Europe’s chronic shortage of finance for young innovative companies will cause it to fall further behind global competitors, according to a business lobby group which wants governments to back entrepreneurs through tax incentives.
In a detailed report on boosting innovation in the EU, BusinessEurope calls for the expansion of risk-sharing products offered by the European Investment Bank, which would assuage the reluctance of banks to gamble on new technologies.
An integrated venture-capital market should be established within the EU, according to the report, which goes on to describe the kinds of tax breaks new firms need to bring new inventions to market.
It commends France for its ‘Jeune Entreprise Innovante’ scheme, which began in 2004 and offers tax exemptions for SMEs that invest more than 15% of their total annual expenditure on R&D. Firms qualifying for the initiative are exempt from all corporation tax and capital gains tax for eight years after their establishment.
“A pan-European initiative inspired by this example and aiming to boost special recognition, under EU state aid rules and national fiscal policies, to young and innovative companies could boost EU innovation capacity,” BussinessEurope said.
The report also has hard words for the EU’s efforts to strengthen coordination between national R&D policies – the so-called European Research Area (ERA) – which still lacks an “effective governance system”.
BusinessEurope wants European R&D programmes, such as the Joint Technology Initiatives (JTIs), not to be constrained by rigid rules on financing and staffing. The JTIs and other such ventures are covered by the rules of the Community Statute, which the report says is holding back innovation.
EU investment in R&D still lagging behind
The report notes that Europe scores well when it comes to investing in clean technology, with EU countries filing more than twice as many patents as the United States in areas like renewable energies.
However, the proportion of national budgets spent on research and development remains below 2% in Europe while the US and Japan invest 2.7% and 3.4% respectively. The major failing is in what the report describes as the “post-R&D” sector – turning innovations into marketable products.
This, says BusinessEurope, requires access to specialised finance like venture capital. Early stage venture capital is too scarce in Europe, with many promising European innovation projects having to find financial backers in the US.
Returning to the example of clean technology, the report says the EU invested around $1,500 million in 2007, which compares badly with the $4,000 million spent in the US.