basic
research differs depending on the structure of industrial and economic tissue and of
public research systems. The efficiency of this public effort acting as a catalyser for
stronger science-industry relations is dependent on the structure and composition of
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the innovation agents and activities. Increases in investment do not by themselves
ensure success.
The effort from business sectors
The additional effort being demanded of the business sector to meet the Barcelona
target can be clearly seen from the comparison with the US and Japan. In 1981 the EU
business community funded about 50% of total R&D expenditure compared with 49%
in the USA and 68% in Japan. By the end of the century the USA had increased the
share funded by business to 67% and Japan had increased to 72% while the EU had
only increased to 55%.
It is becoming clear that private investment in many emerging fields will take place only
after consistent and extensive public investment in human resources, infra-
technologies and, to a lesser extent, generic technologies to provide the knowledge
infrastructure to support the exploitation of the field. Experience from the USA in the
field of biotechnology indicates that private investor enthusiasm for this sector was
fostered by many decades of investment by National Institutes of Health (NIH) in
molecular biology.
The human factor
A major element in expenditure on R&D is the cost of personnel and the efficiency and
effectiveness of R&D expenditure is very significantly dependent on the quality of that
personnel. The is clear evidence of steady increases in expenditures for human
resources, accounting for more than the 75% of total expenses for R&D actions and
projects. Therefore any review of public and private investment in R&D must recognise
the critical role of human resources in the system. From an investment point of view,
the human resource infrastructure issues which arise include: an adequate supply of
R&D personnel with appropriate basic qualifications, training and skills, sufficient
aggregation of activities to allow a critical mass of skills to be assembled, allocation of
resources for continuous training and retraining.
It is worthy of note that expenditure on R&D per researcher in many countries in
Europe exceeds or is comparable to the approx. 200,000$ spent by the US. This
suggests that bridging the gap involves increasing the number of researchers in
Europe.
Sectoral differences
This driving role of the private sector has also changed the type of instruments used by
governments and their relative effects depend on the weight of the industrial sector
and their R&D capabilities.
The rationale for public investments is strongest where societal challenges are not well
met by private efforts or where keeping public control becomes essential. The group
has been working in two areas where these elements are historically evident: defence
and health (as an example of public services).
Defence in Europe has so far remained a national mission, but discussions are
currently under way to increase integration of defence in the European Union. In such
a case this group recommends that R&D should be considered part of the European
Space and Defence Programme (ESDP). In Europe defence R&Ds role as a driver for
RTD investments has been constantly diminishing in recent years. The comparison
with the US highlights the different approach that results in a weaker European
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industry. In the current situation potential synergies at European level are huge.
Nations could achieve much better results, at the same cost, by organising and co-
ordinating defence R&D at the Union level. European co-operation between academia
and defence institutions remains particularly low hindering the transfer of results from
defence technologies to civil applications.
Concerning the health sector, the EU is lagging behind in its ability to generate,
organise and sustain innovative processes and appears less able to translate R&D into
commercial success, partly due to pricing policies, peculiarities of the public regulatory
and health care systems and a strategy of reliance on external inputs such as licences
from international companies,, rather than a strategy of reliance on own R&D and
innovation. Public support to R&D in this sector has been also linked to commitments
in the national health systems between governments and pharmaceutical sectors.
Policies in Europe have been more successful than in the US in maintaining control
over the overall costs of health care.
These trends are also manifest in the emergence of a more knowledge intensive
services sector and in the growing importance of intangibles although both elements
are not clearly depicted by current indicators.
Differences in Member States in R&D investments and associated policy instruments
are remarkable and the group could not detect evidence of significant convergence.
From the groups perspective, strong differences in the structure of industrial tissue
and the role played by the State institutions preclude the transference of practices
because of their context dependency.
The regional factor
Another emerging element in the policy making on R&D is the important role played by
European regions. The position of a country in terms of R&D intensity and GDP growth
is determined by the existence of a number of highly innovative regions. Nevertheless,
regions are not homogenous landscapes. There is no clear evidence of a catching up
process between poorer and richer regions in terms of R&D investment while there is
moderately positive catching up in terms of GDP per capita.
Strong differences in concentration of innovative enterprises or qualified human capital
can be found in some areas within a region.
Policy instruments
Public policy employs a range of instruments both general and specific designed to
motivate the private sector to increase its R&D activity. The three main areas in which
the public sector intervenes are: Direct Supports, Indirect Supports and Improving
Framework Conditions.
Direct supports instruments take the form of either grants, which effectively share the
cost of research projects between the government and the company or subsidised
loans (soft loans) at reduced interest rates, which reduces the cost of the research and
development to the company. The uses of structural funds, in those countries with
substantial volume of them, become important elements in this approach. Another form
of direct public support comes from public funding of venture capital
(VC), either through support of private VC funds or through the establishment of
specific government VC funds.
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Indirect supports are generally fiscal incentives, which employ the taxation system of
the country to provide the motivation to invest in R&D activity. If the policy aim is to
boost the nation's rate of commercialisation of new products, processes, or services,
then a tax incentive like an R&D tax credit, has some advantages over direct funding.
Success in commercialisation hinges on a sound understanding of the market, and tax
incentives have the advantage of leaving the decisions on which projects to fund in the
hands of private firms rather than government agencies.
Improvement of framework conditions constitutes the third area of intervention in which
public policy can influence investment in R&D. By providing a wide range of regulatory
and infrastructural arrangements private involvement in R&D can be supported and
stimulated. Recent analyses suggest that an increase of R&D investment from
business enterprises depends as much on framework conditions (entrepreneurship
culture, social capital and routine, public-private partnership possibilities, intellectual
property rights/patents, regulatory conditions for efficient capital market, competition
rules, etc.) and availability of human resources (recruitment conditions, availability of
the right qualifications, etc.) as on measures such as direct funding, fiscal measures,
guarantee mechanisms or VC funding.
In order to be effective there is a need to increase the co-operation between all
ministerial departments in order to R&D proof non R&D policies for possible negative
impacts on R&D policies.
The particular manifestation of Science/Industry relations analysed by the group was
that of Science and Technology Parks. This is an important form of industrial/research
based infrastructural development that also seeks to foster a culture of
entrepreneurship and to build high-tech and research human resource capabilities. In
very many cases, in Europe, these S&T Parks have been established by public
agencies and have had to be supported by public funds until reaching self-sustaining
levels of activity. This also underlines the importance of the localisation of these
relationships in order to improve innovative capability.
Associated with this infrastructural element, large-scale research facilities (LSRF) are
also playing an important role in Europe. Governments are devoting large volume of
resources to their construction and operation. Although these LSRF (in some cases
funded by structural funds) are usually accounted for under basic research
expenditures, they constitute an excellent example of technological advancement
where high-tech industries co-operate with research centres in resource provision and
operation.
The changing behaviour of public and private institutions: an evolving scenario
The behaviour and motivations of private and public entities in relation to R&D are very
different and they needed to be analysed separately. This does not imply that
interactions do not exist. On the contrary, these interactions are becoming more
important and specific instruments and larger funds are devoted to ensuring their
effectiveness.
The behaviour of private entities is an important element in increasing the volume and
efficiency of R&D investment. In some specific sectors like biotechnology, private
corporations fund basic research even on a large scale, while aiming for radical
scientific advancements and technological improvements that can be shaped into a
solid and steady basis for industrial innovation. In other more conventional sectors the
attitude towards basic research is the opposite. Basic research and knowledge
creation is seen as a public good and therefore the province of public investment.
10
However, industrial involvement in the basic research process would improve
prospects for these sectors. New product innovations could be envisaged at a very
early stage with the help of both scientists and experts from industry and commerce.
Increasingly, Europe is trying to move its wealth of basic scientific discoveries from the
laboratories of science to the market place more quickly. Additionally, strategic
alliances are growing although to a lesser extent than in the USA.
As a consequence of globalisation, the organisation of industrial R&D in OECD
countries is transforming. Evidence of this can be seen in the growth of the relative
importance of inward and outward research-related foreign direct investment (FDI); in
the explosion of international strategic alliances and in the increasing trade in
technology-intensive goods. Foreign subsidiaries are now responsible for 12% of total
manufacturing R&D investments in OECD countries, and for most of these countries,
this contribution is expected to grow.
Foreign affiliates are responsible for a larger share of industrial R&D investments in
countries where their contribution to local production is important or where foreign
affiliates are concentrated in industries, like pharmaceuticals, with high R&D
intensities. International strategic alliances in R&D have helped firms to access foreign
technologies and markets, as well as to minimise risks and rapidly recover the high
costs of technological development. These trends all seem positive on the whole, yet
many governments remain concerned about the globalisation of R&D. Source
countries are wary of a hollowing-out of the research base. This is an important issue
for ongoing debate.
National and regional governments seem to agree that, despite the concerns, a strong
presence in at least a subsection of high-technology industries is important because of
the contribution of those industries to the economy. While investments in R&D are
important for an economy, increases in productivity are often attributable to the use of
technology developed outside the firm. And given that the stock of knowledge is
increasingly transnational, a countrys growth also depends on its ability to adopt and
develop technological innovations originated elsewhere.
Intangible assets (both intangible goods and competencies) are raising increasing
interest among scholars, policy-makers and firms themselves. Companies across
countries and sectors stress the increasing importance of human resources,
organisational learning and building of capabilities as factors for competitiveness.
Some firms are attempting to include measures of their intangible assets into their
annual reports. Studies of intangibles are developing in both the management and
economics literature. Acquisition development and retention of intangible assets will be
key success factors in the future, particularly for private business.
The legal framework for Intellectual Property Rights is also a key to the promotion of
private investment in R&D. The emerging environment in which publicly funded
universities and research institutions are becoming more aggressive in claiming their
rights poses a complex issue for public policy in this regard.
Public entities have also changed in trying to adapt their roles and attitudes to an
increasingly complex scenario. The consequences are greater attention by public
entities to the application uses of their research results, stimulating entrepreneurship
and spin-off creation, and stronger interaction with other actors (enterprises but also
citizens). Difficulties in long-term funding (e.g. block grant) for public research
organisations are eroding the competitiveness of some of these institutions, and
restructuring of national labs and other public institutions to save costs may have long-
term effects on R&D capabilities, which have not yet been completely analysed.
11
Governments are aware of these changes and, in fact, they are not only adapting their
policy goals, priorities and instruments to them but also anticipating future changes.
Recent evolution of public funding in several Member States has three main drivers:
- Slow shift towards a significant role for regional (or even local) authorities in funding
and supporting R&D and innovation. This introduces more pressure on the co-
ordination structures to reduce overlapping.
- Emphasis on exploitation of scientific knowledge through a better transfer to
productive sectors or self-exploitation.
- Combination of different sources of funding to support complex activities (grants,
loans, fiscal incentives and infrastructures).
Finally, the results confirm that a simple increase in R&D investments does not
necessarily imply a change in efficiency of innovation practices. It is evident that other
factors play important roles such as those related to the interactions amongst actors,
and the way that mutual confidence is built and maintained. Furthermore, in many
cases, the objective is not to increase R&D investments but rather to ensure the
conditions that allow new technologies to be easily and rapidly absorbed and adapted.
A crucial factor, for example, is a high quality education system producing a labour
force that can adapt and add value to ideas produced elsewhere. This is clearly seen
in cases where countries and regions exhibit higher rates of economic growth in spite
of lower levels of R&D intensity.
Practices extracted from case studies and national reports
The group has addressed a number of case studies where relevant lessons and
practices were identified. They are summarised in the tables in Section 9.4 of the main
report.
First of all, increasing public and private investment in S&T depends on improving the
policy arena in terms of co-ordination with other policies, as well as differentiating
between R&D and innovation policies. The findings show that in general, public policy
measures should create a suitable environment for increasing and stimulating R&D
investments from both public and private sources. For example, use public funding for
scientific parks, virtual centres, large-scale research infrastructures and other
mechanisms to serve as attractors of private investments. Private policies on R&D
investments are always based on effort-benefit trade-offs; nevertheless, enhancement
of public technology appraisal capacity is needed to orient national investments. In this
context public funding should be used as a stimulator to mobilise private R&D funding.
Secondly efficiency and effectiveness in the utilisation of available resources lies in
increasing the relevance and funding of human resources and in general investment in
intangibles. To act simultaneously with higher education, infrastructures and R&D is a
necessary precondition in a knowledge-based society. Policy co-ordination that
involves goal-setting and thematic prioritisation should be concurrently addressed.
Flexibility of policy measures is needed at the various administrative levels, especially
between European, national and regional levels. This involves more co-ordination but
also adaptation to the specific needs of R&D investments. National and regional
innovation policies can play an even more relevant role if they are coherent with a
European policy.
Finally, a better understanding of the behaviour of major players is needed. All
stakeholders (civil society, government, industry and the scientific community) should
12
be in close contact when research goals and programmes are to be fixed. A better
understanding of future scientific and technological expectations of research actors
and the users of knowledge is required. Efforts could be made to conduct future
oriented co-ordination initiatives and consultation processes in order to involve all
stakeholders in the priority setting process. Knowledge transfer as well as adoption
and adaptation should be promoted. Better understanding of the so-called triple helix
dynamics of science/industry/government relations is needed. Networking and
collaboration appear more and more important in that framework.
13
1. Introduction: R&D and innovation
In January 2000 the European Commission adopted a Communication
proposing the creation of a European Research Area (ERA) aimed at creating
conditions making it possible to increase the impact of European research
efforts by strengthening the coherence of research activities and policies
conducted in Europe.
At the Lisbon European Council in March 2000 the Heads of State or
Governments fully endorsed the project and set a series of objectives as well
as an implementation timetable. In June 2000 a Research Council Resolution
called on the Commission, in collaboration with the Member States, to present
a set of indicators and a methodology to benchmark five themes.
The main objectives of the benchmarking of R&D policies launched by the
European Commission are to provide support for the improvement of R&D
policy design and implementation at all levels (regional, national and European)
and to promote further development of synergies and coordination of research
efforts in Europe, thus improving their efficiency and effectiveness.
The initial themes chosen were:
Human resources in R&D, including the attractiveness of science and
technology professions,
Public and private investment in R&D,
Scientific and technological productivity,
Impact of R&D on economic competitiveness and employment,
Promotion of R&D culture and public understanding of science.
For each of the themes, a group of experts was set up by the Commission in
order to shed light and to analyse current situation in EU Member States.
Additionally, a High Level Group with representatives of Member States was
also set up to co-operate with the Commission in driving the process.
Policy aspects should be compared from several perspectives in order to be
able to extract good practices that could improve the situation of European S&T
in the selected themes. In this way benchmarking is understood as a
mechanism to learn from others. Then, active exchange of ideas and positions
amongst the expert groups, policy makers at regional, national and EU levels
and research communities is a necessity to constantly improve the conclusions.
Under this framework, the whole benchmarking exercise was understood as a
three phases process (see Figure 1): Data collection from indicators, Evaluation
and international comparison, and Learning on policy measures. Figure 1 also
suggest that the scope of the expert groups set up by the European
14
Commission has been limited to the analysis of pre-existent information and the
identification of some trends and policy options.
At the end, should policy makers be responsible for evaluating options in their
own national contexts due to the need to adapt options to contextual
constraints.
Figure 1: Scope of the Benchmarking Exercise
Data
collection
from
indicators
Evaluation
and
international
comparison
Learning
process
on policy
measures
Tools Tools Tools
HLG discussions
National Policy workshops
National reports
Indicators
Other statistics
Shared targets
OECD reports
Various publications
Commission docs.
Groups analysis
Usefulness
Usefulness Usefulness
Convergence
Political awareness
Context understanding
Effects of policies
Trends
Improvement on
policy measures
Tuning of targets
Scope of the expert groups
This report is the result of the work carried out by the Expert Group on Public
and Private Investment in R&D, which approached its mission in the following
context:
Through the identification of key factors that may help to improve R&D in
Europe, the aim of the Expert Group was to address the following questions:
How to increase the public and private investments on S&T?
How to utilise more efficiently and effectively the available resources?
How to gain a better understanding of the behaviour of major players?
What are the most successful policy instruments implemented at national
and European level to improve R&D investments?
The Groups work therefore has been aimed at providing in the area of Public
and Private investment in R&D a consolidated basis of evidence on the
performance of R&D efforts in Europe; the qualitative factors that underpin this
performance; the ways in which these factors are addressed by R&D policies;
and the relative levels of success of those policies.
15
Figure 2 graphically summarises the objective of the group. It has focused on
inputs to the national innovation systems (mainly R&D investments but also
other regulatory or financial schemes) in the European and OECD contexts.
Other groups were also focussing on outputs (performance and productivity) or
on specific dimensions like human resources.
Figure 2: The focus of the expert group on public and private R&D investments
The key message from this diagram is the dynamic nature of the iterations,
taking place within the system. This group was mainly concerned with the
inputs to the R&D system in the form of investments. However, it was
constantly aware of the frequent adjustments called for in public and private
investments made by policy makers and responsible at the institutional level in
response to variations in output from desired targets.
The group conducted the exercise through a number of meetings at which
appropriate Commission services presented information on relevant
programmes and issues and the group itself determined the range of issues on
which it focused its analysis.
Individual group members, utilising their respective wider networks, prepared
analyses of issues and case studies to illustrate the operation of public R&D
policies in the area of investments and their impact on the behaviour of public
and private actors of S&T, mainly on large or SMEs firms and public research
centres. Recent articles and public references on the identified issues were
analysed to inform the discussions. Data related to the above mentioned
indicators and other related information were made available to the group.
The group debated and attempted to reach consensus on the critical practices
which could be transferred to other contexts, regional, national and EU wide,
stimulating the learning process embedded in the whole benchmarking
exercise. This report presents the agreements reached by the group.
Inputs
Human
Resources,
Facilities,
European S&T
System
Global Context
Member
States
Region
Outputs
New
Knowledge,
Economic
Development,
Quality of life
Adjustments
Focus of the
Expert Group
Funding
16
2. Outline of the Report
Chapter 1 of this report, the Introduction outlines the establishment of the group
and sets out its task. Chapter 2 contains the outline of the report.
Chapter 3 starts with a brief analysis of the relevance of the theme, not only in
relation to economic growth in itself but also as a part of the benchmarking
exercise. Within this context, the methodological approach used by the group to
extract findings and recommendations is described. Attention is paid to
qualitative and quantitative elements and their complementary perspectives.
Special attention is devoted to the use of case studies.
Chapter 4 of the report addresses the general topic of investment in R&D and
outlines the statistical trends of investment and performance in R&D and the
contributions of Government, Business and the Research Community to the
funding and performance of R&D. This chapter also deals with the Groups
views on the important elements of the newly promulgated targets for
Investment in R&D from the recent Barcelona Summit of EU leaders.
Chapter 5 focuses on the important area of the rationale for support for R&D.
The first section deals with the critical role of the general advancement of
knowledge in the furtherance of the quality of life for citizens. The second
section probes the competitiveness challenge facing market based companies
and the role of R&D in meeting the challenge. The third section addresses
societal challenges, which are typically the province of governments. Two
examples of sectors, where governments have kept responsibilities, are
expanded upon. These are the fields of defence research and health research.
The fourth section sets out the policy instruments employed by governments in
response to these various challenges. This chapter reviews the direct and
indirect supports offered by governments to public and private research
institutions and also reviews public policies for improving framework conditions.
Chapter 6 addresses the evolving framework in which R&D is being carried out
and its consequences on investments. The impact of globalisation on R&D and
the emerging institutional changes that are occurring are covered. In this
chapter also the increasing importance of intangible elements in R&D is
presented.
The group identified a set of issues in order to extract some findings and
recommendations that could eventually inform the decision-making processes
in other contexts. Case studies related to these issues were developed. In
Chapters 5 and 6 the issues and the case studies are used as illustrations of
the emerging scenarios for investment in R&D. Interrelationships amongst the
issues are also discussed in order to extract some conclusions. These are
incorporated in Chapters 5 and 6.
Chapter 7 sets out the group's selected example, biotechnology, of the
interaction of factors and issues in a technology field.
17
Chapter 8 sets out the policy orientations or open questions deriving from the
findings.
Chapter 9 proposes the way forward on features for benchmarking public and
private investment in R&D.
The references used in the report from external sources or generated by the
group are listed included.
The main body of the report is completed with some annexes related to the
worked out case studies in order to provide further analysis and rationale for
policy funding and orientations.
These Annexes are:
Annex I Innovation and VC,
Annex II European Synchrotron Radiation Facility,
Annex III Biotechnology in two European Regions
Annex IV Defence R&D
Annex V The use of structural funds in R&D
Annex VI The impact of non R&D policies on R&D policies
Annex VII Trends in R&D expenditure in relation to GDP during the 90s.
.
18
3. Methodological Approach
3.1. Quantitative elements
A reduced number of indicators applicable to benchmarking of public and
private investment in R&D were selected and made available to the group. The
following indicators constituted a point of reference for the work carried out by
the group:
Total research and development expenditure in relation to GDP and
breakdown by source of funding
Research and development expenditure financed by industry in relation to
industrial output
Share of the annual government budget allocated to research
Share of SMEs in publicly funded R&D executed by the business sector
Volume of VC investment in early stages (seed and start-up) in relation to
GDP
The expert group examined the relevance of each indicator in explaining trends
associated with the individual issues considered and their interaction. Where
necessary other data, which better enlighten the understanding of issues, were
sought. The group is also aware that indicators initially attributed to other
groups are also useful for this theme, demonstrating the close relationship
amongst all themes.
Additionally other related indicators provided by the Commission and OECD
were also used to support deep understanding of trends or international
comparisons.
The feeling of the group is that the analysis of the indicators selected by the
Commission and Council cannot cover the complexities of the theme and other
indicators more closely related to the issues identified will be necessary. To
cope with this problem two complementary approaches were used:
To use other sources of quantitative information (from several studies from
the Commission services like the Key figures 2000, national reports and
from OECD, UNICE and other external sources),
To combine case studies and qualitative analyses to interpret the rationale
behind the figures related to the selected indicators.
The agreed objective was to put into context and demonstrate the motivations
and limitations of public and private operators for investing in R&D, by testing
19
the chosen indicators in a global context and charting R&D investment trends
and possible policy implications.
3.2. Qualitative elements
A comprehensive literature search was undertaken to support the analysis of
these issues. In particular, the extensive reports and working documents from
OECD Science and Technology division were examined. The High Level Group
of national representatives (HLG) that was set up to work with the Commission
also supplied a considerable volume of information. Special attention was paid
to the national reports submitted by Member States.
Three main areas deserved the attention of the group:
Role of public policy: The focus was to understand ways in which public
policy interacts with research and the impact it has on investment, to
explore, for example, the extent to which this influences the balance
between support for basic and applied research; and to examine the spill-
over effects of direct and indirect support to specific sectors (e.g. aerospace
and defence), as well as the effect of regionalisation.
Behaviour of public and private actors: The central issue here is to
understand whether there has been a shift towards applied research in
response to the growth of the knowledge based economy and what the
response of institutions has been. Aspects explored included, among
others, the impact of such a shift and the implications for science industry
relations.
Contextual concerns (globalisation and financial markets): The
increasing globalisation of economic activities is impacting on R&D
investment in a number of ways. For example, multinational companies are
tending to concentrate investment in countries where markets are most
developed, where highly skilled human resources are available and where
the regulatory environment is most favourable. The internationalisation of
financial markets has implications on the volume and direction of investment
flows. These trends raise issues as regards the appropriate geographical
level (international, national or regional) for intervention to encourage
investment in R&D.
An important task of the expert group was to identify practices that could be
more widely used in Europe to improve the volume and efficiency of R&D
investments and guide R&D funding policies for public and private research
institutions. To address that goal, general trends in R&D funding have been
extracted from the reviewed background literature (see references) and from
the experience of the experts of the group. Selected trends were limited to
those that support the analysis of the issues identified by the expert group and
which help in understanding the changing behaviours of agents involved in
European R&D and innovation systems.
20
However, general trends yield limited help to policy makers in the definition of
specific policies targeted at solving particular problems. Implementation of
R&D policies requires practical efforts based on accumulated experiences
either successful or which have failed.
A complementary approach has been used based on case studies. In these
case studies, the process that led to the achievement of good practice was
analysed to identify those elements that can stimulate new ways of thinking in
other countries. Case studies were selected to take into account geographical,
industrial, thematic or policy settings.
Figure 3 depicts an overall perspective of the work carried out and the
interaction between the selected issues. It is to be noted that examination of a
limited number of issues and a limited set of case studies, based on the
knowledge and experience of the groups members, cannot cover the very rich
context found in Europe. Nevertheless, the group has the strong feeling that
main results and consequences for R&D policy evolution are, in practice, well
covered with this approach.
This approach goes to the core of the whole benchmarking philosophy where
sharing of experiences and adaptation and absorption of practices
are embedded in the concept of learning organisation.
Figure 3: Identified issues and their interaction
I ndust r y
Sci ence
cooper at i on
Non- RT D pol i ci es
Gener al condi t i ons f or i nvest ment s : gl obal i sat i on , vent ur e capi t al
Publ i c sect or Pr i vat e sect or
Publ i c pol i ci es r el at ed to RT D i nvest ment s
Uni ver si t i es
Resear ch l abs
Lar ge f i r ms
Mul t i nat i onal s
SMEs
S&T
par ks
B
I
O
T
E
C
H
St at e Ai ds
Taxat i on
Regi onal i sat i on
St r uct ur al Funds
Educat i on , Heal t h , Def ence
One cross cutting issue (R&D investments on biotechnology) was also selected
to demonstrate the close interaction between all the issues addressed in the
report.
21
4. General trends in investments in R&D:
4.1 Expenditure on R&D
The more relevant measures of investment in R&D for the present purposes
are the Gross Expenditure on Research and Development (GERD), and the
Business Expenditure on Research and Development (BERD). For comparative
purposes GERD is expressed as a % of GDP giving a measure of the research
intensity of the economy and BERD is expressed as a % of the Product or
Output of Industry or as a component of the global GERD.
Despite the well-known limitations, which attach to such indicators they give
readily acceptable measures of the overall position of individual countries. The
patterns of change in these indicators are also informative as they reflect
changes in investment behaviour by the actors, which may in turn be influenced
by changes in public policy.
When considering the role of RTD in generating prosperity, any links to GDP
are important. Figure 4 shows the pattern of Research Intensity versus GDP
per capita for 14 of the EU countries together with Japan and the USA. The
pattern clearly indicates that in general the higher the level of research intensity
in a country the higher the GDP per capita. National objectives to raise the level
of research intensity therefore call for policies to encourage both private as well
as public investments in RTD. A reading from the other side is also possible.
Higher GDP per capita allows higher research intensity. Figures do not
demonstrate the source of the process. Tracing historical data does not help
too much because the natures of growth and research have also changed
dramatically over time.
Figure 4: Research Intensity v GDP per capita 2000
Source: Group analysis of OECD Data
Research Intensity v GDP per capita
S w e d e n
J a p a n
Fi nl and
US
Ge r ma ny
Fr a nc e Ne t h e r l a n d s
UK
De n ma r k
Gr e e c e
P o r t u g a l
S p a i n
I t a l y
I r e l and
Be l g i u m
Aus t r i a
y = 18093x
0.2624
R
2
= 0.5856
10000
15000
20000
25000
30000
35000
40000
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00
Research Intensity % of GDP
EU-15
22
In addition, steady rates of GDP growth have been higher than the GERD/GDP.
All this demonstrates that there is no single relationship between general
economic growth and R&D investments.
Research and Development are expensive activities conducted by teams of
skilled people and using sophisticated equipment during long periods of time.
To support these activities, economic resources are needed. The composition
of the necessary resources depends on the type of R&D activity but in general
terms, it is known that roughly the 75% of expenses are related to human
resources. This is a clear indication of the knowledge intensive activities
associated to R&D.
Comparison among countries cannot be done in absolute terms. The strong
differences in GDP, numbers of researchers, etc. impose the need to work in
percentages. Even then, the number of researchers in the national innovation
system make difficult to overpass a threshold related to the absorption capacity
of the system to higher investments.
Figures 5 describes the international situation of GERD in relation to the
number of researchers.
Figure 5: GERD per Researcher (ppp$)
A major element in expenditure on R&D is the cost of personnel and the
efficiency and effectiveness of R&D expenditure is very significantly dependent
on the quality of those personnel. In addition as figure 5 shows, many EU
countries compare well with the USA in terms of GERD per researcher. Any
plan of increasing public and private investment in R&D must recognise the
necessity to dispose of appropriately skilled human resources and the crucial
role of the public sector in catering for that need. From an investment point of
view, the human resource issues which arise include: An adequate supply of
research and development personnel with appropriate basic qualifications,
GERD per researcher (ppp$)
194.817
166.299
161.021
147.744
182.266
186.373
73.125
138.505
181.844
206.651
80.542
103.546
194.271
160.479
169.096
191.220
144.306
108.968
0 50000 100000 150000 200000 250000
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Netherla
Portugal
Spain
Sweden
UK
UE
US
Japan
Australia
Data 1999; US 1997; Source: OECD, Main Science and Technology In dicators, November 2001 .
23
training and skills, sufficient aggregation of activities to allow a critical mass of
skills to be assembled, allocation of resources for continuous training and
retraining. The achievement of critical mass involves personnel with a range of
expertise and experience and the establishment of networks to facilitate joint
programmes of activity, which eventually could create self-sustaining virtual
grouping of capabilities. The appropriate facilities are also important to the
integrity of the capability. A critical mass of personnel provides the necessary
career structures for the proper development of researchers. A key element in
the construction and maintenance of such capability is the investment, not just
the initial capital investment but also the planned funding of the ongoing
investment over adequate periods of time.
Figure 6: R&D to Sales Trends in Manufacturing 1983-1998
In Figure 6 the USA levels of R&D expenditure as a % of net sales for the
period 1985 to 1998 are shown for Computers, Pharmaceuticals, Electronic
components and Scientific and Measuring instruments. These four sectors
have research expenditure percentages two to four times the general average
for all manufacturing sectors and also are the sectors in which the USA has
established significant economic strength and competitiveness.
These patterns are reflected in EU sectors also. In applying overall targets for
research intensity, the strategy adopted must reflect the structure of industry
and services in Member States. If research intensity is to be lifted in some
countries then capabilities in new sectors will have to be developed. Historical
developments suggest that such changes will be long-term projects and will
require heavy levels of public funding to generate.
R& D- t o- Sal es Trends i n Manuf act uri ng: 1983- 1998
0
2
4
6
8
10
12
14
16
1983 1985 1987 1989 1991 1993 1995 1997
Year
R
&
D

F
u
n
d
s

a
s

a

%
o
f

N
e
t

S
a
l
e
s
Co mp u t e r s
Phar maceut i cal s
El ect r oni c Component s
Sci ent i f i c & Measur i ng I nst r ument s
Al l Manuf act ur i ng
Source: National Science Foundation, National Patterns of R&D Resources, Early release 2000 Papers
24
4.2 Performance of R&D
Figure 7: Public R&D Performance
Source: OECD
Publ i c R&D Perf ormance
as a % of R&D Expe ndi t ur e
0 5 10 15 20 25 30 35 40
EU 1999
1 9 8 1
US 2 0 0 0
1 9 8 1
J a pa n 1 9 9 9
1 9 8 1
% of R&D Expendi t ure
Hi gher Educat i on Government
Public R&D Performance
as a % of R&D Expendi t ure
0 2 0 4 0 6 0 8 0 1 0 0
Aus t r i a 1 9 9 9
1 9 8 1
Be l g i u m 2 0 0 0
1 9 8 1
De n ma r k 1 9 9 9
1 9 8 1
Fi nl a nd 2 0 0 0
1 9 8 1
Fr a nc e 1 9 9 9
1 9 8 1
Ge r ma n y 2 0 0 0
1 9 8 1
Gr e e c e 1 9 9 9
1 9 8 1
I r e l a nd 1 9 9 7
1 9 8 1
I t al y 1999
1 9 8 1
Ne t he r l a nds
1 9 8 1
Po r t ug a l 1 9 9 9
1 9 8 2
S p a i n 2 0 0 0
1 9 8 1
S we d e n 1 9 9 9
1 9 8 1
UK 1 9 9 9
1 9 8 1
% of R&D Expendi t ure
Hi gher Educat i on Government
25
Figure 7 shows that the proportion of R&D performed by the Higher Education
Sector rose slightly from 1981 to 1999 in the EU while it fell slightly in the USA
and significantly in Japan. The proportion performed by Government fell
significantly in all three areas. In individual Member States of the EU the
proportion of R&D performed in the Higher Education Sector rose except for
Germany, Sweden. Finland, Denmark, and Italy, which recorded a small
reduction and France, which remained unchanged in the period 1981-1999.
To analyse the rationale behind these figures it is important to know the
evolution of the public sector. In Spain, for instance, the increase of the share
covered by higher education is due to the combination of two facts: a huge
increase in the number of universities (all of them transferred to the regional
governments and strongly supported by them) and the stagnation of research
institutes (like CSIC) constrained by the central budget.
A great deal of attention has been paid to the difference proportion of R&D
performed by the public sector in EU and in the USA. Scholars have interpreted
the higher weight of the public sector in Europe as a historical consequence of
a less dynamic society. It is important to mention, however, that a change in
this structure (i.e. higher convergence between the USA and the EU) should
also imply strong shifts in societal responsibilities affecting not only R&D but
also other policy areas.
4.2.1 R&D in European Regions:
It is widely accepted that the ability of any organisation or society to innovate
relies heavily on its level of technology: technologically advanced regions and
nations are prone to innovate more (and hence to grow faster) than
technologically lagging ones. From this perspective, there is an incentive for
every society to try to maximise its technological capacity. The traditional way
to achieve this is by increasing investment in research and development
(R&D). Greater investment in R&D contributes to greater technological
potential, and thus to innovation and growth, (Trajtenberg 1990).
New economic approaches to growth introduced by Romer(1996) and
Lucas(1988) making technology an endogenous factor in the equation of
growth allow for increasing returns to investment and for divergence. There is
no longer automatic catch-up or convergence -- as in the case of the
neoclassical growth approach -- since the capacity of every area to transform
R&D investment into technology and then into economic activity determines the
dynamic potential of any space. Hence, in general, the greater the investment
in R&D the greater is the capacity of a nation or region to grow.
However, the relationship between R&D and economic growth is not linear.
There are strong threshold effects and external economies associated with
R&D investment. Returns from R&D heavily rely on the quality of the workforce
conducting research, on the concentration of R&D centres in limited spaces, on
the quality of the local human capital (Audretsch and Feldman 1996a; De
Bondt 1996; Engelbrecht 1997), and, above all, on the amount of investment in
R&D (Scherer 1982; Dosi 1988).
26
It follows that reduced and/or dispersed investment in R&D in lagging
geographical areas may not yield the expected returns in terms of
technological progress since most R&D projects may have inadequate scale to
conduct competitive research and local researchers are likely to be more
isolated than in advanced technological centres. Critical mass may not be
achieved. In addition, in lagging regions, the lack of a dense network of
companies, the predominance of small and very small enterprises and the lack
of competition, together with the overall lack of entrepreneurship, curtail the
capacity of the economic environment to make the progress from innovation
into economic activity.
In contrast, since the cost of transmitting tacit knowledge rises along with
distance (Audretsch and Feldman 1996a and 1996b), the geographical
concentration of R&D centres and investment may multiply returns by the
creation of self-reinforcing virtuous circles of accumulation through spillovers
and lead to the genesis of significant multiplier effects in technologically
advanced areas (Verspagen 1997). As Smulders and van de Klundert
underline 'in most cases, an increase in concentration is associated with a rise
in the rate of growth'. There is thus a clear incentive for decision makers to try
to cluster R&D activities and investment territorially in order to maximise its
returns, to the detriment of a greater redistribution of the R&D effort.
Despite the strong positive association between R&D expenditure and GDP
per capita in general terms, the relationship between expenditure and regional
growth is not as clear-cut. Some studies find no connection between changes
in the regional R&D effort and economic growth in the technologically
advanced regions. In contrast, a positive association is observed in the cases
of the technologically lagging regions.
As technologically driven innovation becomes more costly to finance and
technological competition becomes global, companies and regions can no
longer remain at the forefront of technological innovation in several sectors and
need to specialise. This process leads to a reduction of R&D investment in less
competitive sectors and, consequently, to a reduction in the overall R&D
expenditure. The reduction in technological effort is more than compensated in
core regions by the returns from specialisation and by the capacity of these
regions to benefit from the technological spillovers generated elsewhere.
Regions are not homogeneous landscapes. Strong differences in concentration
of innovative enterprises or qualified human capital can be found in some
areas within a region; mainly around large cities or S&T parks. The patched
map used in the areas of intervention for the structural funds is the result of this
situation.
The widespread difference between regions in Europe can be seen in the
following Table 1. In terms of expenditure on R&D the disparity between
regions with the highest and lowest research expenditure in each country is
very large.
27
Table 1 shows two high expenditure regions in each of the countries for which
data is kept and two low expenditure regions. One striking feature of this Table
is the contrast between the lowest regions in the UK, which are comparable in
their actual spending on R&D with the highest regions in Portugal and Greece.
The literature recognises a lower propensity to innovate in regions with high
levels of employment in agriculture and labour intensive industry.
Table 1 Regional R&D expenditure disparities measured in current ECU/EUR all
sectors -NUTS 2 level - 1999
Regions with High R&D Expenditure Regions with Low R&D
Expenditure
Current ECU/EUR
PPS Current ECU/EUR PPS
Country Top
regions
Mio
As a %
of the
countr
y
As a %
of the
EEA
Mio Lowest regions
Mio As a % of
the
country
As a %
of the
EEA
Mio
EU-15 153336 98 148 179
EEA 155933 100 150 311
DK Denmark 3305 100
D Oberbayern
(1997)
5911 14 4.3 5446 Trier (1997) 75 0.2 0.1 70
Stuttgart (1997) 5045 12 3.7 4649 Dessau (1997) 56 0.1 0.0 52
EL Attiki (1997) 267 49 0.2 335 Ionia Nisia (1997) 4 0.7 0.0 4
Kentriki
Makedonia
(1997)
96 18 0.1 121 Notio Aigaio (1997) 2 0.4 0.0 3
E Comunidad de
Madrid
1589 32 1.0 1900 Baleares 33 0.7 0.0 39
Catalua 1130 23 0.7 1350 La Rioja 20 0.4 0.0 24
F le de France 13426 45 8.6 12603 Limousin 89 0.3 0.1 83
Rhne-Alpes 2966 10 1.9 2785 Corse 19 0.1 0.0 18
I Lombardia
(1996)
2372 24 1.8 2677 Molise (1996) 14 0.1 0.0 16
Lazio (1996) 1 869 19 1.4 2109 Valle d'Aosta (1996) 5 0.0 0.0 5
NL Zuid-Holland
(1998)
1 698 25 1.2 1671 Flevoland (1998) 116 1.7 0.1 121
Noord-Brabant
(1998)
1 222 18 0.8 1269 Zeeland (1998) 51 0.7 0.0 53
A Wien (1993) 1 218 52 1.0 1109 Burgenland (1993 11 0.5 0.0 10
Steiermark
(1993)
331 14 0.3 301 Krnten (1993) 36 1.5 0.0 33
P Lisboa e Vale do
Tejo
438 54 0.3 510 Algarve 16 2.0 0.0 24
Norte 169 21 0.1 177 Madeira (PT) 10 1.2 0.0 14
FIN Uusimaa
(Suuralue)
1 804 47 1.2 1301 It-Suomi 174 4.5 0.1 159
Etel-Suomi 1 152 30 0.7 784 land 1 0.0 0.0 0
UK South East
(NUTS1)
6 021 24 3.9 5774 North East 424 1.7 0.3 406
Eastern (NUTS
1)
4 595 18 2.9 4407 Northern Ireland 266 1.1 0.2 255
IS Iceland 152 100 0.1 132
NO Oslo og
Akershus
1 151 47 0.7 942 Nord-Norge 115 4.7 0.1 94
Trndelag 420 17 0.3 344 Sr-stlandet 42 1.7 0.0 34
28
In the sections of the report dealing with Science and Technology Parks and
Large Scale Research Facilities strong emphasis has been given to the
importance of regional and local involvement. These two areas of infrastructural
investment in R&D provide regions with opportunities to become significant
stakeholders.
Figure 8: Regional Research Intensity versus Regional GDP per capita
Ten top European regions
Source: OECD
Figure 8 illustrates the point that no firm connection between R&D expenditure
levels and GDP per capita in regions is manifest. Six of the top ten regions in
Europe in terms of research intensity have GDP per capita figures below or just
about equal to the EU average. These ten regions account for almost 25% of the
R&D expenditure of the EU-15. Out of a total of 211 regions 28 account for 50% of
R&D expenditure in Europe.
Human Resources
As pointed out elsewhere personnel represent the major element in R&D
expenditure and regional concentration of scientists and researchers provides
much of the dynamism for innovation and technological development. Lagging
regions, which aspire to raise their technological capability, have to attract highly
qualified personnel in significant numbers to lead the process and to avoid brain
drain to other regions.
0
20
40
60
80
100
120
140
160
180
1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
Research Expenditure as a % of GDP
R
e
g
i
o
n
a
l

G
D
P

p
e
r

C
a
p
i
t
a

%

o
f

E
U

a
v
e
r
a
g
e

EU
Ile de France
Braunschweig
Oberbayern
Stuttgart
Uusimaa
Pohjois-Suomi
Berlin
Midi-Pyrennes
Rheinhessen-Pfalz
Tbingen
29
Table 2 Top 10 regions in terms of R&D intensity all sectors in EEA
countries 1998
R&D expenditure
As a %
of GDP
Current
ECU/EUR
PPS
Region Country Mio % Mio
EU-15 1.87 142 002 98 137 083
EEA 1.87 144 424 100 139 112
Braunschweig (1997) D 4.84 1 675 1.2 1 543
Stuttgart (1997) D 4.79 5 045 3.7 4 649
Oberbayern (1997) D 4.38 5 911 4.3 5 446
Tbingen (1997) D 4.05 1 608 1.2 1 481
Pohjois-Suomi FIN 3.82 410 0.3 376
Uusimaa (Suuralue) FIN 3.73 1 571 1.1 1 441
Midi-Pyrnes F 3.70 1 803 1.2 1 673
Rheinhessen-Pfalz
(1997)
D 3.50 1 527 1.1 1 407
Ile de France F 3.43 12 416 8.6 11 521
Berlin (1997) D 3.41 2 566 1.9 2 364
Source: Eurostat 2002
Germany and Sweden dominate this measure with 3 regions each in the top 10.
Germany dominates the business sector top 10 but has no region in the top 10 in
the Higher Education sector. This sector is dominated by Sweden and Greece.
The position of a country in terms of R&D intensity and GDP growth is mainly due
to the existence of a number of highly innovative regions, although differences
between parts of countries is remarkable
There is no clear evidence of a catching up process between poorer and richer
regions in terms of R&D investment. However, there is moderately positive
catching up in terms of GDP per capita.
Drivers of growth depend very much on the available resources of reach region.
Policies should be based on the identification of specific strongholds at the
regional level and not on imitation of other policies from very different regions
30
4.3 Funding of R&D
Funding of R&D in OECD countries has been increasing steadily since the mid
1980s with the exception of a period of stagnation from 1991 to 1994. Figure 9
illustrates that all of the increase in funding in that period came from the
business sector, as the government contribution has remained static and as
shown in Figure 8, even been decreasing in the triad (the EU, the USA and
Japan).
Figure 9: Global funding of R&D in OECD countries
The reason for static or decreasing contributions from governments may be
found in the difficulty in EU Member States of increasing annual budgets during
the nineties due to the commitment to control public deficits (especially in the
EU Member States due to the Maastricht convergence criteria); in the political
will to reduce general taxes and in the conviction that the private sector should
lead the process. On the other hand, higher growth rates of GDP have
paradoxically reduced the GERD/GDP value because other factors of the
economy have grown faster.

Trend i n gl obal f undi ng of R&D expendi t ure i n
OECD Count r i e s 1985 - 1998
0
50, 000
100, 000
150, 000
200, 000
250, 000
300, 000
350, 000
400, 000
450, 000
500, 000
198 5 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Ye ar
M
i
l
l
i
o
n
s

o
f

U
S
$
(
1
9
9
5
P
P
P
s
)

Tot al GERD Busi ness Gover nment Ot her nat i onal sour ces
31
4.3.1 Public Sector Funding
Share of Government budget allocated to R&D
Figure 10: Share of government budget allocated to R&D
Figure 10 gives the share of the annual government budget allocated to
research. It measures the relative importance given to R&D in the governments
general spending commitments and, therefore, indicates the relative position
accorded to R&D amongst government spending measures.
The importance that is given to R&D support in government budgets varies
considerably between the Member States. In France and the Netherlands the
role of the government R&D budget is very high (5.0% and 3.3% respectively)
compared to the EU average (2.0%) and to the other European countries.
However, in France the government R&D budget at an initially high level
registered an average annual decline during the period 1995-1999. The shares
of government budgets reach in Finland, Germany, UK and Spain values that are
around the EU average, but of these four countries, only Spain had a very high
growth rate of government R&D budget followed by Finland.
The gap between the share of government budgets allocated to R&D in the USA
and in the EU is large and growing. At the same time in Europe, some of the
countries with shares of government budgets allocated to R&D below the EU
average are experiencing high growth of this indicator as the move to catch up.
However, some of the larger European countries, France, Germany and the UK
show this indicator in decline.
0.76
0.77
1.19
1.36
1.36
1.37
1.4
1.47
1.83
1.87
1.9
1.99
2.11
3.25
3.86
4.2
4.95
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
France
US
Japan
Netherla
Finland
EU
Germany
UK
Spain
Portugal
Sweden
Denmark
Belgium)
Italy
Austria
Ireland
Greece
Luxembo
Source : DG Research
Data : Eurostat, Member States, DG EcFin, USA(NSF), Japan(NISTEP)
Note : (1)B,EL,F,IRL,I,UK,US and EU: 1999; all other countries: 2000
32
The government budget covers only the direct government support for a
countrys R&D expenditures. Other, indirect policy measures are also available
that are not included in government budget data, for example R&D credits or tax
incentives. The bulk of the public budget is usually spent on salaries of public
sector researchers and on running of the public sector research institutes.
Government programmes in some EU countries aiming to reduce personnel
costs (i.e. freezing the positions of civil servants in research institutions) have not
necessarily implied a shift of resources towards competitive allocation of funding
based on the evaluation of R&D proposals, but to reduce total expenses.
Forms of public funding
Public investment in R&D takes two rather distinct forms. One is public sector
research and development (PSR), which is commissioned and funded publicly
and carried out by public and private bodies and institutions. The second is
publicly funded support to the sector of private research. A third form that can
be observed is the emerging activity carried out by public research centres or
universities through creation of spin-offs or generation of patent incomes. This
activity is very different to contract research (paid by private sector)(EC-
TSER1999).
Public sector research is carried out in diverse organisations. The three main
ones are (i) universities, (ii) non-university research organisations for general or
specific functions and (iii) Government laboratories to support policy formation
and implementation or simply to contribute to the advancement of knowledge
as it is the case in large research organisations like CNRS (France), CSIC
(Spain) or CNR (Italy). These organisations carry out the following functions,
with the relative importance ascribed to each of these functions changing over
time:
i) to improve scientific knowledge;
ii) to support policy formation and implementation;
iii) to support public welfare (e.g. health, the environment, public
safety, etc.);
iv) to support economic development (inc. technology transfer);
v) to define programmes to build up and support prestige activities
and capabilities in "frontier" science;
vi) Training and qualification of human resources;
vii) Social diffusion of scientific and technological culture.
The largest part of income for higher education and other public research
institutions comes from government sources (either federal or state/provincial).
It is either provided directly by the ministries involved in the funding and
managing of such institutions, or funding is delegated to intermediary agencies.
Government funding in most countries is provided by three different
mechanisms:
i) institutional (flat-rate) funding (General University Fund/GUF) to
provide for the basic needs of an institution, except in the USA,
33
where private research universities play an important role and
where federal or state governments enforce higher levels of
involvement of private foundations
ii) more competitive funding instruments such as grants and
contracts providing for specific tasks or research projects, and
iii) funding via special programmes either to advance specific
research sectors or to advance excellency in general, which is
also based on competitive criteria.
In fact, institutional funding in universities is associated to teaching activities
(based on the number of students) and less on the research activity carried out.
This approach has deep consequences due to the steady reduction in the
number of students in hard sciences exhibited by many European universities
as a consequence of the demographic decline and the lack of attractiveness of
some degrees.
The long-term instability of the university funds has also pressed university
research groups to find additional funding from the public sector (like the EU
R&D Framework Programme) and the private sector.
The General University Fund or block grant system - gives researchers in
relevant universities, research institutes and government laboratories a degree
of freedom in deciding on the internal allocation of funds. There is a slow but
steady erosion of 'block grant' systems in favour of competitive applications for
grants, and a growing role, in some larger countries, for regional agencies to
act as providers of funds for research. Whatever the system is, every sector of
PSR is under increasing pressure to raise research funds from other sources
than public support.
Government resources for PSR have remained stable in most countries and
PSR has been encouraged to look for new sources of funds. Additional
resources have been provided by the EU Framework Programmes and
Structural Funds (although these ones are usually merged with government
budgets, in some Member States have been clearly visible), by charitable
foundations in some countries, by industry and by valorising research results
(through licensing for example).
Recent evolution of public funding in several Member States has three main
drivers:
Slow shift towards a competence of regional (or even local) authorities in
R&D and above all in innovation. It introduces more pressure on the co-
ordination structures to reduce overlapping.
Emphasis on exploitation of scientific knowledge through a better transfer to
productive sectors or self-exploitation.
Combination of different sources of funding.
This trend is associated with the rapid change in the role of governments where
the emphasis is placed on the improvement of the investment scenario.
34
The pressure on public research to be more accountable and relevant for
industrial and societal needs is shifting the locus of influence on research
agendas. It was beginning to be suggested in the late 1990s that research
techniques of modern science had become so well distributed that public
scientific institutions were no longer central to scientific activity. However, closer
examination of the processes by which researchers gain competence and
reputation highlights the importance of scientific networks with relatively open
boundaries. These networks need an element of autonomy, which is a
characteristic most likely to be sustained by a significant public sector content.
The tendency of the private and public fields of activity in R&D to move closer to
one another demonstrates their complementarity.
The analysis of figures of R&D budget in the General State Budgets of EU
Member States, both in absolute and relative terms, give clear indications of
the total effort that a country is devoting to R&D in their national budgets, and
also, the political will to support R&D.
In evaluating the nature of this effort, it is important to analyse the way that this
budget is used. More specifically, it is important to see the percentage used to
finance R&D projects with respect to total figures. This figure is very important
in understanding the catalyser effect that this funding is generating in the
national innovation systems and the competitive nature of these systems. An
R&D project implies a research activity with specific goals and limited time and
money.
In some EU countries, the largest part of the budget is directly transferred to
research institutions in order to support personnel and operational costs of the
public system: institutional funding. In others, by contrast, this funding is mainly
used to support project funding. The same structure could be found in the
Framework Programme budget with a clear distinction between direct actions
(to JRC institutes) and indirect actions (to other agents) mainly to support R&D
projects. In FP5 93% is devoted to project funding.
The very different nature of these two types of expenses has deep
consequences for the evolution of budgets. While pressures to reduce
institutional support in some cases is very strong in conjunction with several
measures to reduce the weight of the state structures for R&D, the pressure to
increase project funding is increasing. The general feeling in scientific and
technological communities reveals the importance of allocating funding for
projects based on competitive calls as a mechanism to stimulate system
efficiency and private participation, as well as spill over on the rest of society.
The figures for (civil) governmental R&D project funding are difficult to obtain in
Member States in a homogenous way because they are distributed in several
ministries, central and regional governments, pure project funding, fuzzy border
between civil and military research, and other measures like grants for human
resources, etc. On the other hand, the institutional funding received by
universities in Europe usually covers teaching and research activities and the
breakdown between these two components is very difficult to obtain.
35
In spite of these problems, some hints can be found on available although not
completely refined data.
Figures collected by the German office for S&T in Brussels (KoWi) are
summarised in the following table (Greece, Ireland, Portugal and Luxemburg
are not included due to the lack of data, although their total R&D budget is 1347
M):
Figure 11: Relative importance of project funding
Member States Total government
financed civil R&D
expenditures in
2000 (in M)
Government
financed civil R&D
project funding in
2000 (in M)
Percentage of
project funding
Austria 1445 141 10
Belgium 1418 373 26
Denmark 1182 467 40
Finland 1262 523 41
France 10132 689 7
Germany 15000 4579 31
Italy 6697 1203 18
Netherlands 2875 628 22
Spain 2932 339 12
Sweden 1739 581 33
UK 6307 1649 26
TOTAL 50989 11172 22
Source: KOWI
A simple analysis of Figure 11 indicates four main conclusions:
Project funding varies considerably from one country to another although
northern countries devote more funding to project funding than southern
countries. This reflects the different structure of their systems and the
weight of their public institutions.
If we compare this figure with the FP5 budget devoted to project funding
(excluding JRC), it indicates that EU is financing 24% of all public financed
R&D projects in the EU. This is a considerable volume and it indicates its
relative importance as a catalyser.
The strong weight of institutional funding, its slow growth pace in the last
decade and estimates for the future, will make very difficult to substantially
increase the public funding of business RTD in the near future without
profound changes in the internal structure of the national R&D and
innovation systems.
The continuous pressure on public institutions (universities and research
centres) to look for external funding can solve partly the needs of additional
funding but it does not solve the need of funding for personnel and
36
operational costs, mainly covered by governments. Too much pressure can
divert them from their ultimate goal in society: advancement of knowledge.
These figures do not show the level of funding from structural funds devoted to
supplement project funding in Member States. Possibly, these figures are rather
low in most countries although they are becoming more important in institutional
funding, human resources and innovation projects.
Regional funding and structural funds
European regions have increased their share of and responsibility for R&D
funding in the last decade. This reflects a shift of power to control R&D budgets
as a consequence of the administrative decentralisation carried out in many
European countries, but is also based on the growing acceptance that this is a
crucial element in improving general socio-economic conditions.
The perceived evolution of regional involvement is proceeding in four
complementary directions:
the transference of responsibility of universities from central to regional
governments (for example in Germany, Spain, Belgium). It implied the
transference of funds to regional governments for teaching and structure
costs and in lesser extension to general non-competitive research
the appearance of project funding programmes in the regions with some
priorities not strictly related to those defined at the national R&D
programmes. Then, European, national and regional R&D programmes
compete for the same clients in the same region on the same priorities
with different difficulty degree for research centres (over subscription rate
is very different).
the assumption of additional responsibilities for innovation (horizontal
measures to support technology absorption, mainly for SMEs). The
consequence is the definition of specific innovation strategies supported
in many cases by structural funds. This process was extremely important
in Objective 1 regions with the side effect of increasing awareness in
regional authorities on the benefits of innovation.
the involvement in the funding and operation of S&T parks or Large-scale
research facilities. This approach is considered as highly useful in
boosting economic development, participation of local economic actors
and employment creation in some areas.
The analysis of the regional budget is indicates that it is mainly spent through
two basic instruments: structural funds and the cohesion funds.
The Structural Funds support many types of R&D activities under all regional
objectives. During the period 1989 to 1993, 3.9% of financial resources for all
objectives went to these activities (11.5% in Objective 2 regions). The total
funding under objectives 1 to 6 in the period 1994 to 1999 has been increased
37
to 5.7% (up to 16.8% in Objective 2 regions). It is still too early, however, to
evaluate this trend in the period 2000-2006.
There are strong disparities from one country to another. As an example, for
Objective 1 regions, the percentage can range from 3.1 in France to 17.3% in
the Netherlands. In Objective 2 regions, percentages range from 8.3% in
Denmark to 25.3% in Finland. This is a clear consequence of the freedom at
the national level. It does not mean that R&D is a priority or not in those
countries; the total amount devoted to R&D depends on the global allocation of
budgets. In some countries, governments preferred to use Structural Funds
directly for R&D while in others they chose to use national budgets for these
purposes.
Basically through the European Regional Development Fund (ERDF) and the
European Social Fund (ESF), Member States are devoting more and more
efforts to increasing the investment in R&D through the launching of specific
policy measures. This is especially relevant in the case of ERDF and ESF
because of the nature of their respective goals and the horizontal nature of the
potential interventions through them. After three periods of intervention, the
following lessons can be extracted:
There is no clear connection between the GDP per head of one region
and the gross expenditure on RTD (GERD). The case of Balearic
Islands in Spain with lowest ratio of GERD to GDP of all the Spanish
regions but the highest level of GDP per head is a remarkable case.
They do not see any strong argument to modify it.
The volume of structural funds in the least favoured regions devoted to
R&D and innovation is in many Objective 1 regions larger in terms of
financial volume than those received from the R&D Framework
Programme. In spite of the huge amount of money spent in Objective 1
regions to increase their R&D capability, their participation in the
Framework Programme has remained nearly stable.
The evolution of the financial effort made on R&D depends on the type
of region. Objective 1regions have much more margin and volume of
resources to do that. Nevertheless, this is a very unstable investment
because it is not totally controlled by the region.
The relative improvement of a region does not foster better behaviour in
others (even if they are geographically connected). This fact re-enforces
the view that the interventions are too close.
The trend to concentrate the investments in large R&D infrastructure
projects (like creation of new research centres or technological parks)
where it is possible to increase visibility and attractiveness. The
dynamics of regional clusters associated to these initiatives have not
been deeply studied and it is too soon to see their long-term effects.
38
4.3.2 Private Sector Funding
Business expenditure on R&D (BERD) as a requirement to boost innovation
and economic progress is widely recognised. This importance has motivated
EU and many Member States to set up long-term objectives in terms of
percentage of GDP devoted to R&D and more specifically on BERD, in order to
improve the global efficiency of the national R&D and innovation systems.
Consequently, governments have designed specific measures and instruments
to facilitate these goals and to see an increase of the role paid by private
sector.
In the second part of the 90's, the most dynamic economies have experienced
a growth of business enterprise R&D expenditures (BERD) due to the
combination of the intensification of industry funding on BERD with increasing
financing from government and growth in the economy as a whole.
Business sector R&D expenditure is traditionally stimulated by both direct
support and tax incentives for R&D. Direct support and tax incentives tend to be
substitutes. Direct government funding of R&D seems to have stagnated in
most countries (it grew less than 6% between 1990 and 1999 according to
OECD), but industry financing has compensated this situation, producing an
increase globally.
Governments have found it easier to allocate more resources through tax
incentives to enterprises, convinced of the role of industry as an engine for
growth and employment. This allocation decision is also stimulated by
governments need to comply with competition rules, for example. Governments
are also balancing the need to stimulate growth with the possibility that their
interventions will simply substitute for private investments, which would have
been made in any case. Simultaneously, public sector research institutions
have not received a larger share of the funding from governments but efforts to
strengthen their linkages with and funding from industry have been
systematically pursued.
It is uncertain how company R&D budgets will fare during economic downturns
when corporate revenues and profits stagnate. This fact introduces a relative
instability in the definition of priorities and goals because governments cannot
ensure the satisfaction of their policy aims in the same way than public sector
does.
As a result, the vision of business R&D strategies has changed. Companies are
abandoning the idea of an R&D with only a support role indirectly linked to
business objectives, to bring it to a much more relevant place in which the R&D
strategy is driven by business goals. As a consequence:
R&D projects choose to pursue an increasing relation to the development of
new products, processes and services.
Due to short time to market industrial products, industry shows a reduced
interest in basic long-term research.
39
Figure 12 shows that in 1981 the EU business community funded about 50% of
total R&D expenditure compared with 49% in the USA and 68% in Japan. By the
end of the century the USA had increased the share funded by business to 67%
and Japan had increased to 72% while the EU had only increased to 55%.
Figure 12: R&D funding by Source
Source: OECD
Figures 13 shows the changes in the sources of R&D funding in the period
1981-1999 /2000. For individual Member States in the EU Business funding of
R&D in 1981 was 62% for Belgium, 57% for Finland, 59% for Germany, and
58% for Sweden.
All other Member States recorded percentages in the 38 to 43 range except for
Portugal and Greece, where business funding of R&D was 22%. By the end of
the century Ireland and Denmark had increased business funding to above the
EU average while all other Member States had increased by 2 to 5 percentage
points. Funding from abroad increased in all Member States except Italy and
was a significant component of funding in Greece, Portugal, and the UK.
R&D Funding
as a % of R&D Expenditure
0 20 40 60 80 100
EU 1999
1981
US 2000
1981
Japan 1999
1981
% of R&D Expenditure
Business Government Other National Sources From Abroad
40
Figure 13: R&D funding by Source - European Countries
Source: OECD
4.3.3 Funding from abroad
From Figure 13, we can see that there is a positive evolution of the R&D
expenditures from abroad. It is a clear consequence of the globalisation of the
R&D and innovation systems and the need to attract (or to get) external funds.
Figures do not allow an analysis of the evolution outside EU. In many cases,
growth is linked to European programmes and the activities of foreign
multinationals contracting with the European public system. The EU Framework
Programme contributes significantly to the increase in funds from broad for all
EU Member States. Technology markets are becoming global and European

R&D Funding
as a % of R&D Expenditure
0 20 40 60 80 100
Austria 1999
1981
Belgium 1999
1981
Denmark 1999
1981
Finland 1999
1981
France 1999
1981
Germany 2000
1981
Greece 1999
1986
Ireland 1997
1981
Italy 1999
1981
Netherlands
1981
Portugal 1999
1982
Spain 1999
1981
Sweden 1999
1981
UK 1999
1981
% of R&D Expenditure
Business Government Other National Sources From Abroad
41
investments in other countries are also growing. More details about the
globalisation aspects are developed below in chapter 6.1
4.3.4 Funding of science based innovation, risk capital
Decisions to invest in R&D are also impacted by the available modes of
financing the investment, particularly the availability of risk finance. The Lisbon
European Council recognised the importance of this issue, in March 2000 and
asked for the implementation by 2003 of the Risk Capital Action Plan (RCAP
1998) as a necessary contribution to the creation of a knowledge based EU
economy.
In 2000 early stage VC invested in technology based SMEs amounted in
Europe to 6.65 bl. surpassing by three to eight times, depending on the
country, Government R&D subsidies to SMEs. The number of investments was
over 6000 touching more than 4600 companies. In the same year about 8.6
bl. were raised to be invested in high tech early stage firms.
In terms of VC investments (early stages, expansion/development, buyout) to
GDP in 2000, three groups of countries can be distinguished: Sweden, UK, the
Netherlands with VC investments above the European average (0.383%) and
representing more than 0.4% of GDP; France, Finland, Italy (up from 1999),
Germany, Belgium (down from 1999), Ireland with a ratio between 0.4% and
0.2%; Spain (down from 1999), Denmark, Portugal, Greece, Austria with
investments lower than 0.2% of GDP (source EVCA)
As can be seen in Figure 14, Europe records a lower share of seed and start-
up funds than the USA, as VC in Europe remains more oriented to buyout or
expansion, while American VC is more oriented to seed and start-up money.
Figure 14: Seed and Start-up Venture Capital investment per 000 of GDP
0.079
0.162
0.163
0.165
0.186
0.221
0.231
0.234
0.255
0.291
0.379
0.383
0.480
0.859
0.924
0.99
1.01
0 0.2 0.4 0.6 0.8 1 1.2 1.4
USA
Japan
Sweden
UK
Netherlands
EU
France
Finland
Italy
Germany
Belgium
Ireland
Spain
Denmark
Portugal
Greece
Austria
Luxembourg(na)
Source : DG Research
Data : Eurostat, EVCA,NVCA, VEC
Note : (1)all countries: 2000
42
The volume of VC in early stages in relation to GDP plays a strategic role in
financing innovations and, thus, in supporting structural change towards a
knowledge-based economy.
The managerial quality of the VC industry differs considerably between
countries, resulting in varying survival rates. In the USA, the tradition of
providing business competencies is very strong, while in Europe it is still rather
weakly developed.
The availability of VC funds considerably varies from one industrial sector to
another. This is recognition of the different role played by these funds in the
different sectors.
The strong concentration on ICT and biotech in the USA also applies in the EU.
With respect to VC, studies show that:
The growth rate of venture funds strongly correlates to financial market
performances.
Early stage VC in Europe can be considered as the most important tool for
the development of technology based SMEs.
Member States have a prominent and long-term role in improving the VC
business and financial environment; in particular, exit mechanisms are
important for vibrant VC markets.
These analyses lead to the following suggestions:
Ministers of Research and Education need to further strengthen actions on
several relevant issues linked to VC:
The co-operation between universities, national research institutes and
VC industry needs to be strengthened to make it more business
oriented.
The VC government funds management, which normally reports to the
Ministers of Finance and which should be more directed to providing
commercial seed finance to early stage companies without distorting the
market;
The establishment of Technology parks; as in the USA, in Europe there
is room for many more excellent parks;
The enhancement of public technology appraisal capacity to orient
national investments
European Ministers of Finance are the main policy makers responsible for
actions summarised in the Risk Capital Action Plan endorsed in the Lisbon
Council (2000), but the European Commission can provide a useful and
important thrust through the single market regulations. At this stage,
member countries competition to attract VC investments, for instance
through better conditions for taxation, should be regarded as positive.
43
European performance should be benchmarked against the USA and Israel.
State sponsored VC has to be commercially allocated and, preferably,
directed to very early stage investments.
The VC indicator is the more dynamic among the five covering R&D public and
private investment, with a growth rate of venture funds strongly correlated to
financial market performance. Early stage VC in Europe has surpassed by a
large extent state support R&D to SMEs, and can be considered the most
important tool for development of technology based SMEs.
For a full discussion and analysis of the role of VC in R&D investment see
ANNEX I.
Examples from different EU countries
UK has set a national High Technology Fund, organised as a Fund of
Funds and endowed with 200 M, plus several regional VC Funds. It
has promoted several schemes to reinforce academic-industry links:
Faraday Partnerships to group universities, R&D organisations,
businesses and VC; University Challenge (up to 45M) to establish
seed-funds for universities spin-off; Science Enterprise Challenge (up
to 50M) awarded to universities to promote entrepreneurship in local
firms; Higher Education Innovation Fund (HEIF) (up to 140M over 3
years) enabling Higher Education Institutions to develop their capability
to work with the local business community
Ireland has established a Seed and VC Fund, still organised as a Fund
of Funds with 40 M.
France passed a law on innovation in 1999. It has led to setting up: 31
incubators; 5 national VC funds specialised in micro-electronics,
software, biotechnology, multimedia, telecommunications; regional VC
funds; a new category of investment funds to help new innovating
companies; the support to new innovating companies. 30,5 M were
committed in 1999. It has been renewed since. The role of the national
Agency for research (ANVAR) has been enhanced to promote
innovation (loans with zero interest rate and taking shares in new
companies).
Denmark has funded the Danish Growth Fund, which provides more
subsidies than VC.
44
4.4. Future targets for R&D Spending
In the recent Barcelona summit Heads of Governments in the EU reiterated the
Lisbon commitment to boost R&D (research and development) and innovation
in the EU by increasing expenditure in this area, aiming to approach 3% of
GDP by 2010, with two thirds being contributed by the private sector. As
indicated earlier only Sweden and Finland exceed this target figure at present
while the EU average is just below 2%.
It is important to appreciate that in all economies only a small number of high
tech sectors have high research intensities. In these sectors, typically, research
expenditure is between 8 and 12% of net sales and countries, which have a
strong representation of these sectors in their industrial structures, will as a
consequence register high levels of overall research intensity.
Implicitly this discussion recognises that not all sectors require the same R&D
intensity and therefore, the strong influence of the structure of the industrial
tissue to evaluate the adequacy of the current intensity. As an example in one
country or region dominated by the service sector, R&D needs are clearly less
than in other regions with a large manufacturing fabric although innovation
intensity could be crucial.
The volume of R&D funds is strongly dependent on the structure of the
industrial tissue. In some cases deficiencies in the structure impede changes
that could improve susceptibility to innovation.
A simple increase of R&D investments does not necessarily imply a change in
efficiency of national innovation systems. It is evident that other factors play
important roles such as those related to the interactions amongst actors, and
the way that mutual confidence is built and maintained. Many of these factors
are under public policy control. Furthermore, in many cases, the objective is not
solely that R&D investments should be increased but rather to ensure the
conditions so that new technologies are easily and rapidly absorbed and
adapted. One crucial factor, for example, is a high quality education system
producing a labour force that can adapt and add value to ideas produced
elsewhere. This is clearly seen in cases where countries that exhibit higher
rates of economic growth but lower levels of R&D intensity. In many of these
countries tax incentive measures have tended to become major policy levers.
The principal conclusions drawn by the group in relation to these trends are as
follows:
In relation to the target of raising EU R&D intensity to 3%, this represents a
50% increase. With the Government percentage static and under some
pressure to fall achievement of the overall target will represent a substantial
challenge to the private sector that would have to achieve an even larger
increase. On the other hand if governments are to share the task then
significant changes in policy are required.
45
The steady increase in funding from abroad for R&D is a reflection of
increased globalisation in R&D activity. Countries with strong programmes of
attracting foreign direct investment are now seeking to attract this investment
in the form of R&D investment.
It is also clear that a mix of public and private investment in R&D is essential
to ensure efficiency and effectiveness of the overall investment. It also
depends on the careful design of policy instruments.
The various structural changes in R&D activities that are taking place,
particularly in the private sector are also requiring responses from public
policy makers particularly in support for infratechnologies, generic
technologies and basic research.
4.5. Clustering and trends of Member States
The present section incorporates a quantitative analysis followed by an
interpretation of data by the expert group by combining different indicators
related to expenses and budgets in matrices. The group was mainly interested
in the joint evolution over the years of several parameters in order to
understand trends. Accordingly with this goal two different but consecutive
periods per Member States were chosen: from 1990 to 1995 and from 1996 to
2000. Averages of existing data over each period are used (for further
specifications see Annex VII).
The first analysis was based on comparisons between gross domestic product
versus R&D expenditures.
In this case, many Member States have made an important effort to promote
higher rate of R&D expenses under the strong feeling that it could boost
development in their countries. But, did it really happen? In the period
considered both R&D expenditure per capita and GDP per capita show a
positive trend in most countries. Italy is the only exception. This country has
decreased their R&D expenditure.
The Nordic countries (Sweden, Denmark, Finland) are the ones that have
experienced the more significant increases in R&D expenditure per capita, and
together with Austria and Belgium, are the Member States with the highest
R&D expenses per capita in relation to their GDP. Also these countries have
undergone a significant increase in GDP per capita in absolute terms.
However other States with a smaller relation between R&D expenditure per
capita and GDP per capita, show also a considerable increase in the last
indicator. An outstanding case is Ireland. From 1990 to 2000, this country has
undergone a huge increase in the GDP per capita. Also Netherlands shows this
behaviour. Thus, this figure shows that the causality relation between increases
in R&D expenditures per capita and increases in GDP per capita is not always
clear.
46
However, because the objective of the group is focused on funding R&D, it
seems interesting to look at the relationship the other way round and ask to
what extent do countries economic productivity and the amount of available
resources it generates (proxy used: GDP/inhabitant) influence their propensity
to invest in R&D.
Introducing the relationship using GDP as the independent variable along with
the more generally discussed reverse relationship also allows us to discern
important consequences. In fact, the consequence of the coexistence of these
two relationships might imply a circular causality system whereby more
productive countries investing more in R&D may be able to accumulate further
growth possibilities through R&D, in a virtuous investment cycle, while less
productive countries may be captured in a vicious cycle of not generating
enough wealth to be able to invest significantly in R&D and therefore would
grow more slowly in a knowledge-based economy.
Figure 15: R&D expenditure per capita versus GDP per capita
Data Source: Eurostat 2002
Luxembourg no data on R&D expenditure per inhabitant. For the first period only complete series
available for France, Ireland, Italy, Netherlands, Austria, Finland and United Kingdom. Netherlands data
up to 1998. Ireland and Greece only data up to 1997. 2000 data only available for Germany, Spain,
France, Austria and United Kingdom.
Sweden data on GDP since 1993. Spain and Portugal data since 1995. Germany data since 1991.
The data show that there is an overall strong positive correlation between GDP
per capita and GERD per capita. This lends support to the R&D expenditure
elasticity hypothesis (see Annex VII), indicating that countries having a higher
GDP per capita can allocate increasingly more of that extra GDP to R&D than
less productive countries constrained by other priorities policies (healthcare and
welfare, education, defence). On the other hand, the lower slope and

GR
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0
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200
300
400
500
600
700
800
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5,000 10,000 15,000 20,000 25,000 30,000
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47
acceleration factor of the second curb suggest that the richer countries have on
the whole tended to invest less in R&D in the second five year period in
proportion with GDP growth.
But richer countries not only invest more on R&D than the poorer ones; they
also have more choice on how much to allocate, depending on how high R&D
is in the investment agenda of governments and of firms. In fact, the spread of
the data points about the curves in Fig. 15 increases as GDP grows. The
variation in the choices in the higher performing countries is very likely to
depend on the priority assigned by industry to R&D investment, which in turn is
probably related to the countries industrial structure, especially to the degree of
their specialisation in knowledge-intensive industries and services.
Although a finer analysis would be required to test this hypothesis, it seems that
only the countries above a relatively high threshold of GDP per capita are able
to keep a relatively high level of R&D investment, and that the difference in how
much of their GDP growth is turned into R&D investment is largely dependent
on how much their industrial structure is oriented to highly innovative,
knowledge-intensive sectors who place a higher priority on R&D to sustain their
innovation paths and whose R&D investment is therefore less elastic to GDP
than in larger, longer established and more diversified industrial economies.
The countries below that threshold, on the other hand, are more constrained in
their choice to allocate resources to R&D and generally have less innovative
and knowledge-intensive industries.
The growth of their R&D investments is thus small in absolute terms, though
they may exhibit higher R&D growth rates than most countries and relative to
their own GDP. In order to take off to higher absolute levels of R&D investment,
these countries would need a boost in GDP to liberate extra investment
resources that can but scarcely be taken out of competing allocations, a step
that only Ireland has been able to achieve through a radical change in its
industrial structure; with its combination of a highly increased GDP per capita
and a growing sector of knowledge-intensive industry and services, Ireland is
likely to experience a significant take-off in R&D investment. Until they achieve
such growth, the other low GDP countries have to rely on sustained public
effort to continue they moderate absolute increase in R&D, which represents a
high growth rate and a heavy relative burden on their GDP growths.
The second important aspect to consider is the relation over time between
gross domestic product versus government budget on R&D.
Governments have made an effort in increasing budgets to support the
launching of R&D activities and to support the public system. This table shows
at what extent this effort has been strong enough to trigger economic growth
and, simultaneously, to test the relation between these two aspects.
Figure 16 shows a fast convergence at the top. While in the average 1990-95
France, Sweden and Germany were clearly at the top of government spending
in R&D per capita, in the 1996-2000 average there is a much more
homogeneous group including, besides the former countries, also Finland,
48
Denmark and the Netherlands, whose absolute growth was closely followed by
other middle-high GDP countries (Belgium, Austria). The countries having the
lower GDP per capita in 1990-1995, which also had less business R&D as
percentage of GDP, relied heavily on government effort (using EU cohesion
funds) to support growth of R&D expenditure (Greece, Portugal, Ireland,
Spain), with the remarkable exception of Italy whose behaviour emulated that of
the more traditional high performing industrial countries, while its average
business expenditure grew little in absolute terms and declined in proportion to
GDP resulting in an overall drop of R&D expenditure per capita and in relation
to GDP in this country.
From the analysis of Figure 16 we again see that while countries with higher
GDP are both more able to allocate more government funding to R&D and
more flexible in their choices for allocating resources, the less productive
countries had to rely on sustained albeit comparatively scarce government
effort, to a great extent supported by EU cohesion funds, to be able to keep
whatever moderate absolute growth they could generate. Much as these
countries have progressed in relative terms, given their low starting points,
again it is clear that it is only through changes in their industrial structures and
increased productivity that they will be able to boost their R&D efforts closer to
EU averages.
Figure 16: GBOARD per 000 of population versus GDP per capita
Data Source: Eurostat 2002
2000 data on government budget only available for Finland. Ireland only data up to 1998.
Sweden data on GDP since 1993. Spain and Portugal data since 1995. Germany data since 1991.
AT Austria ES Spain GR Greece NL Netherlands
BE Belgium FI Finland IE Ireland PT Portugal
DE Germany FR France IT Italy SE Sweden
DK Denmark UK United Kingdom LU Luxembourg

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49
5. Rationale for support for R&D
Citizens expect their governments to facilitate the attainment of a high quality of
life. There is a wide acceptance among citizens that technology can be a
significant contributor to that quality of life and so there is always political
pressure on governments to meet their citizens expectations. At the same time
there is a readiness on the part of most people to support the development of
beneficial technologies.
Citizens also support economic development when the benefits are clearly
desirable. However, they do not always perceive the benefits, which can accrue
from technology and therefore the need for public awareness of Science and
Technology arises. In as much as economic competitiveness is an important
component of economic success governments will be supported in creating the
conditions, which foster competitiveness. R&D is a critical element in the
process of technological development and will command a level of societal
support, to the extent that its importance is publicly perceived..
The rationale of public R&D and innovation policies is basically grounded in the
economic character of technological knowledge.
It is widely accepted that technology (and technological knowledge) is a critical
contributor to productivity and economic growth. Implicit in the public funding of
basic research is the expectation that the research will lead to intellectual
advances, and that, over the long term, these advances, either directly or
indirectly, will benefit citizens. Basic research may well lead to a variety of
benefits, including general advancement of knowledge, training, social,
environmental or economic impacts, etc., in the longer or shorter term, even if
these are not the primary objectives of the research.
Scientific and technological knowledge has aspects that it shares with a range
of other economic goods characterised in an economic sense as public goods,
in contrast to those of private goods.
Private goods provide the owner with the opportunity to express property rights
over the good and usually can only be used one at a time. Pure public goods
are available to all and can be enjoyed by many simultaneously. Many goods,
whether material or immaterial, fall in between these extremes, and the degree
of each type has something to say on how a market for these goods operates.
Knowledge is in this context seen as a public good; several users may use the
same piece of knowledge simultaneously. At relatively little cost others may
gain access to the piece of knowledge. As a consequence knowledge is often
characterised as an economic good with quasi-public characteristics, with
severe consequences for how markets for knowledge, as an economic good,
may operate.
The market will not by itself generate optimal amount of public good leading to
an under-provision of knowledge in society. Characteristics as these have been
core parts of a welfare rationale for why public authorities should have a
50
research and technology policy, a rationale that has had substantial impact on
the developments of these policies during the last century.
In Europe and other advanced economies at the present time, the system of
knowledge generation and diffusion is changing. The process takes many
forms, but has in the recent period, with somewhat of a misnomer, been
characterised as the emergence of the knowledge-based, or learning,
economy. Part of what is happening is fundamental changes in the structure
and operation of a range of markets for knowledge, reflected in new and
extended forms of knowledge suppliers and of new forms of commodification
of knowledge. Developments of VC markets and substantial corporate
venturing by major global companies in recent years in high tech industries,
based e.g. on biotechnology and information technology, illustrates this.
What processes like these amount to is a changing distribution of the economic
characteristics of knowledge, primarily relevant for the kind of knowledge
generation, research and scientific developments that are motivated by the use
of the resulting knowledge as a factor in economic production. This may have
substantial implications for the formulation of research policy objectives and for
forms of support and organisation of scientific and technological research.
Analysis of historical data indicates that industry tends to under-invest in the
type of research that, although long-term and high-risk, ultimately provides the
highest rates of return and, in fact, is necessary for long-term economic growth
at the national level. Barriers or market failures occur that impact the private
sectors expected rate-of-return calculations causing systematic under-
investment. Economists have explained under-investment in R&D largely by the
concept of spillovers, which refers to the tendency of knowledge either to
directly leak or spillover from the originating source or to be incompletely
compensated for in marketplace transactions.
While spillovers are an important characteristic of technology-based markets, in
reality, this economic activity is much more complicated and is impacted by
other barriers not so commonly identified or understood. The following six
sources of market failure (under-investment) occur across technologies and at
specific points in a technologys life cycle. The first four components relate
more to the elements to be taken into account for decision making up front.
The latter two components relate more to the effects to be taken into account
all along the life cycle of the technology:
(1) Technical Complexity: The multidisciplinary nature of R&D, driven by
intrinsic complexity and the systems nature of many emerging technologies is
raising risk calculations:
(2) Time: Increased global competition in R&D is shortening technology life
cycles and raising discount rates (particularly for long-term, high-risk
technology research);
(3) Capital Intensity: Estimates of risk climb dramatically as the projected cost
of a research project increases relative to a firms total R&D portfolio;
(4) Economies of Scope: Market and hence R&D strategies often are more
focused than the potential scope of markets enabled by an emerging
51
technology, thereby reducing investment incentives derived from rate-of-
return calculations;
(5) Appropriability: Leakage or spillover of technical knowledge to companies
that did not contribute to a research project is typically greater the earlier in
the R&D cycle an investment is undertaken;
(6) Infratechnologies and Standards: Technical tools, methods and
techniques, science and engineering data bases, and the technical basis for
standards have a public good character and low visibility; such technical
infrastructure is therefore subject to under-investment over most of the
technology life cycle.
Any one of these barriers can have serious negative impacts on private sector
R&D investment. Moreover, the severity of their impacts can vary over
technology life cycles and among levels in supply chains.
Public R&D policy in most countries supports government funding of generic
technology or more radical infratechnology research when some non-market
objective (such as defence or health care as detailed below) is available as a
driver. In these and other areas the social rates-of-return can be many multiples
of the private rates-of-return, hence the rationale for strong public funding
support.
The desired time horizon to obtain results of public investments has become a
crucial factor in the formulation of specific actions. Whereas public investment
in the past adopted long time horizons, the need to demonstrate the usefulness
and efficiency of the efforts is favouring short-term actions with consequences
for basic/applied R&D.
5.1 The challenge of advancement of knowledge
Implicit in the public funding of basic research is the expectation that the
research will lead to intellectual advances, and that, over the long term, these
advances, either directly or indirectly, will benefit citizens although this benefit is
sometimes not always perceived in a first place.
Fundamental research has generally been the province of university research
departments and traditionally the GUF has been the basis for this. Much of the
research done in humanities departments of higher education institutions falls
into this category of research and is not included in economically oriented
analyses of science based technological research.
Many emerging areas such as nanotechnology, and molecular computing still
have large gaps in underlying knowledge and understanding of phenomena
requiring extensive programmes of basic research. As pointed out earlier, the
business community will not fund this form of research, but, as the
biotechnology example illustrates, prolonged and substantial public investment
in basic research (in molecular biology in this case) does foster the creation of
new industries and eventual investor enthusiasm for the new field.
52
An enhanced competition scenario can lead to increased investments in R&D
and innovation in order to ensure a sustainable firm. However in all sectors,
public and private R&D funding, especially for long term or fundamental
knowledge continues to be one of the first type of investments reduced after the
onset of any economic difficulty. Risk capital investors also react in the same
way. However, this is not necessarily the case for investments in innovation.
The increase of public investments in R&D relies more and more on a short-
term problem solving approach dictated by the political agenda. This directly
affects the research agenda as well as the scientific community composition
and the sustainability of one of Europes strengths, its Science Base
Figure 17: Funding of Basic Research
As shown by Figure 17, the large countries dominate investment in basic
research but data is missing for many countries since the middle 90s. For those
countries still recording figures it can be observed that many small countries
allocate a significant and rising percentage of R&D expenditure to basic
research.
Many larger companies in specific sectors allocate a percentage of research
funds to basic research but usually with possible relevance to particular
applications. Increasingly as these companies are funding research
programmes and projects in higher education institutions, some allocations to
curiosity driven research are being made.
However, research for the advancement of knowledge will tend to remain
dependent on public funding. Under-investment in basic research led by an
excess of short-term priority setting may prove harmful in the long run.
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53
5.2 The competitiveness challenge
Global competition raises the significance of managing innovation and
technological change, and places a premium on strategic technology
development and utilisation strategies. However, at the very time that global
competition has increased, the sources and mechanisms of technology
development have become ever more complex and challenging. R&D has
become much more global. More firms in more nations have been pursuing
R&D strategies and developing new technologies, contributing to a long-term
convergence in national technological capabilities Traditionally, public
technology policy has focused on conducting and supporting scientific research
that serves the technological missions of government agencies and
departments--especially in the area of national defence. Private sector
companies have benefited not only from the knowledge base provided by
publicly conducted or funded basic research, but also from the "spin-off" effects
of mission-oriented R&D programs. Today, however, scientific and
technological development processes have become much more complex:
private sector technologies are as likely to "spin-on" to governmental
mission applications as the reverse--especially in the application of
information technologies;
technological capability alone does not generate competitive success -
continuous product and process improvements, organisational knowledge,
commercialisation strategies, and related factors also drive innovation and
competitiveness;
technology life cycles have contracted, while the capital required to
generate new technologies has expanded;
new scientific and technological information diffuses rapidly across borders;
and
technology-based international competition has become much more robust.
In response to these and other factors, public technology policy already has
begun a long and challenging process of shifting to a more commercially
oriented, partnership-based system that is more responsive to the
contemporary realities of global competition and technological change.
Governments facing challenges to economic competitiveness are increasingly
seeking to raise the level of innovation in their systems. The first areas in which
this can be done are those, which are substantially under the direct control of
governments and for which there are strong societal pressures for superior
performance. It is recognised that innovation is the basis for consistent
advancement and increasingly, it is being acknowledged that collaboration and
networking across a wide spectrum of stakeholders and actors, are the most
effective methods for achieving success.
Firms are also using outsourcing schemes to increase their competitiveness.
This concept was initially linked to contract services from other firms (typically
54
in ICT) in order to reduce costs and increase flexibility without increasing the
number of employees.
Today it is broadening its use to other areas like R&D. This process is
modifying the structure and capabilities of internal R&D placing more attention
to the way that other actors perform their work and on controlling the quality. In
this sense, it can be understood as an asymmetric co-operation scheme.
The net effect on R&D investments is not clear but in this case, some firms are
reducing investments while probably other companies are increasing it
because of the need to compete and contracting the work to others.
Governments should take into account this trend to include specific measures.
5.3 Other societal challenges
The group has selected two examples to illustrate the issues involved. Defence
related R&D is a cornerstone of strong defence policies and for large political
blocs such as the USA and the EU defence spending represents significant
public expenditure and Defence R&D is an important component of overall R&D
activity.
From the service area, Health care is a major societal concern and again
significant public expenditure is involved. Health-related R&D is a critical
element in meeting societys expectations. Both these examples pose
interesting problems for policymakers in the investment area.
5.3.1 Defence Related R&D
In Europe it is assumed that long term security should be based on the retention
of an independent defence capability supported by strong defence technology
and industry base and, to this purpose, the identification and exploitation of new
technologies remain essential.
The European Union has been promoting a Common Foreign and Security Policy
(CFSP) but the various organisational arrangements covering defence and
security are complex and overlapping but without total membership representation
by all Member States of the EU. Some of these arrangements have a wider
coverage than the EU. (See Annex IV)
Resources:
States normally fund public and private defence R&D, which on the other hand
needs to tap into all the available national technological assets. Some defence
technologies have a dual-use character responding to both civil and military
needs. Spillover occurs in both directions, from military to civil and vice -versa.
In 2000 EU member countries investments in defence R&D amounted to 9104
M, about 17% total EU government expenses in R&D and almost 7% of total
55
EU public and private R&D expenses. All EU countries, except UK, have
constantly reduced expenses in the last 5 years. In 2000, military R&D in 7 EU
countries totalled 99.5% of the EU expenses with the top 3 totalling about 92%.
In Figure 18 there is a classification of the major defence companies in the
world derived from a two dimensional grid which distinguishes between Civilian,
Balanced and Defence focus on one axis, reflected in the % of total firm
revenue derived from defence activities and size based on the level of total
revenue from defence on the second axis. The size of the circles indicates the
relative total employment of each firm with the central circles in blue
representing the relative defence related employment numbers.
BAE Systems, among the European companies, is the most focused on
defence. In the future many of the companies will be strategically positioning
themselves more towards the balanced focus.
Figure 18: Classification of Defence Companies
Dual use:
Overall, across all defence technologies, it is considered that about 50% are
dual use in nature (Western European Armament Group (WEAG)). Usually,
additional technical work is needed to use technologies developed for civil
application for defence purposes. Synergies between defence and civil sectors
are not generally acknowledged at European level, so that there is no
mechanism to address in a structured manner the transfer of technologies and
the unnecessary duplication of costs. The aerospace sector, for instance,
provides a good case of the benefits brought by having civil and defence R&D
in the same company.
In recent years, the emphasis on spin-on (military technology applications of
non-military, commercial technology) has increased in importance, although
spin-off (to commercial applications from military technology) remains a
Classification of Defence Companies
0
5
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15
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25
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Finmeccanica
Thales
General Dynamics
Northrup Grumman
Raytheon
BAE Systems
Lockheed Martin
Boeing
Rolls Royce
TRW
EADS
Mits. Heavy Ind
UTC
56
general, second-order feature of public investments in R&D for military
objectives.
In the area of dual use the USA system of funding research by universities and
defence contractors would appear to be more flexible in terms of facilitating
transfer of knowledge and technology to the private sector. Similar flexibility
would benefit European companies. DARPA is also funding R&D activities that
are covered by the civil budget in the EU. This therefore makes comparisons
more difficult. In contrast to the USA, EU universities display a marked
reluctance to undertake defence related R&D. Furthermore, spending on
defence generally including defence R&D is much more positively viewed in the
USA than in Europe.
European Defence Industry:
The Top 5 European defence companies employed in 1999 more than 300.000
people, about 44% of them being in defence activities. The same companies
registered in 1999 revenues in Defence of about 30 B$, less than the top 2
USA companies.
European defence industry started in 1999 and 2000 a process of
consolidation, probably not yet completed and not yet attempted in the ground
and naval sector. As a result, four major defence companies have so far
emerged.
The concurrent concentration and privatisation of European defence companies
has affected R&D budgets, as European companies listed on the stock
exchange and operating in a globalised financial market can no longer sustain
with their internal resources the past levels of R&D expenses, which run closer
to 15-20% of annual revenues.
European Fora for defence R&D co-operation:
European nations invest their Defence R&D money mostly in domestic
establishments and very few spend more than 10% of their budget through
international co-operative activities. The scarce resources being fragmented
across different spending priorities of separate national defence ministries often
leads to unnecessary duplication of efforts and prevents the achievement of a
critical mass. The disparities between the national regulatory and administrative
systems also hamper transnational transfers of knowledge and the mobility of
researchers. This reduces the return of scarce investment, compared to the
USA.
Duplication of efforts across Europe where the same topics are funded by
several national, regional or even European programmes is widely known and
results in lower efficiency in the use of R&D resources. Co-ordination among
the different levels of administration needs improvement.
In recent years European governments, realising this inefficient state of affairs,
increased their willingness to co-operate creating a number of Fora for defence
57
R&D co-operation. However, establishing co-operation in Europe in these fields
is difficult and there is a need for a specific mechanism for Defence R&D and
Industrial co-operation.
Trans-Atlantic relations and comparisons:
Even in times of budgetary reductions, the USA attaches a clear priority in
maintaining technological capabilities over procurement, while Europe, except
the UK, usually does the opposite. So the gap between Europe and America,
already huge, has been widening in recent years. Although not exactly
comparable, in 96 the USA support to defence R&D was 3 times higher than
Europe and in 2000 it reached 3.7 times. This is set to increase with recent
budget approvals in the USA.
The level of support obtained by industries in the two sides of Atlantic is also
very different, for instance government finance for aerospace R&D activities,
through all mechanisms, account for 32% of industry turnover in the USA in
comparison to 19% in the EU.
The consequences of this disparity are felt outside R&D, since the vast gap
between the USA and Europe in terms of resources devoted to Defence R&D
severely undermines the allies co-operation at operations level also. No
important industrial transatlantic project has been implemented in recent years
and access to American military technology has been confined to very few
European companies.
The Way Forward:
It is beyond the scope of the group to propose any recommendation addressing
the defence policy except for the aspects concerning R&D. However the group
recognises that any progress in European Defence R&D co-operation in this
field requires a preliminary positive political construction, in which European
Defence R&D can find its place.
Public procurement has a useful role to play in stimulating the generation and
absorption of advanced technologies embedded in products and services and,
as a result, motivating higher levels of private investments in R&D.
Spending the same amount of resources could produce in Europe much more
results, if unnecessary duplications could be reduced and higher economy of
scale could be achieved.
While universities and research institutions constitute the backbone for basic
defence research in the USA, in Europe the link between academia and
defence institutions is much weaker. Co-operation between national research
institutes, and between them and universities, so far quite limited in Europe,
should be pursued and reinforced. This will enhance the benefits from the dual
nature of defence R&D easing the transfer of technologies to civil applications.
58
5.3.2 Health related R&D
A report to the European Commission argues that the European drug industry
is losing competitiveness in the face of the USA, although there are differences
among EU countries. In particular, the EU is lagging behind in its ability to
generate, organise and sustain innovative processes and appears less able to
translate R&D into commercial success. This is partly due to pricing policies,
peculiarities of the public regulatory and health care systems and a strategy of
reliance on external inputs such as licences from international companies,,
rather than on own R&D and innovation. This sector has a manufacturing
component (pharmaceutical industry, equipment, etc.) and a service
component.
The health sector in all industrialised countries is very large. Among the G-7
countries, for example, annual per capita health expenditures range from 1391
$ in the UK, (the lowest in EU) to the 2364$ of Germany, (the highest in EU) to
the 4095$ of the USA, which amounts to 6.8% of the UK GDP, 10.7% of
German GDP and 13.9% of the USA GDP. (OECD1999).
R&D expenditures for health are of great interest because of the sectors size
and expected growth as the population in many OECD countries ages. They
are difficult to measure, however, because of institutional complexity and
diversity (e.g. health R&D may be publicly or privately funded, and carried out
in firms, universities, hospitals, and private not-for-profit institutions).
Figure 19: Health R&D as a % of GDP 2000
In 1998, government support
for health-related R&D (based
on government budget
appropriations for R&D-
GBAORD) in OECD countries
was about USD 19 billion (in
current PPP USA dollars), or
approximately 0.1% of their
combined GDP.
In Figure 19, compared to the
European Union and Japan,
government support for health
R&D is high in the United
States. In 2000, it represented
about 0.2% Union (0.05% in
1998) and Japan (0.03%).
During the 1990s, the growth
rate of government support for
health-related R&D in Japan
(10%) was about double that
in the United States (5.5%)
and the European Union (5%).
When data from additional
59
GBAORD categories are used to adjust for some of the institutional differences
as regards the funding of health R&D, a different picture emerges. The United
States is no longer a leader: health R&D budgets relative to GDP are similar to
that of the United States in Finland, Austria and the Netherlands. The difference
in government support for health R&D between the United States and the
European Union also narrows sharply.
Another indicator often used as a proxy to measure health-related R&D is R&D
expenditure by the pharmaceutical industry (Figure 20). In 1999, it represented
close to 0.47% of GDP in Sweden, a significant increase from 1991 (0.25%). It
was also high in the United Kingdom (0.29%), Belgium (0.25%) and Denmark
(0.24).
The share of pharmaceutical R&D in business sector R&D is high in the United
Kingdom and Denmark. Pharmaceuticals account for approximately 20% of
total business R&D expenditure. While the ratio of pharmaceutical R&D to GDP
is low in Italy and Spain, this sector accounts for a significant share of total
business R&D in both countries.
Figure 20: R&D in the Pharmaceutical Industry

In 2001 in the USA the largest actual dollar amount increase from the previous
year was earmarked for health-related R&D. This reflected the extensive goals
that have developed within the biomedical community, particularly those
stemming from successes with the Human Genome Project. However, the
health-related spending increases from Fiscal Year 1999 to 2000 accounted for
approximately 70% of total R&D increases, whereas they accounted for
approximately 50% in FY 2001. On the other hand, additional funding for both
general science R&D and for space research, which is linked to advancements
involving the International Space Station, played a more significant role in the
overall budget adjustments than in the previous year. This indicated a possible
shift toward a more balanced allocation of resources across the range of
sciences.
Competition between public and private entities in pursuing long term scientific
goals is becoming more common but the rules of the game are not clear. A
60
good example is the case of human genome. Striking a proper balance
between co-ordination and competition is difficult. Currently at European level
there is room for more co-ordination, but we should avoid quelling competition.
Health requirements provide the catalyst for extensive application of a variety of
technologies from ICT to Nanotechnology, mainly for diagnosis and monitoring
of an ageing population.
These developments are, in turn, encouraging the setting up of new companies
to provide new services and products in the areas of illness prevention,
healthcare assistance based on continuous monitoring of groups of well off,
ageing people.
An example of the policy dilemmas faced in the area of health can be found in
pharmaceuticals. On the one hand, governments must support the industry in
developing new products and treatments demanded by an increasingly well off,
ageing and educated population. The industry is prepared to undertake the
R&D in the expectation of a future stream of revenue. On the other hand, the
same governments as managers of the health care service, which is the
dominant market for the new developments, are striving to reduce the future
stream of revenue to the industry. This calls for a very intricate balance to be
struck in public policy.
5.4 Instruments
In attempting to deal with those market failures, which reduce the involvement
of the private sector in socially desirable R&D, public policy employs a range of
instruments generally designed to motivate the private sector to increase its
R&D activity. The three main areas in which public intervenes are:
Direct Supports
Indirect Supports
Framework Conditions.
The group in its analysis of issues dealt directly with each of these areas and
found many each of these interventions either separately or jointly at work
within the illustrative case studies selected.
61
Figure 21: A Rough Taxonomy of Supports For R&D
At a Workshop on Fiscal incentives for R&D in January 2002, the OECD
presented Figure 20. It is a taxonomy of supports on the axes of who pays for
the R&D and who decides on the priorities. As the diagram illustrates the
general trend is to try and move as much of the activity into the bottom right
segment.
5.4.1 Direct Supports
Where governments and local administrations wish to enlarge the stock of
knowledge available to domestic firms direct financial incentives are regarded
as the more efficient instruments for achieving this goal. Direct funding of
commercial R&D, by contrast, could foster a misallocation of resources among
major sectors of the economy. There is also the danger that direct supports
may contravene EU competition rules.
It is interesting that three of the Member States of the EU with the highest
research intensities, Sweden, Finland and Germany employ direct financial
incentives, which prioritise key technological sectors and activities. There
are several reasons for this policy approach, which largely includes a mixture of
government priorities, perceived needs and costs feared, exclusively.

PPS


Direct Funding of R&D
(Mission Oriented)

Commercially Oriented
Public Research
Organisations
Public Venture Capital


R&D Tax Incentives

Public contributions to
Private Venture Capital
Government
Government Industry
Who Decides
Who Pays



Taxes(?)


Industry R&D
(Industry R&D financing
Venture capital
Corporate venture capital)
Industry
P/PS
Source: Presentation by Jerry Sheehan, OECD Science Policy Division to an EC Workshop on Fiscal
measures for R&D, Brussels, Jan. 2002
62
These direct supports take the form of either grants, which effectively share the
cost of research projects between the government and the company or
subsidised loans (soft loans) at reduced interest rates, which reduces the cost
of the research and development to the company.
In the groups examination of the role played by EU Structural Funds in
fostering R&D, Ireland and Portugal made use of Regional and Cohesion Fund
allocations for this purpose. To a lesser extent, Spain and Italy also employed
structural funds in this way.
An important point in relation to Direct Supports is that they are generally
administered by Ministries of Research and can be accurately targeted at
specific research priorities or at specific beneficiaries.
Another form of direct public support comes from public funding of VC, either
through support of private VC funds or through the establishment of specific
government VC funds. The group examined the general application of VC to
R&D (See Annex I). Within that it found that In 2000 Government agencies
represented on the average 5% of European venture funds. Finland (20.1%),
Germany (16.4%), Austria (15.9%) and Ireland (11.1%) were notable
exceptions with higher contributions (source EVCA [1]).
One form of direct support, which has been introduced in recent years, is a
system of guarantees and warranties to support VC for SMEs. These schemes
aim to share the risk in the early years of projects between the state and the VC
provider. Such schemes are particularly suited to funding of R&D. However, to
date they are not widely adopted and an examination of the experience to date
and the conditions governing such schemes would appear worthwhile.
Almost all European countries, and also the USA, have developed State
venture funds, with different goals and different achievements. And the situation
is evolving very rapidly. Some funds are devoted to support very early stages
university spin-offs, others focus their investments in less developed areas,
others support only selected industries, and others deliver only through the
private sector.
The group also examined a particular example of direct support to R&D, which
can extend across national boundaries. This is the funding by governments of
large-scale scientific research facilities (LSRF). The case of the European
Synchrotron Radiation Facility is set out in Annex II. Where different Member
States might wish to collaborate in setting up such facilities harmonisation of
regulations and administrative systems can be helpful.
63
The role of structural funds
One of the most direct influences that the public policy can exert on investment
in R&D is the use of State aids. These can take many forms. The European
Commission has permitted the use of its structural funds in the field of R&D, in
those countries, which have been attempting to catch up with average general
development levels in the EU. The accumulated experience on the allocation of
R&D funding through structural funds enables us to extract some
consequences. The following are examples of countries that have received
support through the structural funds from the EU.
Spain:
In Spain it was found among other things that there is no clear connection between the
GDP per head of one region and the gross expenditure on R&D (GERD). In spite of
the huge amount of money spent in Objective 1 regions to increase their R&D
capability, their participation in the Framework Programme has remained nearly stable.
Trends are to concentrate the investments in large R&D infrastructure projects (like
creation of new research centres or technological parks) where it is possible to
increase visibility and attractiveness.
Italy:
In the case of Italy structural policies and innovation policies used to be separated
issues, managed by different administrations. In the last 5 years a huge process of
institutional reform, privatisation, and industrial reorganisation changed this approach,
promoting a convergence of the two sets of policies The tradition of development
policy was based on State intervention in Southern Region through direct investments
by National Agency and State-owned enterprises and company subsidies in Northern
regions for countering industrial decline. The positive effect of the old Southern policy
was that it provided basic infrastructures and large plants for basic production. The
negative effect was that it centralised decisions and did not encourage local firms and
local authorities to design and to implement their own development projects.
In the past Italy used a very small amount of already assigned structural funds
because of scarce national capacity to attract private firms and to promote local
development from the top-down and because of the poor implementation capacity of
the local authority.
A new approach to development was based on the success of the Northern industrial
district model and its diffusion to the South (mainly along the Adriatic coast regions)
and the institutional change giving more power to regional administration and the direct
election of the Mayors. It promoted a new approach of structural policy based on
development agreements involving all the local actors (municipalities, associations,
unions, firms, educational institutions) in defining an integrated project of local
development and the national government (1997-2001) connected this approach to the
EU structural funds. The new approach was called: bargaining planning because it
was based on a process of negotiation between this local public-private coalition and
the regional and national government for co-funding integrated development projects.
In the new approach to Innovation policy regional governments (both in the North and
in the South) promote development plans by converging structural and innovation
policies, based on bargaining planning. Local development pacts involve
municipalities, local bank foundations, universities, firms and firm associations.
64
National government calls for tender concerning big innovation projects (financed by
UMTS license gains).
The positive effect is that it favours innovation diffusion and aggregation of local forces,
making local authorities and companies responsible for the success. The negative
effect is that there is a risk of increasing disparities and measuring industrial and
innovation projects to the local size.
Ireland
A further contrast is found in the case of Ireland where structural funds were applied
directly to developing R&D capability. Focus of expenditure in the 1989-1993
Operational Programme for Industry was the development of Infrastructure viz.
Programmes in Advanced Technology (PATs) and Technology Centres. The 1994-
1999 Operational Programme continued support for these initiatives and focused on
the development of R&D capabilities within companies.
Within the Industry Operational Programme, the Food sub-programme included R&D
support for food processors and support for research conducted by Teagasc
(Agricultural Research and Advisory Institute) and other institutions. The Operational
programmes for Agriculture, Food and Forestry, Fisheries, and the Environment also
had specific R&D measures.
Targets for the Community Support Framework included:
raising BERD as a % of GDP from 0.65 in 1993 to 0.82 in 1999
raising GERD as a % of GDP from 1.00 in 1993 to 1.32 in 1999
Objectives of R&D Expenditure in the Future (2000-2005):
Continued growth in quantity and quality of R&D spending in industry and
relevant institutions.
Embedding research, technology and innovation into companies and their
development strategies.
Development of technology-literate managers and staff and managerially-
literate technologists.
Promotion of increased collaboration Company to Company, Company to
Institution, Institution to Institution.
Support the establishment of New Technology Based Firms.
In the case of Italy and Ireland the use to which the funds were devoted
promoted the national objectives of strengthening the capabilities in R&D as
part of wider development strategies. Some lessons can be drawn from the
separate national situations.
The designation of less developed regions for receipt of structural funds can
militate against interregional projects and collaboration because of funding
rules;
Efforts to raise capability in R&D using structural funds are not reflected in
application to Framework Programmes.
From programmes funded with structural funds assistance direct support for
new R&D performers has been generally successful if integrated with in-firm
education and good management. However, support for employment of
technologists in small enterprises has not been particularly successful.
65
5.4.2 Indirect supports
Indirect supports are generally fiscal incentives, which employ the taxation
system of the country to provide the motivation to invest in R&D activity. If the
policy aim is to boost the nation's rate of commercialisation of new products,
processes, or services, then a tax incentive like an R&D tax credit, has some
advantages over direct funding. Success in commercialisation hinges on a
sound understanding of the market, and tax incentives have the advantage of
leaving the decisions of which projects to fund in the hands of private firms
rather than government agencies.
Even with the tax subsidies, firms still will be putting up most of the money for
projects they pursue, which ensures that they, not taxpayers, will bear most of
the risks of failure.
The EU countries with a lower innovative performance, (Portugal, Spain and Italy)
adopt general programmes of fiscal incentives, which promote a wide range of
technological innovation activities. Their governments seek to stimulate activity
across the whole economy, as opposed to within specific sectors,
The USA, France, and more recently the UK, offer examples of countries with
traditionally high innovation expenditure and well developed technological
development frameworks that have chosen to support activities such as R&D,
both fiscally and financially. Their fiscal incentives are normally incremental
schemes, which only reward increased levels of expenditure in excess of a pre-
determined baseline (average of expenditure in previous years), but
nevertheless apply to all companies. The recent extension of the UK tax credit
to all companies is based on overall expenditure in R&D (volume base).
Additionally, the budgetary effect is normally regulated by the application of
limits, which reduce the total incentive that any one company may receive. In
France also the tax credit is targeted at increasing patenting and developing
innovative software.
The following Figure 22 sets out examples of practices, which have been identified
in this area from various countries.
Figure 22: Practice examples
Promotion of Specific Innovation Objectives
Country Tax Incentive Purpose
UK R&D tax credit
UK Free depreciation of
R&D equipment;
Improvement of research infrastructure
Ireland Tax incentive Technology transfer
Spain Tax credit Acquisition of new IT and promotion of
quality and design
France Tax credit Registering new Patents and development
and introduction of new software
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Promotion of General Business activity
Italy Tax Credit Training and collaboration between
universities / research institutes and
companies;
Netherlands Tax incentive Recruitment of Research personnel
France Tax Deduction Spin-off companies
Source: Corporation Tax and Innovation: Innovation papers 19. European Commission
The impact of tax incentives is still a hotly debated issue in economics. The
following box sets out some recent evidence in support.
Impact of Tax Incentives
A recent study by the Institute for Fiscal Studies examined the effects of R&D
tax credits in nine countries over the period from 1979 to 1997 and recorded
the following conclusions:
Tax incentives seem a natural policy tool for a market-oriented government
wanting to increase R&D expenditures. Firms decide where and how to spend
their R&D rather than having it determined through a bureaucratic central
authority. Economists, however, have traditionally been sceptical over the
efficacy of fiscal provisions, partially for the reason that the absolute tax price
elasticity of R&D was believed to be low. We have examined the sensitivity of
R&D to changes in its user cost in nine countries over the period 1979-1997.
Variation in fiscal incentives across countries and over time serve as quasi-
experiments helping to identify the elasticity of R&D with respect to changes in
the user cost.
Our primary conclusion is that fiscal provisions matter. There is considerable
variation in the user cost of R&D within and across countries induced by the
very different tax systems that have operated over our sample period. The
econometric analysis suggests that tax changes significantly affect the level of
R&D even after controlling for demand, country-specific fixed effects and world
macro-economic shocks. The impact elasticity is not large (just over -0.1), but
over the long run may be more substantial (about unity in absolute magnitude).
Can one conclude then that R&D tax credits are desirable? Although the above
analysis counters the objection that they are ineffective it does not imply that
they are necessarily desirable. In addition to the elasticity of R&D several other
elements would have to be considered in a cost-benefit analysis. First, there
would be the administrative costs of monitoring the credit system. Second,
there would be some potentially perverse incentives induced by the design of
different credit systems, which could cause distortions to economic activity.
Third, firms may be tempted to use public money for funding research they
would have in any case carried out on their own budget. Fourth, it is possible in
a world of international spillovers that a country would be better off free-riding
on the R&D efforts of other countries rather than attempting to subsidise
innovation itself.
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5.4.3 Framework conditions
This is the third area in which public policy can influence investment in R&D. By
providing a wide range of regulatory and infrastructural arrangements private
involvement in R&D can be supported and stimulated.
Recent discussions in many fora put forward the view that an increase of R&D
investment from business enterprises depends as much on framework
conditions (entrepreneurship culture, social capital and routine, public-private
partnership possibilities, competition rules, etc.) and availability of human
resources (recruitment conditions, availability of the right qualifications, etc.) as
on measures such as direct funding, fiscal measures, guarantee mechanisms
or VC funding.
The group in its analysis of issues identified a number, which rely heavily on
framework conditions. A specific example supporting public-private
partnerships is Science/Industry Relations.
Science/industry relationships:
The particular manifestation of Science/Industry relations analysed by the
group was that of Science and Technology Parks. This form of industrial
/research based infrastructural development also seeks to foster a culture of
entrepreneurship in traditionally risk averse stakeholders and to build high-tech
and research human resource capabilities.
In very many cases, in Europe, these S&T Parks have been established by
public agencies and have had to be supported by public funds until reaching
self-sustaining levels of activity.
From the literature and confirmed by a workshop carried out in this exercise the
common attributes of successful parks tend to be:
Strong leadership;
Visionary planning;
Deep pockets and patience;
Good timing;
Appropriate services;
Meaningful relationships with universities;
These are not a recipe or menu for success. They correlate with success but
are neither necessary nor sufficient. The local context is critical with all its
subtleties and nuances.
Reflecting European concerns in the field of S&T parks, contributors to the
Madrid workshop further highlighted the following critical areas:
Provision of adequate seed capital for start-ups;
Need for entrepreneurship within the universities and generally;
Need to intertwine the logics of science, business and public policy;
Improvements in the interface skills of universities;
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Concentration of activities in some geographical areas and scientific domains
encourages increased investments. In particular, the involvement of regional
governments in innovation and S&T parks is considered as a success by
providing physical infrastructure.
De-regulation:
The effect of de-regulation policies in previously government controlled sectors
and the policies implemented by some European governments in licensing
public utilities, can result in the postponement of private R&D funding until the
huge entry investments have been recovered.
Human Resources:
It is well recognised that up to 75% of R&D expenditure is associated with
human resource costs. Therefore the provision of sufficient numbers of
appropriately educated and trained personnel, at all levels, is a prerequisite for
gaining any return on R&D investment. Aspects of framework conditions were
analysed under the interaction between R&D policies and other public policies,
particularly education and training policies, which greatly impact the supply of
qualified and skilled human resources. The group recognised issues of human
resource provision and competition as critical but the details were left to the
other expert groups to deal with.
The narrowness of the S&T base in most economies is a barrier to
advancement. Extending Graduate employment, particularly technological
graduates, to low R&D intensity sectors and small companies, remains an
untapped opportunity in most countries and experiences in Spain and Ireland
offer examples for others. In both these cases, the initial cost of employing
technological graduates was subsidised for one year after which the companies
carried the full costs. In the vast majority of cases, the companies recognised
the benefits to their innovation efforts even before the end of the trial period and
retained the services of the graduates.
IPR:
Finally, the legal framework for Intellectual Property Rights is also a key to the
promotion of private investment in R&D. The emerging environment in which
publicly funded universities and research institutions are becoming more
aggressive in claiming their rights poses a complex issue for public policy in this
regard.
Spin-Offs:
Allied to this the framework conditions to support a vibrant spin-off culture from
large firms and publicly funded universities and research institutions need to be
strengthened.
While the group would support strongly the view that appropriate framework
conditions will foster private investment in R&D, it recognises that a full array of
public supports direct and indirect are essential to address all the barriers to
optimal R&D investment. This calls for the deployment of a sophisticated mix of
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instruments, which respond appropriately to the various contexts and
conditions, which will arise in the complex arena of R&D.
Networking has emerged as the dominant structure of operation in the field of
R&D and must be strongly supported in public and private strategies.
The participation of public research centres and universities in networks is
becoming more commonly linked to large enterprises; however, the economic
weight of that contribution is mainly achieved through intangibles since the
availability of people with the necessary qualifications becomes an essential factor
and valued asset in the support of large investments in R&D.
Research actors (industries or universities or research labs) combine several
sources of funding to seek better support of their research agenda. These actors
require not only a good response to their needs in public policies but also policies
that do not conflict with one another.
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6. The Evolving Framework
6.1 Globalisation
The organisation of industrial R&D in OECD countries is transforming.
Evidence of this can be seen in the growth in the relative importance of inward
and outward research-related foreign direct investment (FDI); the explosion of
international strategic alliances and the increasing trade in technology-intensive
goods. Foreign subsidiaries are now responsible for 12% of total manufacturing
R&D investments in OECD countries, and for most of these countries, this
contribution is expected to grow.
Foreign affiliates are responsible for a larger share of industrial R&D
investments in countries where their contribution to local production is important
or where foreign affiliates are concentrated in industries, like pharmaceuticals,
with high R&D intensities. With the exception of Japan, the seven largest R&D
performing countries have all seen a marked rise in the percentage of R&D
expenditures financed from foreign sources since 1981. Figure 20 is repeated
from an earlier chapter, illustrating the importance for the EU of funding from
abroad.
Some firms have had foreign laboratories since well before World War II.
Nevertheless, in the United States there are at least 635 foreign-owned and
freestanding R&D facilities, more than half of which were established after
1986. In Europe, in 1995 there were over 300 Japanese R&D facilities, twice as
many as in 1989. In Figure 23 funding from abroad refers to research
commissioned by foreign companies with institutes and companies in the
reference countries. The foreign affiliates are normally registered in the host
country and their R&D activities would not count as funding from abroad. The
EU Framework Programme has been a significant contributor to the increase in
funds from abroad for Member States.
Figure 23: R&D Funding by Source
R&D Funding
as a % of R&D Expenditure
0 20 40 60 80 100
EU 1999
1981
US 2000
1981
Japan 1999
1981
% of R&D Expenditure
Business Government Other National Sources From Abroad
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The explosion of international strategic alliances in R&D has helped firms to
access foreign technologies and markets, as well as to minimise risks and
rapidly recover the high costs of technological development. From 1980 to
1994, the total number of science and technology alliances grew by 10.8% per
year, and about 65% of those alliances involved two partners from different
countries. Technology-based alliances are especially common in information
technology, biotechnology and advanced material industries. They all testify to
the shared belief that key know-how is increasingly scattered internationally.
These trends all seem positive on the whole, yet many governments remain
concerned about the globalisation of R&D. Source countries are wary of a
hollowing-out of the research base. Recipient countries are sometimes
sceptical that foreign-affiliate laboratories are anything more than listening
posts whose contribution to the domestic research base could be improved.
The research intensity of foreign affiliates is generally lower than that of
national firms, with the exception of a few countries like Ireland, Australia, and
the United Kingdom.
Another worry, which all countries appear to share, concerns the effects of
international mergers and acquisitions on R&D. One of the hallmarks of cross-
border M&A, as witnessed in pharmaceuticals and telecommunications, has
been a rationalisation of redundant activities worldwide.
National and regional governments seem to agree that, despite the concerns, a
strong presence in at least a subsection of high-technology industries is
important because of the contribution of those industries to the economy. While
investments in R&D are important for an economy, increases in productivity are
often attributable to the use of technology developed outside the firm. And
given that the stock of knowledge is increasingly transnational, a country's
growth depends on its ability to adopt technological innovations, no matter
where they emerge.
Key industrial sectors continue to be main drivers for investments in many other
industrial sectors. In this sense, data and past experience demonstrates that
ICT, aerospace, defence, energy and pharmaceutical strategic sectors have
provoked effects through dissemination in related sectors and they are also
absorbing horizontal technologies from many others.
For most countries the path to strong R&D activity has two strands. One is the
level of domestic R&D activity, which indigenous firms perform within the
country and the second is the activity of foreign affiliates in the country. Both
strands need the same framework conditions and human resource capabilities.
However, the foreign affiliate activity is more mobile and subject to more
complex decision making regimes.
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6.2 Behaviour of public and private actors
The behaviour of public and private actors is significantly influenced by the
general context in which R&D activities are conducted. The consequences of
behaviour shifts are most clearly discerned in patterns of institutional change.
The main issues identified by the group influencing this behaviour are:
R&D and its context within Innovation policy and the relationship between
public and private activity in institutional change.
This issue focuses on the changes taking place in the context for R&D
within national innovation systems and how the separate roles of public and
private actors are changing the institutional frameworks.
Structural changes in R&D sources and in the socio-economic
environment.
The increasing influence of socio-economic demands such as sustainability
is bringing about structural changes in the sources of demand for R&D.
Science/Industry relationship - related to public/private financing -
The development of close collaborative relations between industry and
research institutions is shifting the balance of funding between public and
private. Quality linkages between industry and higher education institutions
are determinants for the innovation capacity and competitiveness of a
country.
S&T based SMEs are weak on R&D and strong on Innovation.
This issue focuses on new entrants to the R&D field of activities
R&D policies changing to focus on new structures.
This issue deals with efforts by policymakers to react to and anticipate
changes in the environment for R&D
Share of SMEs in publicly funded R&D executed by the business sector.
This indicator of Figure 24 informs about the relative importance of SMEs in
executing publicly funded R&D. Public funding of R&D gives governments an
instrument for directing resources to their chosen research priorities (sectors,
technology fields) and/or to certain types of performers (categories of firms).
Supporting SMEs in their research and development activities has become an
important policy objective over recent years, and SMEs appear to provide a
fertile breeding ground for new ideas and innovative ways.
This indicator reflects the relative importance of SMEs in executing publicly
funded research in the business sector. This is one of the principal policy
instruments in supporting research activities in the business sector.
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8. 33
10. 01
10. 21
11. 35
15. 45
35. 57
38. 61
48. 41
51. 47
52. 73
59. 88
72. 84
83. 33
0 20 40 60 80 100
Irel and
Greece
Portug al
Spai n
Denmark
Fi nl and
Austri a
Netherl ands
Japan
Germany
UK
US
France
Bel gi um(na)
Ital y(na)
Luxembourg( na)
Sweden( na)
Source : DG Resear ch
Dat a : Member St at es, OECD, USA( NSF) , Japan( NI STEP)
Not e : ( 1) P: 2000; FI N, UK, JP, US: 1999; D, EL, I RL: 1997
al l ot her count ri es: 1998
Figure 24: Share of SMEs in publicly funded R&D executed by the business
sector.
The value of the share is not only influenced by policy priorities, but also by the
relative shares of large and small firms in the enterprise population and the
share of SMEs in high tech industries varies between countries.
To correctly interpret this indicator, it is important to notice that in a given
country the number of high-tech SMEs is very low; the majority of them are
conventional SMEs linked to traditional sectors where emphasis on or need to
perform R&D activities is very low. Horizontal support measures promoted by
governments should take this division of companies into account
Small and medium-sized enterprises dominate industry in most European
countries. The contribution of these firms to innovation growth has been
renewed in recent years. Increasing interest in innovation and related technical
change (particularly in new, expanding areas such as ICT), seem to lead SMEs
to access more quickly R&D and intermediary institutions, such as technology
centres, and interact more closely with appropriate expertise.
For different reasons, technology based SMEs are often more effective than
large companies at commercialising radical innovations that open new product
markets. First of all, they can satisfy their need for revenue growth by
concentrating on markets that are initially small; their programmes are more
targeted than those of the large firms. Also, they tend not to have an installed
base of customers who discount the value of new technology, and what is
more, they do not have to worry about cannibalising existing product lines
(especially young firms that introduce new products or adapt existing ones).
Nevertheless, they face several pitfalls that restrain their research and
development efforts: difficulties in access to finance, lack of well-functioning VC
or seed finance markets, inadequate knowledge or access to know-how, lack of
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information about possibilities of improving collaborations within networks and
clusters, lack of qualified professionals. Large companies remain the biggest
innovators and the linkages between large companies and SMEs must be
strengthened
Although technology-based SMEs are contributing to the European position in
high-tech sectors, their number with respect to the total number of SMEs is very
low. University spin-offs are particularly important here and to date their
numbers in Europe are low and their generation of revenue is low. A well-
functioning market for scientific knowledge is needed.
The changing demand from society for transparency and accountability in all
aspects of public affairs, particularly in value for money from publicly funded
activity, has placed significant pressure for change on publicly funded research
and education institutions. In addition, demographics are exerting pressure on
higher education institutions as falling student numbers bring concomitant
reductions in central public funding. Simultaneously, changes in strategy by
industry are offering these institutions opportunities for funding through contract
research.
Multinational companies and their R&D investments are generally understood
in a global scenario, but they do not limit their R&D investment strategy to
Europe. A multinational companys choice of location for a new research centre
will be dictated by the need to be close to markets. The choice may also
depend on fundamental factors such as competent human resources as well as
on the local legal constraints and incentives received. As many of these
companies, which have in-house R&D facilities in locations distant from their
home base, are joining the trend to restructure these activities and outsource
their R&D needs, concerns raised earlier about commitment and competence
can be alleviated as local institutions and companies become the competent
suppliers of R&D.
As a result, the institutional framework for research is becoming more
interlinked and more diversified as the former linear structure of knowledge
creation, discovery and exploitation becomes more networked and iterative.
Newer technologies are also more multi-disciplinary and based on a variety of
sciences. This phenomenon is also changing the character of the institutional
framework for R&D with major impacts on recruitment and retention policies
and management styles.
Public research actors will have to embrace more radical institutional changes.
Mission oriented national research labs suffer from internal regulatory
constraints imposing difficulties in their involvement in innovation activities. For
universities, public involvement is still necessary especially due to demographic
decline and some reductions in the numbers of S&T students will make it more
difficult in the future to support general R&D activities. Spin off creation does
not depend exclusively on the availability of risk capital but also on a tackling
the lack of entrepreneurship in public research centres. A further area of
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concern relates to needed changes in the traditional education systems to
foster more multi-disciplinarity.
The relationships between the scientific community, the industrial sector and
government are clearly changing. The dynamics condition the behaviour of the
actors, the effectiveness and efficiency of R&D activities as well as policies.
These inter-linkages are key for the creation as well as diffusion of knowledge.
Understanding the configuration of actors has become essential, not only within
the sector but also within the whole science and technology system.
6.3 The increasing importance of measuring and assessing intangibles.
Intangible assets are raising increasing interests among scholars, policy-
makers and firms themselves. Companies across countries and sectors stress
the increasing importance of human resources, organisational learning and
building of capabilities as factors for competitiveness. Some firms are
attempting to include measures of their intangible assets into their annual
report. Studies of intangibles are developing in both the management and
economics literature.
A report to the European Commission by the High Level Expert Group on the
Intangible Economy (2000) argues that a key element of competitiveness has
become the exploitation of intangible investments such as R&D, proprietary
know-how, employees' skills, world networks and brands, and especially the
capacity to combine external and internal sources of knowledge.
Buigues, Jacquemin and Dewatripont (2000) stress that intangibles such as
R&D, marketing, advertising software and training, are growing in importance
and have transformed the sources of competitiveness, so much so that public
policies should change. They claim that public policies should shift focus
towards sustaining intangible investments rather than tangible ones, in
particular sustaining R&D and training.
It seems that what has changed in recent decades and has led to the focus on
firms' intangible assets is the firms' value. The tangible capital appears no
longer sufficient to explain a firm's value. Both tangible and intangible assets
determine the latter.
When a firm renews products frequently and regularly innovates, its current
achievements do not summarise adequately the firm's value: what is in the
pipeline is as important. Therefore the future expected value should be taken
into account when valuing a firm. However, such future value is by definition
difficult to measure, and the best approximation is a probability distribution of
future profits. In order to influence such probabilistic valuation, the firm has to
build a reputation for competence, so that market analysts and other
stakeholders perceive better the intangible capital (the capabilities) of the firm.
It is clear that one significant way firms can build this reputation is by investing
in R&D. The risks associated with breakthrough R&D have been highlighted
earlier and the role of public support for private investment outlined. Policy
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makers would undoubtedly be more comfortable recommending such support if
there were clearer and more consistent methods available to assess the
intangible components of programmes and projects.
Some groundbreaking work has been undertaken in this field by amongst
others Milgrom and Roberts, and Lev, but much remains to be done.
The group has utilised a study of intangible assets in the pharmaceutical
industry to illustrate the relative position of Europe in this area.
This study sets out a framework for examining intangible assets and contrasts
the position of the industry in Europe and the USA. It adopts the view that, in
the new economy, firm value is a set of complementarities between traditional
tangible assets (financial and physical) and the increasingly important
intangible assets (organisational capabilities, knowledge and external
relationships). The many mergers and acquisitions in the industry in Europe
are seen as strategies to reduce the costs associated with the development of
new complementarities and to control the new intangible assets, given the large
technological and organisational changes made necessary by the development
of the biotechnologies.
In contrast to the USA the study found deficiencies in Europe with regard to the
creation of SMEs and the favouring of innovation and its diffusion. What
mattered for the former was, not so much tangible resources, such as VC
funding, but intangible ones, such as:
norms and institutional features favouring the development of intangibles;
the different focus of biomedical schools not favouring applied research at
the expense of basic research;
the flexibility in scientists' career and their possibility to move from university
to business and back;
property right protection favouring innovation in universities.
The absence or minor importance of such features in Europe appears to have
led to both delays in adopting the new technology and the lack of
commercialisation of innovation. European governments and the European
Commission are already stressing the need to provide a climate favourable to
innovation and to firm creation for the respective policies to have positive
effects. The consideration of intangible assets in policy-making would lead to
the formulation of policies effective in creating such a climate.
The evolving framework for R&D is much more volatile than in the past with
large firms simultaneously reducing in-house activities and extending the reach
of their external co-operation and collaboration with a broad range of
stakeholders, local and international.
The significance of measuring and assessing
1. intangible goods (the intangibles that could be bought and sold such as
R&D results, new designs, technical drawings, licences, and other
intellectual property rights) and
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2. intangible capabilities (the intangibles that may be equally or more
valuable, but which cannot be traded, since they are part of the firms
organisation, composition of human capital, in-house training schemes,
R&D procedures, lab organisation, etc.)
Much of the attention to the growing importance of intangibles touches upon
these two major categories of intangibles and how they are financially (and
otherwise) supported.
It is important to realise that in this rapidly changing environment, not all
change vectors are necessarily helpful but must be managed to gain maximum
benefit. For instance,
Globalisation of activity is giving rise to competition between regions for
attracting private investment in R&D. This in turn raises the need for accurate
assessment and analysis of key intangible assets to detect the best
opportunities.
Increases in innovation investments may not necessarily rely on previous
investments on R&D in the same company. Innovation policies do not
necessarily increase research investments as their goal is improving the
absorption rate of new or advanced technologies.
Diffusion of research results is recognised as an important element in improving
innovation. However, improving innovation absorption in low research intensity
sectors is equally important. This involves the creation of intangible assets.
Absorption capacity depends on the availability of skilled personnel, which, in
turn, depends on a strong multi-disciplinary education system.
Ex post evaluation of public policies, including measurement of the efficiency of
R&D investments is crucial. To date poor use has been made of policy
evaluation. The problem of the time lag between the implementation of a new
policy and its impact must be recognised and factored into the evaluation
timetable.
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7. Cross-cutting issue: Biotechnology
The report has addressed public and private investment in R&D from multiple
perspectives by analysing a group of issues relevant to understand trends and
constraints. Although these issues were separately analysed, cross effects are
important making useless some policy measures or strengthening the combined
effect of others. As a consequence, policy makers foresee interaction effects
(positive or negative) before and after its definition. Past experiences in other
countries become a basic element for mutual learning.
The interaction amongst issues can be made visible in multiple research areas.
Nevertheless, due to the limited time and effort available, only one R&D area was
chosen: biotechnology. This area was selected as a cross-cutting issue due to the
following reasons:
This is one area where public and private R&D investments are growing very
fast and governments in practically all developed countries are prioritising
economic efforts towards biotechnology .
Governments, both national and regional, are experimenting around biotech
the implementation of new policy measures. As an example, centres of
excellence, scientific and technological parks and spin-off incubators were
located in some specific areas.
This is an area where public-private partnerships become evident. Science-
industry relationships found in biotechnology are one of their most successful
examples.
Financial markets and above all VC funds have specialised action lines for
biotechnology. Skilled human resources to support the strong growth is
becoming a precondition for consolidation of the sector. Then, universities and
other high education establishments, in co-operation with industries, are facing
the challenge with strong investments between education and R&D policies.
Globalisation of investments, where companies in the USA are investing in the
EU and mergers and acquisitions, strategic alliances and relocation of R&D
facilities are becoming common, constitutes a very valuable scenario to
understand consequences on R&D investments.
To cover this issue, R&D investments on biotechnology were analysed in two
countries (Germany and Belgium) were special efforts has been carried out.
In Germany, BioRegion Rhein-Neckar-Dreieck in Heidelberg constituted an
initiative where important research institutions and pharmaceutical enterprises are
working together. Particularly, Federal Government (BMBF) and also the State of
Baden-Wurttemberg support the local development.
In Flanders the creation of the Flemish Inter-University Institute for Biotechnology
(VIB) groups 9 university departments and 5 associated labs with strong support
from the Flemish government. Both experiences are complementary and good
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basis for benchmarking. Annex III describes in detail the case study; however, this
section summarises main findings and contextual aspects.
Success is based on the number of enterprises, high quality employment, total
investments, number of patents, etc. The following elements are important to
understand the present situation.
The USA continues to hold a strong position in biotechnology. The gap is not
narrowing in terms of volume of investments.
Germany, the UK and France are the European countries with better position in
patents although the USA holds a dominant share and the gap is widening.
The industrial structure is changing very fast. The number of new biotech
companies is growing in recent years but the USA companies outgrow the total
number of EU. The rate of alliances, mergers and acquisitions is also very high.
However, the consolidation of the sector is not evident with many companies
disappearing every year.
VC specialised in biotechnology is growing very fast but remains
underdeveloped in Europe. As in the rest of new sectors, this market acts
better on the second round of investments.
Science link between universities, new spin offs and investments from large
multinationals is a basic feature of this sector. The consequence is that very
highly skilled human resources are needed.
Networks and co-operation clusters become crucial and specific instruments to
promote them are implemented by governments. Co-operation covers large
industries, SMEs and public research centres.
From the situation summarised above, the group analysed the experiences in
Germany and Flanders, and tried to extract some practical policy implications.
First of all, it seems that large public investment in R&D creating a performing
science base is a necessary condition. As an example, sustainability of new
biotech companies implies the need to continue governmental financial support
during long periods of time, while attracting VC.
In this area, the experience demonstrates the usefulness of a strong co-operation
between regional and federal governments to ensure the conditions to boost
private investments.
It is important to notice that even in cases where investments are closely tied to a
(small) geographical area (Flanders or Heidelberg) the consequences are
worldwide. Enterprises and research centres located in these regions are strongly
connected to other centres and enterprises in the rest of the world.
Internationalisation and worldwide excellence is a clear requisite for survivability.
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The example of the Heidelberg region also shows the crucial importance of the
true involvement of national, regional (or even local) governments. Success is also
based in the capability to synchronise investments not only in R&D facilities but
also in the creation of new university programmes, local infrastructures to attract
top-level people, and specific measures to attract investments from abroad.
Finally, the concentration of investments in one area creates a boom of economic
development where high quality services, infrastructures for residential areas, and
high quality employments grow faster than in neighbouring regions. The whole
area becomes a virtual centre of private-public excellence. However, this
concentration is done freezing R&D public investments in other priority areas.
Comparison of equivalent benefits in the same period is very difficult to do.
Anyway, these activities cannot start from scratch.
Figure 25: Interdependency of Public-Private Technology Assets;
Biotechnology
Generic Technologies Science Base Infratechnologies
Product Process
Commercial
Products
Genomics
immunology
microbiology/
virology
molecular and
cellular
biology
nanoscience
neuroscience
pharmacology
physiology
proteomics
bioinformatics
biospectroscopy
combinatorial
chemistry
DNA chemistry,
sequencing, and
profiling
electrophoresis
fluorescence
gene expression
analysis
magnetic resonance
spectrometry
mass spectrometry
nucleic acid
diagnostics
protein structure
modeling/ analysis
techniques
antiangiogenesis
antisense
apoptosis
bioelectronics
biomaterials
biosensors
functional genomics
gene delivery
systems
gene testing
gene therapy
gene expression
systems
monoclonal
antibodies
pharmacogenomics
stem-cell tissue
engineering
recombinant
antibody engineering
Cell
encapsulation
cell culture
DNA arrays/
chips
fermentation
gene transfer
immunoassays
implantable
delivery
systems
nucleic acid
amplification
recombinant
DNA/ genetic
engineering
separation
technologies
transgenic
animals
coagulation
inhibitors
DNA probes
Inflammation
inhibitors
Hormone
restorations
nanodevices
neuroactive
steroids
neuro-
transmitter
inhibitors
protease
inhibitors
vaccines
Public Public Private Private Public Private
The above Figure 25 shows the technological complexity of the biotechnology
sector and the broad way in which the balance between Public and Private
investment shifts within the development of the sector. This pattern is repeated in
other high tech sectors.
81
8. The way forward
The work presented in this report is the result of a preliminary exercise on R&D
investments, embedded in the long-term goal of supporting the benchmarking
process of national R&D policies. It has been conducted from the information
related to a set of selected indicators and many reports available to the group,
from Member States and also from other external sources. The accumulated
experience should constitute the basis for future exercises on benchmarking
and also on improvements of the exercise.
This section will describe the way that the group considers that benchmarking
on public and private investments in R&D could be supported. This analysis is
done from two complementary perspectives:
1. The necessary improvements on selected indicators
2. The steps forward on the learning process for future exercises
8.1. On indicators
It has been mentioned in previous sections that the work of this report started
from some indicators proposed by the Commission that were accepted by
Member States and allocated to expert groups (five in our case) as relevant for
the theme analysis.
The group has not worked on collecting figures. They were provided and
available from multiple sources and specifically from OECD and Commission
documents (Key Figures 2001). The group has found all of them relevant to its
work and then, extensively used in the report, although two difficulties were
soon evident:
Indicators are at too aggregated a level and many important analysis would
require additional information and decomposition to be useful. Additionally,
even in the case of supporting the required level of detail, other Commission
supported benchmarking exercises like the innovation trend-chart use a
slightly different set (e.g. on VC) making difficult to set up clear
comparisons.
Other indicators also seem very useful for the groups theme (public and
private R&D investments) by complementing the information provided by the
initial set. These indicators, described later in this section, would provide
further insight for the next benchmarking exercise.
The group is aware of the time required to collect statistics in some cases, and
the substantial effort required from statistics bodies at the national and
European level. In this sense, their consideration will take time. However, in
relation to the indicators chosen at the start of this benchmarking exercise, the
group would offer the following comments:
82
1. Total research and development expenditure in relation to GDP and
breakdown by source of funding. The importance of this indicator is
not questioned. Breakdown by regions would be very useful.
2. Research and development expenditure financed by industry in
relation to industrial output. Here, the value of the indicator should be
higher if information is provided on sectors due to the large
differences in investments and behaviour from one sector to another.
3. Share of the annual government budget allocated to research. The
analysis of global figures is important to extract general trends, but it
is also important to be able to distinguish between civilian and
military research and on Government priorities according to their
annual and long-term budgets and also, if possible, the distinction
between subsidies and loans. It may prove to be of broader
European Interest to identify and monitor new innovative funding
schemes and major changes in R&D priorities
4. Share of SMEs in publicly funded R&D executed by the business
sector. Governments are paying more attention to SMEs due to the
growing relevance and contribution of this type of enterprises in
employment and also take up of technological advances. Specific
information on spin-offs and start-ups is extremely important to
evaluate the level of entrepreneurship in a society.
5. Volume of VC investment in early stages (seed and start-up) in
relation to GDP. The difference between this indicator and that used
in the Innovation Scoreboard, (high-tech VC investments in %GDP),
was noted by the group. Both indicators are relevant.
6. Metropolitan and other regionally based investments in R&D and
innovation: In Europe R&D and innovation investments are highly
concentrated in particular regions and localities. The current
indicators for R&D, innovation and other output indicators should be
used to study systematically these agglomerations and their
development.
On the other hand, apart from the additional but closely related indicators found
by the group and mentioned above, there are two additional areas where wide
consensus on indicators is really important to be able to analyse the evolution
and capabilities of knowledge society. These areas are:
1. Intangibles. As the role of RTD and other intangibles is becoming
increasingly important to the economy of the knowledge society, this
may be illustrated also by the indicators used for measuring. It could be
achieved by expanding and going beyond the RTD and innovation
indicators already in use by national governments and international
organisations to include more systematically human resource
development, trade flows of intellectual property rights, technology
licensing and other purchases as well as related services, etc.
83
2. Globalisation. This factor could be measured in terms of numbers of
strategic alliances, investments in Europe from abroad and also from
Europe to other countries.
3. Several international organisations are involved in the creation of new
indicators for R&D, innovation and output indicators. Here, standardised
methodologies must be upheld to allow comparisons over time and
across regions, countries and continents. There may be a need to
update the Oslo Manual on Innovation Indicators, the Technology
Balance of Payments Manual and the new methodologies depicting
systematically investments in intangible assets, both goods and
competencies.
4. It is important that experiments with new indicators are being made to
increase the validity and relevance of the indicators for policy making
and corporate strategy development.
Finally, it is the feeling of the group that additional effort should be made to
converge with other work in the area of benchmarking in order to avoid
overlapping and duplication of effort. This overlapping also unavoidably affects
the different groups of experts set up by the Commission because of the strong
interaction between the different perspectives chosen.
8.2. On the next cycle of the benchmarking exercise
The usefulness of the benchmarking exercise is multi-fold. The awareness on
some critical issues emerging from the comparative analysis can offer policy
makers at regional and national levels, a basket of open questions associated
to digested information and rationale. However, it is crucial to stimulate the
learning process with a permanent and stable effort through the deep
involvement of policy makers.
The group feels that the benefits of the whole exercise will become evident
when the rationale behind policy measures can be attached to the information
related to the identified issues. It is up to policy makers at national (and in some
cases regional) level to conduct internal analyses based on public
benchmarking information adapted to their contextual constraints.
Building up on this experience, next benchmarking processes on public and
private investments in R&D should be based on the following assumptions:
1. More focused and detailed information related to be selected and
additional indicators, as described in section 9.1, should be available.
For that purpose, long-term commitments amongst affected bodies
are necessary to homogenise and collect statistics. If it were possible
a single source would decisively help.
84
2. Improvements in the structure of national reports where additional
information relevant to benchmarking purposes should be added.
Specifically, on the rationale behind policy measures to increase or
not R&D budgets, composition of public investments or new policy
instruments set up in Member States.
3. Deep and regular information exchange between policy makers
related to specific areas need to be organised. More specifically, this
exchange information and learning process could have a well-defined
structure and outcomes.
Sectoral benchmarking to avoid multi-sectoral aggregation of information, in
order to extrapolate the usefulness of the measures taken, seems relevant. In
this, the analysis of ICT, biotech and aerospace sectors could offer a
reasonable range of different structures at the European level.
85
9. Policy findings and orientations
Strong policy recommendations to be applied as recipes are in most cases
hazardous. The following orientations and findings drawn from the groups
analyses have to be seen and discussed within the specific national context,
which depends first and foremost of the global national policy objectives but
also on the structure of the business sector, the strength and weaknesses of
the S&T and innovation settings and the historical and cultural background.
According to the analysis of these issues and findings, policy orientations in the
area of public and private R&D investment must cover three complementary
dimensions. Globally, they could generate the necessary context for fostering
steady growths in R&D investments.
The policy orientations have been developed following the outline proposed by
the Commission of open questions in the harmonised structure for the final
report.
9.1. How to increase public and private investments in R&D?
O1. The stability and sustainability of public policies related to R&D activities
are important features for building confidence of the private sector so that
heavy and long-term commitments in R&D can be programmed and
increased.
O2. While SMEs are important actors in increasing innovation and policies
need to be oriented towards them, large companies remain essential
actors in R&D and innovation funded by the private sector and links
between large companies and SMEs are important. Public policies need to
address the support to both types and promote links between large firms
and small businesses to increase investment from the private sector. The
problems of the use of public money where private investment would have
been done anyway (dead weight losses) needs to be addressed in that
context.
O3. It has been observed that both the private and the public sector tend to
reduce R&D funding in times of downturn in the economic cycle. The
necessary maintenance of the overall R&D investment and especially from
the private sector for competitiveness raises the question of the need to
foresee adaptable schemes for increasing public support contra-cyclically.
O4. Long-term co-operation among R&D and innovation actors, between
public and private actors but also among private ones appears more and
more as fundamental to increase R&D investment and to improve its
effectiveness. Therefore, measures promoting networking need to be
explicitly looked for and enforced.
O5. Attraction and development of high-tech businesses are crucial for future
competitiveness of economies. They need a good environment for
settlement and essentially easy networking with research centres, good
infrastructures and access to VC. The concentration of means and policy
86
measures in specific locations, to meet these requirements appears an
efficient way to increase R&D investment from the private sector and to
invest public money. In Europe there is room for more S&T parks and
places where the best conditions can be met should be looked for. Focus
of the parks on some priority domains where specialisation is a
requirement appears as a feature for increasing chances of success.
O6. Highly skilled human resources become a crucial factor in stimulating
R&D activities and innovation, particularly in SMEs linked to traditional
sectors. This calls for more investment in this area, such as through
specific programmes partly funded by public or private agencies to provide
qualified people in R&D activities to SMEs.
O7. More uniform regulation at European level on risk and VC could facilitate
their extension and use. Cross border VC needs to be developed and
improved. Measures to facilitate the use of existing VC, especially by start-
ups and spin-offs, such as through guarantee schemes, should be
explored further. Greater co-operation among ministries (in charge of
research, innovation, education and finance) for VC management may
also help providing commercial seed finance to early stage companies
without distorting the market.
O8. Increased flexibility in the management of programmes and public R&D
centres could help generating more spin-offs from public R&D activity and
capturing more external funding for public R&D activities.
9.2. How to utilise more efficiently and effectively the available
resources?
O9. Collaborative R&D projects are an efficient way to improve public-private
and private-private partnerships and to avoid duplication of effort. This
approach, followed by the Framework Programme, is not the main
mechanism at national or regional levels and although funding of such
projects is increasingly emphasised, the greatest part is still devoted to
single entity projects.
O10. Public policies on innovation should have their own goals and indicators,
independent from considerations made for the long-term goals of basic
research prioritised in national or European R&D programmes. The
tendency to fix only short-term priorities should be resisted strongly. A
reflection on sharing programmes and funding of research in the scientific
fields where no immediate benefit return can be expected has to be
engaged to use scarce resources more efficiently.
O11. In terms of new knowledge creation, strong interaction between higher
education and infrastructures should be promoted by specific policy
measures.
O12. In the long run, investing in human resources appears much more efficient
than investing in tangible infrastructures to improve the absorption rate of
advanced technologies.
O13. A European Research and Innovation Area and movements towards a
European Education Area are too closely related to be considered as
87
completely separate elements. The European Commission and the
Member States should reflect on the creation of effective links between
them.
O14. Public R&D policies should not be isolated from other policies, especially
when R&D investments made in other policies are important to contribute
to total investments. Close co-operation among decision-making instances
or even integration should be explored to guide prioritisation processes
and to better exploit synergies.
O15. Flexibility of policy measures is needed at the various administrative
levels, especially between national and regional levels. This implies more
co-ordination but also possibilities of adaptation to local specific R&D
investment needs in order to better aggregate the various complementary
local actors.
O16. Evaluation to assess the efficiency and effectiveness of measures is
fundamental although time lag difficulties need to be overcome. In that
latter respect relevant and up to date indicators are important. Evaluation
needs to be more than just administrative and involve cost/benefit
analyses. More resources should be devoted to such follow-up activities.
For an efficient investment, a systematic evaluation of networking and
collaboration impact at all levels needs to be carried out
9.3. How to gain a better understanding of the behaviour of major
players?
O17. Private policies on R&D investments are always based on effort-benefit
trade-offs. Enhancement of technology appraisal capacity as well as
understanding of societal needs by the authorities is needed. This calls for
the participation of all stakeholders (scientific community, business sector,
administration and society) in the priority setting decision process to better
target public investment.
O18. Progressive opening of national programmes, cross fertilisation measures
and mobilisation of human resources need to be promoted. The idea is to
facilitate co-operation and to boost diffusion and uptake of knowledge by
increasing the efficiency of the resources used. Some overlapping is
however necessary to keep constructive emulation, to create critical mass
and to address specific secondary goals.
9.4. Practices extracted from case studies and national reports
The group has addressed a number of case studies where relevant lessons
and practices were identified. They are summarised in the following tables.
First of all, increasing public and private investment on S&T lies in improving
the policy arena in terms of co-ordination with other policies, as well as
differentiating between R&D and innovation policies. The findings show that in
general, public policy measures should create an adequate environment for
88
increasing and stimulating R&D investments both from public and private
sources. For example, use public funding for scientific parks, virtual centres,
large-scale research infrastructures and other mechanisms to serve as
attractors of private investments. Private policies on R&D investments are
always based on the effort-benefit trade-offs; nevertheless, enhancement of
public technology appraisal capacity is needed to orient national investments.
In this context public funding should be used as catalyser or stimulator to
mobilise private R&D funding.
Secondly efficiency and effectiveness in the utilisation of available resources
lies in increasing the relevance and funding of human resources and in general
investment in intangibles. To act simultaneously with higher education,
infrastructures and R&D is a necessary precondition in a knowledge-based
society. Policy co-ordination that involves goal-setting and thematic
prioritisation should be concurrently addressed. Flexibility of policy measures is
needed at the various administrative levels, especially between European,
national and regional levels. This involves more co-ordination but also
adaptation to the specific needs of R&D investments. National and regional
innovation policies can play an even more relevant role if it is coherent with a
European policy.
Finally, a better understanding of the behaviour of major players is needed. All
stakeholders (civil society, government, industry and the scientific community)
should be in close contact when research goals and programmes are to be
fixed. A better understanding of future scientific and technological expectations
of not only research actors but also of the users of knowledge is required.
Efforts could be made to conduct future oriented co-ordination initiatives and
consultation processes in order to implicate all stakeholders in the priority
setting process. Knowledge transfer as well as adoption and adaptation should
be promoted. Better understanding the triple helix dynamics of
science/industry/government relations is needed. Networking and collaboration
appears more and more important in that framework.
89
Table 3: Practices derived from Case Studies and National Reports
Case Study Focus Principal lessons Relevant practices identified
Impact of non-
R&D policies on
R&D policies
Defence R&D
Health Industry
(Pharmaceuticals)
Interaction of
major public
policies on
investment
behaviour of
actors in R&D
Impact of
Defence
spending on
R&D
Consequenc
es of dual
use
Changing
Structure of the
industry and its
impact on
investment in
R&D
Deregulation processes aimed at maximising the
price paid for licenses can result in reductions in
R&D investment while new investors restore
stability to balance sheets
Impact on human resources
The USA Defence R&D has been a main driver of
innovation. Although the structure of defence R&D
funding is different, Europe cannot hope to match
the level of spending.
In Europe in relation to dual use technologies
there is no mechanism to address in a structured
manner the transfer of technologies and the
unnecessary duplication of costs.
European companies listed on the stock exchange
operating in a globalised financial market can no
longer sustain with their resources past levels of
R&D expenses
Major restructuring of large companies following
mergers and acquisitions is generally followed by
rationalisation of R&D organisation.
Strong public support needed for infratechnologies
and generic capabilities.
Maintaining a close relationship between
R&D polices and education and training
policies. Investment in knowledge and
skills should be a centre strategy.
(OECD).
Centralisation of decision making and
funding mechanisms for R&D into one
governmental department or ministry or
inter-ministerial co-ordination structures.
(Finland, Spain, Portugal, France)
90
Case Study Focus Principal lessons Relevant practices identified
State aids:
the Role of EU
Structural funds
Use of Structural
Funds to
develop R&D
capabilities
Where funds are used, either solely or in conjunction
with member State public funds, programmes targeted
on specific R&D priority areas using competitive
allocation mechanisms yield best results.
Integration of structural funds and
innovation policies, through bargain
planning by aggregation at local level
and innovation diffusion. (Spain and Italy)
Targeted strategic programmes financed
with structural funds (Ireland, Italy)
Creation of specific programmes for R&D
and innovation based on structural funds
(Portugal, Spain, Greece, Italy)
Science/Industry
relations
the role of
Science and
Technology
parks
Networking
Characteristics of
successful parks
Characteristics of
successful
networking
The common attributes of successful parks tend to
be:
Strong leadership; Visionary planning;
Deep pockets and patience; Good timing;
Appropriate services;
Meaningful relationships with universities and
research institutions as well as local and
international networks.
Provision of adequate seed capital for start-ups;
Need for entrepreneurship within the universities
and research institutions as partners;
Need to intertwine the logics of science, business
and public policy;
Improvements in the interface skills of universities
and R&D-sources;
Stability of the networking process in the longer
term becomes essential instead of shorter term
networking based on specific projects
Facilitating the creation of spin-offs
around S&T parks (Bio-region in
Germany)
Deep involvement of local and regional
governments on supporting S/T
parks. The (case of Flanders region,
Belgium)
The Spanish government is using loans
and not only grants to support the
creation of scientific parks for
universities. Public centres will return
loans in 10 years.
FINLAND, NL, DK, etc.
91
Case Study Focus Principal lessons Relevant practice identified
Centralisation
vs.
Decentralisation
: Regionalisation
of R&D
Investment in
Belgium
Role of local and
regional
governments in
promoting R&D.
Co-ordination
between regional
and central
governments
Lessons learned from the Belgium experience:
The path to decentralisation may have to be
taken in stages.
The problems of co-ordination are
considerable due to difficulties in separating
competencies
Disparity in public investment between
regions/communities can grow.
Specific objectives of the regions diverge
In terms of efficiency there is some duplication
and fragmentation.
Decentralisation in the management of
S&T policy can be successful in stimulating
more R&D funding if co-ordination is set up
to ensure efficiency. (Belgium, Spain).
Horizontal co-ordination of regional
innovation efforts such as the EU Interreg
programme.
Jointly funded R&D initiatives between
central and regional governments
(Belgium).
Risk capital Role of VC in
funding R&D
Europe records a lower share of seed and
start-up funds than the USA.
Early stage VC in Europe can be considered
as the most important tool for the development
of technology based SMEs.
State sponsored VC has to be commercially
allocated and, preferably, directed to very early
stage investments.
UK has set a national High Technology
Fund, organised as a Fund of Funds.
Promoting the role of funding agencies of
venture / risk capital, especially for SMEs,
and start up companies, high technology
sectors, or seed capital (France, UK,
European Investment Fund).
Large-scale
Scientific
Research Facilities
Major Infrastructure
investment for S&T
The ESRF is a good example of a co-ordinated
effort by 12 Member States outside the EU
framework.
Large-scale facilities like the ESRF are good
examples of the parallel performance of excellent
fundamental research and applied research in
the sense of industrial exploitation.
Large-scale facilities of this type can rarely be
financed by a single Member State. Joint
agencies and joint funding are required.
Attraction and retention of high quality
researchers is a critical factor for success.
Location of the facility in a supportive
environment.
Local implementation of results facilitates
research programmes.
Publication of research results in return for
free use of facilities.
Financing the construction of large-scale
research infrastructures by combining
national, regional and structural funds. As an
example, the case of the telescope in Canary
Islands. Specific programme to increase the
participation of Spanish industry (Spain).
92
Case Study Focus Principal lessons Relevant practice identified
Biotechnology Crosscutting issues
(combination of
different types of
policy measures).
Co-ordinating the various research departments
from various universities allows the host
institution to capitalise on economies of scale
and scope.
Public support has been necessary on the
innovative infrastructure level to create
communication and cohesion of the local public
and private players and the support has had to
be sustained until the regional processes were
self-sustainable.
In the USA long term public funding of molecular
biology research eventually led to the
establishment of the biotech industry.
A common infrastructure available for all
research departments, which would be too
costly for individual research departments on
their own.
The long term funding horizon for basic
research provided through the VIB
framework, allows human resources to be
sustained, which are critical in biotech.
Taxation based
incentives for
R&D
Indirect public
support for R&D
If the policy aim is to boost the Nation's rate of
commercialisation of new products, processes,
or services, then a tax incentive like the R&D tax
credit has some advantages over direct funding.
Relevant practices found in UK, Ireland, France,
Spain, Italy, Portugal, Norway and the
Netherlands.
93
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ANNEX I. Case Study: Innovation and Venture Capital (VC).
Technology and innovation lie at the basis of new world-class businesses,
which in their early stages very often combine high potential with high risk and
demand a long-standing, in business terms, commitment. Although small
compared to other financial markets, seed and start up VC uniquely meets
these requirements. In the last 50 years VC has proved to be one the most
important growth factors in the North American economy, where some of the
current major companies stem from early stage VC investments.
The Lisbon European Council, recognising the importance of this issue, in
March 2000 has asked for the implementation by 2003 of the Risk Capital
Action Plan RCAP (1998) as a necessary contribute to the creation of a
Knowledge based EU economy.
1. Relevance of the issue
1.1 Volume of funds (source EVCA [1])
In 2000 early stage VC invested in technology based SMEs amounted in
Europe to 6.65 bl. surpassing by three to eight times, depending on the
country, Government R&D subsidies to SMEs. The number of investments
was over 6000 touching more than 4600 companies. In the same year about
8.6 bl. were raised to be invested in high tech early stage firms.
VC in Europe has registered a spectacular growth in the last 4 years with
2000 early stage investments amounting to 10 times 1997 investments. While
the trend will probably suffer a sharp decline in 2001 due to the difficult
financial market conditions, it will probably resume a positive rate in the next
years. EU VC, which still remains in terms of GDP between 30-40 % of what it
is in the USA, has still an important margin to grow.
1.2 Quality of the investments
VC provides equity and finance to new businesses together with expertise,
contacts, and other resources, that complement the entrepreneur activity.
Providing long-term finance support and other capabilities, venture funds
guarantee funds for when the enterprise does not produce revenues and
profits. Venture capitalists, contrary to investment bankers, rely on their
industrial and financial competencies to manage their funds.
Lenders, the other usual source of funding, look at enterprises with a different
perspective: to the ability of a company to repay its debts (cash flow,
collateral, personal equity contribution), which can very seldom be fulfilled by
new high tech enterprises. (Bank lending to SMEs exceeds by large VC, but
not for technology based SMEs, for which, even if data are not available, it
can be assumed that VC surpasses bank loans).
VC investments are also very different from research programmes, which,
contrary to VC, limit their contribution only R&D and to well established firms.
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2. Aspects to focus the attention
Policy measures should be aimed at expanding the number and the volume of
VC investments and at improving the quality of investments. However their
action, in line with the RCAP philosophy, should focus on the creation of the
most favourable environment and limit direct funding to certain categories.
Several aspects, with political relevance, need to be considered and they can
be grouped in three following subjects:
1. Offer: Sources of VC funds, including the role of institutional
investors, the opportunity of government sponsored VC funds, the
goals of corporate funds, the private investors interests, the
international flow of VC;
2. Demand: Opportunities for VC investments, which relates to factors
such as the rate of formation of technology based firms, the relations
between university and industry, technological corporate spin-offs,
the pattern of VC investments and the industrial structure in the
member countries;
3. Business and financial environment: in particular the exit conditions
for VC investors, the effectiveness of stock markets, the return of
investments, the level of taxation, human resources and cultural
barriers.
Ministers of research and education have a direct clout on several
aspects related to the VC demand side and on government sponsored
VC, whereas most of the aspects related to the financial environment are
already dealt by measures to be undertaken by the Ministers of Finance under
RCAP[5], which addresses market fragmentation, institutional and regulatory
barriers, taxation, paucity of high tech small businesses, human resources,
cultural barriers. RCAP has already identified a set of indicators (with data not
yet available for all of them) to monitor the European risk capital market. The
need to review and modify them has not yet emerged.
3. Demand: Opportunities for VC investments
3.1 Paucity of technological firms
The lack of opportunities to invest has been in the past the major hampering
factor to the growth of the European venture fund industry. Europe was not
the better environment in the past and even the early stage venture funds that
existed invested mostly in the USA because of the scarcity of occasions in
Europe.
The situation has dramatically changed in the last years; a less dominant
government, a more dynamic industry and, to a certain extent, university
make up the environment that promotes the emergence of new technological
start-ups. (To pass the very high threshold of financial returns for seed money
(~80%) and for start-up funds (~60%) requires an exceptional and rewarding
business model.) These businesses very often result from corporate or
university spin-offs. Entrepreneurial and cultural attitudes and human
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resources are accordingly evolving also in Europe. As a result, not only
European VC has increased, but also Europe has been able in the latest
years to attract more and more non-European funds. However, the situation
still remains unsatisfactory when compared to the USA, but it is worth to
underline that even in 2001 the flood of proposals from European tech
entrepreneurs to venture capitalists desks has not stopped.
3.2 Volumes and Pattern of Disbursement
Quite substantial differences in terms of volumes and number of investments
are recorded between the European Union member countries with a situation,
due to very high and different growth rates, rapidly evolving. In terms of VC
investments (early stages, expansion/development, buyout) to GDP in 2000,
three groups of countries can be distinguished: Sweden, UK, the Netherlands
with VC investments above the European average (0.383%) and representing
more than 0.4% of GDP; France, Finland, Italy (up from 1999), Germany,
Belgium (down from 1999), Ireland with a ratio between 0.4% and 0.2%;
Spain (down from 1999), Denmark, Portugal, Greece, Austria with
investments lower than 0.2% of GDP (source EVCA[1]). The first tier matches
the American average, while the others compare unfavourably.
In addition to a lower volume of investments for all venture funds, Europe
records a lower share of seed and start-up funds than the USA, as VC in
Europe remains more oriented to buyout or expansion, while American VC is
more oriented to seed and start-up money. This pattern of disbursement
depends both from the different origin of money, mainly cautious pensions
funds and banks in Europe, while in the USA primarily corporate and private
investors, and from the important differences in the rates of return of
investment (see 5.1). The relative importance of industries in each country
reverberates also in sectors where VC invests; in 2000 high tech firms in
Europe received about one third of the invested funds, at the top of list above
the average: Ireland (84%), Belgium (71%), Denmark (61%), Finland (54%),
Germany (50%), and France (45%); at the bottom UK, Sweden, Portugal and
Italy with around 20%.
The expected allocation of funds raised in 2000 partially modifies the situation,
with the share of 2000 funds expected to be allocated to early stage high tech
companies in parenthesis for each country: Belgium (80%), Finland (57%),
Germany (41%), Italy (39%), France (34%). In UK, Sweden and the
Netherlands VC will mainly finance the buyout of companies. In UK the low
rate of financing to high tech initiatives has remained constant along the
years, while in Sweden this has first happened in 2000. VC high tech funds
are expected to be sharply lower in 2001.
3.3 Corporate spin-offs [8]
Corporate spin-offs result mainly from the restructuring of large companies
and secondly from the individual entrepreneurial initiative. Increased
competition in recent years pressed and is still pressing companies to
externalise functions to reduce costs and dispose businesses that no longer fit
in the core competences. Corporate spin-offs increased in Europe in the last
years and count today for about 10-15% of the new firms. They feature low
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failure rates benefiting from healthier prospects than new established firms
and produce a higher number of innovation then new start-ups. All major
corporations developed permanent internal capabilities to restructure/re-
engineer candidate units to be spun-off in order to maximise commercial
chances of success and profits from the divestiture for the parent company.
Examples of this phenomenon can be seen in almost all industries, the most
recent ones include some global pharmaceutical companies, which are
spinning-off their corporate research centres and outsourcing research
through VC mechanisms as a way to manage their huge R&D expenses.
Large European high tech companies, such as Siemens or Finmeccanica,
provide other examples of corporate R&D re-engineering which result in
setting-up small firms increasingly backed by VC. Investments in some cases
run up into hundreds million euros.
Availability of risk capital happen to be a crucial factor of success, which can
determine if activities will be spun-off and succeed or will be closed down.
3.4 Industry-University relations
University spin-off companies, usually of smaller size than corporate spin-offs,
constitute another important economic source of innovation. In consideration
of this, almost all EU countries are pursuing active policies to increase
linkages between universities and industries with some promoting the
establishments and growth of universities SMEs. It can be counted among
these initiatives science and technology parks, incubators, university
enterprise centres, mobility of researchers between university and industry,
the financing of the technology transfer. Nevertheless, these schemes do not
yet appear to be as close to SMEs as they are in the USA and Israel [3].
No major cluster has yet emerged in Europe comparable to the two major
USA clusters, the Silicon Valley and the Boston area, and not even to Israel. It
is difficult to predict whether this can happen also in Europe due to the
European greater fragmentation and the inexistence of such important poles.
Nonetheless the USA experience shows also that many other important
successful stories (Stanford, Carnegie Mellon, etc) of co-operation between
universities and industry exist beyond the two major ones. Commercial
branches of each university should be the normal contact with VC; their
relevance to the university budget could be a criterion to judge the level of
importance of this mechanism.
4. Source of funding
4.1 Sources of capital
In 2000 pension funds overtook banks for the first time in Europe as the major
investors in VC, contributing with 24.2% to the total figure, banks contributed
with 21.7%, insurance companies 12.9%, funds of funds 11.4%, corporate
investors 10.9%, and other investors, such as individuals and government
agencies with less than 10% (source EVCA [1]).
However, due to the differences in pension schemes in Europe, pension funds
are an important source of VC only in few European countries, such as UK,
Sweden, Netherlands, Finland, which are, by the way, the only EU countries
with no legal restraints on investment in equities by banks and institutional
investors.
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Corporate funds are particularly low compared to the USA and European
personal fortunes invested in VC too.
Different measures are required to raise the total amount of venture funds,
particularly seed and start-up VC, and they must address all potential sources
of funds: insurance and pension funds, corporate, private wealth.
Changes in pension schemes, while politically sensitive, can dramatically
enlarge the pool of funds in Europe both encouraging funded pension
schemes and removing the legal barriers, which inhibit investments of
insurances and pension funds especially in early stages VC. This is possibly
the most important thing that the public sector could do to promote innovation
finance in the long run[3]. To this regard the proposal tabled by the
Commission for a new directive on the adoption of prudential rules allowing
institutional investors to invest in VC has a paramount importance. Of course,
prudent rules tend to prevent these funds to invest too much in early stages
ventures.
On the contrary, growth of corporate funds mainly oriented to early stages due
to the type of investors will be driven by the underway restructuring, since
corporate VC is aimed at accessing new technologies, besides achieving
good financial returns.
4.2 International VC
A simplified analysis of the international fluxes of VC proves useful and
appropriate to find the better conditions (returns, legal, financial) of
investments. The analysis covers the country of origin, management and
destination of VC. Time delays, capitals raised in one year are usually
invested in the following 2 or 3 years, and capital gains are collected in the
following 10 years, must be considered.
National sources represented in 2000 52% of total funds raised in Europe, EU
funds not national (money raised in a EU country but whose origin is from
another EU country), accounted for 21% and non EU money raised in Europe
accounted for 27%. In total 73% of the funds derives from Europe and 27%
from outside, about 75% of the latter comes from the USA (source EVCA [1]).
Even if the time delay between the raise of funds and their investments makes
comparisons inaccurate, trends can clearly be identified.
Differences between the amounts invested in one country and originated in
that country show that in 2000, as in the previous years, UK has been the
preferred destination country of non-domestic money followed at a large
distance by Italy, France, Germany and Sweden. Net contributors to other
countries were the Netherlands, Belgium, Denmark and Greece due to excess
of raised capital or lack of opportunities to invest.
Instead differences between the amounts managed in one country and
originated in that country show that in 2000, as in the previous years, UK has
been by large the preferred country where to manage funds, followed at
distance by France, Sweden, Italy and Spain.
In summary UK, followed by France and Sweden, proves to be the best place
in Europe where to manage funds signalling that legal and financial conditions
are probably better than in any other large European countries; on the
contrary, the very low level of VC invested in early stages and in high tech in
UK, especially considering the available amount of capitals, signals that the
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opportunities to invest in UK are quite poor, while Belgium, Finland, Germany,
Italy, France, and until last year also Sweden, are attracting more high tech
investments.
No comprehensive data are available about funds raised in Europe and
invested in the USA, but some private data and differences in rate of returns
confirm they must be substantial.
4.3 State Financial Interventions and VC
In 2000 Government agencies represented on the average 5% of European
venture funds. Finland (20.1%), Germany (16.4%), Austria (15.9%) and
Ireland (11.1%) were notable exceptions with higher contributions (source
EVCA [1]).
The philosophy underlying the RCAP attributes a prominent role to public
authorities to improve the environment, where VC operates, but recognises a
limited role to public funding as a way to solve market failures, for it risks
distorting or displacing the private sector. And the European Commission has
recently stated there is no general risk capital market failure in the EU [6];
but some major market failures affect SMEs on their access to the capital
market, in particular for the high transaction costs of small deals and the
imperfect information available to investors interested in SMEs [6].
Almost all European countries, and also the USA, have developed State
venture funds, with different goals and different achievements. And the
situation is evolving very rapidly. Some funds are devoted to support very
early stages university spin-offs, others focus their investments in less
developed areas, others support only selected industries, and others deliver
only through the private sector.
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To this respect the situation in Europe is evolving very rapidly State financial
contributions to venture funds need to be carefully devised and implemented,
since they risk distorting valuations, favouring the take of higher risks than
due, raising the moral hazard of investors. A controversial Dutch scheme,
supporting early stage investments repaying half of the losses incurred by the
investor, while positive in the short term, resulted in the long term in less
effective investments [2].
The case: EIF European Investment Fund
An example, in line with the RCAP policy, but too recent to be fully
evaluated, is provided by the EIF scheme, under which also EU and EIB
funds are managed, to support VC for small firms, particularly those in their
early stages of development and those embracing technological innovation.
A commercial approach has been taken: EIF contributes to existing private
venture funds substantially enlarging the pool of funds and expects a return
commensurate with In the latest years EIF has become a leading player in
the European VC market and the most important public (government)
investor. EIF is currently managing 2.5 Bl., 1.6 already committed to VC
funds and the rest to be invested before 2004. This amount comes from
three sources: EIF own resources; the European Community under the ETF
mandate; the EIB.
EIF operates as a Fund of Funds and focuses on early stage funds backing
VC, which will not be able to start and develop at the same scale or speed,
with the following objectives: to support Europes technology; to address
Examples from different EU countries
UK has set a national High Technology Fund, organised as a Fund of Funds
and endowed with 200 M, plus several regional VC Funds. It has promoted
several schemes to reinforce academic-industry links: Faraday Partnerships to
group universities, R&D organisations, businesses and VC; University Challenge
(up to 45M) to establish seed-funds for universities spin-off; Science Enterprise
Challenge (up to 50M) awarded to universities to promote entrepreneurship in
local firms; Higher Education Innovation Fund (HEIF) (up to 140M over 3 years)
enabling Higher Education Institutions to develop their capability to work with the
local business community
Ireland has established a Seed and VC Fund, still organised as a Fund of
Funds with 40 M.
France in 1999 passed a law on innovation, which has conducted to: the set
up of 31 incubators; 5 national VC funds specialised in micro-electronics, software,
biotechnology, multimedia, telecommunications; regional VC funds have been
established; a new category of investment funds have been created to help new
innovating companies; the role of the national Agency for research ANVAR, with
30.5 M, has been enhanced to promote innovation.
Denmark has funded the Danish Growth Fund, which provides more
subsidies than VC.
Portugal is in the process of evaluating the setting up of a state sponsored VC
Fund
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regional financing gaps; to support pan-European funds. EIF operates
commercially looking for appropriate returns and aims at being catalytic
attracting other investors.
As an example, recent operations include the financing of:
Heidelberg Innovation, a risk capital fund specialised on
biotechnology researches in the Heidelberg area;
the BIOAM fund, the first public private French fund on biotechnologies;
SYMBION in Denmark, a seed capital fund on biotech and
information technology; which continues the actions of the homonym
incubator.
As far as today EIF has already invested in all EU countries except Greece.
EIF funded initial investments provided a return of 34%, but data are not yet
available on returns of investments from EIB funding. However, it seems that
the latter will not attain the same level of returns because of a lower quality of
investments.
Scale and speed of VC in Europe has certainly been positively affected by EIF
and no major distortion has been recorded. EIF operations are in line with the
philosophy of the Risk Capital Action Plan. The same should be
recommended for governments wanting to set up similar VC funds. In this
case EIF methodology and instruments (guidelines, due diligence, etc) could
be usefully applied to new government sponsored VC funds.
the profile of the VC fund. The funds committed (2.5 bl. by 2004) will be
substantial in size; EIF programme is already the most important fund of funds
in Europe.
In this respect also the structural funds could play a role, for their interventions
could take the form of co-financing of risk capital funds for SMEs. Replacing
grant finance with equity finance would allow structural funds to reach more
efficiently a larger number of beneficiaries [6].
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5. Business and Financial Environment
5.1 VC and the stock market
The reason to invest is financial return for money invested. A lively positive
financial market carries also an increase of venture funds; at the opposite a
market closed to IPOs dries up also venture funds. The spectacular growth of
VC recorded in Europe in the last 5 years depended on a number of factors,
among them stands the impressive performance of the technological financial
markets, particularly the NASDAQ and the various European new markets
recently established in all EU countries, and the privatisation/liberalisation of
the European markets. National new markets have in the last years been
created in all EU countries (TechMark, Neuer Markt, Nouveau March, Nuovo
Mercato, etc) spurring financial activities in favour of high tech sectors and
providing the IPO route as an exit to European VC. The European
Commission has also plaid an important role in setting up the EASDAQ,
which, however, was not so successful in collecting wide European interest.
The recent take over by the NASDAQ and its re-denomination into Nasdaq
Europe could lead to its revitalisation.
Unfortunately, due to lower quality of opportunities and the absence of
suitable financial markets, the returns for seed and start-up money invested in
Europe (IRR ~6.5%) have been constantly lower than in USA (IRR ~15%) [2],
which partially explains in revenge the lower level of VC in Europe and bodes
badly for Europe if we are to assist in the next years to a retrenchment of
world Venture funds.
5.2 Pan European market
Consolidating new national markets in a pan-European market, a process
already under way, would certainly improve liquidity, and also reversibility,
reducing the cost of transactions and providing a more efficient exit, through
IPO, for venture capitalists from their investment. The physical arrival of the
euro and a further reduction of financial barriers in the single market could be
the catalyst for such a move, an agreement has already been reached
between the French and German new market, and its in the process to be
extended to other markets. However further efforts need to be undertaken
because regulatory, fiscal and cultural barriers still hinder the development of
VC in Europe: the lack of harmonised structure in Europe does not enable
funds to easily raise and invest capital in other European countries; the
difference in accounting makes difficult the cross-border issue of shares. The
European Commission activities in the Single Market domain have proved so
far the most valuable driver in this convergence, which has not yet been
achieved.
5.3 Taxation
Taxation influences VC essentially in three ways: taxes on capital gains,
different treatment of debt instruments and capital, tax treatment of stock
options.
On taxes on capital gains, it is worth to note some recent fiscal competition
between EU member countries to attract VC (i.e. proposed tax reduction of
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capital gains in UK for venture capitalists under some conditions). Adapting
tax treatment to the specificities of VC, such as de-taxation of venture profits
re-invested in 4 years time, could give a boost to the industry.
The industry attaches great importance to how stock options are taxed. In
most countries of Europe, except Italy and partially UK, stock options, which
are used in start-ups to attract high calibre executives from larger companies,
are taxed when exercised forcing the executive to sell them right away to
meet the tax liability. Industry proposes to consider the actual sale of shares
as the most appropriate time to impose a tax charge to executives with stock
options, as they should be treated to this respect as the entrepreneurs, who
are taxed when the sell the underlying shares.
6. Trends
The scene for European venture funds is very positive, developments are
taking place on all fronts, growth of capitals, more opportunities to invest, etc.
Among them need to be quoted the Commission important proposals to
harmonise the financial single market.
6.Conclusions and recommendations
The VC indicator is the more dynamic among the five covering R&D public
and private funding with the growth rate of venture funds strongly correlated to
financial market performances.
Early stage VC in Europe has surpassed, by a large extent, R&D state
support to SMEs and can be considered the most important tool for the
development of technology based SMEs.
For some years EU Governments have been placing high importance on
initiatives in favour of SMEs and, among them, to VC.
USA and Israel are the most valuable in terms of comparison to benchmark
for the long established VC operations and the good results. European
situation is widely diversified with UK being, by large, the most advanced in
VC management, but lagging behind in early stage investments.
States have a prominent and long-term role on improving the VC business
and financial environment. State sponsored VC has to be commercially
allocated and, preferably, directed to very early stage investments.
European Ministers of Finance are the main policy makers responsible for
actions summarised in Risk Capital Action Plan endorsed in the Lisbon
Council (2000), but the European Commission can provide a useful and
important thrust through the single market regulations. At this stage, member
countries competition to attract VC investments, for instance through better
conditions for taxation, should be regarded as positive.
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Ministers of Research and Education have responsibilities on several relevant
aspects for VC activity. Actions are already under way, but they need to be
further strengthened on:
the co-operation between university and national research institutes
and VC industry, not yet sufficiently developed and business oriented;
the VC government funds management, which normally reports to the
Ministers of Finance and which should be more directed to provide
commercial seed finance to early stage companies without distorting
the market;
the establishment of Technology parks. No European park matches
the two USA major ones, but, as in the USA, in Europe there is room
for many more excellent parks;
the enhancement of public technology appraisal capacity to orient
national investments.
References:
1. Annual Survey of pan-European Private Equity & Venture Capital
Activity, EVCA Yearbook 2001
2. Bygrave, Hay, Peters, The Venture Capital Handbook, Prentice Hall
1999;
3. Benchmarking Financing of Innovation Pilot Study, DG Enterprise 1998
4. Fabozzi, Modigliani, Capital markets, Institutions and Instruments,
W&W 1992;
5. Progress Report on the Risk Capital Action Plan, Communication from
the European Commission COM(2000) 658
6. State Aid and Risk Capital, Communication from the European
Commission 175/COMP/07
7. The Eureka Venture Capital Expert Group report, 28.5.01
8. Moncada, Tubke, Howells, Carbone,: The Impact of Corporate Spin-
offs on Competitiveness and Employment in the European Union,
IPTS 1999;
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Annex II. Case study: European Synchrotron Radiation Facility
1. Introduction and rationale
In some scientific domains like life sciences, distance between scientific
discovery and development of commercial products is narrowing. Still, the time
needed is three times longer than in information technologies. However, this fact
has two consequences. The academic world has less time to work in the phases
of discovery and fundamental research. The relationship with industry is
becoming closer.
Swift development of biotechnology has fuelled the need to synthesise
molecules and to elucidate the structure of them by modern methods and
tools of structural biology. The proteins are most important. To do that, a
synchrotron facility is as a giant microscope for molecular structures the
best instrument.
As a consequence, fundamental research groups and, at the same time,
private companies are more interested than ever in using large-scale research
facilities which usually were considered scientific equipment far away from the
interest of the private sector. This has changed considerably in the case of
synchrotron facilities.
A very good example of the growing importance of commercial use while
being a major European research facility and one of the leading installations
for worldwide scientific community is the European Synchrotron Radiation
Facility ESRF in Grenoble (France).
Installations, such as the ESRF, are important models of scientific and
technological poles that are driven by the motivation of scientists and
competition among them, while attracting more and more commercial users.
The case of the ESRF allows for the discussion of important issues in R&D
funding in Europe.
2. Sketch of the case
2.1 Description
Operating a powerful source of light in the X-ray range, the ESRF is a large
experimental facility for fundamental and applied research in physics,
chemistry, materials, and life sciences.
The synchrotron light used at the experimental stations, the beam lines, has
remarkable characteristics. In pushing the technological limits, the ESRF
allows researchers to perform novel experiments that have not been feasible
before.
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The ESRF was the first fully operational 3rd-generation synchrotron radiation
facility in the world operating in the hard X-ray range. Completely new areas of
experimental research and analysis are being opened- up with the
unprecedented high quality of the X-ray source. Most strikingly, the X-ray beams
at the ESRF are about a factor of 10
12
brighter than those of conventional X-ray
sources used in laboratories and hospitals.
The machine
The machine is essentially a complex of three accelerators: the pre-injector, the booster
synchrotron, and the storage ring, the latter being equipped with insertion devices and
beamline front ends.
The PRE-INJECTOR is a 16 m long linear accelerator (linac), which produces the electrons
and accelerates them up to 200 MeV.
The BOOSTER is a 10 Hz cycling synchrotron of 300 m in circumference, which increases
the energy of the electrons up to 6 GeV before their injection into the storage ring.
The STORAGE RING is the X-ray source in which a very intense beam of electrons is
circulating at 6 GeV, producing X-rays at each passage inside the bending magnets or
insertion devices. It has a circumference of 844 m. 64 beamports are spread around the
ring to give access to beamlines on insertion devices (wigglers/undulators) or, alternatively,
on bending magnets.
The ESRF is a multinational research institute, presently associating 16
participating countries. According to the Convention signed in 1988 by the
founding members, the ESRF is operating as a "non-profit" enterprise (socit
civile) under French law. The Council, whose delegates are designated by the
member parties, supervises management. The ESRF staff is recruited mainly
from the associated countries. A total of some 500 people are employed.
2.2 History
The construction of the ESRF started in 1988. The inauguration and opening
of the first 15 beam lines to scientific users took place in September 1994.
Presently, 40 beam lines are being operated at the ESRF 24 hours a day and
7 days a week in User Service Mode.
The development of the ESRF took place in the following phases:
Conceptual Phase (1976 - 1979)
European Science Foundation (ESF)
ESF Working Group > Black Book
ESF ad hoc committee > BIue Book
Pre-foundation Phase (1980 - 1985)
ESF ad hoc committee (cont) > Design studies, Yellow Book
Progress Committee
European Synchrotron Radiation Project (ESRP) > Green Book
Decision on the location of the ESRF
Foundation Phase (1986 - 1987)
Memorandum of Understanding (MoU) between
France, Germany, UK, Italy, Spain
Start in Grenoble
First Avant Projet Sommaire (APS)
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Red Book
Construction Period - Phase I (1988 - Aug. 1994)
Protocol, Convention/Statutes, Socit civile
Construction of buildings and technical infrastructure, radiation source and first set of beam
lines
Inauguration (30 Sept. 1994)
Construction Period - Phase II (Sept. 1994 - 1998)
Operation for users
Construction of further beamlines
Beamline reviews and start of refurbishment
Full Operation, Further Development, and Refurbishment (Since 1999)
The European Science Foundation (ESF) played an important role in the
development and promotion of the ESRF. The ESF is an international, non-
governmental association founded in 1974 and composed, at that time, of fifty
academies and research councils from 18 European countries.
ESFs main objectives, namely,
- to advance co-operation in fundamental research
- to promote the mobility of research workers
- to assist the free flow of information and ideas
- to facilitate harmonisation of the fundamental research activities of the
Member Organisations,
were materialised well in the joint effort of the ESRF.
In this way the ESRF took advantage in originating from a bottom-up process
launched by the European scientific community, which was supported by the
ESF over several years.
2.3 Organisation and strategy
The size and complexity of the ESRF enterprise are obvious from its
organisational structure. Below the director level, there are various
departments for the machine, technical services, computing services,
administration, and experiments. The experiments are a major concern of the
ESRF management. ESRF provides about 200 experts for the beamlines and
experiments to customers from science and industry. Work at this user
interface is carried out properly and with great care. It is not only restricted to
the operation of a machine, but also comprises competent consultancy in joint
teams of users and expert personnel for the experiments.
A decisive aspect is the flatness of the structure. It guarantees flexibility.
Continuous investment is required to keep the machine in accordance with the
current state of the art. Competition with the other sources, while
complementing each other at the same time, is a major incentive to the ESRF
management.
The successes achieved by the ESRF management become obvious when
comparing the facility with machines in Japan or the USA. This particularly
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applies to the flexibility of the organisation and the quality of the beam and
services offered.
Beamlines are assigned taking into account scientific priorities. Applicants are
scientific groups of the Member States. A Scientific Review Committee
meeting twice a year takes care of the 'scientific excellence' of the
experiments. Thus, the ESRF is always kept at the front of science.
Experiments are assigned according to disciplines. Applicants are the
scientific groups from the Member States.
When making available beam times, particular attention is paid to the
participation of the Member States corresponding to their financial
contributions. The management provides for a careful co-ordination of the
experiments and, hence, for harmony at the facility. This is subject of frequent
discussions and fine adjustments, especially when new Member States join in.
2.4 Financing
Since 1998, the annual budget of operating costs of the ESRF has been of
the order of
430 million French francs (mFF).
The budget for the construction period (1988-1998) was 3.6 billion French
francs (1987 value), of these; 2.6 billion French francs were spent for
construction and 1 billion French francs for operation. These costs do not
include site preparation, which was borne by the regional authorities (Rgion
and Dpartement).
The budget is distributed according to the following key:
France 33%
including a 10% site premium
Germany 23%
Italy 14%
UK 12%
BE +NL 6%
Spain 4%
Nordic countries 4%
Switzerland 4%
The ESRF has concluded arrangements on the long-term use of synchrotron
radiation with governments or institutions not involved in the ESRF through
Membership. Such scientific associates as Portugal (1 %), Israel (1 %), Czech
Republic (0,35 %), and Hungary (0,2 %) have been among the scientific
associates. Participation of Austria, Poland, and Ireland is currently being
discussed. Austria is expected to join in the year 2002.
As soon as the beam times have been fixed, use of the facility is free. The
ESRF budget also includes a certain share for travel expenses incurred by
users from the participating countries in order to perform planned
experiments.
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About 90% of the budget comes from the members and associate members.
Other countries provide less than 10%. Requests for shifts (8 hours/shift) in
the year 2000 totalled 23216, of which 12309 shifts were allocated. 5409 user
visits took place in 2000 as part of the user programme, which means a
considerable increase compared with 1999. They performed 599 experiments
in the first half of 2000. The demand for ESRFs scientific services is
increasing.
According to the ESRF convention the French state cared for the site
preparation. Use of the facility by French users therefore is associated with
the drawback of a major part of the expenses of the ESRF being spent in
France (investments and consumables). Still, this is an advantage for French
suppliers. Current expenses are set off against the French share in the use of
the facility. It must not be underestimated that the ESRF does not only provide
for return flow of funds, but also contributes to the synergy of the Grenoble
science and technology triangle as a 'big science and high-tech pole'. The
ESRF is a crucial factor for other investments by the French state in this area
(e.g. for the MINATEC microsystems and nanotechnology project).
International co-operation and return flow to the individual states are
characterised by the following features:
1. Return flow by personnel (here, the host country has met with success,
especially as far as technical personnel is concerned).
2. Contracts and buying of equipment (69% go to France).
3. Use of beam times by scientists.
The CRG beamlines (Collaborating Research Groups) are financed by the
countries. Return flow is defined by a 'return coefficient' that ideally amounts
to '1'. Nearly 1 is reached at present.
In total, return flow for scientific use for France was 28.6% from 1998 to 2000
(return coefficient 1.12). For Germany, it amounted to 22.03% (return
coefficient 0.86) and for example for the Czech Republic with its 0.46% share
it reached 2.49.
2.5 User community and success
The research programme of the ESRF is determined by Scientific Review
Committees in ranking the experiment proposals submitted. While the use of
the ESRF's experimental facilities is free of cost for scientists from the funding
countries, their experimental results must be published in scientific journals.
Non-refereed access, usually to perform confidential proprietary research, is
possible subject to a charge.
40 beamlines (30 public lines, 10 national CRG) are being operated 24 h a
day. The public beamlines are available to all users. At the 10 national
beamlines, another 30% are made available for general use.
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Research programmes keep the facility in the latest state of the art. At the
moment, three programmes are being pursued: in-vacuum undulators, helical
undulators, and low-gap vacuum chambers. 35% of the expenses go to the
further development (incl. monitoring) of the facility. Competitiveness of the
machine is ensured by the significant development efforts made.
About 20% of the experiments are of industrial interest. Most of these are
being carried out in the framework of the peer-reviewed access by universities
or publicly funded laboratories collaborating with industrial companies. The
direct income from industry is less than two percent only of the ESRF budget.
Total income must not exceed 10% so as to not endanger the non-profit
status. Income from industry shall be increased in small steps.
User service is given highest priority. ESRF organises co-operation among its
users by user meetings. Networks are established and maintained.
Maintenance of a local research culture gains importance in order to generate
synergy and make the ESRF a pole of scientific communication with cross-
links among various disciplines.
Success criteria are set primarily by the publications of the user groups. All
publications resulting from scientific work at the machine have to be submitted
to the ESRF.
The user groups meet regularly at national and international user meetings.
The 'user representative in the science advisory committee of the ESRF' takes
care that the concerns of the users are taken into account. It is obvious that
the user is the central actor at the facility and that the plant operator is efficient
in providing services. Success of the users also means success of the ESRF
management and operation team.
At the beginning of 1998, Science, a journal that is well known all over the
world, presented 10 scientific breakthroughs of the year 1997. One of these
breakthroughs was 'synchrotron radiation'. Breakthrough in this area was
illustrated mainly by examples and experiments performed at ESRF.
2.6 Planning and future trends
Planning for the future has the following objectives:
- maintaining the quality of the radiation
- maintaining the world-wide leading position as far as the scientific results are
concerned
- intensifying economic exploitation of the results
Four major areas of use by industry can be distinguished:
- collaboration with academic institutions
- submission of individual proposals for peer review
- purchase of beam time
- involvement in, and/or development of, dedicated industrial or private
beamlines.
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In June 1999, the ESRF Council adopted the ESRF Industrial Policy
Statement that defines the boundary conditions of co-operation with industry:
In addition to its basic terms of reference as set out in the Convention, the ESRF
should develop its links with industry and encourage links between industry and
academic institutions, in particular industries in Contracting Party and Scientific
Associate countries. These links have two principal aims:
to encourage industry (unless stated otherwise, the use of the term industry
shall mean industries, companies, commercial concerns etc. based or having a
base in Contracting Party and Scientific Associate countries) to use x-ray
radiation, in particular the x-rays produced by synchrotron radiation at the ESRF,
as part of its research, development, and production activities for the creation of
new products and in making improvements to the reliability and quality of
existing products;
to transfer developed or partially developed technologies for exploitation by
industry through licence agreements and other suitable forms of collaboration.
In order to achieve these aims, the ESRF shall be able to:
sell beam time on public beamlines and on CRG beamlines (part of the ESRF
1/3 share) to other organisations for proprietary research subject to an
undertaking that the work is being carried out for peaceful purposes. Not more
than 10% of the total scheduled ESRF beam time on public beamlines and CRG
beamlines can be made available for such proprietary research and not more
than 30% of the available beam time and any individual public or CRG beamline
may be used for these purposes;
create dedicated beamlines for use by and financed by industry or industrial
consortia (including national and/or transnational bodies (e.g. EU)) subject to the
requirement that the total construction costs (including staff costs), infrastructure
costs (including the costs of any additional provision), and operating costs do not
give rise to any increase in the contributions of Members and Scientific
Associates. The ESRF shall be permitted to sell 100% of the available beam
time at such beamlines to industries world-wide;
enter into binding arrangements for the transfer of know-how and technology to
industries for commercial exploitation. Such transfers shall be subject to rules to
be drawn up and agreed by the Council;
charge at appropriate market rates for each of the above items;
at an appropriate time, set up a separate trading company to handle business
resulting from industrial activity.
The income generated by, and the operating costs of, all industrial/commercial
activity shall be accounted separately in the ESRF budget.
Surpluses, after the deduction of costs (operating costs, maintenance costs, repairs,
ex-gratia payments etc.), shall be available to develop the ESRFs collaboration with
industry in order to further the above aims, to enhance the Facility for public users by
developing new beamlines and maintaining existing public beamlines at the forefront
of what is scientifically and technically possible, and if necessary to supplement
Members contributions to the Facility.
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The ESRF management is committed to the 'Scientific Excellence' of the work
performed at the facility. This is even more important, as other facilities of
advanced technology and optimised experiment options come up all over the
world.
The ESRF is integrated in this worldwide community by close communication.
Care is taken that the ESRF keeps its leading position by further
development. Still, ESRF tries to enhance complementarity among the
sources rather than their competition.
Another focus is the moderate extension of co-operation with industry. So far,
income from industry has amounted to a few percent only. The ESRF takes
measures to increase this percentage. These plans are illustrated by the
above-mentioned 'industrial policy statement'. Development is directed
towards reaching the maximum possible 10% of industrial use. Machine hours
are charged in accordance with the market price instead of covering the total
expenses. The facility is demand-driven.
To increase use by industry, marketing is intensified. However, these activities
still are at their beginning. The operators of ESRF see a much larger potential
for winning industry customers. Based on the concept of flexible offer of
beamlines for experiments, wishes of industry can be met.
3. Context conditions
ESRF in Grenoble is located near other well-known installations, e.g. CEA,
LETI, ILL, in the fields of new technologies, materials science, solid-state
physics, microelectronics, microsystems, and nanotechnology. They are all
situated in the same Polygone Scientifique in close neighbourhood.
Within this context, ESRF is an important parameter and partner for the
French R&D policy of specialised technology poles in leading regions.
4. Main issues
Focused spending
ESRF is a good example of a joint effort of European countries in establishing
and operating a scientific large-scale facility. Set up and controlled by the
scientific community, which specifies future lines of research by the
competition of its members exclusively, this facility attracts the means
required for installation and operation and concentrates them on one point.
Adequate equipment and support by the host country, in this case, France,
caused the ESRF to be embedded in an environment that maximises synergy.
An important aspect is the vicinity of the ESRF to the Institut Laue-Langevin
ILL, to CEA with LETI, and to a department of the European Molecular
Biological Laboratory EMBL. In the future, the French project MINATEC will
join these establishments. It will pass further considerable investments for
installations of microelectronics, microsystems engineering, and
nanotechnology into the Grenoble Polygone Scientifique.
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Large-scale facilities of this type can hardly be financed by the individual
Member States. Joint agencies and joint funding are required. When
comparing the capacities of such large-scale facilities with those of smaller,
similar facilities in the individual EU states, for instance, these states
difficulties in offering experimental facilities of similar complexity and reliability
become obvious.
Focusing of funds is a necessary prerequisite for large-scale facilities of
excellent scientific and technical performance.
Competition for resources
This issue is based on the conception of attracting funds from various
sources. Competition for resources by experimental groups supported by
national, but also European, funds is a crucial factor. Granting of EU research
funds following invitations of applications under framework programmes for
the use of such large-scale facilities enhances competition among the
individual groups of researchers as well as the direction of funds to certain
sectors.
As large-scale facilities attract important groups of science in the individual
disciplines, the specific and focused funding of experiments can well influence
formation of centres, central activities, or foci.
State aids
The ESRF is a good example of a co-ordinated effort by the 12 Member
States.
In accordance with the need for a more rapid conversion of research results,
above all from fundamental research, into results that can be exploited
commercially, industry should be given a larger share in decision-making in
the future. If competent representatives of industry are heard, co-operation
with industry in the use of such facilities could be extended and its
significance for society could be further increased.
Fundamental vs. applied R&D
Large-scale facilities like the ESRF are good examples of the parallel
performance of excellent fundamental research and applied research in the
sense of industrial exploitation. The basis is the excellent scientific result.
Application-oriented groups, which work closely to exploitation, are directly
involved. The potential of industrial use, however, still needs to be opened up
completely.
Concentration
Central installations, such as the ESRF, are nodes in networks. The ESRF is
part of the international network of synchrotron radiation sources and works at
the front of development. Concentration on a single location, as shown by the
ESRF and its direct surroundings (ILL, CEA /LETI, EMBL, MINATEC), makes
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it attractive for partners in the international networks, also for other triad
countries, e.g. the United States and Asia. There, similar installations exist
and are further extended. To survive international competition, it is of crucial
importance to Europe to intensify joint investments for large-scale facilities at
the front of science and not just to promote European science, but be an
acknowledged partner on the international level. Only this will give rise to
communication in the international networks, and Europe will profit from the
results of other institutions of the world, which flow back to node points like the
ESRF.
User involvement
The ESRF is an excellent example of concentration on the users. It is no
instrument that is set up top-down by state policy, but desired, requested,
planned, and established bottom-up by the scientific community.
In accordance with the attitude of being a service instrument for users, the
interfaces to the users have been optimised.
This is an indispensable method to connect large-scale facilities with their
user community. It would be fatal, if unfortunate investments would prevent it
from assuming a leading position on an international level. This would no
longer attract users. Such an installation would go past all needs. The ESRF
represents a positive example of how investments should be transferred to
scientific large-scale facilities.
However, these facilities are forced to work constantly at the front of the
scientific experiments and to notice and take up trends and wishes of the user
community. For this, a flexible and intelligent organisation and staff are
required. Only this will allow the rapid meeting of the increasing demand of the
users. If this orientation towards the users will be given up, development will
go past these facilities.
By taking specific measures, the EU can support such flexibility.
In the future, development of new generations of such large-scale facilities will
accelerate. In this respect, conceptions of establishing flexible organisation
and operation structures of such facilities will certainly gain importance.
5. Practices and policy consequences
Establishing of internationally funded central scientific large-scale facilities set
up by the customers will be an important task of European policy in the future.
Networks and processes in user communities should be supported in order to
swiftly plan and implement the extension and new construction of such
installations, tailored to the needs and the position of Europe in scientific and
technical progress.
Preparation and planning of such projects, e.g. by associations representing
the users in this case, the European Science Foundation ESF , has proved
to be successful in determining the needs of the users and converting them
rapidly into plans. Consequently, dialogue between the EU offices in charge of
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research funding and organisations generating ideas for large-scale facilities
should be intensified.
Commitment of the French state to establishing the ESRF in an appropriate
environment certainly is of an exemplary character, and may be transferred to
coming large-scale facilities, although facilities and countries may be different.
The ESRF is embedded in a promoting environment.
Non-profit organisation of an installation under local law, as a result of which
the installation is embedded swiftly in the individual national environment, has
proved to be successful.
6. Extraction of lessons learnt and assessment of transferability
The installations, e.g. the ESRFs, feeling of their own value is the feeling of
independence. The ESRF was created by the initiative of several European
states independent of their membership in the EU. Hence, the European
Commission is not represented in the organisational bodies. Still, a number of
connections to the EU exist in the networks, which may also be project-
related. The ESRF takes part in EUREKA projects. This network formation
and integration in the European context should be extended.
A major factor of success was the fact that the ESRF had a stable financial
horizon under the Multinational Funding Commitment. Such a basis is crucial
to long-term projects. It served as a stable foundation for setting up the
installation over a period of about 15 years, from the first idea to the first
beam.
Another factor of success of the concept was the fact that the ESRF
represented a Socit Civile', a private company under French law.
Compared to other international organisations (e.g. CERN and EMBL), this
facilitated the organisation of the construction and operation of the facility.
A major aspect that is associated with this fact is the saving of costs in the
payment of the staff. In this model, the scientists are paid according to the
financial system, as it exists at CEA. Salaries are smaller than those of
European or international organisations. Under these conditions, low-cost
construction and operation are possible. On the other hand, the question
arises to what an extent excellent personnel is attracted from the Member
States. It is attempted to ease this situation by additional payments for work in
another country.
Aspects of payment and in particular of performance-based payment,
however, continue to be important. In this situation, it was the high motivation
of fundamental researchers to work at a leading facility with special
experimental stations that made the ESRF succeed in having an excellent
staff for operation and customers services and attracting excellent scientists.
European policy should contribute to maintaining the high quality of human
resources. It will be the key issue in the future.
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The positive experience gained by the ESRF is closely connected with the
local environment of the host country, here France. In cases of a similar
embedding being guaranteed, models as the ESRF may be transferred to
other countries. Today, large-scale facilities serving customers in research
and industry should be placed in surroundings that enable the implementation
of the results.
This is also one of the reasons, why France establishes the MINATEC pole for
microsystems engineering and nanotechnology at the ESRF location in
Grenoble. This will allow for a close interaction with the ESRF activities. Thus,
the ESRF and neighbouring installations will be surrounded by a technology
transfer belt for the exploitation of the results in industry.
The setting up of installations like the ESRF should be closely co-ordinated
with EU research policy with a view to launch EU-funded projects at such
installations and, thus, increase the probability of success of the use of such
funds.
Extensive location discussions of the funding countries, however, took too
much time. Such co-ordination processes have to be improved.
Closer orientation to EU policy and funding by the EU will be subjects of future
discussion. The concerns associated with the mixing various financial sources
(European, national, regional) have to be reduced. Use of international
installations is a topic that is of great significance to European integration and
should be given increasing importance in the future.
For instance, together with the EMBL and the CERN, the ESRF has applied
for a large-scale detector project with the European Commission. This
application is based on the conception that apart from the constant
optimisation of the beam, quality of the experiments will benefit considerably
from detector development.
Installations, such as ESRF, offer an environment to train young researchers
in important fields of using synchrotron techniques. Support of this training will
lead to these researchers strengthening the community in their countries,
which works in the growing market of synchrotron radiation use. The EU
should also take appropriate measures along this line.
7. Recommendations of R&D investments
Policy recommendations to the EU
- The EU should support the process of preparing and planning large-
scale facilities, such as the ESRF, systematically. Groups and networks that
generate ideas of new large-scale facilities should closely interact with EU
research policy. This will enable a swift implementation of ideas and plans of
such installations.
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- A co-ordinated policy of large-scale facilities is recommended. For the
planning processes, the EU should take appropriate measures together with
the responsible and competent organisations from the Member States and
transnational organisations (e.g. associations).
- A considerable advantage is the bottom-up establishment of large-
scale facilities by the user community. Contrary to the Joint Research Centre,
the ESRF was not founded programmatically for certain tasks. The basis was
the knowledge of an instrument that was needed by the scientific community
over a long term. Such bottom-up planning processes should be preferred to
top-down processes.
- The planning and construction of large-scale facilities that make the EU
assume a leading position in scientific progress and the commercial
exploitation of the results should be supported specifically by EU funds and
other services of the EU in order to maximise their effect for the EU.
- Processes of preparing the setting up of such installations should be
accelerated. The ESRF, for instance, needed 9 years of scientific discussion
(first conceptions in 1975) until a political venture by France and Germany set
the project into motion.
- Embedding in national research policies and co-ordination of the tasks
on the regional, national, and European level are common tasks of all parties
involved. However, the EU should take over a major part in this process.
- The EU should facilitate access to international large-scale facilities.
This applies to both Inter-Governmental Research Organisations (IGOs) and
installations, such as the ESRF.
- Access for countries that are not yet represented as users should be
facilitated for the installations gaining effect over the entire EU. This especially
holds for candidate states.
General recommendations on the organisation of large-scale facilities
- It can be learnt from the ESRF case that a simple management
structure is crucial to being competitive. Bureaucracy should be restricted to
the extent absolutely necessary.
- Excellent staff is required for the operation and further development of
the facility as well as for the groups of scientists, which are attracted, by a
good facility.
- Communication between large installations all over the world should be
enhanced by the exchange of scientists with a view to identify possibilities of
complementary action and, thus, increase mutual benefit.
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- Programmes have to be developed, which enable such central large-
scale facilities to constantly attract young and dynamic staff and provide for
their delegation. The same holds for the operations personnel of these
facilities, which has to work in a customer-oriented manner and, hence, faces
particular challenges.
- Without losing scientific excellence, measures to open these
installations to use by industry should be further intensified.
References
- www.esrf.fr
- ESRF Annual Report 2000
- ESRF Report Highlights 2000
- ESRF Newsletters
- History of ESRF. Karl Witte. Science Days, Aussois. May 2001
- ESRF Industrial Policy Statement (June 1999) and Guidelines for the
Use of the ESRF by Industrial Companies (December 1999)
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Annex III Case study: Biotechnology in Two European regions
Bio Region Heidelberg (Germany)
(BioRegion Rhein-Neckar-Dreieck e.V.)
1. Introduction and rationale
Enterprises as economic actors and their internal capabilities have the
greatest influence on innovation processes. Innovation in enterprises and their
absorption of new technologies is governed by high value internal attributes.
These attributes include the size of the enterprise, its innovation management
capabilities and qualified personnel.
Of equal importance are the external linkages for the enterprises. Success is
determined by the interaction of the enterprises with the environment, the co-
operation with sources of technology, financial institutions, consultants,
experienced transfer organisations, regional development organisations and
public support programmes.
The internal capabilities and external linkages of the enterprises are by far the
most important factors contributing to regional success. The quality,
motivation and dynamism of the enterprises are the determining factors. They
are critical for the development of the region. Therefore all measures, which
strengthen directly the enterprises, must be emphasised.
The creation of new enterprises provides a region with special dynamics for
growth. However, it is not appropriate to build up institutions of secondary
importance in the innovation scene or organisations for their own sake. These
will only be burdens for the region at the end. All public and private measures
must serve primarily the objective of creating, stabilising and strengthening
first class enterprises.
An efficient infrastructure of a qualified and dynamic staff of research and
development institutions together with their interfaces for co-operation and
technology transfer are very important for the development of a region.
The Heidelberg Region in the middle Rhine valley of Southern Germany with
its young enterprises is a good example of economic growth by creation of
new businesses especially in the commercially promising fields of
biotechnology and medical technology. It is a good example for the interaction
of partners in networks and regional clustering, supported by regional
resources, local state and national programmes.
The case is the more important as Germany made a late start in developing
biotechnology. Germany did not follow the United States into the
biotechnology sector in the late 1970s when it took off there. It is also still
today clearly behind the leading European country in this sector, the UK.
However, the rapid growth in this sector can well be examined in the
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Heidelberg region and lessons for sectoral regional development can be
learned.
2. Outline of the case
2.1 Description
To optimise the interface between biotechnology research and its practical
implementation, the Federal Ministry of Education and Research BMBF funds a number
of initiatives. They are aimed at establishing solid structures to handle the challenges to
one of the key technologies of the 21st century. Last but not least, the acknowledged
scientific base is to be transformed into marketable technologies.
The BioRegio initiative in 1996 opened the door to the successful use of biotechnology in
Germany and given rise to a dynamic innovation process. The intention of the initiative,
namely, to couple biotechnology research with economic implementation, has been
reached successfully. At several places, young biotechnology enterprises have been
founded, where researchers develop knowledge intensive products and services.
In parallel, solid structures have been established for the specific support of technology
transfer.
Complementing this, the BioFuture competition addresses young scientists. It is the
objective of this initiative to promote young scientists in biotechnology and to establish
new centres of competence for basic innovations in biosciences.
The BioChance initiative is especially devoted to young enterprises in the field
of biotechnology. This initiative serves to promote projects of industrial
research and pre-commercialisation phase development, which may
contribute decisively to the founding of start-up enterprises on the market.
Promising strengths in selected areas of modern biotechnology will be further
developed within the framework of the BioProfile regional competition. It
serves to open up new fields of application, extend competencies, and
sharpen profiles.
The national funding schemes are amplified by measures of the local State of
Baden-Wrttemberg in biotechnology.
2.2 History
The BioRegion Heidelberg was successful in 1996 in the BioRegio
competition of the federal ministry BMBF for regions strong in biotechnology.
The BioRegion Heidelberg is a centre of important R&D institutions and of
pharmaceutical companies. So far an ideal prerequisite for growth is given in
this sector.
125
In total about 3200 scientists are working on the fields molecular biology and
biotechnology. Main representatives are the university with its centre for
molecular biology (ZMBH), the German Cancer Research Centre (DKFZ) the
Max-Planck-Institute for Medical Research (MPI) and the European Molecular
Biology Laboratory (EMBL).
Large pharmaceutical companies, such as the BASF Group in Ludwigshafen,
Roche Diagnostics in Mannheim and Merck in Darmstadt, employ in the
region more than 1000 staff in their laboratories. These companies play a
major role for the Start-ups, in their function as sponsors, shareholders in
regional venture funds and as customers of the first line for the new
enterprises.
Now one observes many small enterprises in life sciences whose number is
rapidly growing. The Technology Park Heidelberg GmbH is an important
incubator for new enterprises. German and international VC firms are
engaged strongly in the region.
2.3 Organisation and strategy
Members of the association BioRegion Rhein-Neckar-Dreieck e.V.
The non-profit organisation, BioRegion Rhein-Neckar-Dreieck e.V., is a
platform for the promotion of biotechnology in the region, consisting of
research institutes, universities, pharmaceutical and biotechnology
companies, city and district councils, chambers of commerce, business
associations and others. Members of the BioRegion Rhein-Neckar-Dreieck
e.V. included:
Small and medium-sized enterprises in biotechnology
Research Institutions
Universities
Consultancies/Investors
Chambers of Commerce, Business Associations and other Organisations
Cities, Towns, Counties ("Landkreise")
Large Pharmaceutical Companies
Technology Parks
Publishers
2.4 Financing
The Federal Research Ministry announced the BioRegio Competition in
October 1995. Up to 20 biotechnology clusters were invited to take part in the
first phase of the competition and to submit proposals for projects to promote
biotechnology by developing biotechnology networks and by creating a
favourable climate for biotechnology activities.
126
17 biotechnology clusters submitted project proposals. Each participating region was
allocated up to 50keuro the Biotechnology 2000 Programme over a six-month period
ending in September 1996 (at a total cost of less than .85meuro. The grants were
allocated on the basis of matching funding for the development and implementation of
strategies to promote biotechnology.
An international jury selected the clusters in Munich, the Rhine/Neckar area and the
Rhineland as model regions. A special award was granted to the Jena biotechnology
cluster. These regions were granted priority access to additional Biotechnology 2000
grants during the second phase of the BioRegio Competition.
Each of the three winning regions was given priority access to additional Biotechnology
2000 grants of 25 meuro over a five-year period ending in 2001 (total cost: 75meuro in
1997-2001), in addition to grants secured in the normal way. The Jena BioRegion will
also be granted privileged access to BioRegio grants, but on a more modest scale.
2.5 Success in creation of enterprises
The number of SMEs in biotechnology has grown from 31 to more than 80
since the beginning of the BioRegio initiative in 1996. The number of
workplaces has tripled to more than 1400. Some of the new companies have
already grown to be global players.
The investment to the new companies is estimated by the BioRegion Rhein-
Neckar-Dreieck e.V. to be much higher than 50M. The most important VC
firm in the region has, as lead investor, shares in about 8 of the new
companies through its own seed capital fund. In addition to VC funding the
companies make use of the BioRegio project programme of BMBF for their
R&D projects. The total financial volume of these projects is about 50 meuro.
The BioRegio projects of the BMBF support programme asked for 50% of co-
funding. Often the co-funding came from large enterprises participating in the
projects.
The Neuenheimer Feld is an area of the city of Heidelberg, which hosts the
Technology Park with its Start-ups, the Cancer Research Center, a great
number of university hospitals and research clinics, most of the belonging to
the university. More than 9000 people are employed in the institutions and
enterprises of this particular area. An idea of the dynamics of the region can
be discerned from the economic analysis of this life science cluster as a hot
spot within the entire region. 27 Institutions expend almost 500 meuro per
annum and 16 start-up companies have revenues of 40 meuro.
The planned objective is to assemble competences in the greater Heidelberg
region, in the areas Heidelberg, Mannheim, Kaiserslautern and Mainz in the
sectors genomics, proteomics and bioinformatics.
127
3. Context conditions
BioRegion Heidelberg offers a helpful environment for creation and growth of
Start-up enterprises. The entrepreneurs draw the following picture of the
strength and weaknesses of the environment.
The entrepreneurs identify as most important parameters for the site of their
new enterprises the availability of partners for scientific co-operation, the
existence of well-trained personnel and the existence of technology parks and
suitable laboratory space. Very important are also the quality of life and the
offer of support programmes.
A growing bottleneck is a lack of laboratory space. Therefore Heidelberg is
going to open new technology parks in different areas of the city and the
region.
Sales possibilities and the engagement of large firms are judged to be less
important for the creation phase as a prerequisite for growth this parameter
gains weight and will be more important.
4. Main issues affected
Focused spending
The BioRegio Competition in Germany has considerably improved the climate
for biotechnology activities and led to the development of effective
biotechnology networks. It has mobilised considerable amounts of further
investments. Private investments generated by the competition between 1996
and 1998 were an estimated DM 1 bn. The competition also triggered a wave
of biotechnology start-ups. The Ernst&Young European Life Science Report
2001 reported about 330 German core biotechnology companies at the end of
the year 2000.
The federal support of the BioRegios in the state of Baden-Wrttemberg was
accompanied by a state programme and regional initiatives, which brought
Position of Heidelberg concerning factors for creation
of life science enterprises
0
1
2
3
Weight
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Sales possibilities
Engangement of large firms
Opinion Leaders
Suppliers
Consulting
Consulting by
BioRegion
Economic co-operation
Financial support
by BioRegion
Support programms
Scientific co-operation
Quality of life
Well trained
personel
Technology parks,
laboratory space
128
considerable additional resources to the regions, among them the Heidelberg
Region and the city.
SMEs
In the last 6 months of 2000 12 new biotechnolgy firms were founded in the
Heidelberg Region. They employed at least 150 staff by the end of the year
2001 in market oriented projects based on the strengths of the region,
primarily gene-, genome and proteome research and bioinformatics. The new
enterprises are linked to networks involving large enterprises as customers for
products and licences of the innovative small businesses.
Risk capital
The development of the Heidelberg Region has been accompanied by a
steady growth of the number of seed and VC companies from all over the
world offering capital to the start-ups in the region. In the past the
development of new enterprises was mainly hindered by bottlenecks in the
capital market. For about 3 years now, sufficient private and public capital is
available in Germany for early stage financing. The trend of competition
among the VC companies in financing promising business ideas is going on.
The Federal Government has created by several measures important
prerequisites to improve the VC capital market, particularly by a new law, the
Drittes Finanzmarktfrderungsgesetz, which applies new regulations to the
exit profits of VC companies.
Belgian Case
By contrast in Flanders a central policy instrument has been the creation of an
inter-university research centre in biotechnology, VIB, which centralises
funding for basic research and operates a technology transfer unit.
Biotechnology in Flanders
Flanders has a strong tradition in biotechnology. As early as the 1970s, a
number of Flemish research groups had already acquired innovative biotech
know-how. Star researchers such as Desire Collen, Marc van Montagu,
Walter Fiers were among the first in identifying gene defects and were
pioneers of plant transformation. The first wave of biotech start-ups headed
by Plant Genetic Systems and Innogenetics- has served as an example in
Flanders for recent start-ups such as Tibotec, Virco, DevGen, CropDesign
and Tromb-X. More than 20 Dedicated Biotech Firms(DBF) are currently
active in Flanders. In addition, Flanders has attracted foreign companies such
as Pharming, Genzyme and Genencor and traditionally hosted LMFs such as
Janssen Pharmaceutica.
The government of Flanders stimulates R&D in biotechnology through the
IWT Institute. IWT supports R&D within companies, providing grants and
129
services such as technology transfer, partner search. A guarantee fund for
VC further stimulates biotechnology investments in Flanders. The guarantee
fund is set up for organisations participating in start-up and growth companies.
In addition, the government of Flanders created the Biotech Fund Flanders,
which provides VC for companies located in Flanders and active in the field of
biotechnology. GIMV (Investment Company for Flanders) manages this fund.
Important also is the presence in Brussels of two major stock exchanges for
growth companies, EASDAQ and EuroNM.
The government of Flanders also encourages the clustering of biotech
companies in a Biotech Valley.
VIB: Flemish Inter-University Institute for Biotechnology
The Flemish Inter-university Institute for Biotechnology (VIB) founded in 1995
by the regional Government in Flanders, combines 9 university departments
and 5 associated laboratories, representing over 750 researchers and
technicians who perform biotechnological research in various domains such
as life sciences, plant molecular biology and cell biology. VIB is
headquartered in Zwijnaarde.
The VIB has 3 major objectives
(1) to perform quality research. VIB through an extensive structural base
financing from the government of Flanders guarantees scientists stability
and quality in their research mission.
(2) Transfer of technology : New discoveries and technologies that arise from
basic research are transferred to industrial and social applications through
licensing, co-operative agreements and spin-offs.
(3) To promote the image of biotechnology by providing information to the
public and conducting research on the impact of biotechnology on society.
(1) Expanding strategic basic research
VIB receives an annual grant of about 25 mio EURO from the Flemish
Government. Two government commissioners closely follow VIBs activities
and the way in which the funds are invested. The grant finances about 40%
of the research in the nine VIB departments.
(2) Technology transfer and commercialisation
VIB has developed a structured technology transfer programme around
the new discoveries and technologies that result from the basic research.
The technology transfer process can be divided into three steps
(a) tracking down discoveries that can form the basis of new industrial
applications
(b) protecting these discoveries via the submission of patent requests
(c) concluding agreements with companies that are able and want to
convert the patented discoveries into market-ready products or processes.
To implement this process a dedicated Technology Transfer Team was
established in VIB. It protects new findings via patent applications and
acts as the central point of contact for companies and investors.
In close consultation between researchers and the TTT, new technology
platforms are constructed that can form a solid basis for new industrial
activity through spin-offs. The TTT further assists in drawing up a
business plan and search for funding of a spin-off.
130
In 1999 VIB built a bio-incubator, in the immediate neighbourhood of the
VIB headquarters in the science park of the University of Gent. The bio-
incubator is a business centre specifically designed for new biotech
companies to develop their activities during the first couple of years.
VIB has developed a network of industry contacts in the sector of
biotechnology in Flanders. This network is clustered around VIB through
membership in an association offering members privileged access to VIB
research and regular meetings ensuring the promotion of industrial
interaction.
(3)Promoting biotechnology to the large public
VIB promotes a well-founded, objective public debate regarding biotechnology
by supporting and co-ordinating analyses that chart the impact of
biotechnology on society.
VIBs performance record
VIB research is regularly evaluated with regard to scientific quality by
specialised, international scientific advisory boards.
VIBs research groups are ranked above average in the SCI index. With
regard to the lines of invention, the institute was classified in the top 10%
of all research departments with similar budgets. The internal evaluation
of VIB is oriented towards giving incentives to perform leading research.
Also the Technology Transfer and Commercialisation activities of VIB are
regularly evaluated.
The number of reported new discoveries doubled to 40 in 1997. The
number of submitted patents quadrupled to 20 in 1997. This expanding
portfolio of patents is one reason for the concluding of several license
and R&D agreements with industry.
The number of contracts with industry has doubled over the period 1999-
2000, with about 55 contracts in portfolio in 2000.
So far, two spin-offs have been created, DevGen in 1997, with an
employment of about 80 people and CropDesign in 1998, with an
employment of about 60.
The Bio-incubator will host 7 to 8 new biotech companies by the end of
2001.
131
Lessons learned and assessment of the transferability
Heidelberg
-The regional focus and the appropriate funding scheme of the federal
government in high performance areas (such as the BioRegion Heidelberg in
the promising sector of life sciences) are successful and can be transferred to
other regions.
- Public support is necessary on the innovative infrastructure level by creating
communication and cohesion of the local public and private players. The
players are universities, research institutes, large enterprises, small business,
VC, service enterprises (consultants for innovation management, business
development, industrial management, financing, IPRs) and regional
authorities.
- The support has to last until the self-sustainability of the regional processes
is visible. The programmes need staying power matched to the deployment of
the regional processes. Short-term thinking is not appropriate.
- Co-ordination of the support schemes and actions of the different levels of
public administration is very important (federal programmes, state (regional)
programmes, local (district, city) activities), based on people as promoters.
- Networks and co-operation clusters are emerging out of the support
programmes of the government such as the BioProfile programme of the
federal government. Once the regional networks have been established these
programmes find well-prepared partners who are able to respond quickly to
the funding offered. Little time is lost when looking for appropriate partners in
the consortia for the projects. Daily communication allows for a quick start-up
of specific projects.
- The existence of large companies in the biotech sector as project partners in
R&D projects, as sources of business knowledge and sources of seed and VC
is very important.
- Seed and VC are of particular importance for the creation and growth of the
companies.
- Schemes of development of VC firms by the federal government by
refinancing engagements were successful. Venture firms are one of the
motors of development in the Heidelberg area.
- The region as a centre of excellence with a sharp profile in biotechnology
and related disciplines attracts international VC, which constitutes a
considerable increase of the resources.
- The aura of the region attracts young career oriented academic and
technical persons for new and growing enterprises as well as for higher
educational and research institutions.
132
VIB
The role the VIB plays in co-ordinating the various research departments
from various universities allows to capitalise on economies of scale and
scope in research through exploiting common inputs and
complementarities. This holds especially for some technologies, such as
bio-informatics and genome analysis, where VIB offers a common
infrastructure available for all research departments, which would be too
costly for individual research departments. The lack of geographical
proximity, with the research departments located at the universities in
Gent, Leuven, Antwerp and Brussels, is however a disadvantage for
intense interactions.
The long term funding horizon for basic research provided through the VIB
framework allows human resources to be sustained, which are critical in
biotech. The creation of a stable environment for high quality research in
addition to the training facilities offered by VIB provides an important
stimulus for retaining researchers.
In the interface department (commercialisation unit), business and
technical incubation services are offered. VIB expects its researchers to
do excellent research and not to get overloaded with the calls from
commercial activities. It is the commercialisation unit which is really
focusing on what can be commercialised. If a line of research can be
patented, the VIB will apply for a patent. Whenever possible, a spin-off is
created. This provides economies of scale in developing the necessary
resources and expertise required for commercialising activities. On the
other hand, introducing an additional layer, and hence distance in the
relationship between university and industry, may endanger interactions,
certainly if this layer holds a monopoly position in industry contacts .
Indeed on the technology transfer function, the VIB still needs to prove its
position. VIBs reputation as a partner for industrial collaboration is growing,
but industry contacts are still of relatively minor importance, at least in terms
of revenue. Furthermore, these contacts are geographically very much
concentration on the Flanders region (around 75%). This clearly needs to be
expanded internationally, especially with the USA, where the bulk of
biotechnology activities are located
Recommendations for R&D investments
- High performance areas with specific competencies in promising sectors
need special attention.
133
- Existing support schemes for regional networks among the partners of the
local innovation system in future oriented R&D and business fields should be
strengthened and new schemes developed.
- There is a demand for better co-ordination of EU and national programmes.
- Better co-ordination and harmonisation of EU R&D and regional
programmes is also necessary.
- The support programmes should be adjusted to the (longer) time scales of
the development processes of the regions and should be reduced only step
by step according to the degree of rising self-sustainability of the regional
processes.
- Support programmes should have clear profiles related to their objectives:
On one hand programmes for the infrastructure, networks and the
entrepreneurial milieu, on the other hand programmes for specific scientific,
technological and economic objectives (such as BioProfile in the case of
Heidelberg). Synergy, particularly by involvement of key players in the
networks, between these types of projects has to be secured.
- Public-private partnerships, emphasising the exploitation of the dynamics of
the markets and enterprises, have to be stimulated. Focusing on key persons
running such organisations is a good investment of public money.
- The administration of public support funds has to be as quick as the
development processes of the regions. A deregulation of R&D and regional
development schemes of the EU and national programmes is a major task.
- The support of new companies and entrepreneurs is crucial for the dynamics
of the regions and their networks. Entrepreneurs introduce the strongest
momentum to innovation. They contribute strongly to the valorisation of the
knowledge and know-how in universities, R&D institutions and industrial
enterprises. Sophisticated support schemes should be developed.
- The co-operation of large enterprises, SMEs and start-ups is lacking well-
targeted support measures. The interaction of those partners should be
optimised by appropriate public support measures (large enterprises as spin-
off sources for ideas and entrepreneurs, as investors, as customers for new
companies, as partners in R&D projects). The market forces are not sufficient
to create co-operation structures leading to synergetic innovative ideas,
products and business fields.
- Seed capital for Start-ups and schemes to support their take-off processes
from the host institutes are still underdeveloped. Funding schemes with risk
orientation and quick accessibility (which do not emerge from the VC markets)
have to be developed for the entrepreneurs.
134
Relevant Reports and Papers
E&Y, 2000, European Life Sciences 2000
SPRU, Impact of IPR on the Development of European Biotechnology, 1998
PREST, Links to the Science Base of IT and Biotechnology Industries, 2000
OECD, Industry Science Relationships: interin Report, 2000
OECD, Biotechnology Statistics in OECD Member countries, 2001
OECD, Further Towards a Biotechnology Statistics Framework, 2001
KUL, Incentim, Tissue Engineering, On the crossroads of medical science and
engineering, 2001.
Pamolli et al. 2001, The Competitiveness of European Biotechnology: A case
study of innovation, Background report for the Competitiveness Report 2001,
EC-DG Enterprise, to be released November 22, 2001.
Audretsch, D; & P. Stephan, 1996, Company-scientist locational linkages: the
case of biotechnology, American Economic Review, 641-652.
Deeds, D;, DeCarolis D;,& J. Coombs, 1997, The impact of firm specific
capabilities on the amount of capital raised in an initial public offering:
evidence from the biotechnology industry, Journal of Business
Venturing, 165-187.
Johnson & Melkonian, Policy & Technology as Factors in Industry
Consolidation
Liebeskind, J. Oliver, A. Zucker, L. Brewer, M. 1996, Social networks,
learning and flexibility: sourcing scientific knowledge in new
biotechnology firms, Organisation Science, 783-831.
Mc Millan et al 2000, An analysis of the critical role of public science in
innovation: the case of biotechnology, Research Policy, 1-8.
Zucker, L. Darby M, 1997, Present at the biotechnological revolution:
transformation of technological identity for a large incumbent
pharmaceutical firm, Research Policy, 429-446.
Information material on BioRegion Rhein-Neckar-Dreieck e.V., Heidelberg.
www.bioregio-rnd.de
- Study on the Economic Power of Research and Science in Life Science in
Heidelberg,
Ernst&Young, Stuttgart, May 2000
- Ernst&Young 8
th
Annual Life Sciences Report 2001
- Biotechnology in Germany, Report of an IST Expert Mission, British
Embassy Berlin, 1998
- The BioRegio Programme, Federal Ministry of Education and Research
BMBF, Bonn
- Federal Research Report 2000 (Bundesbericht Forschung 2000), BMBF,
Bonn
135
Annex IV. DEFENCE R&D
Relevance of the issue
Common Foreign and Security Policy CFSP has acquired more and
more importance in the realm of the European Union. In relation to this
policy, it is assumed that long term security should be based on the
retention of an independent defence capability supported by strong
defence technology and industry base and, to this purpose, the
identification and exploitation of new technologies remain essential.
States normally fund public and private defence R&D, which on the
other hand needs to tap into all the available national technological
assets. Some defence technologies have a dual-use character
responding to both civil and military needs. Spillover occurs in both
directions, from military to civil and vice versa.
In 2000 EU member countries investments in defence R&D amounted
to more than 9.000 M, about 17% total EU government expenses in
R&D. The USA spent in the same year four times more than Europe.
Only seven out of fifteen EU countries significantly invest in defence
R&D, while three, Austria, Ireland and Luxembourg, do not practically
spend anything.
Issues to be addressed
Issues related to Defence R&D normally extend and touch subjects that go
beyond Research and need to be addressed at several political levels.
Some of the main issues of concern for European Defence R&D are:
1. CFSP and R&D;
2. Resources;
3. Dual Use;
4. European industry;
5. European Fora for co-operation;
6. Transatlantic relations and comparisons;
7. Conclusions: The Way Forward, a more efficient way of spending
136
1. CFSP and R&D
Defence has been and is today more and more a subject of intense
European discussions. Interest in the field dates back to after the
Second World War. In 1952, six countries (Belgium, France, Germany,
Italy, Luxembourg, and Netherlands) signed in Paris the European
Defence Community (EDC) Treaty, which later collapsed in national
Parliaments. Previously, the NATO Treaty in 1949 and Western Union
Treaty in 1948 were also signed. R&D has never received much
attention in NATO and WEU framework, only minor R&D activities, in
terms of volume of resources compared to what countries invested
autonomously, have been done under the umbrella of the two
organisations.
Quite recently, European defence policy has speeded up, especially in
the EU framework and in connection with NATOs role evolution. The
Maastricht Treaty incorporated the objective of a common foreign
policy and the Amsterdam Treaty revised the provision of the Common
Foreign and Security Policy CFSP leading, among other things, to the
appointment of the High Representative Mr.Javier Solana.
Since the Cologne Council in June 1999, each successive Council has
gradually given substance to the CFSP and, at Helsinki in December
1999, the Council defined the headline goal in terms of military
capabilities setting targets for a Rapid Reaction Force, made by 50-
60.000 persons, capable of being deployed within 60 days and serving
for up to one year. This objective resulted in the definition of a full set of
capabilities, but among them no reference was made to R&D.
The CFSP implementation differs considerably from the implementation
of other Community policies, since the Presidency and the member
Countries usually take initiatives, while the Commission enjoy a minor
role.
How European countries participate to security organisations remains
an unsolved problem: ten of fifteen are members of the WEU; four are
not members of NATO but are observers in WEU; six European
countries are members of NATO, but not of EU.
It is a general feeling that while EU defence policy has gradually
improved in the last years, the situation is still far from optimal. To this
regard the recently started EU Convention is expected to shed some
light also on the future evolution of EU defence policy, which will
reverberate also on R&D.
137
2. Resources
Governments support defence R&D through direct funding to national
laboratories, universities and industries, but also through procurement
of equipment. Funding for research goes only to national institutions,
mostly on national programmes and in minor quantity to international
co-operation. Instead, procurement spending quite often, and always
when there is no national industry, benefit non national companies,
especially American companies.
Data describing the volume of R&D support are not very accurate, since a
certain amount of expenses tends to be purposively hidden and so difficult to
identify. Further, there is no consistent information available on defence
research funding by industry because criteria still differ between companies.
However, statistics have been recorded at international level along the years,
particularly OECD and other international institutes, such as the International
Institute of Strategic Studies IISS, which are normally retained as the best
figures to rely on.
The table below shows the expenses for Defence R&D of the EU member
countries in the last 5 years and compares them to the USA. The first 11
countries in the table are both members of EU and NATO.
(Const.1999 USA $)
Defence
R&D
1996 1997 1998 1999 2000
Be 3 2 1 2 1
Dk 5 5 5 5 1
Fr 5.131 3.975 3.385 3.025 3.053
Ge 1.924 1.547 1.467 1.313 1.299
Gr 10 19 24 22 24
It 787 781 555 310 333
Lu 0 0 0 0 0
Nl 126 107 103 66 66
Por 4 4 4 4 4
Sp 293 252 206 177 175
UK 3.560 3.632 3.938 4.067 4.026
A 10 10 10 10 10
SF 9 9 10 14 8
Irl 0 0 0 0 0
Swe 167 165 167 98 104
EU 12.029 10.508 9.875 9.113 9.104
USA 37.163 37.873 37.824 36.635 33.692
(Source IISS)
In 2000 EU member countries investments in defence R&D amounted to 9104
M, about 17% total EU government expenses in R&D and almost 7% of total
EU public and private R&D expenses. The table shows that all EU countries,
except UK, have constantly reduced expenses in the last 5 years. Looking
further back in the years, defence spending, including R&D, has been
severely reduced in all countries as a result of the peace dividend after the
138
end of the cold war. Countries of the former Warsaw Pact have lowered
defence expenditure by more than 50% between 1985 and 2000, while NATO
European members have, on the average, reduced it by 30%.
In 2000, military R&D in 7 EU countries totalled 99.5% of the EU expenses with
the Top 3 totalling about 92%. Two EU countries do not spend anything on
defence R&D. Differences in foreign and military policy pursued by the different
governments explains such a situation, that will probably evolve in the next
years into a more balanced picture as a consequence of the CFSP likely
adjustment.
Data, shown in the table below, regarding Defence R&D budget as a
percentage of total government spending on R&D both illustrate the
intensity of the support and measure the attention that different
governments pay to Defence R&D. It is worth noting some discrepancy,
regarding particularly Spain, exists between the following data collected at
OECD level and previous ones estimated by the IISS.
Defence Budget R&D as a percentage of Total GBAORD
1985 1990 1995 1996 1997 1998 1999 2000
Austria 0,03 0,03 0,01 0,01 0 0 0 0,02
Belgium 1,52 0,47 0,38 0,52 0,55 0,48 0,4 0,36
Denmark 0,52 0,42 0,62 0,57 0,57 0,56 0,56 0,52
Finland 1,76 1,46 2,08 2,04 1,54 1,37 1,37 1,3
France 32,55 40,05 29,98 29,74 25,19 23,38 22,74 22,61
Germany 11,93 13,47 9,06 9,95 9,57 8,76 8,33 8,02
Greece 2,92 2,25 1,25 1,24 1,21 1,29 0,89 0,77
Ireland 0 0 0 0 0 0 0..
Italy 9,93 6,14 4,72 3,06 4,41 2,64 1,25 0,88
Luxembourg .. .. .. .. .. .. .. ..
Netherlands 3,01 3,02 3,26 3,82 3,05 3,38 3,05..
Portugal .. 0 2,6 2,17 1,39 1,34 1,6 1,18
Spain (*) 7,05 18,45 10,4 10,78 19,58 28,95 26,15..
Sweden 24,02 23,62 20,89 20,89.. 7,31 7,35 7,12
United Kingdom 48,51 43,67 36,54 37,22 39,24 36,79 38,01..
European Union 23,69 23,07 16,31 16,23 15,45 14,67 14,47..
United States 67,55 62,6 54,08 54,75 55,25 54,13 53,2 51,83
(*) data in 97,98,99 inconsistent with other sources
(Source OECD)
The proportion of Defence R&D on total GBORD has been constantly
decreasing in Europe in the last five years, especially in Sweden, Italy and
France. OECD data about Spain are inconsistent with data coming from other
sources and need to be checked.
3. Dual Use
Overall, across all defence technologies, it is considered that about 50% are
dual use in nature (WEAG). Usually, additional technical work is needed to
use for defence purposes technologies developed for civil application. Military
requirements are always more demanding, but the sharing of the knowledge
139
base and developments provides scope for mutual cost benefits. Synergies
between defence and civil sectors are not generally acknowledged at
European level, so that there is no mechanism to address in a structured
manner the transfer of technologies and the unnecessary duplication of costs,
even though some ESA or Community projects could be considered dual. The
aerospace sector, for instance, provides a good case of the benefits brought
by having civil and defence R&D in the same company.
In the last years, the emphasis on spin-on (military technology applications of
non-military, commercial technology) increased in importance, although spin-
off (to commercial applications from military technology) remains a general,
second-order feature of public investments in R&D for military objectives.
Hence, procurement processes of military technology and related high-tech
products and services may include also long-term commercial applications.
large-scale R&D investments.
Since a number of years, the USA government has put considerable
emphasis on the transfer of R&D results from major military laboratories
(such a Lawrence Livermore) and similar defence-related technology.
Efforts are also made to link these centres to the major research
universities. European research centres witnesses the same pressure,
but in most cases to a lower extent. The plans to privatise DERA or to
rearrange INTAs management look like cases in point.
4. European Defence Industry
The Top 5 European defence companies employed in 1999 more than
300.000 people, about 44% of them were in defence activities. The same
companies registered in 1999 revenues in Defence of about 30 B$, less than
the top 2 USA companies. These synthetic data clearly illustrate how most
defence EU and USA companies still operate on different level of scale
economy.
European defence industry started in 1999 and 2000 a process of
consolidation, probably not yet completed and not yet attempted in the
ground and naval sector. As a result, four major defence companies
have so far emerged:
1. BAe Systems, which regrouped in 1999 a large part of British
industrial activities (British Aerospace and Marconi),
subsequently acquired 35% of the Swedish Saab and an
important presence in the USA. In 1999 it was the third world
defence supplier after the USA company Lockheed Martin and
Boeing;
2. EADS, which came into being in 2000, bringing together French
Aerospatiale and Matra, DASA from Germany and CASA from
Spain, it owns 80% of Airbus, 100% of Eurocopter, 75% of
Astrium;
140
3. Thales, mainly a French electronic company, but also the
second supplier in the UK thanks to the acquisition of Racal;
4. Finmeccanica, mainly Italian, but present in several European
JV (Agusta-Westland, MBDS, Alenia Marconi Systems).
European consolidation, urged by EU Head of States and Government
in 1997, followed a turbulent period of concentration in the USA
prompted by the severe market reduction of the 90 and halted by the
USA government with the aim of preserving a sufficient level of
competition. Mergers in the defence industry were pushed through in
order to achieve bigger economies of scale, particularly to reduce
production, purchasing and R&D costs, and reinforce marketing
capabilities.
The table below lists the major defence companies based in OECD countries.
The data show that, due to the limited size of the European demand, European
companies will never reach the dimensions and scale efficiencies of American
companies, unless they recur to economise of scope (civil/military) or
transatlantic alliances
Company CountryDef.RevenueDef/Total Tot.Empl. Def.Empl.
(M$ 1999) Rev. % (est.)
Lockheed
Martin USA 17.930 70 149.000 104.300
Boeing USA 15.600 27 197.000 53.190
BAE Systems UK 15.470 77 71.150 54.786
Raytheon USA 11.530 58 105.300 61.074
Northrop
Grumman USA 7.070 79 44.600 35.234
General
Dynamics USA 5.550 62 43.400 26.908
EADS F 4.559 20 88.879 17.776
Thales F 4.080 56 48.920 27.395
UTC USA 3.480 14 148.300 20.762
TRW USA 2.990 18 122.260 22.007
Finmeccanica I 2.790 44 43.690 19.224
Mitsubishi
Heavy Ind. USA 2.460 10 64.990 6.499
Rolls Royce UK 2.410 27 49.600 13.392
TOP 13 95.919 1.177.089 462.546
(Source SIPRI 2001)
The concurrent concentration and privatisation of European defence
companies affected also R&D budgets, as European companies listed
on the stock exchange operating in a globalised financial market can no
longer sustain with their means the past levels of R&D expenses, which
run closer to 15-20% of annual revenues.
141
It is also worth mentioning that defence industry includes a large
number of SMEs, many of them involved in high tech activities,
especially in the USA.
5. European Fora for defence R&D co-operation
European nations invest their Defence R&D money mostly in domestic
establishments and very few spend more than 10% of their budget
through international co-operative activities. Though little is known about
the detailed content of national research activities, the scarce
resources being fragmented across different spending priorities of
separate national defence ministries often leads to unnecessary
duplication of efforts and prevents the achievement of a critical mass.
The disparities between the national regulatory and administrative
systems also hamper transnational transfers of knowledge and the
mobility of researchers. Therefore the poor coordination between
European governments in defence R&D spending further reduces the
return of scarce investment, compared to the USA.
In recent years European governments, reali sing this inefficient state of
affairs, increased their willingness to co-operate creating a number of
Fora for defence R&D co-operation. The following are particularly worth
to be mentioned, also in consideration as a possible EU federating
Agency:
1. WEAG, the Western European Armament Group, a forum for
intergovernmental consultation, which includes all EU countries
except Ireland. WEAO, the Western European Armament
Organisation inside WEAG, was established to manage defence
research projects, procure contracts and provide the latter with
research and technological support. The recent signed
EUROPA MoU offers a good environment for R&D co-operation.
Annual budget of R&D projects amount only to 40 M;
2. OCCAR, the Organisation for Joint Armament Co-operation,
was set up to manage Europe large-scale joint programmes
with a common system of project management. Present
membership includes France, Germany, Italy, UK, Spain and
Netherlands. OCCAR presently manages seven programmes.
Other projects will be placed under OCCAR management when
member nations agree to do so. A400M, if the contract were
finally signed, would be the most important and widest
programme (8 countries) under OCCAR management;
3. LoI Letter of Intent signed by the Ministers of Defence of six
countries with the intent to integrate the respective defence
market. The Letter covers also Research and Development
142
4. The Framework Agreement signed in 2000 by the Ministers of
Defence of six countries with the objective to harmonise national
defence regulations.
The existence of several Fora already shows how difficult it is the co-
operation in Europe, but also shows in any case the need for a specific
mechanism for Defence R&D and Industrial co-operation.
6. Trans-Atlantic relations and comparisons
In the domain Europe compares particularly unfavourably with the USA:
Europe defence R&D expenses are a quarter of USA expenses.
Even in times of budgetary reductions, the USA attaches a clear priority
in maintaining technological capabilities over procurement, while
Europe, except UK, does usually the opposite. So the gap between
Europe and America already huge has always been widening in the last
years, in 96 the USA support to defence R&D was 3 times higher than
Europe and in 2000 it reached 3.7 times. As it concern industry, during
the 1995 to 2000 in the USA support to aerospace companies through
procurement decreased at a rate of 7% per year, whereas support to
R&D increased by 1% annually, for Europe the same figures read as
6% and 3%.
In addition, in the next years the disparity between the two sides of the
Atlantic will further increase. President Bush proposed for the 2003 the
USA budget, after allotting 49.171 M$ in 2002, an increase of 11% of
resources for defence R&D.
Moreover, the level of support obtained by industries in the two sides of
Atlantic is also very different, for instance government finance
aerospace R&D activities, through all mechanisms, account for 32% of
industry turnover in the USA in comparison to 19% in the EU.
The USA has a well-established national S&T strategy finalised at
maintaining military advantage and supported by the Basic Research
Plan, the Defence Technology Area Plan and the Joint War fighting S&T
Plan. It is a heavily top-down approach, which addresses near, mid and
far term needs. For instance, the Basic Research Plan, with an annual
budget of about 1.300 M$, sponsors basic research performed by
universities, industries and national labs.
However, so far, no important industrial transatlantic project has been
implemented in the latest years and access to American military technology has
been restrained to very few European companies. Possibly, the Joint Strike
Fighter will be the first modern case of co-operation, even though discussions
under way have not yet completely clarified the role of European companies in
143
the programme. At any rate, co-operation is going to be built on bilateral terms
and so far there is no practical way for EU-USA co-operation.
7. Conclusions: The Way Forward
It is beyond the scope of the group to propose any recommendation
addressing the defence policy except for the aspects concerning R&D.
However the group recognises that any progress in European Defence
R&D co-operation in this field requires a preliminary positive political
construction, in which European Defence R&D can find its place. So far,
Defence R&D in Europe stands mainly on a national pillar and on weak
cross border co-operation with no EU involvement. ESDP, which so far
misses the R&D leg, could provide such a framework for a European
Defence R&D Policy.
According to present investments there is no practical possibility to
close the gap between Europe and the USA, differences are too huge
and cannot be recovered in the short-medium term. Concentrating
resources on European priorities, such as crisis management and
others, should probably most reward the effort.
The present situation is far from optimal. Spending the same amount of
resources could produce in Europe much more results, if unnecessary
duplications could be reduced and higher economy of scale could be
achieved. How Europe addressed the issue of access to space or the
collaboration of some countries for the Eurofighter provide good
examples of what could be achieved with a better and common
organisation. To this effect, l arge demonstrators and highly complex
systems could catalyse efforts into producing a European Defence R&D
Policy. Return to participants will be paid by better results at lower
costs.
Specificity of Defence R&D requires specific methods and rules for
managing such co-operation. Moreover, the great unbalances between
EU member countries plead initially for a more intergovernmental than
community co-operation. Already existing and tested agreements, such
as WEAGs Europa, OCCAR or ESA, could provide the framework,
which could accommodate European Defence R&D projects. The
present EU Framework Programme does not consider and it is not
tailored to take into account such specificity. As far as interdependence
and mutual contribution progresses, the instrument for managing co-
operation could evolve into a Union/Community programme.
144
While universities and research institutions constitute the backbone for
basic defence research in the USA, in Europe the link between
academia and defence institutions is much weaker. A European DARPA
is still far from coming to existence, but co-operation between national
research institutes among them and between them and universities, so
far quite limited in Europe, should be pursued and reinforced. This will
enhance the benefits from the dual nature of defence R&D easing the
transfer of technologies to civil applications.
Public investments remain the main driver of Defence R&D. Therefore,
if and when EU establishes its defence policy, this should also comprise
EU allocations for Defence R&D.
Bibliography
1. IISS, The Military Balance 2000-2001, Oxford University Press
2001;
2. Aecma, Government Funding for Aerospace, Aecma July. 2000
3. Nones, A Test Bed for Enhanced Co-operation: the European
Defence Industry, The International Spectator Jul.2000;
4. SIPRI Yearbook 2001;
5. Conference on European Defence R&D: Funding the Future,
GPC International, Brussels 24.1.02;
6. WEAG, Science and Technology Strategy, WEAG 1998
7. European Commission, Vision 2020, 2001
8. Strategic Aerospace Review for 21st century (STAR 21) Report
(draft)
145
Annex V. The role of structural funds for R&D
1. Introduction
Regional European policy has as a main responsibility to improve the quality
of life and wealth of European citizens in all its regions. This aim is the basis
for a more integrated and cohesive Europe and it will become one of the
fundamental instruments to facilitate the future enlargement of the European
Union. Policy provisions have been included in the Treaty of the European
Union within the Title XVII on Economic and Social Cohesion (COM, 1997).
The budget associated to the regional policy of the EU, following the budget to
the Common Agricultural Policy, is the most important in terms of volume at
European level. It roughly accounts for the third part of the Commissions
annual budget. Figure 1 summarises the distribution of the European budget
in its main chapters.
This budget is mainly spent through two basic instruments: structural funds
and the cohesion funds
1
. They are major elements to foster a more
homogeneous and integrated Europe and fulfil one of the basic goals in the
construction of the European Union. The general goals of these funds appear
in articles 160 and 161 of the Treaty.

1
The ISPA fund to facilitate the pre-accession countries will not be considered in this note.
Figure 1 EU Budget Distribution
R&D
4%
Structural Funds
35%
Common
Agricultural
Policy
49%
Reserve
1%
External
Policies
6%
Administration
3%
Internal Policies
6%
146
More specifically, there are two main types of structural funds with different
goals:
ERDF, European Regional Development Fund. It is mainly
devoted to support the economic development of the European
regions.
ESF, European Social Fund. It is mainly devoted to support the
development of skilled human resources.
The level of EU intervention depends on the target objective as defined by
the priorities to be addressed. These are classified as Objective 1,2, 3,4, 5a,
5b and 6
2
which cover different political goals and have varied intensity levels
of financial contribution ranging from a maximum of 75% to 50% depending
on the objective and type of fund. In all cases, it is mandatory for Member
States to make an investment to complete the remaining financial contribution.
The procedures for these investments are regulated by rules approved by
the Council.
The management of these funds, the selection of priorities and their
implementation is a responsibility of the Member States. Nevertheless, all
structural funds have as one of their special feature, the need to complement
the funding from the National State Budgets under a principle of
additionality
3
. Thus, these funds have an implicit domino effect on the
national policies that should be aligned with the priorities in the operational
programmes.
The responsibility for defining the so-called operational programmes (where
general measures and the distribution of funding are delineated) relies on the
national authorities within general conditions of eligibility and administration of
the funds. Several supervision and joint committees between the Commission
and national or regional authorities are set up with the aim of ensuring goals
and eligibility rules are met.
Two different policy options for using the structural funds are available. One is
the definition of specific measures to apply the funding and the other is to
embed these funds inside the general budget. Many Member States prefer
to consider the structural funds as an extra-funding for their priorities, while
the Commission prefer to seen them allocated to clearly visible lines of
actions.
As a result, there is a well-recognised stress and delicate balance that should
be foreseen between national and European authorities in setting priorities

2
Objective 1: development and restructuring of less-developed regions. Objective 2:
conversion of areas seriously affected by industry decline. Objective 3: combating long-term
unemployment, vocational integration of young people and integration of people threatened
by exclusion from the labour market. Objective 4: adaptation of workers to industrial change
and development of systems of production. Objective 5a: restructuring of agriculture, aid to
modernisation and restructuring of fisheries. Objective 5b; development and restructuring of
rural areas. Objective 6: development of areas of very low population density.
3
The objective is not to supplement some measures or actions that national governments
need to do but to be able to set up additional actions.
147
and in the follow up procedures. The same happens between national and
regional authorities in the management of those funds.
The Commission is also trying to increase the funding for interregional
activities (coping with objectives promoting co-operation between regions in
different countries) although they still constitute a minor part of the global
funding received through structural funds.
Recent reports from the EU (CEC, 2000) indicate that these funds have
contributed in the past to closing the GDP gap among a majority of less
favoured European regions. In some cases, they have acted as triggers for
more ambitious development programmes at the national level. In the last
period of intervention (2000-2006) several regions initially classified as
Objective 1 (GDP per capita below the 75% of the European average) have
passed to Objective 2 and even no longer perceive these funds (above all
ERDF) due to the improvement of their wealth. Nevertheless, a group of
poorer regions have yet to demonstrate any relevant advance.
From the policy definition standpoint, the use of structural funds to support
specific actions devoted to improving the situation in some European regions
4
cannot be considered as an isolated activity. Policy makers do not conceive
them aside from the other public resources available in one specific region or
even from sources of private funding. The same attitude is witnessed at the
national and regional levels.
Apart from the administrative difficulties that result from the regulations, EU
funds have provided additional fuel to cover the same goals as national
money does. However, differences have arisen through conflicts in regulation
and transparency issues. These EU funds not only affect the national or
regional budget available to meet the percentage not covered by the structural
funds but also they complement other measures totally funded by national or
regional funds. The trend to subsume these funds within the general budgets
is counteracted by the Commissions wishes to have transparency and
accountability.
Empirical analyses suggest that growth of RTD output by region (measured by
the increase in patents per head of population) is closely correlated with
growth of GDP, once extreme cases (regions with very low patent intensity or
very high growth rates) are excluded. It suggests, in addition, that there is also
a positive association between growth and the proportion of SMEs in a region
which are innovative, when regional differences in level of technology are
taken into account.
Although such relationships do not prove that the direction of causality runs
from innovation to growth (in fact this relies on a linear model of innovation
that it is no longer widely accepted), it provides some support for a policy
encouraging RTD as a means of stimulating economic development.

4
Although structural funds not necessarily reflect a territorial dimension it is true that in
many cases, a patched landscape of eligible areas conform strong constraints to the policy
maker in the implementation of specific measures.
148
Therefore, it is evident the efforts of policy makers to use structural funds to
finance R&D and innovation activities look for an accelerated pace of
development.
2. The R&D dimension of the structural funds
The perception that modern societies should to devote resources on R&D and
innovation because it contributes to the long-term progress of society has
been the general discourse of policy makers since the nineties. Nevertheless,
it is less clear that this in fact has derived in the implementation of practical
measures and in a positive evolution of the annual budgets. This vision has
formed part in all countries and even for the European Union in the
formulation of their annual budgets
5
.
It is not strange that this trend had influenced the formulation of regional policy
under a more applied perspective. As a consequence, the R&D dimension
embedded into the structural funds was promoted as a major element to
accelerate the catching up process and a crucial element to get the above
mentioned improvement in the quality of life of European citizens.
Two communications from the Commission are relevant in this context.
COM(98) 275, represented in 1998 an effort to convince policy makers about
the need to implement a coherent framework between all sources of funding
in favour of innovation. The second one, COM(2001) 60, offers some
guidelines for innovative actions for the new period of Structural Funds. Both
are remarkable pieces of active policy to stimulate the shift of structural funds
towards R&D and innovation.
As a consequence, the Structural Funds support many types of RTD activities
under all regional objectives. During the period 1989 to 1993, 3,9% of
financial resources for all objectives went to these activities (11.5% in
Objective 2 regions). The total funding under objectives 1 to 6 in the period
1994 to 1999 has been increased to 5.7% (up to 16.8% in Objective 2
regions). It is still too early however to evaluate this trend in the period 2000-
2006.
From the accumulated experience, more emphasis should be placed on four
interrelated elements: to build up RTD skills among the work force, to improve
networking, to promote an innovation culture and to stimulate demand.
There are strong disparities from one country to another. As an example, for
Objective 1 regions, the percentage can range from 3,1 in France to 17,3% in
the Netherlands. In Objective 2 regions it ranges from 8,3% in Denmark to
25,3% in Finland. This is a clear consequence of the freedom at the national
level. It does not mean that R&D has or not interest in those countries; the
total amount devoted to R&D depends on the global allocation of budgets. In

5
The R&D budget, in spite of its relative importance as the third policy, accounts only for the
4% of the total budget.
149
some countries, governments preferred to directly use Structural Funds for
R&D while in others it is more preferable to use national budgets for these
purposes.
European regions supported by structural funds could be clustered depending
on the relative importance of their growth in economic terms (i.e. GDP rate)
during some period of time; however, as the activities financed by structural
funds are closely blended with other measures, it is not easy to extrapolate
the benefit of these programmes as isolated from many others.
For the programming period 2000 to 2006, the ERDF regulation envisages
renewed emphasis on RTD. SMEs will be supported to facilitate innovation
and technology transfer, and assistance generally will be given to RTD, to
encourage innovation and the use of new technologies. The aim is to
strengthen the R&D potential of regions and to encourage the development of
the information society.
With the aim of simplifying and concentrating the available resources, there
are three main strategic topics as innovative actions in the period 2000-2006:
Regional economy based on the knowledge and technological
innovation. The aim is to help less-favoured regions to increase
their technological level.
eEuropeRegio: the Information Society to the service of regional
development
Regional identity and sustainable development: to promote
regional cohesion and competitiveness by an integrated planning
of economic, social, cultural and environmental activities.
These goals are not far away from the general goals expressed by the
Commission in the creation of a the European Research Area (COM, 2000a)
emphasising the role to be played by the regions.
the conditions must be studied and put in place for a real territorialisation of
research policies (adaptation to the geographical socio-economic context),
and a better understanding and strengthening is needed of the role that the
regions can play, in addition to the Member States and the Union, in the
establishment of a more dynamic European Research Area on the
international scene.
Later, in a communication concerning the implementation of the European
Research Area (COM, 2000b), the Commission stated:
EU measures should be designed in such a way as to encourage:
Full use of the dynamic and potential of the regions by networking
their capacities and activities with regard to research, innovation
and technology transfer, especially where they are confronted with
common problems
150
The taking into account of regional, geographical or economic
specificities in the carrying out of research activities in Europe
Basically through ERDF and ESF, Member States are then devoting more
and more efforts to increase the investment in R&D through the launching of
specific policy measures. This is specially relevant in the case of ERDF and
ESF due to the nature of their respective goals and the horizontal nature of
the potential interventions through them.
One unsolved debate is the relationship between the effort in R&D through
structural funds and through the Framework Programme. This ambivalence
has been made visible in the financing of large scale research infrastructures.
The Conference of Research Infrastructures hold in Strasbourg in September
2000 adressed this topic framed by a working document of the Commission
services (SEC, 2001). In that document, the Commission declared:
By putting further emphasis on the regional dimension of R&D, the Structural
Funds will contribute to making the European Research Area a concrete
reality, covering also lagging regions as full partners. Investments in research
infrastructures remains a key element in regional development programmes
for the current programming period 2000-2006, particularly for the less
favoured regions.
However, in spite of general statements in favour of coordination al several
sources of funding, differences in the implementation process between
General Directorates in charge of structural funds and Framework Programme
have avoided better interaction in the past. Nowadays, there is a common
view that both approaches are complementary and they need to be aligned
with the interests of interested bodies.
3. The R&D component of the structural funds: the Spanish case
3.1. General aspects
The R&D allocation in the Spanish General State Budgets has increased in
the last ten years with growth rates above the EU average. Nevertheless, this
process has not been enough to increase the percentage of GDP devoted to
research. A similar situation can be found at the regional level where the
budgets allocated to research, development and innovation have been also
increased in the practical totality of the Spanish regions following the trend of
the central government.
From the Spanish indicators of Science and Technology in 2000 (MCYT,
2001), we see that, although the total internal expenses among the regions
have grown from 1995 (590,688 Mpts.) to 1999 (831.158 Mpts.), the
percentage of GERD/GDP has not advanced that much. In 1995, it was
0,81% (the lowest value of the last decade) and in 1999 increased to 0, 89%.
151
To analyse the behaviour of the regions, the following table summarises the
distribution of the percentage of internal expenses and researchers mong the
different regions in Spain.
REGION 1995 1999 1995 1999
% int. exp % researchers
Andaluca 9,7 9,5 12,4 14,0
Aragn 2,5 2,7 3,1 2,6
Asturias 1,6 1,5 2,2 1,7
Baleares 0,5 0,6 0,6 0,6
Canarias 2,0 2,1 2,7 2,9
Cantabria 0,9 0,8 0,9 0,7
Castilla y Len 3,8 4,0 4,5 5,5
Castilla la Mancha 1,9 1,3 1,1 1,2
Catalua 21,0 22,6 18,6 19,2
Comunidad Valenciana 5,9 6,6 7,5 6,6
Extremadura 0,6 0,8 0,8 1,2
Galicia 3,3 3,3 4,1 5,3
Madrid 34,0 31,8 30,8 27,3
Murcia 1,4 1,7 1,9 1,7
Navarra 1,6 1,8 1,6 2,3
Pais Vasco 9,0 8,3 6,6 6,1
La Rioja 0,3 0,4 0,4 0,4
Table 2. Distribution of internal expenses and researchers
Notice that the internal catching up process (within Spain) is very poor. In
some objective 1 regions (like Andaluca, Asturias, Cantabria, Castilla la
Mancha, Galicia) the situation has not improved in the analysed period. The
concentration in Madrid and Catalua is very remarkable.
The situation with respect to the number of researchers is not very different.
The evolution in several regions that is evident however can be attributed to
the creation of new universities and, consequently directly increase those
researchers are working in the public system.
Nevertheless, the general trend in the evolution of the Spanish policy has also
motivated a parallel (increased) effort in the allocation of structural funds for
R&D
6
. Although this growth has been a visible reality from one period to
another it is even today a marginal aspect of the structural funds. Not more
than the 10% has been allocated to R&D and innovation in the current period
of intervention. On the other hand, it has not been enough to overcome the
general increase in the GDP
7
.

6
With practical limitations derived from the need to complement the investments with the
general budget for specific measures.
7
As in many other countries in Europe, GDP has also increased due to the change in the
accounting system. It has also generated a reduction in the percentage.
152
From the Second Report on S&T indicators it is possible to extract some
figures concerning the contribution to Structural Funds to R&D (in percentage
and in MEURO) in Spain during two periods.
89-93N % 89-93 TOTAL 94-99 % 94-99 TOTAL
Objective 1 2.16 219.99 4.80 1,261.92
Objective 2 9.7 146.08 23.19 560.02
Objective 5b 0.0 0 1.9 12.60
Table 3. Distribution of structural funds by objectives
Finally, it is important to mention that the availability of much more funding
from structural funds to support R&D and innovation in Objective 1 regions
has pressed them to increase their regional budgets for R&D in order to be
able to complement the required percentage.
3.2. Examples of policy measures
Within the multiple activities co-financed with structural funds, four of them
have been selected. They correspond to non classical actions that were
created due to the availability of structural funds and would have been very
difficult to implement without them.
RTD projects
In the period 94-99 an experimental programme was launched to support the
development of R&D projects by the public sector with some industrial interest
by the companies in the region. Within this programme, a large amount of
money was mobilised for objective 1 and 2 regions (2/3 for Objective 1 and
1/3 for Objective 2). The programme was managed as a single one for the
Objective 1 regions (with some tentative targets for each of them) and
individual programmes for Objective 2 regions.
This fresh money was extremely important for some regions where the
amounts received were clearly higher than the average funding received from
the national research plan (see below). Difficulties were experienced by many
research groups because of the requirement collaborate with companies to
present a proposal. In many cases, it was the reason to redirect their interest
to more applied activity.
In spite of the relatively low percentage allocated to Objective 1 regions, there
were many practical difficulties to cover these goals in some regions when the
funding was allocated to RTD projects and not merely infrastructure (i.e.
creation of centres or deployment of telecom networks for campuses)
Large scale research facilities
Another example of co-operation between one Regional government and the
national one is the agreement to support the construction of the GRANTECAN
(a large segmented telescope in Canary Islands).
153
This example represents the allocation of important funds to build up a large
scale research infrastructure for scientific research (not applied research). It
has represented a very important element of progress in the region where
many SMEs can contribute to the construction and later on in the
maintenance and operation. With this decision, the attractiveness of Canary
Island for R&D, a sector not connected with the tourism or agriculture (two
important sectors in this region) has been strengthened.
Reimbursable grants
The third policy measure is the so called global grant managed by CDTI
(Centro para el Desarrollo Tecnolgico Industrial). Under this scheme,
technological projects submitted by firms are co-financed (up to a 50% of total
costs) where no reimbursement is required in case of failure or, in case of
success, reimbursement over a five year period starting after the end of the
project with no interest applied. The funds, once reimbursed, are reintroduced
in the system for the financing of new projects.
The attractiveness of this kind of scheme is strongly dependent on the interest
rates in the open market. If interest rates are very high, SMEs could find a
very good mechanism to obtain funding, if they are very low, the associated
bureaucracy can outweigh the potential advantages.
Innovation strategies
The Commission has also promoted within the art. 10 of ERDF, the
programme on Regional Innovation Strategies (RIS) in co-operation with the
Innovation Programme with the initiative Regional Innovation and Technology
Transfer Strategies and Infrastructures (RITTS). Also, in connection with the
ESF (under art. 6) the analysis of Regional Information Society Initiatives.
As a consequence of this effort, the Spanish regions have defined their
innovation strategies (in some cases in connection with de definition of the
Regional R&D Plans) and they have also modified their internal administrative
structures to cope with the new challenges of innovation and knowledge
society culture.
4.3. Interaction with the National Plan for R&D and Innovation
The current National Plan on Research, Development and Technological
Innovation (2000-2006) (NP) has devoted a renewed importance to the
interaction with the structural funds from two different perspectives:
The use of structural funds to fuel the agreements with regional
governments. Basically devoted to physical infrastructures or creation
of new labs or technological centres, these agreements included joint
investments between central and regional authorities by using
structural funds managed by each of them.
The support of some general objectives of the NP where specific calls
published by the central government could be partly funded by
Structural Funds.
154
The need to increase the visibility of R&D in the period 2000-2006 has
motivated the definition of one specific operational programme for R&D and
innovation with six different lines of action
8
: In order to ensure a smooth
movement from the previous to the new period, some instruments will
continue and others have been added to stimulate the regional development.
The general orientation in this period is to increase the interaction between
the public and the private sectors.
Activity lines kept from the previous period:
1. Investment in scientific and technological infrastructures The goal is
to update the scientific and technological equipment in some prioritised
areas both in public and private sectors. Due to some problems in the past,
operation and maintenance apart from purchasing are important elements.
2. Projects or R&D and innovation activities with a clear interest in regional
development in the short and medium term both in the public and private
sectors. The objective is to support applied research activities whose
results could be directly applied to the industrial tissue. Interaction between
public and private actors, even with users participation will be specially
favoured.

3. Training of researchers and technologists. These actions have as
fundamental goal to contribute to the creation and empowerment of human
resources for the R&D activities in those areas prioritised in the
programme.
Apart from the instruments and activities present in previous programmes, the
new operational programme includes new ones that reflect the shift in the
Spanish R&D policy:
1. Creation of technological based companies with the main purpose of
contributing to the regeneration of the industrial tissue in some regions
through the creation of new start ups and spin offs in order to take
advantage of the results obtained in R&D projects. More specifically, the
creation of spin offs from universities, research or technological centres. To
facilitate this goal, support to incubators will be also considered.

2. Creation of new scientific and technological centres This line is
focused upon the priority areas where a clear industrial interest will be
present and where human resources should exist to ensure the launching
process. The centres should allow closely located SMEs to access to the
R&D results without the need to create their own research infrastructure.
Special attention is paid to the creation of virtual centres within or not the
same region.


8
The first one is financed through ESF and the rest through FEDER. Cohesion fund is not
involved in R&D.
155
3. Support for the construction of large scale research facilities (LSRF).
LSRF are scientific facilities whose activity extends beyond the interest of
one specific region. Their scientific motivation is the advancement of
knowledge. They have exhibited a huge catalyser role in one region as the
experience has demonstrated in other parts of Europe (Grenoble, Geneve
or Heidelberg are very well known examples in this field). In the Spanish
case, this is especially important because of the delays in Objective 1
regions in catching up with the benefits of information society.

4. Mobility of researchers and technicians within the general context of
ESF, and with the general goal of facilitating the creation of new research
and development groups. These mobility actions have as primary goal to
facilitate the temporary movement of a trained researcher to another group
with the goal of establishing a new research line or to help in the
improvement of performance or use of a new equipment or industrial
process. Three modalities were considered: within the same region,
between Objective 1 regions or between region 1 and 2.
4. Lessons learned
1. There is no clear connection between the GDP per head of one
region and the gross expenditure on RTD (GERD). The case of
Balearic Islands in Spain with lowest ratio of GERD to GDP of all
the Spanish regions but the highest level of GDP per head is a
remarkable case. They do not see any strong argument to modify
it.
2. The volume of structural funds in the least favoured regions
devoted to R&D and innovation is in many Objective 1 regions
larger in terms of financial volume than those received by the R&D
Framework Programme. In Spain this is the case for all of them.
3. In spite of the huge amount of money spent in Objective 1 regions
to increase their R&D capability, their participation in the
Framework Programme has remained nearly stable.
4. The interaction and distribution of thematic priorities and policy
measures between the Regional Programmes, the National
Programmes and the Framework Programme is not clear and has
not been solved in spite of the different Communications from the
Commission.
5. The evolution of the financial effort made on R&D depends on the
type of region. Regions as objective no. 1 have much more margin
and volume of resources to do that. Nevertheless, this is a very
unstable investment because it is not totally controlled by the
region.
6. The additionality principle is not totally clear. In many cases, the
measures are the same measures promoted through the national
156
budget. The criteria should be based on efficiency and not only
transparency.
7. Specific regulations (particularly for Objective 2 regions) in the
definition of maps of eligible areas, introduces distortions in the
implementation of general measures or policies. The consequence
is the appearance of a border effect where investments are
located in poorest regions while services or manpower come from
other non eligible areas.
8. The relative improvement of a region does not attract better
behaviours in others (even if they are geographically connected).
This fact re-enforces the view that the interventions are too close.
9. Trend to concentrate the investments in large R&D infrastructure
projects (like creation of new research centres or technological
parks) where it is possible to increase visibility and attractiveness.
The dynamics of regional clusters associated to these initiatives
have not been deeply studied and it is soon to see their long-term
effects.
5. Conclusions and recommendations
Several conclusions could be extracted from the previous analysis and
lessons. These conclusions try to establish some guidelines for the future.
Although all these conclusions directly reflect the Spanish situation, many of
them could also be applied to other Member States because the problems
(not necessarily the causes behind them) are shared by many of them.
1. There is a progressive increase in the percentage of structural funds
devoted to support innovation activities (including applied research).
Data show that in most part of regions, the amounts devoted to R&D and
innovation have grown from one period of intervention to another. Although
this is a consequence of the accepted role that these activities have to speed
up the economic growth rate, there are two dangerous side effects:
When structural funds exceed in one specific region a threshold
(defined by comparison with other funding sources for the agents
in the regional innovation system), they could reduce the external
competitiveness of its research groups. The consequence is that it
is easier to get funding from the specific regional or national
programmes covered by structural funds (above all in Objective 1
regions) than to compete national or internationally for them.
The capacity of per capita funding absorption in objective 1
regions for RTD activities is very limited due to the dependency on
the availability of skilled human resources. As a consequence, it
157
seems necessary to enforce the coordination between policy
measures related to ERFD and ESF.
The transition from the prioritisation of physical infrastructures to the logical
one requires the previous availability of skilled human resources. This is the
most important barrier to gain in efficiency.
Structural funds should be also devoted to increase the attractiveness of the
regions for high-tech activities.
2. The relationship between the Structural Funds and the Framework
Programme to support R&D activities is not well developed
Available data do not indicate any correlation between the increase in the
volume of structural funds devoted to R&D and in innovation and the increase
in the participation in the Framework Programme.
The Second Report on Indicators (page 397) mentioned, the Operational
Programmes of the different Structural Funds, devised in the framework of a
partnership between the local, regional, national and Community authorities,
could in future make sure that they have points of access to the Fifth
Framework Programme (public and private research laboratories, firms,
technology transfer units, various interfaces, etc.) and their actions
complement each other well in the area of R&D and innovation, in accordance
with the European Commissions Action Plan for Innovation.
The proposal for the Sixth Framework Programme could make this goal a bit
more difficult for two main reasons: the evolution of priorities and activities
towards more long-term research, and the decrease in relevance and funding
of the Innovation Programme. The consequence is that the well known
hooks where FP can be linked to Structural Funds could be lost.
The reaction, for the policy makers at the national level and for the users
(above all in regions objective 1) could be to re-enforce the R&D activities with
Structural Funds, an easier regime, and to forego participation in the
Framework Programme. It may well be the most probable scenario for SMEs
without a deep R&D tradition.
The border between R&D and innovation is unclear and it make difficult to
define the spheres of influence of the FP and the activities funded by
structural funds
It should be necessary to enforce the innovation activities within the FP and to
accept joint activities (partly funded by FP and partly by Structural Funds) to
launch long-term projects.
158
3. Regions are not stimulated to behave less isolatedly because of the
difficulties to establish co-operation within the normal operational
programmes with other regions
The Structural Funds implementation is following a full regional approach. It is
made visible by the need to conceive and use the funds inside the region.
Interregional activities are marginal. The consequence is the implicit adoption
as regional development model of a black box isolated from the external
context. Funds for interregional activities are marginal.
As an example, it is hard to understand the difficulties to set up RTD actions
between one region objective 1 and another Objective 2 region (or between
two Objective 2 regions). The consequence is isolation. This trend is also
pursued by the regional authorities trying to keep sole responsibility in the
management of the funds and to avoid (or reduce) any constraints from other
places.
Regulations should allow the combination of different types of structural funds
and to enforce co-operation among European regions.
4. Structural Funds should facilitate the interaction between national and
regional programmes
The interaction between regional and national R&D plans constitute a crucial
policy instrument for those Member States with deep decentralisation
processes. It could facilitate the co-operation between central governments
and more or less autonomous regions. In this context, structural funds
(managed by both governmental levels) could play a prominent role due to the
need to provide funding at the national or regional level.
Two problems are still apparent:
a. The balance between complementarity and overlapping of
priorities is not easily solved because R&D becomes an
excuse for other political battles (where transparency
becomes a crucial aspect).
b. The participation of the regional governments in the
management of the programmes and the distribution of
responsibilities between the central and regional governments
contaminates the discussions.
It is true that some R&D activities in the national R&D programme are partly
funded by structural funds, but the separation of responsibilities at national
and regional level is not clear. The joint funding of one R&D activity with funds
from the central administration and one regional government is an exceptional
case.
159
Although R&D is a national responsibility (anchored in the Spanish
Constitutional Law), the joint responsibility in the area of innovation makes
very difficult to establish any type of separation of concerns.
Operational programmes cannot be considered as isolated pieces of R&D
policy. They need to be embedded into the general set of measures promoted
by Member States.
References
1. (COM, 1997). Second report on S&T indicators 1997. Chapter 7: Regional
dimension and cohesion in Europe. EUR 17639. Dec. 1997.
2. (COM, 2001). The regions and the new economy. Guidelines for innovative
actions under the ERFD in 2000-2006. COM(2001) 60 final.
3. (COM, 2000a). Towards a European Research Area. Communication form
the Commission to the Council, the European Parliament, the Economic and
Social Committee and the Committee of the regions. January 2000.
COM(2000)
4. (COM, 2000b). Making a reality of The European Research Area:
Guidelines for EU Research activities. Communication form the Commission
to the Council, the European Parliament, the Economic and Social Committee
and the Committee of the regions. October 2000. COM(2000) 612 final
5. (COM, 2000). e-Europe. COM (2000)
6. (COM, 1997). European Union. Consolidated Treaties (in Spanish) ISBN
92-828-1636-2. European Comisin. 1997.
7. (COM, 1998). Reinforcing cohesion and competitiveness through research,
technological development and innovation. COM(98) 275. May 1998.
8. (SEC, 2001). A European Research Ares for infrastructures. Working
document of the Commission Services. SEC(2001) 356. Feb. 2001.
9. (MCYT, 2001). Indicadores del Sistema Espaol de Ciencia y Tecnologa
2000. Ministerio de Ciencia y Tecnologa. 2001
160
ANNEX VI. Case Study: Impact of non RTD policies on R&D policies
Relevance of the issue
Context
The evolution of public and private investments in RTD is influenced by
decisions taken in other public policies non related to RTD. These non-RTD
policies have implicit or explicit goals that could require the launching of
specific R&D activities. Conversely, scientific or technological advances and
the specific RTD policies can enable or impede the true implementation and
success of policies and regulations in many other sectors. This mutual
influence could affect R&D priority setting processes, motivate deep changes
in the behaviour of actors and drive the reorganisation of public and private
institutions involved in the execution of R&D.
Non-RTD policies affecting RTD
In advanced societies many societal goals cannot be attained without a deep
intertwining with RTD policies.
The most important areas (regardless the way that they may be organised in
ministerial departments in any specific country or cabinet)
9
are:
Transport.
Energy.
Education.
Telecommunications.
Defence and security.
Health.
Agro-food.
Environment.
In all cases, the long-term agenda in each of these policies is faced with
difficult challenges arising from the lack of specific knowledge, cost of
available solutions, dependence of wide spread of technology, all of which
problems call for RTD to contribute viable answers. Some generic drivers of
basic political action cross all these areas in pursuit of better development.
Main identified drivers are:
Cohesion between regions.
Changes in taxation to support innovation.
Decentralisation of administration with the emergence of local or
regional decision making structures.
Re-industrialisation of the industrial tissue with emphasis on innovative
SMEs.
Deregulation of markets looking for higher levels of competence and
then competitiveness.
Each of these drivers provides its own set of interfaces between RTD and
non-RTD policies and with them opportunities for stimulating investments in
RTD. For example, public procurement of goods and services provides a

9
In its Green paper on Innovation (1995) the Commission stated: Strengthening the capacity
for innovation involves various policies: industrial policy, RTD policy, education and training,
tax policy, competition policy, regional policy and policy on support for SMEs, environment
policy, etc.
161
major instrument through which technological innovation and development
can be stimulated by appropriate specification policies.
Priority setting processes
With respect to the priority setting process, all these policies can define long
term goals that are difficult to reach with present technology or with present
knowledge of complex physical, biological or social phenomenon. Some
examples may be useful in understanding the connection between RTD and
other policies; in all these cases, objectives (short or long term) defined in
other policy areas, have influenced the research agenda.
Main Policy Area Policy
Objectives
Related Policy
Area
Research Agenda
Transportation Sustainable
cities.
Reduction in traffic
pollution.
Reduction in road
injuries and
deaths.
Environmental
policy
Public health
policies
Cleaner engines with less CO2
emissions,
Automotive safety,
Intelligent road signalling,
etc
Energy Clean/renewable
energy reducing
dependency on
fossil fuels
Environmental
policy
Cheaper and more
efficient solar cells or
wind mills
High temperature
ceramic materials
Food policy Health of citizens
Security of Food
supply
Public health
policies
Bio-sensors to control quality and
security of human and animal food.
GMO control and regulation
Policy makers have the tendency to favour stricter regulations, but they
cannot be imposed without a deep analysis of their economic and social
effects and based on technology forecasts to be realistic.
The change of behaviour of stakeholders: EU Regulation impact on
innovation of European Industry
Another type of interaction between RTD and non-RTD policies is motivated
by the application of structural changes in the national market of services or in
industrial sectors pursued by governments in order to increase their future
competitiveness.
The interaction of regulation with competitiveness and innovation is complex
and is manifested by a variety of reactions by actors in organising their RTD
efforts. Again a number of examples serve to illustrate the outcome.
The example of the telecommunication sector
In Europe,
new licenses for mobile telephony,
added value data services,
the opening of the local subscriber loop to new entrants,
162
have provoked in European telecom providers the need to adapt their RTD
structures and strategies in order to maintain their competitiveness. Telecom
operators had to
pay more attention to short term RTD activities linked to services
requested by citizens,
postpone long term activities,
exploit their dominant positions on available technologies or services to
keep or create a customer base,
consider technology and services commodities to be purchased in the
open market.
From the structural standpoint, the deregulation process has motivated
the downsizing of operators own corporate R&D centres,
an increase in outsourcing of RTD activities,
the reorganisation of the strategic alliances between operators, telecom
providers and a myriad of high tech SMEs exploring different solutions.
Research capacity of European telecom providers for the development of
basic technologies is lower than a decade ago. Indirectly, the pressure to
obtain results and to recover the investments has led to a loss of interest in
long term activities weakening the established links with research centres.
The example of the health system
RTD in health and biomedical fields reflects the very close links between three
key actors (hospitals, pharmaceutical firms, and universities and research
centres). In some cases, they perceive themselves as clients of different
ministerial departments, not necessarily co-ordinated
10
. A plausible non-RTD
policy in health trying to rationalise the costs of the bill for drugs by reducing
the price of some drugs (for instance, by increasing the introduction of
generics) could impact investments in new drugs by the pharmaceutical
industry, with a knock on effect of reducing outsourcing to research centres or
high-tech SMEs and also the support to clinical trials in selected hospitals.
Pricing scheme negotiations consider RTD investments as an element in
bargaining.
Effects of energy markets de/re- regulation on EU technology portfolio
Energy markets throughout the world are undergoing significant changes
towards deregulation, privatisation, liberalisation, or in a broader sense de/re-
regulation. Beside the expected reduction in energy prices induced by
competition and increased competitiveness of EU industry, the reform may
produce other spillovers in the economy, such as changes in employment, the
environment or the technological sector. Particular attention should be paid to
the technology sector, and more specifically to emerging technologies whose
market diffusion could be boosted or delayed because of these structural
changes.

10
As an example of this situation, the Spanish Health Department has announced the
launching of a strategic action on research on genomics and proteomics supported by their
own funds, and the Ministry of Science and Technology is managing a programme of
Biomedicine.
163
Education and Training policies and their importance for R&D actors /
investment
The OECD argues that investment in knowledge and skills should be at the
center of a strategy for helping societies adapt to structural and technological
change. They stress the importance of learning throughout life for enriching
personal lives, fostering economic growth and maintaining social cohesion.
Gliesecke (1999) using the pharmaceutical sector in Germany as a case study
finds that institutional learning capacities are crucial determinant of successful
S&T policy.
Consequences on the market of environmental regulation
Environmental regulation influences innovation by changing the nature of
competition. This leads to a view of regulation acting as a moderator of
technical change, changing directions and modes of innovation rather than
just stopping or starting it.
Impact on the research organisation inside governments
Because of the interactions of different types of sectoral policies governments
have tried to set up or modify some internal structures to cope with the
situation. The declared objective is generally to facilitate co-ordination and to
increase efficiency.
Organisationally some European countries merge under a single ministerial
department everything related to RTD funding and decision-making. The
intended goal is to co-ordinate better RTD activities and to maximise the
available resources. The cases of Portugal and Spain are examples where co-
ordination was theoretically improved in this way. The undesirable
consequence of this concentration of power in a single point was the isolation
of RTD policies from the needs of sectoral areas. This can be contrasted with
the implementation of regionalisation in Belgium which forms the basis of our
more extensive example of the issue of Centalisation versus Decentralisation
in Section ? below.
The increase in public budgets for RTD depends on the relative political power
of the entities in charge of formulating the policies. It is not clear if this concept
results in an increase or maintenance of the total budgets devoted to R&D. Its
rationale is higher efficiency and not necessarily more volume of funding.
Nevertheless, recent data (2001) show that the percentage of budget increase
for research in the General State Budgets in Spain and Portugal were higher
than other policies and also in comparison with other European countries.
Probably, the better visibility that a ministry has as focal point for RTD made
easier the discussions during the negotiation of the annual budget.
On the other hand, if ministerial departments consider RTD investments as
important for implementing their policies, they can devote extra funding for
that or to promote its deployment. A single department has more constraints
in influencing others.
Identification of policy levers
The analysis of the context presented reflects the complexity of the issue and
the difficulty of setting up a homogeneous framework. Focusing the attention
164
on the mechanisms to increase RTD investments, several policy levers can be
proposed.
1. To set up permanent co-ordination mechanisms when decision-making
affects several sectoral policies.
2. To raise the technological specifications in tenders for public purchases
3. Involvement of sectoral departments in RTD activities carried out by
specialised ministries.
4. Support to end-users in the application of new technologies
5. Creation of scientific advisory bodies linked to all ministerial
departments
Some indicators can be identified to help policy makers in setting targets and
assessing progress
Evolution of the percentage of RTD activities enclosed in other areas.
Data from annual budget distribution.
Increase of business RTD investments in projects or activities related to
public tenders.
Number of agreements between research entities (public and private)
and sectoral ministerial departments.
Finally, the influence and pressure to concentrate the effort on short term
activities comes from the view that research is perceived as the way to solve
urgent problems that policy makers have on their agendas. Other long-term
perspectives in non-RTD policies should compensate this trend/risk.
165
Annex VII: Trends in R&D Expenditure in relation to GDP during the 90s:
The time evolution of R&D investments and the comparison analysis amongst
European countries can be addressed from multiple perspectives. A number
of indicators have been approved for the benchmarking exercise, and used by
statistic offices from the OECD, EU and Member States. However, as we
have mentioned in the report, no single indicators can offer a complete picture
of the situation in Member States because many of them are interrelated, and
complex analysis should simultaneously include their interaction.
The present section incorporates a quantitative analysis followed by an
interpretation of data by the expert group by combining different indicators
related to expenses and budgets in matrices. The bi-dimensional matrices
built on the available indicators are the following ones:
1. Gross domestic product versus R&D expenditure. These tables can
show the interaction between the GDP growth (per inhabitant) and the
R&D expenditure. To avoid size biases and to see the efficiency of the
system the R&D expenditure has been modulated by inhabitants and
by R&D personnel.
2. Gross domestic product versus government budget on R&D. It allows a
comparison between the effort carried out by governments in their
budget (something controlled by them) and the country economic
evolution.
3. Government budget on R&D versus R&D expenditures. This table
shows the relation between the government budget on R&D and the
expenditures in that are in all institutional sectors (business,
government, high education and private non-profit sectors).
We are mainly interested in the evolution over the years of these parameters.
Then, more than absolute figures, we like to understand trends. Accordingly
with this goal two different but consecutive periods per Member States were
chosen: from 1990 to 1995 and from 1996 to 2000. Globally, they cover the
last decade. The grouping of data in two periods has been proposed to avoid
variations due to short term special circumstances in one country. Each dot in
the figures is the mean for a Member State in one period. The figures are
followed by some subjective comments.
Gross Domestic Product versus R&D expenditure
Many Member States have made an important effort to promote higher rate of
R&D expenses under the strong feeling that it could boost development in
their countries. But, did it really happen?
166
Figure 1 shows that in the period considered both R&D expenditure per capita
and GDP per capita shows a positive trend in all the countries. Italy is the only
exception. This country has decreased their R&D expenditure.
The Nordic countries (Sweden, Denmark, Finland) are the ones that have
experienced the more significant increases in R&D expenditure per capita, and
together with Austria and Belgium, are the countries with the highest R&D
expenses per capita in relation to their GDP per capita. The rest of the countries
have undergone a moderate increase in R&D expenditure per capita.
On the other hand, the Nordic countries, Belgium and Austria have experienced
also a significant increase in GDP per capita. However other Member States with
a smaller relation between R&D expenditure per capita and GDP per capita,
show also a considerable increase in that indicator. An outstanding case is
Ireland. From 1990 to 2000, this country has undergone a huge increase in the
GDP per capita. Also Netherlands shows this behaviour. Thus, this figure shows
that the causality relation between increases in R&D expenditures per capita and
increases in GDP per capita is not always clear.
Data Source: Eurostat 2002
Luxembourg no data on R&D expenditure per inhabitant. For the first period only complete series
available for France, Ireland, Italy, Netherlands, Austria, Finland and United Kingdom. Netherlands data
up to 1998. Ireland and Greece only data up to 1997. 2000 data only available for Germany, Spain,
France, Austria and United Kingdom.
Sweden data on GDP since 1993. Spain and Portugal data since 1995. Germany data since 1991.
However, because this is an exercise on funding R&D, it seems interesting to
look at the relationship the other way round and ask to what extent do countries
economic productivity and the amount of available resources it generates (proxy
used: GDP/inhabitant) influence their propensity to invest in R&D.
The rationale is very simple. It draws on the assumption that for governments as
for firms, the decision to invest in R&D at a particular moment in time takes place
in a queue with competing decisions about resource allocations. The higher the

FIGURE 1
GR
PT
ES
IE
IT
UK
NL
FI
BE
FR
AT
DK
DE
SE
GR
PT
ES
IT
IE
UK
AT
BE
NL
FR
DK
DE
FI
SE
0
100
200
300
400
500
600
700
800
900
0 5,000 10,000 15,000 20,000 25,000 30,000
GDP ( per inhabitant al 1995 prices)
R
&
D

e
x
p
e
n
d
i
t
u
r
e
s
.

A
l
l

i
n
s
t
i
t
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a
l

s
e
c
t
o
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s

a
t

1
9
9
5

p
r
i
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s

p
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r

i
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i
t
a
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90-95
96-00
167
position of each potential decision item in the priority queue, the lesser its
elasticity to the amount of available resources. Given the array of pressing
commitments that a government or a firm have regarding e.g. wages, equipment
and maintenance costs, priority policies (healthcare and welfare, education,
defense) or investments, R&D expenditure is liable to be more elastic relative
to the amount of resources than those more pressing items. Translated to the
variables in the figure, this would mean that countries with a higher GDP per
capita would have more resources to spare (both by the government and by the
firms) for investment in R&D, after all the more inelastic requirements on the
available resources are sufficiently met. On the other hand, the relative elasticity
of R&D will depend on how high the government places it in its policy agenda
and on the aggregated perceived impact of R&D in firms competitiveness
(depending on industrial sectors, product life-cycles, etc.).
Of course treating GDP as the independent variable does not mean to deny the
impact of R&D on economic productivity, however mediated. But the causality of
R&D on productivity rests on much stronger assumptions on the mediation
between newly created knowledge and value-added in the market, and probably
implies a longer time lag than the reverse relationship that as more to do with
immediate economic constraints. Introducing the relationship using GDP as the
independent variable along with the more generally discussed reverse
relationship also allows us to discern important consequences. In fact, the
consequence of the coexistence of these two relationships might imply a circular
causality system whereby more productive countries investing more in R&D may
be able to accumulate further growth possibilities through R&D, in a virtuous
investment cycle, while less productive countries may be captured in a vicious
cycle of not generating enough wealth to be able to invest significantly in R&D
and therefore would grow more slowly in a knowledge-based economy.

FIG. 1A
GR
PT ES
IE
IT
UK
NL
FI
BE
FR
AT
DK
DE
SE
GR
PT
ES
IT
IE
UK
AT
BE
NL
FR
DK
DE
FI
SE
R
2
= 0,8935
R
2
= 0,9031
0
100
200
300
400
500
600
700
800
900
5.000 10.000 15.000 20.000 25.000 30.000
GDP ( per inhabitant al 1995 prices)
R
&
D

e
x
p
e
n
d
i
t
u
r
e
s
.

A
l
l

i
n
s
t
i
t
u
t
i
o
n
a
l

s
e
c
t
o
r
s

a
t


1
9
9
5

p
r
i
c
e
s

p
e
r

i
n
a
h
b
i
t
a
n
t

90-95
96-00
Power (90-95)
Power (96-00)
168
The data show there is an overall strong positive correlation between GDP per
capita and GERD per capita (R
2
=0,89 in the 1990-95 averages; R
2
=0,90 in
the 1996-2000 averages). The best fit is a power regression curb, showing
that not only R&D per capita grows along with GDP per capita, but also that
the growth of the dependent variable accelerates as the dependent variable
grows (Fig 1A). This lends support to the elasticity hypothesis, indicating that
countries having a higher GDP per capita can allocate increasingly more of
that extra GDP to R&D than less productive countries. On the other hand, the
lower slope and acceleration factor of the second curb suggest that the richer
countries have on the whole tended to invest less in R&D in the second five
year period in proportion to GDP growth.
However, this is not the whole story. Elasticity is in fact about choice versus
constraint in allocating resources to particular uses. Richer countries not only
invest more on R&D than the poorer ones; they also have more choice on
how much to allocate, depending on how high R&D is in the investment
agenda of governments and of firms. In fact, the spread of the data points
about the curves in fig. 1A increases as GDP grows. Breaking down the data
between two sets of countries, the small performers around the bottom of the
curve and the middle and high performers, the result is strikingly different
(Figures 1B and 1C).

FIGURE 1B
GR
PT
ES
IE
IT
GR
PT
ES
IT
IE
R
2
= 0,9631
R
2
= 0,9588
0
50
100
150
200
250
5.000 10.000 15.000 20.000
GDP ( per inhabitant al 1995 prices)
R
&
D

e
x
p
e
n
d
i
t
u
r
e
s
.

A
l
l

i
n
s
t
i
t
u
t
i
o
n
a
l

s
e
c
t
o
r
s

a
t

1
9
9
5


p
r
i
c
e
s

p
e
r

i
n
a
h
b
i
t
a
n
t

90-95
96-00
Power (90-95)
Power (96-00)
169
While in the first group of countries the correlations are even higher (R
2
=0,96
for both curves), in the second they are much lower and much less significant
(R
2
=0,19 in 1990-95 and 0,31 in 1996-2000). In terms of the elasticity
hypothesis, this means that, while 96% of the variance in R&D expenditure
level per capita among the poorer countries can be explained by their (low)
level of GDP per capita, this variable only explains 20% to 30% of the
variance among the richer countries. The former are constrained to low R&D
investment levels, the latter can choose the intensity of their investment. The
clear-cut difference in the data between these two sets of countries where
only the UK seems in an intermediate position, though captured by the growth
of the Irish GDP and R&D in the second five year period suggests a GDP
threshold effect below which, given that all EU countries share a minimum
priority to increase R&D, such growth is severely constrained. Once that
threshold is passed, the intensity of R&D investment is consistently higher
than in the first group of countries, but on the other hand the range of choices
on how much of the GDP to invest in R&D widens enormously. As the overall
amount of R&D investment is highly determined by how much R&D is
performed in firms, the variation in the choices in the higher performing
countries is very likely to depend on the priority assigned by industry to R&D
investment, which in turn is probably related to the countries industrial
structure, especially to the degree of their specialisation in knowledge-
intensive industries and services.
Figure 1 clearly shows that all the countries that experienced both high
absolute increases in R&D expenditure per capita and higher share of GDP
growth per capita converted into R&D investment (Sweden, Finland, Austria,
Denmark, Belgium) were in 1990-95 placed in the higher productivity group,

FIGURE 1C
UK
NL
FI
BE
FR
AT
DK
DE
SE
UK
AT
BE
NL
FR
DK
DE
FI
SE
R
2
= 0,1899
R
2
= 0,3079
0
100
200
300
400
500
600
700
800
900
10.000 15.000 20.000 25.000 30.000
GDP ( per inhabitant al 1995 prices)
R
&
D

e
x
p
e
n
d
i
t
u
r
e
s
.

A
l
l

i
n
s
t
i
t
u
t
i
o
n
a
l

s
e
c
t
o
r
s

a
t


1
9
9
5

p
r
i
c
e
s

p
e
r

i
n
a
h
b
i
t
a
n
t

90-95
96-00
Power (90-95)
Power (96-00)
170
above a rough GDP threshold of 15 thousand Euros per capita at 1995 prices.
Within this higher GDP per capita group, other countries show either less
growth in R&D investment in proportion to growth in GDP (Germany, the
Netherlands) or hardly any growth at all (France), a situation the latter shares
with the two other countries closest to this high GDP group, the United
Kingdom and Italy that has even decreased R&D investment per capita.
Although a finer analysis would be required to test this hypothesis, this
sustains the interpretation that only the countries above a relatively high
threshold of GDP per capita are able to keep a relatively high level of R&D
investment, and that the difference in how much of their GDP growth is turned
into R&D investment is largely dependent on how much their industrial
structure is oriented to highly innovative, knowledge-intensive sectors who
place a higher priority on R&D to sustain their innovation paths and whose
R&D investment is therefore less elastic to GDP than in larger, longer
established and more diversified industrial economies.
The countries below that threshold, on the other hand, are more constrained
in their choice to allocate resources to GDP and generally have less
innovative and knowledge-intensive industries. The growth of their R&D
investments is thus small in absolute terms, though they may exhibit higher
R&D growth rates than most countries and relative to their own GDP. In order
to take off to higher absolute levels of R&D investment, these countries would
need a boost in GDP to liberate extra investment resources that can but
scarcely be taken out of competing allocations, a step that only Ireland has
been able to achieve through a radical change in its industrial structure; with
its combination of a highly increased GDP per capita and a growing sector of
knowledge-intensive industry and services, Ireland is likely to experience a
significant take-off in R&D investment. Until they achieve such growth, the
other low GDP countries have to rely on sustained public effort to continue
their moderate absolute increase in R&D, which represents a high growth rate
and a heavy relative burden on their GDP growths.
In the following figure R&D expenditure is now modulated by the R&D
personnel in each country. It is possible to distinguish between two groups of
countries: those in the superior corner with high levels in both indicators and
those countries with lower levels both in GDP and R&D expenditure (Italy,
Spain, Portugal and Greece). Thus it seems to be a strong correlation
between GDP per capita and R&D expenses per FTE.
171
Data Source: Eurostat 2002
Luxembourg: no data on R&D expenditure per R&D personnel. For the first period only complete series
available for Spain, France, Ireland, Italy and Netherlands. Netherlands: data up to 1998. Italy, Ireland
and Greece: only data up to 1997. 2000 data only available for: Spain. United Kingdom: no data for the
first period.
Sweden: data on GDP since 1993. Spain and Portugal: data since 1995. Germany: data since 1991.
About evolution in time, this figure demonstrates the difficulties of changing
the general situation in one decade. Only two countries present an
outstanding behaviour and relevant changes in their position: Ireland and
Sweden. The first one has moved placing nearest to the first group of
countries. Sweden offers the most remarkable increase in the R&D
expenditure per R&D personnel. On the other hand Portugal, Italy, Greece,
Spain and France have a negative slope, due to their reduction in R&D
expenditure, per FTE personnel, probably reflecting the fact that most of their
expenditure growth was devoted to increase their human resource base.
Summing up, it seems that the first five year period situation of each country
is reinforced in the second period: countries in the first group continues to
increase their R&D expenditure per R&D personnel, and countries in the
second group worsen their positions, with the respective exceptions of France
and Ireland.

FIGURE 2
IE
IT
FI
NL
DK
SE
AT
ES
PT
GR
FR
DE
BE
GR
AT
ES
IT
IE
PT
NL
BE
FR DK
DE
FI
SE
0.000
0.020
0.040
0.060
0.080
0.100
0.120
0 10,000 20,000 30,000
GDP ( per inhabitant at 1995 prices)
R
&
D

e
x
p
e
n
d
i
t
u
r
e
.

A
l
l

i
n
s
t
i
t
u
t
i
o
n
a
l


s
e
c
t
o
r
s
.

M
i
l
l
i
o
n

a
t

1
9
9
5

p
r
i
c
e
s

p
e
r

R
&
D


p
e
r
s
o
n
n
e
l

(
F
T
E
)

90-95
96-00

172
Figure 2A shows that there is a strong correlation between GDP per capita
and the amount of R&D expenditure per FTE research personnel (R
2
=0.89 in
1990-95 and 0.78 in 1996-2000).
Although variations in R&D investment per FTE research personnel in part
reflect differences in wage levels, most of them can probably be interpreted as
variations in investment expenditures in relation to personnel expenditures. In
this respect, Figure 2 shows that countries with higher GDP per capita,
besides being able to spend more on R&D, can also allocate a larger share of
that expenditure to capital investment (research facilities and equipment,
bibliography, databases). Less productive countries (Portugal, Spain,
Greece, Italy), less provided with human resources for R&D, tend to
concentrate their increase in R&D investments in developing the human stock
for R&D, at the expense of actually decreasing the overall investment per
research personnel. It should however be noted that in the smaller countries
where researcher recruitment is growing at fast relative rates, this can simply
reflect the shift in the composition of the R&D labour force, which is growing in
the base and therefore lowering average wages.
Gross Domestic Product versus Government budget on R&D
Governments have made an effort in increasing budgets to support the
launching of R&D activities and to support the public system. This chart
shows at what extent this effort has been strong enough to trigger economic
growth and, simultaneously, to test the correlation between these two
aspects.
In the bottom of figure 3 there is a group of countries (Ireland, Spain, Portugal
and Greece) with moderate increases both in the government budget per
capita and GPD per capita, except Ireland, that, despite the moderate
increase in the budget, has experienced a huge increase in the GDP per
capita. Placed near to those countries, United Kingdom and Italy have also
undergone a positive trend in the GDP but a reduction on the government
budget.

FIGURE 2A
BE
DE
FR
GR
PT
ES
AT
SE
DK
NL
FI
IT
IE
UK
SE
FI
DE
DK FR
BE
NL
PT
IE
IT
ES
AT
GR
R
2
= 0,8868
R
2
= 0,7834
0,000
0,020
0,040
0,060
0,080
0,100
0,120
0 10.000 20.000 30.000
GDP ( per inhabitant at 1995 prices)
R
&
D

e
x
p
e
n
d
i
t
u
r
e
.

A
l
l

i
n
s
t
i
t
u
t
i
o
n
a
l


s
e
c
t
o
r
s
.

M
i
l
l
i
o
n

a
t

1
9
9
5

p
r
i
c
e
s


p
e
r

R
&
D

p
e
r
s
o
n
n
e
l

(
F
T
E
)

90-95
96-00
Power (90-95)
Linear (96-00)

173
The rest of the countries show high levels in the indicators considered.
However, despite a positive trend in the GDP per capita in all of them, France
and Sweden have experienced an important reduction in the government
budget, and moderate in the case of Germany. On the contrary Finland and
Denmark have increased considerably the government budget. Netherlands,
Belgium and Austria have a modest increase in that indicator.
Data Source: Eurostat 2002
2000 data on government budget only available for Finland. Ireland only data up to 1998.
Sweden data on GDP since 1993. Spain and Portugal data since 1995. Germany data since 1991.

FIGURE 3
DK
DE
FI
NL
AT
BE
UK
IT
ES
IE
GR
PT
SE
FR
DK
BE
DE
GR
PT
ES
IE
IT
UK
AT
NL
SE
FR
FI
0
50
100
150
200
250
300
0 5,000 10,000 15,000 20,000 25,000 30,000
GDP ( per inhabitant at 1995 prices)
G
o
v
e
r
m
e
n
t

b
u
d
g
e
t

a
p
r
o
p
i
a
t
i
o
n
s

o
r

o
u
t
l
a
y
s

o
n


R
&
D

(
m
i
l
l
i
o
n

o
f

c
o
n
s
t
a
n
t

1
9
9
4

E
C
U
/
E
U
R

a
t


1
9
9
5

p
r
i
c
e
s

p
e
r

1
0
0
0

p
o
p
u
l
a
t
i
o
n
)

90-95
96-00

Figure 3A
UE
FR
SE
PT
GR
IE
ES
IT
UK
BE
AT
NL
FI
DE
DK
UE
FI
FR
SE
NL
AT
UK
IT
IE
ES
PT
GR
DE
BE
DK
y = 4E-07x
2.0039
R
2
= 0.813
y = 7E-06x
1.6903
R
2
= 0.7652
0
50
100
150
200
250
300
0 5,000 10,000 15,000 20,000 25,000 30,000
GDP ( per inhabitant at 1995 prices)
Go
ve
rm
en
t
bu
dg
et
ap
ro
pia
tio
ns
or
ou
tla
ys
on
R&
D
(m
illi
on
of
co
ns
ta
nt
19
94
EC
U/
EU
R
at
19
95
pri
ce
s
pe
r
10
00
po
pu
lati
on
)
90-95
96-00
Power (90-95)
Power (96-00)
174
However, governments investment in R&D through budget appropriations per
capita also shows a high positive correlation with GDP per capita (R
2
=0.81 in
1990-95 and 0.77 in 1996-2000) (Figure 3A). On the other hand, the lower
slope and acceleration coefficient in the later period points to the fact that,
generally speaking, governments in higher income countries tended to devote
a lesser part of their growing revenues (assuming these to be correlated to
GDP) to R&D than before.
One interesting trend is the negative correlation between business enterprise
R&D as a percentage in GDP in 1990-95 and the growth of government
appropriations for R&D between 1990-95 and 1996-2000 (R2=0.43 for a
logarithmic regression curve with negative slope) (Figure 3B).
Some governments in countries with an established tradition of business
investment in R&D rested on that position and shifted government spending
priority to other concerns, while being certain to retain comparatively high
R&D expenditure levels through industry funded research (Sweden, France,
Germany, United Kingdom). Others, who also had high or intermediate levels
of business R&D to GDP, developed policies of purposeful R&D growth
through government funding and display fast growth of government budget
appropriations (Finland, Belgium, Denmark, the Netherlands and Ireland).
As a result, Figure 3 shows a fast convergence at the top. While in the
average 1990-95 France, Sweden and Germany were clearly at the top of
government spending in R&D per capita, in the 1996-2000 average there is a
much more homogeneous group including, besides the former countries, also
Finland, Denmark and the Netherlands, whose absolute growth was closely
followed by other middle-high GDP countries (Belgium, Austria). The countries
having the lower GDP per capita in 1990-1995, which also had less business
R&D as percentage of GDP, relied heavily on government effort (using EU
cohesion funds) to support growth of R&D expenditure (Greece, Portugal,
Ireland, Spain), with the remarkable exception of Italy whose behaviour

FIGURE 3B
DK
DE
FI
NL
BE
UK
IT
ES
IE
GR
PT
SE
FR
R
2
= 0,4279
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0%
BERD as % of GDP 1990-95
G
B
A
O
R
D

G
r
o
w
t
h
%

1
9
9
0
-
9
5

t
o

1
9
9
6
-
2
0
0
0

175
emulated that of the more traditional high performing industrial countries,
while its average business expenditure grew little in absolute terms and
declined in proportion to GDP resulting in an overall drop of R&D expenditure
per capita and in relation to GDP in this country.
From the analysis of Figure 3 we again see that while countries with higher
GDP are both more able to allocate more government funding to R&D and
more flexible in their choices for allocating resources, the less productive
countries had to rely on sustained albeit comparatively scarce government
effort, to a great extent supported by EU cohesion funds, to be able to keep
whatever moderate absolute growth they could generate. Much as these
countries have progressed in relative terms, given their low starting points,
again it is clear that it is only through changes in their industrial structures and
increased productivity that they will be able to boost their R&D efforts closer to
EU averages.
The figure 4 shows that the general trend in all Member States is to increase
the government budget on R&D. However Sweden and France are important
exceptions. These countries have reduced the government budget
considerably in the studied period. Also Germany, United Kingdom and Italy
show this trend to a less intense degree.
Between the countries with a positive trend, those with the highest levels in
R&D expenditure per capita (Belgium, Denmark, Finland, Netherlands,
Austria) have experienced a significant increase also in the government
budget. The countries placed in lower corner (Greece, Portugal, Spain and
Ireland) have undergone a moderate growth in both indicators. Though again
Ireland is the exception. This country has experienced a substantial increase
in the R&D expenditures.
As a consequence, the high correlation subsisting between government
budget appropriations for R&D and R&D expenditure per capita somewhat
decreased between the two periods (R
2
=0.92 in 1990-95 and 0,87 in 1996-
2000, Figure 4A), especially because of the considerable decreases in the
appropriations in countries where industry-supported R&D growth took place
(especially Sweden, to a lesser extent Germany). Most countries however
retain a strong relationship between overall R&D expenditure and government
investment in research.

FIGURE 4
GR
PT
ES
IE
IT
AT
UK
BE
DK
FI
NL
FR
DE
SE
PT
GR
ES
IT
IE
UK
AT BE
NL
FR
DK
DE
FI
SE
0
100
200
300
400
500
600
700
800
900
0 50 100 150 200 250 300
Goverment budget appropiations or outlays on R&D million of constatnt 1994 ECU/EUR at 1995
R
&
D

e
x
p
e
n
d
i
t
u
r
e
s
.

A
l
l

i
n
s
t
i
t
u
t
i
o
n
a
l

s
e
c
t
o
r
s

a
t

1
9
9
5

p
r
i
c
e
s

p
e
r

i
n
h
a
b
i
t
a
n
t

90-95
96-00
176
Data Source: Eurostat 2002
Luxembourg no data on R&D expenditure per R&D personnel. For the first period only complete series
available for Spain, France, Ireland, Italy and Netherlands. Netherlands data up to 1998. Italy, Ireland
and Greece only data up to 1997. 2000 data only available for Spain. United Kingdom no data for the
first period.
2000 data on government budget only available for Finland. Ireland only data up to 1998.
AT Austria ES Spain GR Greece NL Netherlands
BE Belgium FI Finland IE Ireland PT Portugal
DE Germany FR France IT Italy SE Sweden
DK Denmark UK United Kingdom LU Luxembourg

FIGURE 4A
SE
DE
FR
NL
FI
DK
BE
UK
AT
IT
IE
ES
PT
GR
SE
FI
DE
DK
FR
NL
BE AT
UK
IE
IT
ES
GR
PT
R
2
= 0,9151
R
2
= 0,8705
0
100
200
300
400
500
600
700
800
900
0 50 100 150 200 250 300
Goverment budget appropiations or outlays on R&D million of constatnt
1994 ECU/EUR at 1995 prices per 1000 population
R
&
D

e
x
p
e
n
d
i
t
u
r
e
s
.

A
l
l

i
n
s
t
i
t
u
t
i
o
n
a
l

s
e
c
t
o
r
s
.

a
t

1
9
9
5

p
r
i
c
e
s

p
e
r

i
n
h
a
b
i
t
a
n
t

90-95
96-00
Power (90-95)
Power (96-00)