Business group wants tax breaks for innovative start-ups

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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. 

Janez Poto?nik European Commissioner for Science and Research said the paper comes at a time when "research and innovation in Europe could head forward into a better-planned, more coordinated future, or find itself stalled in a dead end street". 

"I must admit that papers do not normally excite me! However, the one that BusinessEurope has presented is different. It is therefore a very welcome intervention in the context of the preparation of the post-2010 EU policy strategy, the review of ERA governance, and the preparation of future EU innovation policy. It will help us all to improve our understanding of what a comprehensive research and innovation policy in Europe should look like," said the Commissioner. 

Philippe de Buck, director-general of BusinessEurope, said the financial crisis has added to the urgency surrounding the rejuvenation of Europe's innovation ecosystem. 

"The scale of challenges faced by the European economy and society, the context of crisis and fiercer competition at global level call for further efforts to support research and innovation. Europe must adopt a resolutely offensive profile." 

BusinessEurope President Jürgen R. Thumann said the first Barroso Commission recognised the need to develop such a broad-based innovation strategy. 

"It is essential now to implement this vision with determination. The forthcoming European Innovation Plan and, in the longer term, the Eighth European Framework Programme (FP8) and the next Financial Perspectives (2014-2020), should be decisive milestones in this process."

Europe faces perennial challenges in creating the right environment for entrepreneurship, with the US and Japan consistently more willing to take risks on innovative new ventures. 

The EU executive will publish a new European Innovation Act by next spring at a time when policymakers are debating how to replace the Lisbon Agenda for Growth and Jobs, which expires at the end of 2009. 

It also comes as European Commission President José Manuel Barroso plans to reconfigure the incoming College of Commissioners to put greater focus on innovation policy (EURACTIV 23/09/09). 

Small business groups have stressed the need to put patent protection at the heart of the EU Innovation Act (EURACTIV 08/09/09). 

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