TrendChart - Innovation Policy in Europe 2004

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Innovation Policy in Europe 2004

EUR 21370

34dd87_annual_report.qxp 17/01/2006 15:59 Pagina 3


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"Innovation Policy in Europe 2004" is the annual policy syn-thesis report of the TrendChart initiative run by theInnovation Policy Directorate of the Enterprise and IndustryDirectorate-General of the European Commission.

This published version of the annual synthesis report is accom-panied by a longer version available in PDF which includesthree-page summaries of recent developments in each of theEU25. It is available at: http://www.trendchart.org

The Trend Chart serves the "open policy co-ordinationapproach" laid down by the Lisbon Council in March 2000. Itsupports organisation and scheme managers in Europe withsummarised and concise information and statistics on inno-vation policies, performances and trends in the EuropeanUnion (EU). It is also a European forum for benchmarking

and the exchange of good practices in the area of innovationpolicy.

The TrendChart Products

The Trend Chart on Innovation has been running sinceJanuary 2000. It now tracks innovation policy developmentsin all 25 EU Member States, plus Bulgaria, Iceland, Israel,Liechtenstein, Norway, Romania, Switzerland and Turkey. Italso provides a policy monitoring service for three other non-European zones: NAFTA/Brazil, Asia and the MEDA countries.The Trend Chart website (http://www.trendchart.org) providesaccess to the following services and publications, asthey become available:

A database of innovation policy measures across 33

European countries;A news service and related innovation policy informa-tion database;A "who is who" of agencies and government depart-ments involved in innovation;Annual policy monitoring reports for all countries andzones covered;All background material for four annual policy bench-marking workshops;The European Innovation Scoreboard and other statis-tical reports;An annual synthesis report bringing together key ofthe Trend Chart.

Contact: [email protected]

DG Enterprise and Industry04



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Contents

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Executive Summary

Introduction

Innovation policy developments across Europe

Introduction

Policy efforts and priorities

Policy debates and policy objectives

Trends in policy measures

Innovation challenges and policy responses in the Member States

Methodological approach

Challenges by category of indicators

Developments in policy governance

Policy-making and delivering structures

Appraising policy and the role of evaluation

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2.5.1

2.5.2

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4.0

European innovation policy in a global context

Introduction

Extending the Innovation Policy in Europe 2004: a global view oninnovation policy

The three country groups: a snapshot of innovation performance

Comparative analysis of innovation performance and capacities

Innovation policy governance

NAFTA/Brazil

Asian countries

MEDA countries

Current challenges and policy priorities

Challenges driving innovation policy

Policy trends and priorities

Policy learning at the global level

How is European innovation policy/performance perceived?

Opportunities for policy learning

Annex : comparison of key indicators

Glossary



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0.1 Executive Summary

Innovation Policy in Europe 2004 provides an overview of thechallenge faced by the EU25 Member States in improving theinnovation performance of their economies. It then detailsthe policy-mix and implementation practices in the EU25 torespond to these challenges. Finally, it provides a compara-tive benchmark against which the EU25 can be comparedwith that in place in other Associated and Candidate States inEurope, as well as well as three other key trading partnerregions (North American Free Trade Organisation and Brazil,the Mediterranean countries and nine countries in Asia).

Based on the 2004 European Innovation Scoreboard (EIS), 10key generic challenges were identified across the EU25. Onthis basis, over 100 specific challenges were identified acrossthe EU25 Member States. These challenges are to a greater orlesser degree met by specific policy responses. In order to

appraise, the extent to which EU25 Member States are facingup to these innovation challenges and are making progressin implementing an innovation policy framework, the reportclassifies, for each specific challenge, the Member States as:

Fully addressing the innovation challengeAdopting concrete, but fragmented measures to meetinnovationInitiating a debate about innovation, and lastlyNot addressing the issues.

National policy makers appear to be aware of and addressingthe large majority of challenges, though more often than notthis occurs in a broader context of innovation policy design.In some cases both institutional (regulatory) and specificdirect measures are identified.

Across the EU25, five key trends can be identified from recentpolicy developments:

1. A significant effort to increase the availability andthe breadth of competencies of skilled people contributingto innovation and to strengthen linkages and knowledgeflows both nationally and internationally;

2. A strong regional role in the implementation ofmany recent initiatives, fuelled by the Structural Funds in thenew Member States, and the corresponding need for coordi-nation with national targets and initiatives;

3. A push to increase the overall intensity of innovationactivity through stimulating private enterprises to investmore in R&D, specifically, and other forms of innovationmore generally.

4. An emphasis on the role of regulations, public pro-curement and other business environmental factors inf luenc-ing the performance of the innovation systems of theMember States.

5. The formation of partnership based initiatives tocreate linkages aimed at improving the functioning of inno-vation systems through increased stakeholder cooperation tobreak down barriers and give increased momentum to inno-vation.

Challenges and good practice in the EU25

Looking further into Member State challenges to innovationand good practice policies, we identify similarities in theinnovation challenges, while the good practice policies tendto focus in different directions according to national needs.

A summary of good practice policies in all EU25 MemberStates is given below, but only some of them are explicitlyreferred to in the subsequent chapter. A more detailed analy-

sis of the predominant challenges and good practices in eachof the following countries is available in the online version ofthis report.

A major challenge in Belgium is the low public R&D expen-diture that hampers the creation and then diffusion of knowl-edge. The various Belgian authorities, at federal and regionallevels, have taken a number of measures to boost both pub-lic spending and increase the general innovation intensity ofthe economy. These include an Innovation Pact for Flanders(a partnership agreement between Government, industryand the research sector) and cooperation amongst theFederal and regional authorities on a roadmap to reach the3% GERD/GDP target.

Recent trends in innovation performance in the Czech

Republic give cause for concern with the country fallingfurther behind the EU25 average. Addressing the inadequatesupply of human resources for innovation and creatinggreater incentives for SMEs to innovate are major challenges.In response, a range of programmes have been launched inthe framework of the EU Structural Funds with a numberfocusing on new product development and technologytransfer.

Denmark is one of the most developed EU Member Statesand its recent innovation performance remains broadlyimpressive. The main weakness in terms of the Danish inno-vation system is the low rates of SMEs innovating in-houseand also surprisingly, given for instance Danish excellence indesign, non-technological innovation. Action by the DanishGovernment to respond to such weaknesses include the ini-tiation of the Innovation Consortia Initiative aimed at devel-oping technologies and making them widely available tobusiness via co-operation between various players in theresearch and business sectors.




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Innovation is clearly considered as one key element toreverse the economic stagnation, which has characterisedthe German economy over the last few years. A number ofspecific structural trends in the German innovation systemcall for clear action including notably trends in terms of theskills base for innovation. The Federal Government has takena number of measures to boost innovation within the frame-work of a High-Tech Masterplan aimed at SMEs, theseinclude: tax incentives, facilitating access to highly qualifiedpersonnel, and action to encourage the integration of SMEsinto long-term R&D partnerships (e.g. PROINNO II, DE_28).

Despite strong progress in recent years, the Estonian inno-vation system is still too weak to favour a transition towardsan innovation-based stage of development. Innovationactivity in Estonian enterprises is concentrated in a small

number of foreign owned firms and a group of more inno-vative local firms. Moreover, innovation remains relativelynon-radical and insufficiently focused on new product devel-opment. The Government and the Enterprise Estonia agencyhave developed a number of measures to respond to this sit-uation, including establishing an Inno-Awareness pro-gramme aimed at increasing the skills and competencies ofSMEs to undertake innovation projects.

Although the innovation performance in Greece has showna slight trend to catch up, the Greek innovation systemremains one of the weakest in the EU and economic growthis not strongly based on innovation. Insufficiently developedlifelong learning programmes, the very low business R&Dexpenditure and the extremely low tendency to protect R&Dresults through patenting are significant barriers. In

response, policies supporting researchers in transformingtheir ideas into business activities, expanding eligibility ofSMEs for funding and supporting private investors in devel-oping incubating activities are some of the attempts toanswer the innovation challenges.

Spain needs to overcome problems by increasing ICTexpenditure, increasing added value in high-tech manufac-turing, increasing public R&D expenditure and strengthen-ing the position of Spanish patenting activities. One policypaying off is the provision of financial support to the devel-opment of non-profit Technology Transfer Offices. Thismeasure aims to transfer research results from the publicinnovation system to enterprises through the creation ofoffices specifically devoted to this end.

Although innovation performance in France is above theEU25 average, the country faces an overall challenge to fur-ther improve its innovation performance against its maincompetitors. A main challenge is to formulate a more coher-ent strategic view on innovation and mobilise funds in linewith the 2003 Innovation Plan. Specific challenges relate toweak performance in non-technological innovation andnew-to-firm products. A successful good practice policy has

been the establishment of research and technological inno-vation networks (PRIT) to enhance partnerships in research.

Ireland has the highest growth rates amongst the EU25 butthis growth has been largely based on investment trends(notably foreign sourced) rather than innovation perform-ance. It therefore needs to fund and develop its innovationcapacity to match the increasingly complex demand of sus-taining economic growth. Policies such as tax relief, thePatent Royalty Exemption, the deduction of expenditure onpatents and know-how, and the Commercialisation Fund for-commercial exploitation of knowledge have been imple-mented to encourage innovation development.

Italy's innovation performance is substantially below whatis required if its to halt and reverse a recent loss of competi-

tiveness. The country is weak in most EIS indicators and isnot catching up for any of them. It is particularly weak inbusiness R&D expenditure and in high-tech patenting as wellas in areas like life-long learning. Policy measures remain toofocused on process (cost-cutting) innovation and notenough on product development and diversification. Recentmeasures include tax deductions for investments in newmachinery and staff training such as the Tax Credit pro-gramme and the Tecno-Tremonti law that allows for thereduction of R&D costs including patents from business tax-able income.

Cyprus faces the challenges of diversifying its economy,diminishing its dependence on specific services such astourism and increasing public R&D expenditure.Government policy remains however largely focused on

strengthening the knowledge base in terms of investments inpublic R&D although a range of measures are aimed at entre-preneurship and technology transfer.

Latvia's challenges are multifaceted with needs to substan-tially raise public and private R&D expenditure, to foster anincreased co-operation between key stakeholders and ensurea broader geographical distribution of innovation expendi-ture and activity. A good practice policy measure is the sup-port to market-orientated research (LV_67), which aims atthe promotion of science-intensive entrepreneurship,enhancing knowledge-based production and developmentof modern technologies.

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Despite recent strong growth, the Lithuanian innovationsystem performs poorly compared to most other EU MemberStates. The main long-term challenge relates to knowledge-creation both in terms of public and private expenditure oninnovation and outputs (patents). The need to boost signif-icantly the market outcomes of innovation activity and there-by to improve the competitive position of Lithuanian enter-prises is a more pressing challenge. In response, a range ofnew measures have been designed and are in the process ofbeing launched in the framework of the Structural Fund pro-grammes for 2004-2006.

Paradoxically despite being the richest Member State withhigh growth rates, Luxembourg is clearly faced by the chal-lenge of diversifying its economy (largely based on the finan-cial sector) in order to sustain growth. Over recent years,

there has been a growing recognition that the country hasnot invested enough in innovation and knowledge creation.The Government and the main stakeholders have agreed ona number of actions to respond to the weakness of the inno-vation system as a basis for growth. This includes the cre-ation of a university, targets to boost total R&D funding,increase the share of S&E graduates and foster innovationamongst SME. A successful measure is the Ministry ofEconomic Affairs' "Cluster Programmes", which aims toincrease collaboration and co-operation between compa-nies' activities in specific technology fields (new materials,ICT, aeronautics).

The overall challenge facing Hungary is to maintainprogress towards cohesion with the advanced MemberStates by enhancing international competitiveness. More

than in the past, growth needs to be based on increasing theintensity of innovation activity in local (as opposed to for-eign) enterprises. Recent innovation performance is encour-aging with EIS2004 results showing Hungary as catching upwith other Member States. However, in absolute terms muchremains to be done. An interesting policy measure is thesupport for Co-operative Research Centres aimed at restruc-turing industry-academia co-operation at a regional level.

Malta enjoys a relatively high per capita income withgrowth based on tourism and other services. The Malteseinnovation system is very weak and there is little policy atten-tion paid to innovation in the family-run small firms of themanufacturing sector. Partly in response, the Governmentrecently established a national RTDI programme to stimulateand build a culture for sustained scientific research and inno-vation.

The EIS 2004 results suggest that the Netherlands has thepotential to achieve more growth through innovation thanits currently does. In response to the recognition of an inno-vation deficit in the enterprise sector, a White Paper on inno-vation has been published and a newly establishedInnovation Platform brings together key stakeholders.

Specific challenges faced by the Dutch innovation systeminclude the need to increase the currently insufficient supplyof knowledge workers and to increase the number of com-panies active in high-tech manufacturing while maintainingthe relative lead in high-tech services. Good practice from theNetherlands in recent years has been based on encouragingand supporting start-ups in the high tech industry sector.

EIS2004 results forAustria indicate a rather mixed perform-ance with several indicators moving ahead while others arefalling further behind. It is clear that the Austrian innovationsystem requires reinforcing in order to boost stagnating GDPgrowth rates. Specific challenges concern human resourcesfor innovation (notably S&E graduates) as well as optimisingthe market outcome of the relatively good levels of innova-tion activity amongst SMEs. A number of Government meas-

ures aim precisely at increasing the commercialisation ofinnovative ideas (such as the AplusB programme).Reorganisation and rationalisation of funding institutions forinnovation in enterprises are expected to rationalise to someextent the current complex system.

Poland like most new Member States has a weak innovationsystem although it was catching up in about half of the EISindicators in 2004. Recent relatively good economic growthrates remain disconnected from strengthening the innova-tion potential. The overall challenge remains to boost signif-icantly innovation activity in enterprises to foster sustainedgrowth based on knowledge rather than factor costs.Specific challenges include raising the very low levels ofBERD and in strengthening life-long learning as a means offostering creativity and technology content in the business

sector. Innovation policy remains a relatively new concept,but support for entrepreneurship including aspects relatedto technology transfer and innovation has been providedthrough the National System of Services (KSU) since 1996.This network advisory service has been extended by theNational Network of Innovation (KSI) with a view to enhanc-ing innovation in SMEs.

Despite a trend in Portugal to catch up in many of the EISindicators in recent years, the country remains one of theweakest amongst the former EU15 and lags behind several ofthe new Member States. Given the slow-down of GDPgrowth rates there is a basic need to integrate initiativesaimed at fostering innovation into all public policy areas.Specific challenges related to insufficient attention to patent-ing results of R&D, very low BERD rates, and a weak per-formance in terms of human resources for innovation. Inresponse, Government action included the adoption by theNational Institute for Industrial Property of a "pro-active"approach to the patenting problem with the introduction ofa culture of service orientated and network based approachto stimulating the use of intellectual property by companies.




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Slovenia's position in terms of innovation is in manyrespects enviable with respect to other new Member States,to the extent that it performs above EU25 average for six indi-cators. The weaknesses of the Slovenian innovation systemrelate to insufficient commercialisation both in terms ofpatents and in terms of new-to-market products. Limitedaccess to specialised finance is one factor, which explains thelow intensity of innovation activity amongst SMEs. Thecountry has been a front-runner in developing support forinnovation and industrial development through cluster ini-tiatives. A recent evaluation of the programme launched in2000 suggested this initiative has had some notable successin boosting competitiveness.

Industrial restructuring and economic growth in Slovakia inrecent years has not been mirrored or supported by a step-

change in the innovation potential of the country. EIS2004results indicate that Slovakia is falling further behind in anumber of key indicators. Specific challenges include raisingpublic and private rates of expenditure on R&D and boostingthe rates of new product development and raising the tech-nology content in the service sector. Innovation policy is stillnot well formulated in Slovakia and the response to innova-tion challenges is fragmented. One organisation activeacross the country in supporting enterprises is the NationalAgency for Development of Small and Medium Enterprises,which supports business development, technology transferand innovation through a network of centres. It also runs anumber of funding programmes and initiatives such as theINTEG programme which supports innovation and technolo-gy transfer through technology incubators and cross bordereconomic co-operations.

Finland remains a clear outlier when comparing innovationto economic growth since GDP per capita is below whatcould be expected from the extremely strong innovation per-formance. Yet historically, sustained investment in R&D andinnovation has permitted the country to overcome a severeeconomic crisis. The challenge therefore is to maintain thehighly positive trends in key innovation indicators to permitgrowth to continue. Specific challenges faced by Finlandinclude losing momentum in high-tech patenting, a relative-ly low share of employment in high-tech manufacturing andthe relatively low rates of non-technological innovationamongst SMEs. Measures to strengthen the national innova-tion system are notably managed by the TEKES agency.These include the successful series of National TechnologyProgrammes aimed at obtaining new technology advancedand product development options.

Structural changes during the 1990S enabled the Swedisheconomy to grow at rates close to the EU average through-out the past few years. Yet, evidence suggests that thisgrowth has not been 'employment-rich' nor based on thecreation of new smaller innovative firms. Nonetheless, theoverall performance of the Swedish innovation system isextremely good compared to the EU25. Yet, a number oftrends give cause for concern including problems with

recruiting students to S&E disciplines, SMEs innovating in-house and rates of non-technological innovation. BusinessR&D remains dominated by a number of large industrialgroups and there is a financial bottleneck to creating newinnovative firms. In response, VINNOVA, the national inno-vation agency, has launched the VINNKUBATOR programmeand is studying a Swedish version of the US SBIR scheme(which provides for a percentage of all research funding tobe allocated to new small business initiatives).

The United Kingdom's innovation performance is relative-ly strong both in absolute and relative terms and innovationis clearly placed at the heart of Government policy through anumber of recent policy reviews and declarations.Nevertheless, EIS2004 results suggest that the UK faces spe-cific challenges in raising declining rates of business R&D

expenditure and reinforcing the weak share of employmentin high-tech manufacturing. Other challenges includestrengthening the links between the research and businesssectors, correctly identifying the future engineering andtechnical skills and ensuring that people with these skills areavailable to enterprises. Recent evolutions in policy thinkingin the latter field are reflected in the change of the formerTeaching Company Scheme into the Knowledge TransferPartnerships (UK_18) programme, which is now open to stu-dents of further education colleges as well as higher-educa-tion institutes.

Europe in a global perspective

In 2004, the "Innovation Policy in Europe 2004" policy mon-itoring exercise has, for the first time, attempted to placeEuropean policy developments in a wider perspective oftrends in other advanced industrial economies and neigh-bouring countries. While it is more relevant to analyse howEU Member States are positioned in relation to each other, abroader comparative analysis throws up interesting possibil-ities for learning from policy developments in three othermajor economic regions, namely NAFTA and Brazil, ninecountries from Asia, and seven countries from theMediterranean rim (MEDA).

Chapter 2 of the annual synthesis report analyses innovationperformance on the basis of a common set of indicators forthese 20 countries. It suggests that for policy making pur-poses the countries can be split into three comparatorgroups:

Comparator group 1: high-income economies, signif-icant knowledge producers, outperforming EU25 ininnovation, mixed entrepreneurial dynamics.Comparator group 2: upper-middle income countries,globally integrated markets, FDI driven innovation sys-tems.Comparator group 3: low-income countries withdeveloping but unevenly distributed innovationpotential.

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The report identifies a number of challenges driving policy ineach of the groups. Some of these challenges mirror thosefaced by EU countries, such as concerns about availabilityand quality of highly skilled labour.

In addition, there is a general concern about the importanceof framework conditions (e.g. education or information soci-ety infrastructures) to ensure that the basic enabling skillsand technologies are available to all individuals and enter-prises. Most countries (notably Japan, Mexico and Malaysia)are also aiming to increase the intensity of public and privateinvestments in research and innovation in a manner similarto the EU's own mid-term objectives.

Ensuring that the national innovation system as a whole per-forms more effectively is increasingly seen as an overarching

challenge notably in the higher-income countries. Indeed,initiatives aimed at improving governance based on a broad-er public and private partnership are taking place in a rangeof countries across all three groups.



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0.2 Introduction

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The Innovation Policy in Europe 2004 Report provides anoverview of innovation challenges and policy trends in the25 European Union Member States (EU25), eight associateand accession countries and 20 countries grouped into threerest of the world (ROW) zones namely: NAFTA, MEDA andASIA.

It is divided into two distinct chapters:

an analysis of developments in the governance structures ofinnovation policy and key trends in policy objectives atnational level for the 33 European countries, providing,where appropriate, examples of some key challenges facedby a country and the respective policy responses (based onEuropean Innovation Scoreboard (EIS) data);

recent trends in innovation performance and a discussion ofrelevant policy developments in the three ROW groups.

Moreover, a more detailed snapshot of the current nationalinnovation challenges and policy responses on a country-by-country basis for the EU25 is available in the online version ofthis report.

Chapter one "Innovation Policy Developments AcrossEurope" introduces the current situation of innovation policyas practiced by the 25 EU Member States. It provides detailson policy efforts and priorities, trends in policy measures anda breakdown of challenges for and responses of innovationpolicies of Member States. It additionally provides anoverview of such concerns as SME non-technical innovation,patterns of innovation activities, patents, business and R&D

expenditure, employment structures and the qualificationsof human capital to name but a few.

The second chapter outlines developments in innovationpolicy practices from a global perspective. It provides a snap-shot of three economic areas (NAFTA, MEDA and ASIA),assessing their innovation strengths and weaknesses in acomparative manner to provide an overall idea of Europe'scompetitive position.

It sets out a series of different approaches to national inno-vation policies, best practices, policy trends and identifiesways in which the EU Members can learn from innovationpolicies of other nations. In this respect, it identifies suc-cessful measures from those nations that are traditionallyperceived as successful innovators (USA, Japan) and takes alook at models that have for various reasons, proven to be

successful for traditionally less developed economies (China,Jordan, Egypt etc.).

This report has been compiled by Alasdair Reid ofTechnopolis and Lena Tsipouri of the University of Athens onthe basis of the annual country and country group reportsprepared by the correspondents of the TrendChart PolicyMonitoring Network.



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Innovation policy developments across Europe

Introduction

Policy efforts and priorities

Policy debates and policy objectives

Trends in policy measures

Innovation challenges and policy responses in the Member States

Methodological approach

Challenges by category of indicators

Developments in policy governance

Policy-making and delivering structures

Appraising policy and the role of evaluation

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1.0 Innovation policy developments across Europe

1.1. Introduction

Charting the developments in innovation policy across the25 EU Member States and eight candidate and associatedcountries1 is a challenging and complex task. Innovation asa concept is dealt with in diverse manners (ranging fromefforts to stimulate entrepreneurship and business competi-tiveness to more technologically driven approaches, to pro-moting growth and employment) not only from one countryto another, but often within single Member States from onegovernment department to another.

Moreover, the Innovation Policy in Europe 2004 analysis can-not be limited to examining specific governmental policyannouncements or the adoption of laws, or even to thedesign and introduction of specific funding measures in

favour of innovation in enterprises. Much of the effort to pro-mote innovation in the EU is done through less explicit meth-ods, be it through the promotion of an innovation culture,through assessing the effects of new regulations in terms ofthe barriers or through the drivers they create for innovation.

Finally, the Innovation Policy in Europe 2004 would onlypartly fulfil its mission if it only reported on what has hap-pened or what has been done. A key role of the exercise is toalert the European Institutions and stakeholders at Europeanand national levels to emerging policy trends or to highlightwhere policies are not responding to challenges. These areasare identified by analyses of innovation performance at theEU or national levels.

The next section of this chapter seeks to capture in a succinctmanner a number of these policy trends. This is done inthree ways:

Through identifying formal objectives established bythe 33 countries in their policy declarations, whichhave been published during the reporting period(September 2003-August 2004);

By highlighting significant changes in the balance ofeffort as exemplified by the introduction or modifica-tion of innovation policy measures;

In the form of a synthesis of key policy debates cur-rently taking place which may precede future policydevelopments.

A systematic analysis of challenges faced by the EU25Member States follows in the third section. It is based on therelative position of each country determined by the set ofindicators used in the European Innovation Scoreboard. Thechallenges are derived from indicators, or groups of indica-tors, where a Member State is particularly weak compared tothe EU25 average, as well as of areas where a Member State

is losing momentum

2

over time. In some cases recent poli-cies and concrete measures indicate that the Member State iswell aware of the challenges it faces, while in others there areno specific efforts addressing the challenge, or at least nosystematic recent initiatives.

In the fourth section, the evolution of the governance mech-anisms and delivery structures is addressed. The complexityof innovation policy and the overlapping authority of differ-ent ministries and agencies are recognised as a crucial factorinfluencing efficiency and effectiveness. In several cases, sig-nificant re-organisations have been envisaged with a view toensuring more coherent structures and effective coopera-tion. Appraisals, benchmarking and evaluation are some ofthe instruments used in this context and they are separatelyaddressed.

2 "losing momentum": relative strengths declining towards EU average

1 Individual country reports (identical in format to those prepared for theEU25) are produced for three candidate countries for EU membership:

Bulgaria, Romania and Turkey; and five associated countries: Iceland, Israel,Liechtenstein, Norway and Switzerland.



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1.2. Policy efforts and priorities

1.2.1 Policy debates and policy objectives

The period since 2000 has seen a significant evolution ofinnovation policies across the European Union, reinforced bythe targets set by the Lisbon Agenda. The changes affect hor-izontal or sectoral public policy priorities and objectives,character, structures and tools for their implementation,strategies both in the public and business sectors, consumerbehaviours and public awareness.

As can be seen from the time-line table below, formal docu-ments describing innovation strategies, objectives and meas-ures are available now in almost all EU25 Member States andthe associated and candidate countries (the exceptions beingCyprus, Italy, Luxembourg, Malta, Slovakia and Israel).However, in a number of countries innovation remains thepoor cousin of broader science and technology policies dom-inated by basic or academic research issues (e.g. in Greece,Poland, Portugal, Spain and Romania).

These documents have evolved from simple declarations ofintent to complex interdepartmental action plans and oper-ational programmes. They are increasingly based on consul-tations and surveys of enterprises, foresight exercises and indepth analyses of factors influencing competitiveness. Thedrafting of National Development Plans as part of the plan-ning process for the adoption of the current round of EUStructural Funds has helped most of the cohesion countries(Greece, Portugal and Spain) and the 10 new Member States

to develop similar strategies and targets. Similarly, the candi-date countries are developing national plans and strategiesin support of SMEs in general as well as research and inno-vation policy.



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Time-Line of Innovation Policy Documents

EU25

2000-04

1999

2000-06

2000-02

2000-06

2001-05

2001-05 2001-06

2002-06

2000-06

2004-06

2004-06

2004-06

2003-06

2004-06

2004-07

2004-06

2004-06

2004-06

2004-06

Brussels

Flanders

Wallonia

Austria

Belgium (Federal)

Cyprus

Czech Rep.

Denmark

EstoniaFinland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxembourg

Malta

Netherlands

Poland

Portugal

Slovak Rep.

SloveniaSpain

Sweden

United Kingdom

Candidate and associate countries

Bulgaria

Iceland

Israel

Norway

Romania

Switzerland

Turkey

Type of Policy Document

White Paper/Strategy Paper

(Framework) Law Decree

Action/Implementation Plan/Programme

CSF/SPD/OPs (Structural Funds)

Other Policy Declaration (Innovation sub-theme)

Source: Summary of TrendChart Annual Country Reports 2004 for EU25 and eight associatedand candidate countries.

2000 2001 2002 2003 2004

Time-Line of Innovation Policy Documents



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In the most advanced countries strategies are becomingmore explicit and detailed and often address particular seg-ments of the innovation "market" or organise an automaticmonitoring and update. In this spirit, recent policy initiativesworth studying are:

The adoption in Germany, in February 2004, of a newAction Programme on Innovation in SMEs (High-techMasterplan) with a view to creating a more coherentand effective framework. The programme pullstogether a total of 73 largely existing individual meas-ures in four main areas (technology-based start-ups,redesign of R&D programmes for SMEs, promotion ofco-operation between public research and SMEs, tack-ling shortage in the supply of highly qualif ied labour).

In Belgium, the Flemish Government adopts 'annualpolicy memoranda' which update the Policy Note fora five year period (currently 2000-2004) and providedetails on the concrete implementation of the frame-work;

National innovation policy objectives in the UK arefixed through a process that incorporates views andinterests of various stakeholders. Good examples ofthis activity dating from the last 18 months are theInnovation Report, the Ten-year investment frame-work for science and innovation and the Skills WhitePaper.

In Sweden, at the end of June 2004, the Minister forIndustry and Trade together with the Minister for

Education and Science presented a national strategyfor innovation: "Innovative Sweden". The strategy,which aims at economic growth through renewal,included four prioritised areas: a sustainable knowl-edge base for innovation; innovative industries; inno-vative public investments; an innovative population.

Sweden's neighbour Norway has also moved to adopta new, comprehensive innovation policy. The processwas initiated by the Minister of Education andResearch, but has later been placed under the respon-sibility of the Ministry of Trade and Industry. An actionplan 'From Idea to Value' was published in October2003 which argues that innovation policy must beembedded in a range of policy fields, and not only inthe traditional fields of industrial and research policy.A comprehensive innovation policy is furthermoreseen as contingent upon efficient policy coordinationacross sectoral and administrative borders.

In Switzerland, innovation policy is characterised bycontinuity since 2000 with however a commitmentfrom the Government to put more emphasis on inno-vation and to increase expenditure in this area at an

above-average rate. However, the concept of innova-tion policy has been broadened from a rather narrow-ly science-based view to a view covering social andcultural aspects of innovation activities too (for exam-ple entrepreneurial spirit). For instance, in 2003, theDepartment of Economic Affairs) released an actionplan, entitled InnoNation Switzerland, to promoteinnovation and entrepreneurship.

In the cohesion countries and the new Member States, theOperational Programmes of the Structural Funds increasing-ly incorporate activities related to innovation, including insome cases after revisions of the initial strategy. In all of theten new Member States innovation is included in their agen-das, in some cases following up earlier activities in others juststarting with the Structural Fund. A well-structured strategy

has been developed in Estonia leading to considerableplanned investments through the Structural Funds.

Finally, the three EU candidate countries present a mixed pic-ture in terms of the complexity and longevity of theirapproach to science, technology and innovation policy.Turkey is clearly a leader in terms of planning STI policy hav-ing a track record of several decades and a recent shift toemphasising a national innovation systems approach. Thecountry has clearly benefited from external support bothprior to gaining status as a candidate country, e.g. notablyfrom the World Bank, and increasingly through EU pro-grammes.

Although often externally funded, the strategies and pro-grammes are designed and managed by a strong national

technology and innovation infrastructure. Romania firstdeveloped a national RDI plan in 1997 and has regularlyupdated it since that date. Policy focus has shifted over timefrom restructuring the research infrastructure to more enter-prise orientated innovation policies. Finally, Bulgaria issomewhat of a latecomer but has developed through a part-nership, with several EU Member States, a first national inno-vation strategy during the period 2003-2004 with a ten-point action plan.

More generally, a cross-cutting theme is the systematic inte-gration of innovation with broader governmental policywhich has become a basic driving force in many policy dis-cussions over the last few years. Organisational, commercial,financial and even behavioural innovations are the subject ofa higher level of policy interest, as important determinants ofcompetitiveness. "Knowledge development" becomes abroader concept than technological innovation, reducing oldbut persistent dilemmas on fundamental/applied research,public/private ownership, self-sufficiency/international net-working etc.




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This evolution is more visible in the Member States withdeveloped "National Innovation Systems" (NIS), which linkdirectly innovation to growth and productive investment,while the cohesion countries, the new member and associatestates are beginning to follow this trend. Finland, consideredas the most successful among the Member States in terms ofinnovation finance, performance and policies, has movedahead by creating conditions for knowledge-based develop-ment in society at large, and within different policy sectors,not just within the science and technology policy sphere.

Five synopses of key themes arising from the recent policydocuments can be identified:

1. A significant effort to increase the availability and thebreadth of competencies of skilled people contributing to

innovation and to strengthen linkages and knowledge flowsboth nationally and internationally.

2. A strong regional role in the implementation of manyrecent initiatives, fuelled by the Structural Funds in the newMember States, and the corresponding need for coordina-tion with national targets and initiatives.

3. A push to increase the overall intensity of innovation activitythrough stimulating private enterprises to invest more in R&D,specifically, and other forms of innovation more generally.

4. An accent on the role of regulations, public procurementand other business environmental factors influencing theperformance of the innovation systems of the MemberStates.

5. The formation of partnership based initiatives to createlinkages aimed at improving the functioning of innovationsystems through increased stakeholder cooperation to breakdown barriers and give increased momentum to innovation.

In particular and in detail these five themes can be furtheranalysed as follows:

1. Europe's policy makers are increasingly recognising thatthe crux of the innovation challenge is based on the growingnumber of skilled people and their breadth of competenciesavailable within the national innovation systems.Traditionally, measures have focused on raising the numbersof researchers in scientific institutes or in encouraging limit-ed mobility between universities and research organisationsand enterprises. Increasingly, governments are adopting amore holistic view on the challenge of mobilising adequatehuman resources for innovation.

These are often captured in broad goals such as the UK's goalis to ensure a strong science base provided with trained per-sonnel and guarantee that the skills are in place to supportinnovation. In Belgium, the attraction and development of

talent is one of six recommendations adopted in Flanders,while the "contract for the future of Wallonia", includes a devel-opment plan of human capital, knowledge and know-how.

Moreover, the objective of developing the human potential isallied to a broader emphasis on increasing managementskills for technology, research and innovation. For instance,one of the key priorities in both Greece and the UK is encour-aging informed management of intellectual property. InFrance a call was launched to establish the "Houses ofEntrepreunership" within universities and other higher edu-cation establishments.

In order to maximise the potential of available humanresources, the need to combine teams of specialists bothnationally and internationally is also promoted. This can take

the form of the creation of networks of common activitiesand joint programmes of various complementary institutionsto increase economies of scale and scope to reduce overlap-ping. In the Netherlands, collaboration in R&D receives par-ticular attention in policy documents.

Equally, supporting international cooperation for the trans-national transfer of knowledge and the integration ofEuropean and international knowledge creation networks isanother sub-theme. In Germany, strengthening internationali-sation of the NIS and participating in international pro-grammes has become a national priority. One of the key goalsof the UK is innovation through international collaboration.The Greek Operational Programme for Competitiveness pro-vides increased funding for international cooperation insideand outside Europe.

2. The regional dimension of innovation policy is gaining inimportance. The acquisition of capability for policy makingat regional level is supported by national governments andby the EU. This includes

Strategic thinking and programme preparation;Programme implementation and assessment;Technology transfer and marketing advice.

Specific examples of this trend include France where furtherdecentralisation of competences to regions is occurring orthe UK where the management of grants for business R&Dhas been transferred to the Regional Development Agencies.In France, the Ministry of Industry also aims to foster 'polesof competitiveness' defined territorially by the combinationof a strong industrial basis and a research and educationpotential.

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In a similar vein, the Italian government has recentlyapproved the creation of "technological" districts in somecarefully chosen geographical locations. Sweden is putting aparticular emphasis on regions and centres that display apotential for growth. The VINNVXT programme, which willbe extended in 2005, is a good example of a programme thataims to stimulate strong regional innovation systems withhigh quality environments for R&D, as well as competitiveand dynamic networks, in order to achieve more innovationand lasting growth.

Many of the Operational Programmes of the cohesion coun-tries and new Member States include now innovation poli-cies at the regional level. These programmes aim to developinnovation and technological services to SMEs at national, ormore often, regional level, including industrial research tech-

nology transfer and marketing and legal services.

For instance, the Greek Operational Programme forCompetitiveness provides for services supporting spin offsthrough privately owned technology parks and incubatorsand for independent technology brokerage. In Hungary, 25percent of the new Research and Technology InnovationFund will be spent on promoting activities at the regionallevel. Proposals to support the establishment of new region-al innovation structures, providing innovation services tofirms, are also under discussion.

3. While there is an increasing emphasis on non-technologi-cal innovation measures, these are usually close to the mar-ket activities and are not eligible for direct state aids, or onlyat very low subsidy rates. Hence, more traditional industrialR&D measures remain an important component of innova-tion policy fuelled by the debate on the achievement of theBarcelona target of 3% GERD/GDP, of which two-thirdsshould be business funded. In view of this, a spectrum ofincentives is designed to increase the involvement of thebusiness sector in knowledge creation, while at the sametime increasing government spending (see discussion ofrecently launched measures below).

There is clearly a trend, with a view to achieving critical mass,to focus efforts on specific technologies or key sectors.Smaller countries tend to focus on niches, nevertheless, thesuccess of these efforts depends on the capability of the busi-ness sector to takeover the output of public research andcommercialise it successfully. In Denmark for example,

knowledge networks will be established within high-techand knowledge areas where the country possesses researchand commercial competencies. The Finnish National Fund forResearch and Development (SITRA) confirmed its strategy toconcentrate resources to a few focal areas to be selected byearly 2005. Furthermore, SITRA is going to exit from portfo-lio companies outside these selected focal areas.

4. In order to address a wider range of factors than directfunding to stimulate business innovation, many new initia-tives have a legislative/regulatory character. The UK is one ofthe countries taking a lead on regulatory factors influencinginnovation. To improve regulatory decision-making, itsDepartment of Trade and Industry (DTI) is developing a'Think Innovation' guide for policy-makers, in consultationwith business and other stakeholders, to provide sound eco-nomic and practical guidance on what to look out for whenassessing the unintended consequences of regulation as partof the Regulatory Impact Assessment process.

In other countries, actions taken tend to focus on improvingregulatory environments for motivating public researchersand public research institutions to exploit research resultscommercially, reshaping the conditions for allocation of

intellectual property rights, taking account of patent activityin career trajectories. For instance, in Denmark, an act onTechnology Transfer at Public Research Institutions waspassed by parliament to enable universities to establish a lim-ited company responsible for the transfer of knowledge/tech-nology to the private sector. Similarly, Ireland launched thefirst National Code of Practice for Managing IntellectualProperty from Publicly Funded Research.

5. Finally, creating linkages through new partnership basedinitiatives aimed at improving the functioning of the innova-tion system is clearly an emerging trend. In Denmark, the'Action Plan on Public-private Partnership on Innovation'contains a comprehensive proposal to create appropriateframework conditions for co-operation between the privatesector and knowledge institutions.

In January 2004, the German Federal Government started amajor new innovation initiative, called 'Partnership forInnovation'. The Chancellor invited high level partners frombusiness and research to develop new proposals to turnGermany into a country where risk taking, entrepreneurshipand innovation play a more prominent role. Other purposesof the partnership are to identify bottlenecks and barriersthat hamper innovation activities and to create new confi-dence in the innovative capacity of Germany. The partner-ship will identify future markets and agree on a commonprocedure on how to open up those markets. Similarly, theDutch government launched a broadly based and wide-ranging Innovation Platform to draw-up plans and develop avision to give impetus to innovation in the country.




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Strategic Vision of Research

and Development

Others

Start Up of TechnologyBased Companies

IntensifiedCo-operationBetween Research,Universities andCompanies

Financing ofInnovation

Strengthening ResearchCarried out by Companies

Strengthening the Ability of

Education, Initial andFurther Training

Taxation

Promotion of Clusteringand Co-operation forInnovation

Mobility of Students,Research Workersand Teachers

Innovation and Managementof Enterprises

9%

10%

11%

5%

5%

5%

5%

5%

10% 12%

12%

11%

1.2.2 Trends in policy measures

A large part of the activity of the Innovation Policy in Europe2004 policy network is taken up by monitoring changes tothe policy mix and range of measures implemented in eachcountry. During the 2003-2004 reporting year, some 126measures were either launched or significantly modifiedacross the 33 countries monitored.

Whilst recognising that counting measures per country is atbest an imperfect guide to policy activity, this report con-cludes that there is an average of almost four measures percountry, although certain countries were responsible for ahigher share, notably Latvia, Poland and Portugal with nineeach and Germany with seven measures. Obviously the sizeof the country and the stage it finds itself at in the policy

cycle (for instance national elections or Structural Fund pro-gramming) can influence the outcome. Conversely, coun-tries such as Estonia, Ireland or Slovenia, which were partic-

ularly active in the period 2001-2003 in developing a policyframework, are now in a stocktaking and consolidationphase.

In terms of the importance of specific types of measures asclassified with respect to the Innovation Policy in Europe2004 policy framework, EU governments continue to pro-mote a broad spectrum of direct and indirect incentives, par-ticularly for SMEs, although regulatory matters or improvingthe skills base are increasingly recognised as challenges,. In2003-2004, measures in favour of the start-up of technologybased firms along with intensified co-operation betweenresearch and industry topped the hit-list with respectively12% of all new/modified measures.

Source: Summary of new measures identified in TrendChart AnnualCountry Reports 2004 for EU25 and eight associated and candidatecountries.



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Often considered as a means of favouring both a diversifica-tion of the national economy and sustaining employmentgrowth, actions in favour of the start up of new technologybased companies clearly continue to be in vogue. In Finland,TEKES launched a Start-up Loan for Technology Companies,which have to be completely new and are internationallycompetitive technology-based business.

Similarly, in Belgium (Flanders) a "Talent Bank" has been creat-ed to help start-ups to find capital and the four existingBusiness Angel Networks were merged into a newly createdBAN Vlaanderen. Investments in infrastructure for start-upsalso find favour. The Flemish Government decided to support(by way of the FFEU fund - Financing Fund for One-offInvestment Expenditure) a number of technology-related infra-structures in strategic areas including a second bio-incubator.

Poland has launched a programme, supported by theStructural Funds, which has a double aim: (a) to provideassistance to industrial parks, technology parks and technol-ogy incubators in the preparation of feasibility studies, busi-ness plans, environment assessment, investment projects,etc., and (b) to co-finance projects for the creation and devel-opment of new companies.

A more novel example of measures in this area is the indus-try incubator programme a new measure run by theIndustrial Development Corporation of Norway, SIVA. Anindustry incubator is an incubator that is closely linked to anestablished manufacturing company, called 'the mothercompany' ('the mother company' can also be a group ofcompanies). It aims to facilitate successful readjustment in

existing manufacturing companies and to contribute to spin-offs and the development of a broader and more robust sup-ply chain.

Efforts to encourage intensified cooperation in the innovationsystem are also wide-ranging and reflect the long-standingconcern about the need to increase the commercialisation ofresearch results, notably if they are publicly funded.Examples include the initiative of the Danish government toestablish a Foundation for High-tech development to pro-mote high-tech research and innovation via investments instrategic areas where Denmark both has scientific and com-mercial competencies.

In Finland growing importance is given to more horizontal,collaborative relations with other societal sectors, such aseconomic, industrial, labour, environmental and regionalpolicies and social and health care.

In the UK "Knowledge Transfer Networks" will provide awider, more flexible range of networking activities to broad-en knowledge transfer in businesses and will focus on


UK : Turning knowledge into business

The United Kingdom intends to strengthen the linkagesbetween the research base and businesses in order to bettertranslate its strength in knowledge generation into commer-

cial products and services. The Government therefore pro-motes an increased exploitation of research for the develop-ment of new products or processes and for wider improve-

ments in society (e.g. public health). New or re-designedmeasures in 2003-2004 include:

A new, consolidated Higher Education Innovation Fund(HEIF 2), incorporating funding for activities previouslysupported through the University Challenge fund (UC)

and the Science Enterprise Challenge fund (SEC);

Knowledge Transfer Networks (KTN) will provide a

wider, more flexible range of networking activities tobroaden knowledge transfer to businesses and wi ll focuson areas capable of maximising UK productivity;

Collaborative Research and Development (CRD): Aimedat all UK based businesses wishing to exploit technology

through collaborative R&D funding for projects betweenbusinesses, universities and other potential collaborators;

The Global Watch Scheme, which facilitates business

access to the latest technology, wherever in the world itmay be found, has been expanded.

The Knowledge Transfer Partnerships scheme succeeded theTCS in 2003. It builds on the TCS but now enables peoplequalified at National Vocational Qualification (NVQ) 4 level

to undertake projects or placements in firms with the backingof a Further Education college and provides more flexibility asto the project timescales. This is a clear advantage for busi-

nesses, according to the 2003 DTI Innovation Report, whichpoints out that eighty percent of companies involved believethat knowledge transferred during the placement was either

new to the firm or represented a considerable advance of theirknowledge base.



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areas that have the potential to maximise productivity."Collaborative RTD" is aimed at all UK-based businesses wish-ing to exploit technology through collaborative funding forprojects between businesses, universities and other potentialcollaborators.

Measures captured by the innovation financing category tendto be a relatively broad group including both support seed-and venture- capital as well as more classic grant or loansmechanisms for innovative firms. Such measures includedirect incentives (co-financing) to private activities of hightechnology foreign investment, provision of risk capital, pro-vision of technological and other advice to spin off compa-nies and new technology based firms, to developers of incu-bators and S&T parks and "business angels" networks, RTDprojects, and employment of research personnel.

A range of measures has been taken to respond to the actionplan objective of strengthening company research. Theseinclude the merger of the activities of the French InnovationAgency ANVAR with that of the BDPME (Bank for SMEs'development) so as to offer a complete range of fundingpossibilities. Belgium offers zero interest loans for newly cre-ated firms whilst the Finnish TUPAS funding service helps theenterprises to solve small, technologically challenging prob-lems by bringing the knowledge of expert organisationswithin reach of the enterprises.

Facing a basic problem of in-house capacity of enterprises tolaunch and manage innovation projects, Poland has beenparticularly active in introducing measures, through theStructural Funds aimed at supporting innovation and man-

agement of enterprises (accounting for half the measures ofthis category).

While Germany focuses efforts on strengthening research inhigh-tech areas, it also addresses the specific needs of inno-vative SMEs and their barriers to perform R&D and introduceinnovations. A good example of a partnership basedapproach to strengthening the research and innovationpotential of a specific sector is the Added Value from Seafood(AVS) programme in Iceland, which has been prepared in co-operation with professionals and stakeholders both in fish-eries and the fish processing industry.

Direct incentives in favour ofthe promotion of clustering andco-operation for innovation continued to find favour during2004 notably in the new Member States and candidate coun-tries such as the Czech Republic, Slovenia and Turkey. In theformer a measure KLASTRY (Clusters) within the OperationalProgramme 'Industry and Enterprise' launched by theMinistry of Industry and Trade for 2004-2006 is focused onestablishing and developing sectoral groupings at bothregional and supra-regional levels. In Slovenia, a cluster ini-tiative was launched as early as 2000 and remains one of thetop priority measures.

TrendChart


Slovenia: cluster boom

InSlovenia, a cluster initiative began in 2000 that remainsone of the top priority measures and reflects a recent trendto learn and transfer policy experience from elsewhere in the

EU. Government expectations in this field are high andreflect the enthusiasm for clustering among businesses. TheMinistry of Economy has co-funded several seminars, work-

shops and conferences and study tours by representatives ofclusters (in 2003 to the UK and Sweden).

Representatives of the Ministry have taken part in interna-tional conferences to present the Slovenian experience and,with the assistance of the business magazine Podjetnik

(Entrepreneur), hosted an international cluster conference.The over-subscription of the existing programme resourcesand the positive, albeit partial, conclusions from internaland external evaluations point to the success of the

Slovenian cluster programme.

In spite of the high policy priority assigned to clustering, the

interest of the business sector has far surpassed the ability of government to support the initiative. By 2004, 18 clusteroffices were operational and all together 29 projects related

to clustering have been supported, bringing together 350companies and 40 education/research institutes. In 2003,the total budget for the cluster policy was approximately

EUR 1.5 million. However, 30 requests for funding werereceived for a total amount of EUR 6.9 million, which meantthat the Ministry of Economy was only able to accept 14

projects and grant on average only 21 percent of the fundingrequested.

In 2004, in the face of this strong demand, EUR 2.5 millionwas made available for the cluster policy programme while in2005, the amount is somewhat lower (EUR 1.87 million) on

the assumption that several existing clusters will 'outgrow'the support scheme.



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The expectations of the Government are high in this area andso is the enthusiasm for clustering among businesses. By2004, 29 projects related to clustering were supported.

In December 2003, the first clustering initiative in Turkeystarted in the Bartin Province as a pilot project. The 'BartinRegional Development Project' was launched by the StatePlanning Organisation (DPT) in co-operation with the Under-Secretariat of Treasury (HM), KOSGEB and the NationalCompetitiveness Research Institute (URAK). Following adetailed analysis of the region, the sectors with a potentialglobal competitive advantage were identified. These sectorsinclude yacht and shipbuilding, furniture and wood indus-try, tourism and agriculture. The project will last three yearsand a budget of about EUR 300,000 was allocated for thispurpose.

Finally, taxation incentives introduced during 2004 includedthose in favour of risk capital and generation of "businessangels" funding, RTD activities, and employment of researchpersonnel. France extended the R&D tax credit scheme"crdit impt recherche" in time and expects many moreenterprises to benefit from the measure, while introducingfavourable treatment for young enterprises and businessangels. In Belgium, the Council of Ministers extended to pri-vate companies the scope of a law that concerns tax reduc-tion on the remunerations of scientific researchers. TheDutch government intensified the Tax Credit Scheme(WBSO), which provides legal measures to favour the provi-sion of risk capital, generation of "business angels" networks,foreign direct investment, and employment of research per-sonnel.



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1.3. Innovation challenges and policyresponses in the Member States

1.3.1 Methodological approach

Innovation policies, funding possibilities and performancediffer substantially among the 25 Member States. To improvetheir national innovation system, each Member state faces adifferent set of challenges. To identify the key challenges fac-ing Member States, the respective national performancesidentified by the EIS were used as a common benchmarkingframework. Detailed analyses of each country have beenmade, some of which are referred to in the country-specificboxes in this chapter. For the full list of country analyses,please refer to the online version of this report.

In total, over 100 challenges are identified for all 25 MemberStates. These challenges are to a greater or lesser degree metby specific policy responses. National policy makers appearto be aware of addressing the large majority of challenges,though more often than not this occurs in a broader contextof innovation policy design. In some cases both institutional(regulatory) or specific direct measures are identified andthese are described in more detail in an effort to trigger a dis-cussion on how to best address each case. In a minority ofcases, there are no specific responses.

Based on the policies studied there are four ways that thechallenges seem to be addressed by policy-making:

Legend:A systematic and integrated approach through institu-tional reforms, persistence and specific measuresFragmented measuresLaunching the debateNo specific measures addressing the particular chal-lenge

Fully addressing the challenge: The most effective way isby identifying a challenge, launching a debate with stakehold-ers and then meeting it with both institutional rearrangementsand the necessary specific measures (as in the case of Italy forICT expenditure). Policy actions under this category constituterelevant good practice examples.

Adopting concrete but fragmented measures: In most

cases what we see is that challenges are met in a broader con-text of multi-purpose innovation policy measures. Adoptingsuch measures can be very ef fective but may also lead to limit-ed results, if there is no overall strategy and quantifiable targetsare lacking (e.g. Business R&D in Greece addressed by individ-ual incentives but not changing the overall climate).

The launch of a debate: This is a first indication or stage

of an improving performance, but remains insufficient to con-sider it as meeting a challenge (as in the case of the Irish andCypriot shortage of S&E graduates).

Not addressed: There are many explanations, why somechallenges are not addressed:

a) The weakness reflects a structural problem, deeply embed-ded in the economy, which cannot be easily changed withdirect measures (e.g. share of high tech manufacturing insmall, traditional economies).

b) When the identified challenge originates from a "losingmomentum" ranking, it may take some time to become a pri-ority, since static and persistent weaknesses are more pro-nounced.

c) In some cases specific challenges may be expected to be metindirectly by general policy initiatives (e.g. the number ofScience & Engineering (S&E) graduates may increase if there isan overall reform of the educational system).

d) In the case of many new Member States challenges are iden-tified and are expected to be included in the EU co-fundedregional policy programmes in the immediate future.

This appraisal exercise represents a first attempt to identifythose fields of innovation policy where good progresstowards the Lisbon objective has been made. It is reassuringthat a great number of identified policy challenges havealready led to appropriate policy responses. On the other

hand, some challenges have not yet been taken up at nation-al level for different reasons.

The objective of the following section is to assess theprogress made thus far, and encourage Member States,where necessary and appropriate, to address identifiedweaknesses of the national innovation system. Taking intoaccount the methodological issues and the available infor-mation on national policy measures particularly in terms oftheir concrete impact on innovation, this analysis should, byno means, be considered as an impact assessment or a rank-ing of national policy actions.

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1.3.2 Challenges by category of indicators

The challenges grouped by type of indicator occur with verydifferent relative frequencies and country characteristics.Challenges and policy responses are summarised below inten broad categories.

S&E graduates (share of graduates in sciences & engineering):This is a category where many countries face a challenge:well advanced countries may be weak (such as Austria,Luxembourg, Belgium, the Netherlands and Sweden) or riskfalling behind as their economy and population grows andthe needs of the productive sector increase more rapidly thanthe pool of available S&E graduates, as in the cases ofGermany, Ireland and Finland. Therefore, some of the mostadvanced countries need to worry about the trends of S&E

graduates, not because they currently have insufficient num-bers but because they need to reorganise their educationalpriorities in order to maintain the necessary share requiredby a rapidly growing economy. As for less advanced coun-tries also facing this challenge, the shortage in the educa-tional system is generally structural and has been evident forsome time (e.g. Cyprus, Malta).

Finally, being transitional economies, some of the newMember States need to reform their system (e.g. CzechRepublic, Estonia and Hungary). Certain Member Statesaddress this challenge directly or indirectly by creating newuniversities or departments and/or wide-ranging reorganisa-tion of the educational system. The cases of Ireland andFinland demonstrate the most systematic policy approachincluding institutional and specific measures. Germany offers

an innovative approach through the institutionalisation ofeducational networking whilst Cyprus and Luxembourgaddress the very specific shortage by creating new engineer-ing faculties.

Policy responses to challenges in the field of S&E graduates

Cyprus, Finland, Germany, Ireland, LuxembourgAustria, Belgium, Czech Republic, Hungary, Malta,SwedenThe NetherlandsSweden

Qualifications of human capitalis also an important chal-lenge for many countries. In the current competitive envi-ronment a high share of the working population havingcompleted 3rd level education is an important, but not a suf-ficient, input for innovation. Unless members of the work-force continue to improve and upgrade their qualifications,the level of formal education may be a relatively weak deter-minant of success. Thus life-long learning may even be aremedy for a lower share of higher education graduates.

Countries like Austria, the Czech Republic, France and Polandneed to take this challenge very seriously because they areweak in both components of the human capital indicator.France and Poland are adopting broad initiatives and financespecific measures, offering potential good practices formature and new Member States respectively.

The French approach, concerning broader educationalreform (LMD), seems to be the most appropriate way ofholistically addressing the challenge. In Poland, a structuralreform of education is underway, and a strategy for life-longlearning as well as increased support, through the'Programme for Human Resource Development', is alsoenvisaged.

In Austria, the University Act 2002 that came into force on 1

January 2004 has given universities the greatest possibleautonomy in order to respond to the constantly changingdemands with regard to qualification of human resourcesand to foster the knowledge creation as well as the interac-tion between research and application. Specific measures arealso adopted in Portugal and Malta, which are weak in theshare of graduates in the working population.

For instance, the University of Malta organises annual'Graduate Potential Seminars', where labour market devel-opments are discussed and programmes aimed at bettermeeting the respective needs are carried out. Denmark,Greece, Hungary, Italy, Lithuania and Slovakia perform moreweakly in the field of lifelong learning, thus jeopardising thefuture quality of their human capital. Denmark is addressingthe problem in order to face a potential falling behind by

integrating all areas of life-long learning into one coherentsystem. In all the new Member States facing this challengethere are measures integrated into the new policy docu-ments supported by the EU regional policies.

Policy responses to challenges in the field of qualificationsof human capital

France, PolandAustria, Denmark, Greece, Hungary, Lithuania, Malta,Portugal, SlovakiaCzech RepublicItaly

The composition of the employment structure (the eco-nomic structure of a country defined in terms of the sectoralcomposition of the labour force) is a further challenge par-ticularly employment in hi-tech manufacturing and services. Tosome extent, this constitutes a vicious circle for innovation asan unfavourable employment structure hinders knowledgecreation, and hence, further innovation.


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TrendChart


Surprisingly enough this is not only a challenge for newMember States since countries such as Greece andGermanyare also weak in both cases. To address this, Germany has seta broad vision for change and sufficient financial support bypersistently funding high tech activities, especially high techservices. Greece relies mainly on a variety of measures of theEU regional Structural Funds in order to foster a medium-term economic restructuring.

High tech manufacturing is low in high-income countries likeLuxembourg, the Netherlands and the UK, where there is asystematic effort to improve the situation. The Netherlands,for example, have focussed on strengthening the network ofTechnology and Science Attaches (TWAs) to promote knowl-edge intensive business activity.

In the new Member States that face this challenge are fewspecific measures have been adopted. Estonia is a particular-ly interesting case and figures in this indicator because of itsexplicit policy to attract FDI in high tech manufacturing,which was initially successful but is in danger of not beingsustainable in the long term. In the case of employment inhigh-tech services, Estonia and Latvia are particularly weakand are not directly addressing the challenge. In general oneshould note that this is an indicator that reflects broaderstructural characteristics related to investment opportunitiesand is only partly attributed to innovation.

Policy responses to challenges related to employment

structure

Germany, Netherlands, UKGreece, Luxembourg

Estonia, Latvia

Public R&D expenditure: Public expenditure on R&D isconsidered as a weakness in seven advanced and lessadvanced Member States: , Belgium, Cyprus, Latvia,Lithuania, Luxembourg, Slovakia and Spain. The indicator isspecifically taken care of and nearly all countries consideredhave specific measures to address the issue. This is due to theneed to comply with the Barcelona target. In most cases, theproblem is addressed through budgetary increases for new

measures (partly with EU Structural Fund support). TheBelgian "roadmap" where the central government addressesthe issue, for example with tax deductions, as a long termcommitment in cooperation with the regional governmentsis one case where the challenge appears systematicallyaddressed.

Policy responses to challenges in the field of Public R&Dexpenditure

BelgiumCyprus, Latvia, Lithuania, Luxembourg, Spain

Slovakia

Business R&D expenditure: This indicator, reflecting thesecond aspect of the Barcelona target, is weak in elevencountries, namely, the Czech Republic, Estonia, Greece, Italy,Latvia, Lithuania, the Netherlands, Poland, Portugal,Hungary and the UK. With the exception of the Netherlands,Italy and the UK all of these countries are weak in overall

innovation indicators and economic performance. However,all countries except Lithuania have policies and measures toaddress the problem, supporting both firm in-house and col-laborative research. Lithuania will probably do so after thecompletion of the regional development programming.

Three of the countries mentioned above use fiscal measures.Italy is a particularly interesting case adopting institutionalinnovations for the coordination, promotion, and implemen-tation of measures, with special emphasis for business R&Din the Mezzogiorno, and the reorganisation of the Fund forTechnological Innovation. In the Netherlands, a new pro-gramme (Technopartner) was launched to stimulate innova-tive business activity. The UK emphasises the relevance ofpartnerships and the role of the regions by, re-launching pro-

grammes to better address companies' needs.

Policy responses to challenges in the field of BusinessR&D expenditure

Netherlands, Italy, UKCzech Republic, Estonia, Greece, Poland, Portugal,HungaryLithuaniaLatvia

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Patents (including high tech patents) are an objective butcontroversial indicator as they reflect not only innovationperformance but also historical institutional practices in thehigher education sector as well as the economic structure ofan economy. In countries with limited business R&D activityand high tech production, patents are likely to be weak.Regarding high-tech patents, Cyprus, Poland, Sweden,Denmark and Finland are facing a challenge.

However, it is mainly Denmark, which is strong but fallingbehind, that has taken explicit and encompassing policymeasures, which can be used as good practice examples. Forinstance, it passed an act on technology transfer to of fer spe-cial incentives to universities to increase the propensity ofacademics to patent.

The situation is more of a concern when one considers allpatents and not just hi-tech ones. Greece, Ireland, Lithuania,Luxembourg, Malta, Poland, Portugal and Spain face thischallenge, as does France with regard to US PTO patents.

Of these Member States only France seems to be addressingthe problem as a broader cultural issue, with a long-termperspective, as it has placed special emphasis on IPR since2000.The Spanish approach is another interesting one, try-ing to increase patenting through international collabora-tions. Overall, Member States use very similar measuresincreasing information, making institutional arrangements toincrease IPR protection, offering subsidies for patent applica-tion costs or supporting universities to adopt a more patent-oriented behaviour.

Policy responses to challenges in the field of patents

Cyprus, Denmark, FinlandFrance, Greece, Ireland, Luxembourg, Portugal, Spain,SwedenLithuaniaMalta, Poland

As regards the patterns of innovation activity in enter-prises, the analysis of the relative position of Member Statesis based on the data selected through the CommunityInnovation Survey (CIS) and, in particular, the performanceof SMEs innovating in-house or in collaboration, overall inno-vation finance and the new-to-market or new-to-firm prod-


Ireland: valuable proofs

The Irish Commercialisation Fund provides a range of support designed to improve the commercial exploitation ofknowledge. It was launched in 2001 to meet the need toincrease patent registration from the HE sector and the Stateresearch institutes.The measure was restructured in 2003 and now provides forthe pro-active support of Enterprise Ireland in both the pro-tection and the commercial exploitation of results.Researchers have two main support measures at their dis-

posal:

A Proof of Concept Phase to test out the feasibility oftheir idea, or

A Technology Development Phase to put significantresources behind applied research to bring their ideato a marketable stage.

Over EUR 16.9 million were committed in 2003 to 116applied research initiatives in areas of emerging technolo-

gies (mainly ICT, life sciences, advanced manufacturing andphotonics).

However, many potential patents and potential patents inthe PRI were not exploited because they had not been'proofed' and brought to the point where their commercial

potential was within reach of private companies or newstart-ups. In response, the Business Development Phase,CORD, can now be used to assist in commercialisation. Thismeasure is important to ensure that the Public ResearchInstitutions (including the HE sector and state fundedresearch institutions - PRI) IP is brought to a stage where it

can be licensed to the private sector or commercialised bythe researchers themselves.

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ucts resulting from innovative behaviour. Most MemberStates face

TrendChart - Innovation Policy in Europe 2004

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