Policy Context

This section introduces the policy context specific to the Innovation Capacity of SMEs in terms of the current EU framework and challenges involved in the topic.

1. The European landscape in terms of the Innovation Capacity of SMEs theme

The Innovation Capacity of SMEs is a key topic for Europe’s competitiveness and growth. The contribution of enterprises to innovation is crucial, and a dynamic business sector is a key source and channel of technological and non-technological innovation. Smaller companies frequently exploit technological or commercial opportunities that have been neglected by more established companies and bring them to market.  For these reasons, the Innovation Capacity of SMEs is naturally at the top of European, national and regional innovation policy priorities.

However, OECD figures (7) show that the global economic crisis has had a strong and immediate negative impact on innovation worldwide. Total OECD-area business expenditure on research and development (R&D) declined by a record 4.5% in 2009; it declined across all major EU R&D spenders except France. In 2010, the recovery that occurred in some countries did not always imply a return to pre-2009 R&D levels. This pattern, a dip followed by partial recovery, is confirmed by indicators such as patents and trademarks. Among the countries most active in innovation, there is a striking contrast between top EU countries such as Sweden and Finland, which have experienced a drop in terms of R&D and patents, and countries such as South Korea, which have continued their fast, steady expansion over the last years.

The reduction of innovation support seems to have mostly affected SMEs. The Innovation Union Scoreboard (IUS) 2011 (8) shows that while the EU27 has experienced an improvement in its overall innovation performance over the last five years, performance has worsened in the categories ‘Firm investments’ and ‘Innovators’. A high negative growth rate is in particular observed for Non-R&D innovation expenditure and Venture capital and, to a lesser extent, for SMEs innovating in-house, SMEs with product or process innovations and Sales of new to market and new to firm innovations (see figure below).

Figure N.º 2 – Comparative Growth in EU-27innovation indicators

Overall, across Europe, the situation for SME innovation is still unbalanced. The relative situation between EU countries is best reflected by the results of the 2011 IUS for the categories ‘Linkages & Entrepreneurship’ (which includes the indicators ‘SMEs innovating in-house’, ‘Innovative SMEs collaborating with others’ and ‘Public-private scientific co-publications’ – thus mainly capturing research and technological capabilities of SMEs) and ‘Innovators’ (which includes the indicators ‘SMEs introducing product or process innovation’ and ‘SMEs introducing marketing or organisational innovation’ – thus capturing the capacity of SMEs to introduce innovations in the market). These are presented below:

Figure N.º 3 – State of play for the Innovation Capacity of SMEs in the EU, based on 2011 IUS results

These results, unsurprisingly, show a better situation in Northern European countries – especially Germany, Denmark, Sweden, Finland, Austria, Belgium but also Cyprus and Estonia, which score highly in both categories, and a poorer situation in Eastern Countries, especially Latvia, Bulgaria, Romania, Poland, Hungary and Slovakia, but also Malta.

  • 1.1 EU FUNDING INSTRUMENTS FOR THE INNOVATION CAPACITY OF SMES

    • Public funding, and in particular Structural funds, has traditionally been used in Europe to overcome this ‘innovation gap’ amongst regions and enhance SME innovation capacity. But the scenario of public support is very fragmented and does not make it easy for the traditional SME to use and benefit from such funds.
      In respect of the innovation capacity of SMEs, there are 3 main instruments available for addressing innovation, including: the Framework Programme for Research & Development (currently FP7), the Competitiveness and Innovation Programme (CIP) and Structural Funds, including European Territorial Cooperation (ETC), which includes INTERREG IVC.

      FP7 includes several action lines that can broadly be divided into: those aimed at improving access to funding for SMEs undertaking research (Research for SMEs and to some extent Risk Sharing Finance Facility, RSFF); those aimed at building greater European coherence amongst research projects in specific technologies (the Joint Technologies Initiatives (JTIs) building on the Technology Platforms, Eureka clusters); actions aimed at improving research potential at regional level (Regions for Knowledge – soft measures and Research Potential for infrastructure); and finally a set of actions aimed at improved policy design and implementation.

      According to the Interim Evaluation of the Programme (9), FP7 has a vast and impressive reach in terms of geographical spread of participating teams, and range of topics addressed and funded. The Cooperation and People programmes are broadly achieving their goals while the European Research Council (ERC) appears to be successful in reaching its objectives of excellence and attracting top researchers, and RSFF is making a valuable contribution to research capacity, the report says.
      In general, with regards to the implementation of FP7, most of the basic procedures connected to the development of research themes and selection of projects (design of calls, conduct and probity of peer review, monitoring of gender balance, oversight of ethics) work as well as could be expected. However, “the involvement of industry, and especially SMEs, in FP7 is far from optimal and manifestly needs some fresh thinking. Companies are faced with burdensome and expensive processes for participation, with complex tools, aggravated by rules and practices that are often hard to understand. SMEs in rapidly developing science-based industries need to be able to react quickly to market opportunities and developments and are deterred by the lengthy procedures in the Framework Programme, and can struggle to finance cash-flow needs when payments for research are slow. It is, too, difficult for SMEs to take an effective lead in developing research projects” (10).

      The main tools CIP uses for the support of innovation activities are: PRO INNO Europe, Europe Innova, Enterprise Europe Network, High Growth & Innovative SME Facility (GIF), and Eco-innovation. In particular, PRO INNO Europe and Europe Innova are important cornerstones of the European innovation strategy as they aim at mobilising innovation policymakers and intermediaries at all levels, with a view to improving existing innovation support mechanisms in Europe, notably for SMEs, and fostering trans-national cooperation. Thus, the two programmes are considered complementary at policymaking as well as design level.

      The Enterprise Europe Network offers a 'one-stop shop' to meet all the information needs of SMEs and companies in Europe.

      The High Growth and Innovative SME Facility invests in specialised funds, which provides venture capital for SME financing. The GIF is funded by the CIP but managed by the European Investment Fund (EIF) on behalf of the Commission. The GIF's objective is to improve access to finance for the start-up and growth of SMEs, and investment in innovation activities, including eco-innovation.

      According to the Interim Evaluation of the CIP (11), it has been an efficient programme that will improve its performance in the coming years. CIP improved its efficiency – “at both European and national level - of having one Network facing SMEs across Europe as a result of the role of the Executive Agency for Competitiveness and Innovation (EACI), which managed to create synergies, simplifications and economies of scale in the management of the different programmes and increased its efficiency, and because of the simplification of Intelligent Energy Europe (IEE II) and ICT-PSP procedures”. However, it is also mentioned in the report that the “administrative burden continues to be an inefficiency of the programme across all its three pillars…[Entrepreneurship and Innovation Programme (EIP), ICT-PSP and IEE II)]”. Moreover, the evaluation mentions that there is a perception among some of the European and national stakeholders interviewed during the evaluation process, “that the low success rate for proposals (for example, under IEE II and eco-innovation) creates potentially unacceptable costs for unsuccessful applicants and acts as a deterrent to future participation”.

      The EU Cohesion Policy for the period 2007-2013 is implemented via the European Regional Development Fund (ERDF) and the European Social Fund (ESF), which both offer investments that are directly relevant to innovation since they both consider that for the promotion of sustainable development and strengthening of competitiveness, it is essential to concentrate resources on research, technological development and innovation (RTDI), entrepreneurship, information society, and training & adaptability of workers.

      According to the Evaluation of Cohesion Policy (12) “the main change from the previous period is the increased weight given to R&D and innovation”, which reflects the emphasis put on the pursuit of the Lisbon, and afterwards the Europe 2020, strategic objectives. However, the economic recession affected the implementation of programmes funded by the Structural Funds in most Member States. Specifically, at the end of 2009, three years into the programming period, eligible expenditures to be co-financed from the ERDF and Cohesion Fund amounted to just 7% of the total amount of funding available for the period 2007-2013. In the EU12 countries, expenditure was significantly lower, only 4% of the funding was allocated, compared with 9% for the EU15. In the case of support of innovation in SMEs, the commitment rate was on average very similar in the EU15 (24%) and the EU12 (22%). Commitments were low in Greece, Spain and Italy as well as in Cyprus, mainly due to the economic recession, although “there are a number of countries in which the recession had the opposite effect, of increasing demand from enterprises for funding, especially for research and innovation related support. In these countries, firms used the opportunity provided by the reduction in sales and the under-utilized resources which resulted from this, to initiate R&D and innovation projects. This was reported in Finland, the Netherlands (in the South region) and Slovenia as well as in Germany, where there was also increased demand for support of networking and cluster-type activities”. In these countries, the respective governments sought to use the Structural Funds to help counter the downturn in their economic activity.

      For the 2014 – 2020 period, is its expected that most of the current dispersed activities will be concentrated on the new Horizon 2020 programme, which merges FP7 and CIP into a new programme with a budget in excess of €70 billion, which should also improve the complementarities and synergy with new Cohesion and Structural Funds Policy for the same period.

      Horizon 2020 will focus on tackling major societal challenges, maximising the competitiveness impact of research and innovation and raising and spreading levels of excellence in the research base, while Cohesion policy will focus on galvanising smart specialisation that will act as a capacity building instrument, based on learning mechanisms and the creation of critical skills in regions and Member States. ‘Strengthening research, technological development and innovation’ is the first of the 11 objectives set down by Cohesion Policy for 2014-2020 in order to deliver the Europe 2020 objectives, and ‘Enhancing the competitiveness of small and medium-sized enterprises’ is the third. A European ‘model’ of development based on smart specialisation, as pursued by Cohesion policies and by European Territorial Cooperation programmes in particular, should emphasise the innovation and entrepreneurial opportunities available via the mobilisation and energising of the specific clusters, networks, and private-public partnerships in each region. Smart specialisation will provide a new growth perspective for the EU by mobilising the innovation dynamics of the regions and fostering new growth through structural change to the benefit of companies and in particular of SMEs. This same path is already visible in initiatives launched recently by the European Commission, such as the call launched in March 2012 by DG Enterprise for ‘Clusters and Entrepreneurship in support of Emerging Industries’, the goal of which is to support regions to adapt their industrial structures to unlock the potential of clusters and entrepreneurship for regional economic development and for addressing societal challenges such as reducing CO2 emissions, improving resource efficiency and protecting the environment. Through these projects, it is expected to provide direct support to the development of more fertile environments in which SMEs can combine creativity with the use of new technologies and more resource efficient solutions, leading to new business opportunities and to smarter and more sustainable growth.

2. Bringing it into the field – the main barriers to the innovation capacity of SMEs and relevant initiatives across Europe to overcome them

The focus of the SME-oriented policies and programmes described above is very much on overcoming barriers to the innovation capacity of SMEs. Within this ‘Policy Context’ section, it is relevant to assess what the current state-of-the-art as regards the most common barriers to innovation in Small and Medium sized firms is, that is, the state-of-the-art that has been identified in most studies and surveys performed in Europe over the recent years. This will allow us to establish a framework for the first level of evaluation of the content of the projects under analysis and, in presence of such a framework, to identify and select the relevant content for further analysis. In other words, relevant content and outcomes of INTERREG IVC projects in terms of ‘Innovation capacity of SMEs’ should address the most relevant barriers to innovation, as defined in the state-of-the-art, which sounds like a logical rationale. In order to do so, an extensive literature review was conducted on documents from various sources that resulted in a list of the main challenges/barriers to raising the innovation capacity of SMEs that surely must be addressed by projects working in this field. While other barriers can be identified (most often a subset of these, or exactly the same only under a different designation), the 5 below are considered to be the most relevant and sufficiently large in scope to accommodate the vast majority of difficulties faced by SMEs in their quest for innovation. Within the scope of the present theme, the focus is on barriers specific to SMEs that are addressed by these, leaving aside all barriers related to regulatory issues or market barriers & standards, which are considered to be within the scope of Innovation Systems.

These barriers, in no particular order, are:

Table 4 – Barriers to the Innovation Capacity of SMEs
Lack of financial resources for innovation and difficulties in accessing finance and innovation project funding
Shortages in skills to manage innovation, intellectual property and knowledge
Insufficient marketing of innovation including the poor use of public procurement and public markets by SMEs and lack of information and skills to access international markets
Lack of internal research and technological capabilities
Weaknesses in networking and cooperation with external parties

Each of these barriers, and the rationale behind its selection, is presented below.

  • 2.1 LACK OF FINANCIAL RESOURCES FOR INNOVATION AND DIFFICULTIES IN ACCESS TO FINANCE AND INNOVATION PROJECT FUNDING

    • This barrier, not surprisingly, appears in all recent surveys and studies as a top concern of European SMEs. This same conclusion has, in particular, been reached by survey results, such as:

      - The European Central Bank Consultation (2011) among 7 532 firms, 6 941 of which had fewer than 250 employees where ‘access to finance’ was second ranked most pressing problem faced by SMEs in the Euro Area.
      - The Public Consultation on the effectiveness of innovation support in Europe (2010) on 1 000 companies (of which a large majority were innovative micro and small enterprises) and 430 innovation intermediaries that found that:
      1. Lack of access to finance is viewed by enterprises as the main factor hampering innovation activities.
      2. Lack of access to finance is considered by institutional stakeholders as the principal barrier hampering enterprises bringing innovations to the market.

      Innovation is a costly affair and companies, and especially SMEs, need to make choices about where to use scarce resources, for which innovation is often in competition with other business functions. The problem is particularly urgent in a scenario of economic crisis and shortage of bank loans to industry, as presently faced across Europe, and is a top priority for all national and regional actors involved in innovation support.

      Funding for innovation in SMEs may take the form of Public Grants (e.g. vouchers or similar schemes), equity (such as Venture or Seed Capital, either public or private) and ‘debt’ financing.  Primarily, equity financing is used during the seed/start-up phase and emerging growth phase, while bank loans and guarantees (also known as debt financing instruments) are essential for companies during the emerging growth, development phase, and later stages. Public Grants are traditionally used across the entire life span of SMEs although they may be customised towards a certain target (e.g. young SMEs, export companies, etc.) and can be provided through different instruments, including Voucher schemes, which have become increasingly popular across Europe as a simple way to fund innovation in SMEs, building on initial successful experiences in the Netherlands. They facilitate, amongst other things, the liaising of private enterprises (notably SMEs) with external knowledge providers, in a small-scale approach targeted to the needs of individual companies. These schemes succeed in reaching out to substantial numbers of lagging companies to undertake innovation activities. Namely, companies with a limited track record in making use of government support for innovation and in relating with external knowledge providers’ Good Practices (GPs) related with the implementation of voucher schemes have been largely addressed by INTERREG IVC projects addressing the topic of Innovation Capacity of SMEs, including MINI-EUROPE (‘Inno-voucher’ and ‘Innovouchers’ GPs), DISTRICT+ (‘R&D Card’), PERIA (‘Innovation Vouchers’). The most relevant of these Good Practices, as well as others mentioned below and addressed within the scope of INTERREG IVC projects, will be reviewed in detail in the next chapter.

      Turning to the issue of Venture Capital (VC), measures in this regard must be analysed with caution as one of the main criticisms to the state of innovation is that the VC market in Europe lacks critical mass. But over recent years, several fully public or public-private partnership funds have been set up across the EU with a focus on those stages where market failures have been identified (early stage) – including some addressed within INTERREG IVC projects such as SMART+ (through the ‘INNOFIN’ sub-project), INNOHUBS (‘Business Accelerator’, for the promotion of private VC and the ‘Business Angel Network’ from the Madrid region), Mini-Europe (‘Financial Engineering’ for Public VC and ‘FLIIN’ for public-private VC), DISTRICT+ (‘Fondo Toscana’ and ‘Lower Silesia Trust Fund’ for public VC and ‘Mercia Fund Management’ and ‘SCCISME’ for public-private VC).

      Proportionately, the largest source of SME finance is still bank lending. The most recent European Central Bank survey on the Access to finance of SMEs in the Euro Area (2011) found that 40% of respondent firms drew on their overdraft facilities or credit lines and more than a third used a bank loan. In this sense, exploring the path of public (government) guarantees for private bank loans, especially for younger companies that possess few material assets that could be used as loan collateral, could prove to be a more successful path. There is a substantial body of research and evidence that states that loan guarantee programmes are of strategic importance to SMEs for ensuring access to financing. 

      A study on Policy options and instruments for financing innovation (2009) pointed out that traditional financing institutions can increase the supply of funds to innovative enterprises if assured by guarantees or other forms of credit enhancement but also noted that the effectiveness of these programmes depends on the degree to which they can reach the intended recipients, notably the innovative enterprises. Increasingly, a risk sensitive banking sector is asking for more collateral and higher risk premiums (UAPME, 2011) (16).

      The European Association of Mutual Guarantee Societies (2011) pointed out that, in the future, in the context of rising interest rates and stricter prudential supervisory rules, SMEs will have to count on loan guarantees more than ever – which calls for new and innovative approaches. Such new forms of support to foster lending for innovation are being tested by some small German commercial banks.  The Innovation Saving Plan (known also as Innovations-Vorsorge-Vertrag) is a concrete example of new innovative financial instruments.  First, the company must save 40% of the amount required for its innovation investment (not taxable), 40% comes from the bank as a loan and the remaining 20% is provided by the State or region. Under INTERREG IVC, a similar Good Practice has been addressed within the ERIK Action project (the ‘FAME’ measure from the region of Alentejo, Portugal), for the concession of private loans to SMEs with public guarantee from regional authorities.

      Other innovation funding topics that have been emerging lately, especially in a period of shortage of bank credit, include tax reliefs (exemption or reduction of taxes for companies performing innovation activities or for investors who purchase new shares in those companies) and non-bank sources of finance, such as peer-to-peer lending services or crowdsourcing (gathering of funding for specific projects from individuals, normally using web platform to reach scale). The crux of crowdfunding is that many participants (those that provide money) are often emotionally or ideologically encouraged by the cause they serve. In fact, many of the projects serve a societal, environmental or artistic cause and that appeals to the typical participant in crowdfunding. At present, crowdfunding is still little known and not a mainstream affair, and as such (as for tax reliefs or peer-to-peer lending), are promising areas for exploring in public funded projects, such as INTERREG IVC for example.

  • 2.2 SHORTAGES IN SKILLS TO MANAGE INNOVATION, INTELLECTUAL PROPERTY AND KNOWLEDGE

    • An adequate supply of skills in the workforce is obviously necessary for conducting innovation activities within SMEs, however managerial skills play a similarly important role in order to properly manage the innovation cycle. If managers are incapable of utilising the skills available to them in conducting innovation activities, the efforts developed for these activities are unlikely to result in a steady flow of innovations. Studies have shown that sometimes SME managers or people responsible for innovation activities tend to lack formal qualifications, which may inhibit their ability to conduct innovation activities, clearly evidencing a shortage of skills in innovation management within SMEs.

      And while the proportions of firms identifying innovation skill shortages or inadequacies vary widely over countries and over time, they unanimously rank this barrier in the top five of barriers to innovation in SMEs. This has been the case in the following studies from different world regions:

      - Results from the Fourth Community Innovation Survey in Europe, for example, showed that a lack of qualified personnel ranked only below the costs of innovation and a perception that innovation involved excessive economic risks, in terms of firm concerns in innovation.
      - A 2009 Canadian survey found that 57% of world-first innovators judged a lack of skilled personnel to be an impediment to their activity.

      It has been shown by the IMP³rove project, which is funded by the Europe INNOVA programme of the European Commission, that high growth companies have a better functioning innovation management, and that a structured and systematic approach towards managing innovation is a key driver of profitable growth. In a study (20) comparing non-innovative firms – firms that have not introduced new (or significantly improved) products or processes over the recent years – with innovative firms, it is evidenced that those with a history of successful innovation projects, hence having functioning innovation management, are less likely to experience financial constraints in innovation projects. As a consequence, there is a pressing need to improve the level of skills in Innovation Management of SMEs managers and persons responsible for innovation activities. To successfully achieve this objective, policymakers at all levels – EU, national and regional – must design support measures aimed at providing the latter with the required skills for managing their innovation activities (technical as well as non-technical). While aspects such as ‘innovation management’ and ‘IT skills’ are often covered, other topics such a creativity, human resource managing, IPR and assets management and funding of innovation are much less present.

      INTERREG IVC projects have largely covered this barrier, mainly from an ‘innovation management’ perspective, and in particular through addressing Good Practices focused on the coaching or training of SME managers. Examples of coaching GPs include ‘Vaeksthuset’, from INNOHUBS, ‘Organisation Innovation’ from INNOMOT, ‘Business Family’ from MINI-EUROPE, ‘Pioneers’, ‘Inno-Assistant’, ‘MATIX’, ‘Industrial Dynamics’ and ‘Product Competence’, all from DISTRICT+, and ‘TIP Coaching’ from ERIK Action. Good Practices focused on training include ‘Innovation Race’ and ‘KREO’ from INNOHUBS, ‘InnoCámaras’ from INNOMOT, ‘HLS Pathfinder’ and ‘E-learning plant’ from MINI-EUROPE, the ‘KNOW-ECO’ subproject from DISTRICT+, and ‘Innovation Cycle’ and ‘Parenthood’ from ERIK ACTION.

      Another approach consists in measures to support SMEs in recruiting new staff, which brings new skills into the company – in areas such as design, or marketing. This approach has also been addressed within INTERREG IVC projects through measures such as ‘Summer Design Office’ (MINI-EUROPE), ‘New Products by Design’ (PERIA) or ‘Trainee in TIME’ (ERIK ACTION).

  • 2.3 INSUFFICIENT MARKETING OF INNOVATION INCLUDING THE POOR USE OF PUBLIC PROCUREMENT AND PUBLIC MARKETS BY SMES AND LACK OF INFORMATION AND SKILLS TO ACCESS INTERNATIONAL MARKETS

    • In high performing companies, innovation management and marketing management best practices are interlinked and inseparable. These organisations understand that consistent investment and strong implementation of best practice value delivery and innovation programmes, bring consistently best performance across the economic cycle.

      Inside innovative companies, marketers play an important role within a series of (new) cross-functional teams that are ideating, screening ideas, developing concepts, launching new products and managing current and innovation portfolios that maintain alignment with the company strategy. Armed with a strong business strategy that includes well defined value maximisation goals and a clear innovation road map, marketing managers ensure their teams are acutely aware of the business and company growth initiatives and that sales, R&D and customer service teams are tooled and well-trained in value management and innovation best practices(21).

      However, most companies do not have the means or the knowledge to adequately market their innovations, in particular towards two essential markets for growth and maturing: public markets (through public procurement) and international markets.

      The potentially positive impact of ‘innovation public procurement’ has been pointed out in numerous (see below) European level publications or national and regional innovation strategies that also note that public procurement of innovation is a relevant instrument to support innovation in SMEs and suppliers, besides their importance in fostering more efficiency in the public sector and providing new solutions to societal challenges:

      - The Europe 2020 strategy and the Commission Communication on an Integrated Industrial Policy and on the Innovation Union stress that Members States, Regions and the European Commission must take actions to support the procurement of innovation and, particularly, "to promote SME access".
      - According to the OECD report on demand-side innovation policies from 2011, public procurement is the most prominent tool for fostering demand.
      - The Aho's report (2006) called for developing Lead Markets policies where public procurement will be used to drive demand for innovative goods while at the same time improving the level of public services.
      - A major survey carried out by Ernst & Young (26) has shown that 74.1% of respondents considered that public procurement creates demand for innovation.
      - A recent demand-side innovation strategy paper found that the more efficient allocation of a small percentage of the approximately €22bn public procurement budget in Finland would result in an addition the size of the Finnish Funding Agency for Technology and Innovation TEKES’s entire budget for research and innovation (Finland Ministry of Employment and the Economy, 2010).

      In spite of the efforts and awareness raising, the potential of public procurement to spur the development of innovative products and services is still not sufficiently exploited. This has been shown, for example, in the results of the 2009 Innobarometer report, which found that between 64% and 77% of companies interested in public procurement indicated that none of the opportunities offered innovative products or services.  Internationalisation is also a source of concern for innovative oriented SMEs. The Study “Barriers to internationalisation and growth of EU's innovative companies” (DG Enterprise, 2010) points out the results of the CIS-2006 survey, which show that 14.7% of all firms, 18.1% of technological innovator firms and 16.2% of non-technological innovator firms, ranked ‘lack of information on international markets’ as the most relevant barrier to innovation.

      In summary, there are two major trends in this topic: a demand-led approach, with an intervention through public procurement, and a market-led approach, with an intervention by SMEs, at the level of tools (Customer Relationship Management, online sales, market research, business intelligence) or processes (participation in trade fairs, missions).

      INTERREG IVC projects addressing the Innovation Capacity of SMEs theme have mainly tackled the problem from the latter perspective, addressing Good Practices focusing on action by SMEs to support marketing or internationalisation tools and processes. This is the case of SMART+ (through the sub-project ‘IART Territories’) and of INNOHUBS that has addressed Good Practices for training of SMEs (‘Innovative Workshops’ and ‘SIGNAL’), as well as for consultancy support (‘SIAI’) and internationalisation support (‘Business Internationalisation’). But also of MINI-EUROPE (‘I-Creo’, ‘RURCED’ and ‘WTC-Almeria’, all for support to internationalisation), PERIA (two Good Practices to support internationalisation of SMEs, ‘International Cooperation Visits’ and ‘Foreign Trade Fairs‘).

      Across Europe, there are several new relevant initiatives addressing Innovative Public Procurement and its impact on SMEs.  In Poland, the Public Procurement Office was commissioned by the Polish Agency for Enterprises Development to conduct a project on new forms of public procurement including a series of training sessions for procurers and SMEs co-financed by the Structural Funds. A master’s degree course at the Dublin City University offers public purchasers the opportunity to obtain professional expertise in the procurement of innovation while Enterprise Ireland channels technical advice and market information to contracting authorities helping them to identify types of products or services from the SME community. An interesting initiative of the Greater London Authority is the eLearning tool that has been launched to support public sector procurers and private sector organisations to get involved in procurement procedures. A specific course has also been designed to understand the responsible procurement agenda. Under INTERREG IVC, the topic of Innovative Public Procurement has been covered by projects such as ‘EUROPROC’ and ‘RAPIDE’, outside the scope of this study, but also by INNOMOT through the IVEX Good Practice.

      Regarding interventions at company level, online marketing channels are also considered as the most promising paths, especially for SMEs. “The growth of the social networking phenomenon across the Internet – led by social media sites like Facebook, Twitter, YouTube and LinkedIn – has altered the playing field for business of all stripes and moved social networking beyond critical mass. (28) Social media platforms should be considered as digital infrastructures that allow companies a new kind of networking and (global) marketing. This digital infrastructure is enabling companies to form and join online communities, find and interact with potential partners and customers who share common business or technical goals. These developments provide room for new types of support for the marketing of innovation, which can be duly exploited within interregional cooperation instruments. In the UK, the Trade and Investment’s recently published five-year strategy for promoting growth through trade and investment (“Britain Open for Business”, May, 2011) lays out detailed plans for supporting SME exporters, including the use of Social Media and one of measures foreseen is a major new initiative to develop an online peer-to-peer self-help community for UK exporters.

      Another possibility for supporting the development of SMEs’ marketing capabilities, including internationalisation, enhancing access to public markets and developing online tools, is through open Vouchers. While most voucher schemes are limited to R&D cooperation and/or on the type and nationality of service providers (often only public and from the same Member State), an interesting exception are the Baden-Württemberg voucher mechanisms, where SMEs can choose any type of service from any public or private service provider worldwide – thus opening the possibility of using the voucher for promoting European (or global) cooperation, even for SMEs with lower resources (technological, skills or financial) which allows the possibility of breaking the ‘vicious circle’ of local cooperation that often confines SMEs to local markets and limited growth (focus on domestic markets --> lack of (great scale) resources --> application to voucher mechanisms --> confinement to local network partners --> focus on domestic markets). However, the approach to innovation vouchers taken by most programmes and projects across Europe remains in the sense of ‘traditional’ vouchers applicable only to national partners.

  • 2.4 LACK OF INTERNAL RESEARCH AND TECHNOLOGICAL CAPABILITIES:

    • SMEs are increasingly dependent on external sources of technical activity because the process which generates new technologies is becoming more complex. However, before having access to the knowledge held by competencies centres, SMEs need to develop and structure their own capacities. One way to achieve this goal is to hire technically qualified manpower. To keep initiative and technical leadership, they need to strengthen their in-house research facilities, which is a barrier for most SMEs. The vast majority of SMEs do not carry out in-house research due to a lack of adequate research and technological capabilities, but many SMEs cannot even outsource it because they are unable to express their research needs.

      Innovative capabilities depend on the ability to exploit external knowledge and on in-house R&D efforts. The lack of internal research and technological capabilities, at least at a minimum level, is therefore an important barrier to innovation, as recognised in all the literature. The same study referred to above, “Barriers to internationalisation and growth of EU's innovative companies” (DG Enterprise, 2010) building on data from CIS-2006 survey, also showed ‘lack of information technology’ as one of the top 5 barriers to innovation in firms, being ranked as #1 barrier by 14.2% of all firms, 15.8% of technological innovator firms and 16.7% of non-technological innovator firms.

      Across Europe the main trends in overcoming the barrier of lack of internal research capabilities in SMEs follows two main trends: on the one hand, support for the creation of new internal competences, mainly through the incorporation of new research staff, e.g. through programmes to incentivise the recruitment of PhD graduates by industry; on the other hand, support to the creation of own or shared technological facilities in industry, such as labs, certification mechanisms or methods to improve technology transfer. There are also several measures and good practices to incentivise the cooperation between industries and established scientific and research organisations, but that is analysed under the barrier ‘weaknesses in cooperation’.

      INTERREG IVC projects that have tackled this barrier have mainly focused on Good Practices that facilitate technology transfer from the scientific community to industry, in particular through the creation of networks. This was the case with MINI-EUROPE and the ‘Genomnanotech’ good practice (specific to the nanotechnologies sector), with DISTRICT+ and the ‘Network of Competence’ and with ERIK ACTION and the Good Practices ‘Helice Net’ (for the aeronautic sector), ‘TT Andalusia’ and ‘Campus’ (in this case for stimulating the creation of academia spin-offs).

      The approach of stimulating the recruitment of research staff has also been addressed under PERIA (‘Creation of R&D departments’) and ERIK ACTION (‘Innovation Assistant’). ERIK ACTION has also addressed the topic of funding of research activities in SMEs through the good practice ‘Individual Research projects’.

  • 2.5 WEAKNESSES IN NETWORKING AND COOPERATION WITH EXTERNAL PARTIES:

    • The importance of networking and cooperation with external parties is mentioned in several survey results that clearly highlight that, for small organisations with limited resources such as SMEs, the use of external skills and knowledge is essential for achieving innovation and competitiveness, especially in more challenging and dynamic areas. This is the conclusion from surveys such as:

      1. EC-consultation on Effectiveness of Innovation Support in Europe (30) reaching nearly 1 000 SMEs (88% having fewer than 250 employees):
      * 46% indicate they have difficulties in finding partners for innovation
      * 38% indicate they have difficulties accessing knowledge networks and clusters
      2. McKinsey Global Survey on Innovation (2010) among 2 240 executives around the world:
      * 2nd ranked recommendation to improve innovation performance of firms = encourage collaboration for innovation
      3. DIHK Innovations report 2010 (based on response from 800 innovative firms):
      * 46% of firms indicate they aim to increase their innovation activity through more cooperation with research and knowledge centres
      * 55% of firms state they want to step up innovations by interacting more with clients and suppliers

      Networking and cooperation, and strategic partnerships in general, are expected to have a significant effect on the participating organisations as well as on a larger scale. Major studies view the impact of collaboration in terms of: macro-economic level (socio-economic benefits at national and European level such as higher employment levels and increased European cohesion, through scientific and technological transfer); meso-economic level (increased industrial competitiveness and cross levelling of knowledge within an industry or a cluster); and at micro-economic firm level.

      In spite of its potential and demonstrated impact, networking and cooperation is however far from being a natural process for firms, and especially for SMEs. Analysis of replies to the INNOBAROMETER 2009 (31) show that the larger the companies, the more likely they are to be engaged in strategic relationships with other companies, research or educational organisations. Therefore, we can presume that such strategic partnerships and external collaborations for innovation are not yet a common reality among medium and small companies.

      The most common public policies that tackle this barrier and foster networking and cooperation amongst SMEs and between these and other organisations (large firms or research organisations) fall under two sub-topics: cluster schemes and cooperative networks, including for research – industry cooperation.

      Cluster schemes have the potential to address several challenges related to weaknesses in SME networking:

      - the reduction of transaction costs (through the setting up of a permanent forum and tools for collaboration;
      - the identification of and access to partners (from within or without the cluster);
      - the lack of management skills, as long as effective cluster management is provided.

      Due to their potential and reach, cluster schemes have become increasingly popular instruments across Europe, and Good Practices in this regard have been largely covered by most INTERREG IVC projects dealing with the Innovation Capacity of SMEs theme: SMART+ (through the sub-projects ‘regioNET’ and ‘SMEsGoNet’ addressing cluster management and ‘Smart Tourism’ and ‘TREC’ addressing cluster creation);  MINI-EUROPE (through the good practices ‘Productive Clusters’, ‘Cluster Support’, ‘Pole Programme’ and ‘RIP-WG’ all on cluster management); DISTRICT+ (through the good practices ‘Cluster Initiative Lower Silesia’ and ‘Innovative Clusters’ on cluster management and the sub-project ‘Nicer’ on the internationalisation of clusters); PERIA through the good practice ‘Cluster Management Services’; and ERIK ACTION through the good practice ‘SIDEUM’ on cluster creation. At a more informal level of cooperation, other good practices addressed under INTERREG IVC projects have focused on promoting networks of SMEs: this is the case of ‘Innovation Regional Network’ and ‘BEN Belfast’ addressed under INNOHUBS and ‘Wood sector innovation’ and ‘RDT Bretagne’ under ERIK Action.

      The second sub-topic is cooperative networks, including for research – industry networking. This topic has been extensively addressed at EU, national and regional level, and it is no surprise that it has now largely been replaced by other topics (such as non-technological innovation) within EU cooperation projects, including in INTERREG IVC. But there are more developed good practices available, including measures from the UK and the Netherlands. Innovation Performance Contracts (IPC, from the Netherlands) is a mechanism funded by the National innovation agency seconded by (regional) business associations who act as coordinators of IPCs and penholders for SMEs. Coordinators scout and canvas actively to gather suitable participants that can be clustered around a shared innovation theme. Extensive effort and assistance from these coordinators is devoted to the design of a feasible / meaningful innovation plan prior to awarding the IPC funding (targeted allocation). Once this is concluded, the companies can have a free choice between public knowledge providers (universities and research institutes) and private knowledge providers (engineering companies, design studios, software developers). In the UK, the Knowledge Transfer Networks are fully aimed at the challenge of transaction costs by providing a (virtual) national network fostering collaboration and knowledge transfer. “A Knowledge Transfer Network is a single overarching national network in a specific field of technology or business application which brings together people from businesses, universities, research, finance and technology organisations to stimulate innovation through knowledge transfer(32).

      The objective of a Knowledge Transfer Network (KTN) is “to improve the UK's innovation performance, by increasing the breadth and depth of the knowledge transfer of technology into UK-based businesses, and by accelerating the rate at which this occurs(33). “KTNs have been established and are funded by government, industry and academia. They bring together diverse organisations and provide activities and initiatives that promote the exchange of knowledge and the stimulation of innovation in these communities.  There are currently 15 KTNs which are now hosted on _connect, a networking platform. _connect is a place intended to facilitate open innovation, where people can network, share information(34) and knowledge and work together securely. The future development of _connect will include the possibility for the individual company participating on the platform to generate and manage ‘communities of interest’ or ‘communities of practice’ according to their own needs. Private and public support providers may either launch own communities on the platform or take part in those of their clients. This trend towards ‘virtual’ support through web-based platforms seems promising for support programmes looking to reach a larger number of SMEs.

The next chapters provide a detailed overview of how these trends and challenges on the theme of the Innovation Capacity of SMEs have been met by INTERREG IVC projects.

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