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The Economics Of Innovation

Kristin Schreiber (European Commission) tells us about the different support instruments the EU provides to innovative startups and SMEs

Innovative startups and SMEs are essential for the creation of growth and jobs in Europe. They play a key role in fostering innovation and are able to market new products quickly and adapt easily to the needs of their customers. European industry needs advanced technologies and business models to improve competitiveness in all industrial sectors, both in traditional sectors and emerging industries. However, despite the potential benefits of new technologies for manufacturing, adoption by the industry is not a simple matter. Success in the fourth industrial revolution requires that our industry uses the best available technologies and revises traditional business models.

Europe relies on the performance of innovative companies. However, the backbone of our economy are those SMEs, companies with less than 250 employees, often with traditional business models, who account for 99 percent of the total number of companies in EU, for 67 percent of people employed and 57 percent of the total value added.

Money talk

To allow innovative, as well as more traditional, startups and SMEs to flourish in the EU, both policy makers and businesses need to act. Companies must broaden their understanding of innovation and enhance their management practices. Policy makers need to ensure more consistent policy frameworks in areas critical to innovation, support cooperation across new industrial value chains taking root across Europe, reduce market fragmentation and ensure funding.

The latter is of particular relevance to policy makers. In Europe, startups and  SMEs still have problems accessing various forms of finance. Financing gaps exist, though the situation is improving. Bank lending is the most common source of finance for European SMEs. According to the latest SME Access to Finance Survey conducted by the European Commission and the European Central Bank, credit lines are the most relevant source of finance for 55 percent of SMEs, followed by bank loans (50 percent). However, 20 percent of the SMEs who applied for bank financing did not receive the financing they had planned for. This number varies strongly across countries: with the biggest problems in Greece, Cyprus, Lithuania and the Netherlands.

Though there is little variation between the proportion of SMEs applying for bank loans across sectors of industry, there is a strong correlation between enterprise size and the degree of application success: the smaller the enterprise, the higher its chance of not getting a loan. This situation naturally raises concerns on a startup’s ability to raise finance in the EU.

On the up side, one should recall that there are plenty of alternatives to traditional bank lending for startups and SMEs seeking finance in the EU. Depending on the size of the investment and the stage of a company's growth, money can be raised through family and friends, crowdfunding, business angels, venture capital, and listing on a stock exchange.

Equity is an important source of finance, and in particular venture capital. However, it is taken up by only a minority of startups and SMEs. On average only 13 percent of European SMEs consider equity financing as their preferred source. This is not only a demand-side issue: in some EU countries, equity financing is less available than in others. Around 90 percent of the EU venture capital investment is concentrated in only eight EU Member States, and public markets are also not fully developed. In comparison to the United States, Europe's economy is about the same size, but our equity markets are less than half the size. In the US, SMEs get about five times as much funding from the capital markets – or non-bank financing - as they do in the EU. If European venture capital markets were as developed as their US counterparts, companies could have raised an additional €90 billion over the past five years.

Cash injection

The European Commission is committed to solving these issues and has put in place a set of different policies varying from financial instruments, regulatory tools to ‘soft’ power.

 A share of the EU budget is dedicated to programmes and instruments supporting innovative startups and SMEs. Within the programming period 2014-2020, the Commission has put in place the COSME programme which supports the achievement of various objectives, including better access to finance and access to markets for SMEs and entrepreneurship, and more favourable conditions for business creation and growth.

To improve SMEs' access to finance, COSME uses financial instruments in the form of a risk-sharing mechanism and an equity instrument which are solely available for SMEs. The Loan Guarantee Facility mainly provides guarantees to financial intermediaries for lending to riskier SMEs (transactions which financial intermediaries would not be prepared to do if they had to bear the risk alone). The Equity Facility for Growth focuses on investments into risk capital funds which in turn provide equity financing to SMEs in their growth and expansion stage. Both instruments complement those available under the Horizon 2020 InnovFin programme, which are dedicated mainly to innovative SMEs and small mid-caps. And more financial instruments are available to European companies thanks to the EU (for more details, see box below). Among those, the SME Window of the European Fund for Strategic Investments (part of the so called 'Juncker Plan') contains debt and equity financial instruments which complement those available under COSME and InnovFin. Most of the EU financial instruments are implemented by the European Investment Bank group on behalf of the European Commission, and deployed via local financial intermediaries who support companies at local level e.g. via traditional bank loans. A comprehensive list of all the intermediaries supported by these and other EU financial instruments is available at

In addition, the EU is highly committed to supporting R&D: the Horizon 2020 programme provides funding that spans the innovation cycle, from lab to market. It promotes SME participation across the board: almost €9 billion of the budget of Horizon 2020 is to support SME innovation. A substantial amount is reserved for a dedicated SME Instrument that supports innovative business ideas with the potential to shape new markets. SMEs can undertake their innovation projects alone or with clients, suppliers or other partners according to the needs of their business development plan. The SME instrument is mainly a grant and is substantially different from a loan. The latter is generally provided by a bank and has to be repaid with interest by the company, while the former is often provided by a public administration, e.g. through a public call, and sometimes does not have to be repaid fully, or only in part. For the first time, the grant support from the SME Instrument is complemented by a range of services from enhancing innovation management skills, to accessing overseas markets and investors to finance growth. 

Support structures

However, if we want to have a durable impact on economic conditions in Europe, then we need more structural change. We have to improve the investment environment, especially for SMEs. Therefore, the Commission is addressing barriers to investment, notably through initiatives to develop a Capital Markets Union, to further deepen the Single Market for goods and services, to create a Digital Single Market, and to improve the Single Market in transport and energy. In parallel, the Better Regulation agenda of the Commission seeks to simplify the legal framework and to reduce regulatory burden across the Single Market.

In addition, last year, the Commission launched a Startup and Scale-up Initiative to address the specific issues of startups in the Single Market. It recognises that only a few high-growth companies create most of the jobs and growth in Europe. It is estimated that between three and six percent of businesses with ten or more employees are high-growth companies creating between a third and a half of the jobs on our continent. Within the Initiative, the Commission has put forward a comprehensive package of measures aimed at removing barriers, creating opportunities and improving access to finance for startups.

One major measure is the creation of a pan-European VC Fund-of-Funds, to attract more private capital back to venture capital. Moreover, the Startup Europe initiative will be reinforced, to strengthen the business environment for web and ICT entrepreneurs so that their ideas and business can start and grow in the EU. 

And more

And there is more: in an economy like ours so dependent on bank financing, the ability for SMEs to tap into capital markets is essential and will be more and more important in the coming years. As part of the Commission's priority to boost jobs, growth and investment across the EU, the Capital Markets Union initiative was launched by the Commission in 2015. The initiative offers an opportunity for Europe to widen access to new channels of funding, in other words an opportunity to finance the real economy and economic growth.

Improving the financing landscape for innovative startups and SMEs is a necessary condition for a prosperous European economy. Through efforts undertaken by the EU, jointly with Member States, we believe that we will support growth and job creation, and enable Europe to fulfil its economic potential. 

Kristin Schreiber is the Director in charge of the COSME Programme (fostering the competitiveness of European SME's) as well as SME, startup and scale up policy in DG GROW, the DG for Internal Market, Industry, Entrepreneurship and SME's of the European Commission. She studied International Relations, Economics and European Law at the Institut d'Etudes Politiques in Paris, the University of Kent at Canterbury and the College of Europe in Bruges. She worked as a Graduate Lecturer at the University of Kent in Canterbury and a researcher on the Single Market in Bonn, before joining the European Commission in 1990 where she held a variety of positions. Kristin was appointed to her current position in 2015 after serving as Director for Governance of the Single Market and International Affairs. Previously, she was Head of Cabinet of Employment Commissioner, Vladimir Špidla, Deputy Head of Cabinet of Internal Market Commissioner, Michel Barnier and member of the Cabinets of Enlargement Commissioner, Günter Verheugen and Competition Commissioner, Karel Van Miert. She also served as Head of Unit for International Affairs in the DG for Employment and Social Affairs. Kristin speaks German, French, English and Spanish, some Italian, and has some knowledge of Czech and Slovak, as well. 

Published on 13-07-2017 00:00 by Kristin Schreiber. 1023 page views

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