Innovation Policy
Efficiency of the current policy mix for
Dutch SMEs consisting of national and
European measures
Koen Hendriks
Tilburg University
Fall 2010
Abstract:
In western economies, innovations more and more determine economic growth.
However, with respect to innovation, a number of market failures are present which
could result in an investment level that is lower than the social optimum. Also SMEs,
which account for more than 60% of European and Dutch employment, have to deal
with these market failures. Therefore, the government intervenes. Within the
European Union, policy is designed on a national level, but also on a supra-national
level. This thesis describes how the Dutch and European governments are trying to
correct the market failures as present for Dutch SMEs. Also the complementary,
substitutable and conflicting elements of respective the national and European
programs are discussed. One of the main conclusions is that econometric analysis
shows that participation in national government programs significantly increases
innovativeness of Dutch SMEs, however, participation in European programs does
not.
Keywords:
Market failures, SMEs, innovation policy, national policy, European policy efficient
policy mix
Innovation Policy
Efficiency of the current policy mix consisting of national
and European policies for Dutch SMEs
Koen Hendriks
ANR: 16.65.57
K.T.J.Hendriks@uvt.nl
Tilburg University
Tilburg School of Economics and Management
Economics Department
Examination committee:
Prof. dr. E.E.C. van Damme
Prof. dr. E. Brouwer
Number of words: 24.589
1
Summary
Innovations more and more determine economic growth in western economies.
SMEs (Small and Medium Sized Enterprises) are an important group of companies in
this sense because an overwhelming majority of firms can be characterized as a SME
and in Europe this group of companies is responsible for 60% of employment.
However, empirics show that SMEs participate significantly less in innovation
activities. Innovation often is the result of complex and intense interaction between
end users, companies, knowledge providers and the framework conditions.
However, different types of market failures arise which hinder innovation. As a
result, the government could intervene to correct these market failures, and it does.
Both on the national and European level policy instruments are designed to promote
innovation of SMEs.
When looking at the government instruments, you can see that there exist many
instruments that aim at correcting market failures and promoting innovation.
However, one market failure is not addressed by both national and European
measures, namely the market failure of a missing product market for new
introduced products.
Further, empirics show that SMEs participate relatively more in national programs
compared to larger firms. This may be the result of the generic character of most
programs. SMEs that participate in national programs are significantly more
innovative. In contrast, SMEs participate significantly less in European innovation
programs and SMEs that do participate are not significantly more innovative. A
possible reason is the fact that European measures like the 7th Framework Program
(FP7) have a high administrative burden and a low probability of success.
Analyzing the policy mix for Dutch SMEs, complementary elements can be seen. For
example the cooperation programs of respectively the national government and the
European Union. But also substitutable elements can be found like Eurostars that
can be seen as a substitute of FP7.
In the future, specific innovation policy instruments for SMEs should be designed
more on a national level and should also address the market failure of the missing
product market for new innovative products. European policy should focus on
creating good framework conditions for innovative companies and researchers.
More added value can be created on a national level because the national
government is better able to design policy according to the preferences and needs of
SMEs.
2
Samenvatting
Innovaties bepalen steeds meer de economische groei in Westerse economieën.
MKB is een belangrijke groep bedrijven in deze zin omdat een grote meerderheid
van de Nederlandse bedrijven kan worden geclassificeerd als een MKB1-bedrijf,
verder is het MKB in Europa verantwoordelijk voor ruim 60% van de
werkgelegenheid. Echter, empirie laat zien dat MKB-bedrijven significant minder
participeren in innovatie dan het grootbedrijf. Innovatie is vaak het resultaat van
complexe en intense interactie tussen eindgebruikers, bedrijven, kennisinstellingen
en de randvoorwaarden, het zogenaamde innovatie systeem. Maar verschillende
vormen van marktfalen zijn aanwezig welke innovatie van MKB-bedrijven hinderen.
Daarom zou de overheid kunnen ingrijpen, en dat doet het ook. Voor Nederland
worden er op nationaal en Europees niveau beleidsinstrumenten ontworpen welke
innovatie van het MKB zouden moeten stimuleren.
Wanneer je kijkt naar deze overheidsmaatregelen, zie je een grote hoeveelheid
instrumenten welke allen op een andere manier proberen het marktfalen te
corrigeren en zo innovatie to stimuleren. Echter, één vorm van marktfalen wordt
niet aangepakt door beide overheden, namelijk het marktfalen van de ontbrekende
markt voor nieuw geïntroduceerde producten.
Verder laat empirie zien dat het MKB-bedrijf significant meer in nationale
programma’s participeert vergeleken met het grootbedrijf. Dit zou het resultaat
kunnen zijn van het generieke karakter van de meeste overheidsprogramma’s. MKBbedrijven die participeren in nationale programma’s zijn siginificant meer
innovatief. Echter, MKB-bedrijven participeren significant minder in Europese
programma’s en MKB-bedrijven die participeren zijn niet significant meer
innovatief. Redenen die hieraan ten grondslag zouden kunnen liggen is het feit dat
Europese programma’s zoals het 7e Kaderprogramma (KP7) een hoge
administratieve last kent en een lage kans van succes voor MKB-bedrijven.
De beleidsmix voor Nederlandse MKB-bedrijven laten complementaire elementen
zien zoals bijvoorbeeld de samenwerkingsprogramma’s van respectievelijk de
nationale overheid en de Europese Unie. Maar hiertegenover staat dat ook
substitueerbare elementen te zien zijn, zoals Eurostars een substituut kan zijn voor
KP7.
In de toekomst zou specifiek innovatie beleid op nationaal niveau ontworpen
moeten worden en zou men ook het marktfalen van de ontbrekende markt voor
nieuw geïntroduceerde producten moeten aanpakken. Europees beleid zou zich
meer moeten richten op het creëren van goede randvoorwaarden voor innovatieve
bedrijven en wetenschappers. Meer toegevoegde waarde kan gecreëerd worden op
nationaal niveau, omdat de nationale overheid beter in staat is om het beleid zo in te
richten zodat het aansluit bij specifieke preferenties en behoeften van Nederlandse
MKB-bedrijven.
1
Midden Klein Bedrijf
3
Preface
This master thesis is the final project for receiving the Master of Science degree in
International Economics and Finance from Tilburg University. In the summer of
2007, just before I decided to study economics, the subprime mortgage market in
the United States crashed. The financial crisis that followed had huge consequences
for economic growth in the Europe. I began to think about the underlying factors
that determine economic growth on the long term, namely population growth and
innovations. Since the population in Europe is ageing, innovation will more and
more determine economic growth in the future.
In the master International Economics and Finance I attended the seminar
Competitiveness of the European Economy from prof. dr. van Damme and prof. dr.
Brouwer. In this seminar we discussed the measurement of innovation and its
contribution to economic growth. Also, the Lisbon strategy was mentioned. By 2010
the European countries should invest 3% of their GDP in research and development.
However, most countries failed and especially SMEs lack behind. This could be the
consequence of underlying market failures that restrict innovation. For the case of
the Netherlands, policy is designed on national and European level to correct these
market failures and to foster innovation. Since nowadays there is a lobby to transfer
innovation policy more to the European level I wanted to examine how respectively
the national and European government is aiming to correct the market failures
present for SMEs. In addition, it seemed interesting to examine how successful these
policies are and whether they create synergies with respect to each other.
Writing this thesis was quite a challenge. Without support writing this thesis would
be much harder and therefore I would like to take the opportunity to thank some
people.
First of all, I would like to thank my supervisor at Tilburg University, prof. dr. van
Damme, for his valuable comments and discussions on earlier drafts. Second, my
supervisors on the Ministry of Economic Affairs, Theo Roelandt and Frits von
Meijenfeldt, and my supervisor at Statistics Netherlands George van Leeuwen for
their input and advice.
I am also grateful to my fellow students of Tilburg University. I want to thank them
for the valuable discussions and further tips for research, but even more for the talks
during the breaks about everything except our theses.
Last but not least, I would like to thank my girlfriend, my family and friends for
support during my thesis and my studies.
Koen Hendriks
Budel, 27 November 2010
4
Table of Contents
1 – Introduction .................................................................................................................... 7
2 – Small and Medium Enterprises (SMEs) in the Dutch economy .......................13
2.1 – Definition of SMEs ........................................................... 13
2.2 – SME’s share in the Dutch economy ......................................... 14
2.3 – Sectoral distribution of SMEs within the Dutch economy ................ 15
2.4 – Innovativeness of the Dutch SMEs compared to large enterprises ...... 16
3 – Theoretical Framework .............................................................................................23
3.1 – Innovation system ........................................................... 23
3.2 – Market failures ............................................................... 24
3.2.1 – Inadequate institutional framework ............................... 25
3.2.2 – Missing markets ..................................................... 27
3.2.3 – Externalities ......................................................... 28
3.2.4 – Market structure .................................................... 30
3.2.5 – Incomplete information ............................................. 33
3.2.6 – Bounded consumer rationality ..................................... 34
3.3 – Interaction between national and European policy ....................... 34
3.4 – Complementary versus substitutable policy instruments ................ 36
4 – Dutch innovation policy relevant for SMEs ..........................................................38
4.1 – Generic innovation policy ................................................... 38
4.1.1 – WBSO (Wet Bevordering Speur- en Ontwikkelingswerk / Law for
Promotion of R&D) .......................................................... 39
4.1.2 – Credit for innovation ................................................ 40
4.1.3 – Eurostars............................................................. 41
4.1.4 – Technopartner ....................................................... 42
4.1.5 – Vouchers for innovation ............................................. 43
4.1.6 – Innovation Performance Contracts (IPCs) ......................... 44
4.1.7 – Small Business Innovation Research Program (SBIR) ............. 45
4.1.8 – Syntens ............................................................... 45
4.2 – Specific innovation policy ................................................... 46
5
4.2.1 – Innovation programs ................................................ 47
4.2.2 – International innovation ............................................ 49
4.2.3 – EG-Liason ............................................................ 50
4.3 – Empirical analysis ........................................................... 51
4.4 – Conclusion.................................................................... 54
5 – European innovation policy relevant for SMEs ...................................................60
5.1 – 7th Framework Program (FP7) ............................................. 60
5.2 – Competitiveness and Innovation Framework Program (CIP) ............ 66
5.3 – Empirical analysis ........................................................... 69
5.3 – Conclusion.................................................................... 73
6 – Analyzing the policy mix: The Dutch case .............................................................76
6.1 – Complementary elements ................................................... 76
6.2 – Substitutable elements ...................................................... 78
6.3 – Missing elements ............................................................ 79
6.4 – Empirical analysis ........................................................... 79
6.5 – Conclusion.................................................................... 84
7 – Policy recommendations ...........................................................................................85
8 – Conclusion......................................................................................................................87
References ............................................................................................................................89
Appendix A ...........................................................................................................................94
6
List of tables and figures
Table 2.1
Table 2.2
Table 2.3
Table A.1
Categorical subdivision of SMEs
SMEs share in the Dutch economy as of 01-01-2009
Differences between SMEs and large companies in innovation
participation
Differences between innovative SMEs and large companies in R&D
intensity
Differences between innovative SMEs and innovative large
companies in share of revenue from products new to the market
Budget allocation within the generic part of the Dutch innovation
policy (2010)
Differences between SMEs and large companies in participation in
national government programs
Differences in R&D intensity between SMEs that do participate in
Dutch government programs and SMEs that do not participate in
these programs
Differences in new product introduction between SMEs that do
participate in Dutch government programs and SMEs that do not
participate in these programs
Generic national instruments and corresponding market failures
Specific national instruments and corresponding market failures
Division of budget within FP7
Division of budget within CIP
Differences between SMEs and large companies in participation in
European government programs
Differences in R&D intensity between SMEs that do participate in
European government programs and SMEs that do not participate
in these programs
Differences in new product introduction between SMEs that do
participate in European government programs and SMEs that do
not participate in these programs
European instruments and corresponding market failures
Differences between SMEs and large companies in participation in
both government programs
Differences in R&D intensity between SMEs that do participate both
government programs and SMEs that do not participate in both
programs
Differences in new product introduction between SMEs that do
participate in both government programs and SMEs that do not
participate in both programs
Explanation of variables incorporated in this thesis
Figure 2.1
Figure 2.2
Figure 3.1
Sectoral distribution of SMEs within the Dutch economy
Model for a probability (probit model)
The innovation system
Table 2.4
Table 2.5
Table 4.1
Table 4.2
Table 4.3
Table 4.4
Table 4.5a
Table 4.5b
Table 5.1
Table 5.2
Table 5.3
Table 5.4
Table 5.5
Table 5.6
Table 6.1
Table 6.2
Table 6.3
7
Figure 3.2
Figure 3.3
Figure 3.4
Figure 5.1
Knowlegde and rent spillovers
Relation between competition and innovation according to
Schumpeter (Mark I and Mark II) and Aghion
Competition, profits and efficiency
Structure of the 7th Framework
8
1 – Introduction
Realizing sustainable economic growth is an important goal of economic policy. One
of the factors determining economic growth is productivity growth and therefore is
a key element in economic policy. Long term sustainable growth is affected by
economic behaviour and human actions. Research and development (R&D),
innovations and human capital formation are fundamental. By developing new
products, services, processes and business models, firms can become more
productive (so called dynamic efficiency), which subsequently results in economic
growth at the macro-level (Aghion et. al., 1998).
In 2000, the European Union formulated a strategic goal for itself in the Lisbon
Agenda. Together, the member states of the EU should “become the most
competitive and dynamic knowledge-based economy in the world, capable of
sustainable economic growth with more and better jobs and greater social cohesion”
by 2010 (European Commission, 2002). In the new economic landscape, with more
intense competition from emerging markets like China, India and Brazil and fast
technological developments, innovations become more and more important
(Peeperkorn and Verouden, 2007). To remain competitive with foreign competitors,
it is important for companies to innovate. Therefore, innovation is one of the central
elements of the Lisbon objective and a core feature of the knowledge-based
economy, which the European Union aspires. To achieve this goal, the European
Union set a target for each member state to invest 3% of its GDP in R&D by 2010 (of
which 2% private R&D investments and 1% public R&D investments). Almost every
country failed in achieving this target and many believe that the 3% target was too
ambitious. Nonetheless, the strategy for Europe 2020 also incorporates the 3%
target. Still ambitious, but in the view of the current financial crisis, innovation
seems more important than ever in order to prevent a “lost decade” 2 and achieve
sustainable recovery (European Commission, 2010). However, many changes will be
needed (from both the private and public sector) to achieve this goal in 2020. For
this thesis, I will take the Netherlands as main case.
However, a problem arises when it comes to innovation. Market failures are
present3 which are causing that the outcome resulting from the market is not
socially optimal. These market failures restrain innovation and firms tend to invest
A lost decade means that the economy suffered a permanent loss in wealth and in the potential for
future growth. The better alternative is sustainable recovery which results in full return to the previous
growth path and will raise its potential to go beyond. Innovation is of great importance according to the
European Commission (2010).
3 The market failures present are further discussed in chapter 3, the theoretical framework.
2
9
less in R&D activities than is socially optimal. Also for small and medium sized
enterprises (SMEs), these market failures result in serious restraints to invest in
R&D. However, SMEs are of great importance for the Dutch economy. That is why
the following of this thesis will focus on this group of companies.
The government can intervene to correct this market failure. For the case of the
Netherlands, both the national government and the European Union use policy
measures that aim to stimulate private innovation to a socially desirable level. By its
policy instruments it helps businesses to overcome the failing market. Both
government layers have specific instruments that target SMEs. So, on two levels
policy measures are designed to increase the innovation capacity of small and
medium sized companies. This does not have to be a problem when there exists
sufficient interaction between both levels of government and the two government
levels aim at correcting different market failures for different target groups. Then,
the policy measures of the two government layers could be characterized as
complementary and could lead to synergies between government policies which
would increase its efficiency (Alesina, Angeloni and Etro, 2005). Market failures
present for SMEs will be better tackled in this way, which will most likely lead to an
increase in the innovativeness of smaller private companies. However, also the
possibility arises when both government levels focus on correcting the same market
failures for similar groups of companies. In this case, the policy measures become
substitutes of each other and create no added value with respect to each other. In
the worst case, policy measures may even be conflicting with each other. When this
is the case, there is no efficient policy mix between the national government on the
one hand and the European Union on the other hand. Some market failures are not
tackled and groups of companies are disregarded, which indicates some form of
government failure.
The aim of this thesis is twofold and therefore the research question consists of two
parts. With respect to the first part, the Dutch and European policy regarding
innovation will be analysed and reviewed, attempting to answer the following
question: “Which market failures are present for SMEs with respect to innovation and
how do national and European policy measures try to correct these market failures?”
In order to provide an answer to this question, Chapter 2 will first analyse the role of
SMEs in the Dutch economy to illustrate the importance of this group of companies.
Also, differences between SMEs and large companies with respect to innovation will
be stressed out in this chapter. Chapter 3, hereafter, will provide a theoretical
framework which describes the innovation system, the market failures present for
SMEs with respect to innovation and a theory regarding an efficient policy mix.
Chapter 4 contains a descriptive analysis of how the Dutch innovation policy deals
with these market failures and how accessible the existing measures are for SMEs.
Also an empirical analysis which describes the differences between Dutch SMEs and
10
large companies with respect to participation in government programs is included.
To finalize this part of the research question, Chapter 5 describes the European
programs that aim to stimulate innovation within the private sector and the
corresponding market failures. Also, an empirical analysis to stress differences
between SMEs and large companies is added.
The second part of the research question evaluates the present policy mix between
on the one hand national policy measures and on the other hand European-wide
programs: “How efficient is the current policy mix of national and European
innovation programs?” Chapter 6 will analyze whether or not the national and
European policies could be seen as complements of each other or that there exists
some form of government failure. This is substantiated by an empirical analysis.
Based on the previous chapters, Chapter 7 will put forward policy recommendations
how the policy mix could be improved to increase its effectiveness. Finally, Chapter
8 will conclude and will summarize the answers to the research question:
“How do national and European policy measures aim to correct market failures
present for SMEs with respect to innovation and could the current policy mix of
national and European programs be characterized as efficient?”
The answer to this question is relevant for the policymakers at the Ministry of
Economic Affairs and at the European Union. Possibly, some weaknesses in the
policy mix between national and European innovation policy regarding SMEs are
stressed. Especially in light of the upcoming budget cuts for the Dutch national
government and the new European strategy Europe 2020, the recommendations
could be useful.
The method of analysis is partly theoretical. Off course, theory regarding SMEs and
innovation is being discussed which provides the theoretical framework for this
thesis. National and supra-national policy will be reviewed using this framework.
The answer to question whether or not the present policy mix can be qualified as
efficient also is based on a theoretical model. To link theory with practice some
quantitative analysis is also included, which will make the theory more concrete.
Econometric models, but also descriptive statistics are used to form a more clear
picture. Questions like which companies innovate and what is the added value of
national and European innovation programs will be answered, using micro-data
from the CIS dataset.
11
This thesis will focus only on the Dutch case. Therefore, no conclusions can be
drawn for other European countries based on this thesis. Other countries have to
deal with other circumstances and have different sets of policy instruments.
12
2 – Small and Medium Enterprises (SMEs) in the Dutch
economy
This chapter will analyze the role of small and medium sized enterprises in the
Dutch economy. First, the definition of SMEs will be discussed to define the relevant
Dutch companies for this thesis. Thereafter the role of SMEs in the Dutch economy
and its innovativeness will be analyzed to create a solid base for the remaining part
of this thesis.
2.1 – Definition of SMEs
Long time, there was no consensus across Europe about the definition of SMEs. In
the Netherlands, the most accepted definition of small and medium sized
enterprises in the past decades reads: ‘small enterprise up to 10 persons engaged;
medium sized enterprise between 10 and 100 persons engaged’ (Nooteboom, 1994).
So, all companies ranging from 1 person until 100 persons engaged would be among
the category SMEs. However, the definition of SMEs varied across member states
within the European Union. And because of the fact that there exist extensive
interaction between national and EU measures regarding SMEs, a common
definition was perceived to be necessary in order to improve the consistency and
effectiveness of the measures. Therefore, the European Commission aimed at one
general definition that should apply for all member states. The following definition
was drawn in 2005: ‘The category of micro, small and medium-sized enterprises
(SMEs) is made up of enterprises which employ fewer than 250 persons and which
have an annual turnover not exceeding 50 million euro, and/or an annual balance
sheet total not exceeding 43 million euro’ (European Commission, 2005). The
different categories are shown in table 2.1.
For the following chapters of this thesis, I will apply the common definition of the
European Commission as stated above, if otherwise not possible 4. Most likely, this
definition will be used increasingly among member states of the EU and probably
will become the standard for academic research regarding SMEs throughout Europe,
as international cooperation is becoming more and more important. In addition,
most of the relevant institutions are using the common definition nowadays. Among
them are the Ministry of Economic Affairs and its executive body AgentschapNL,
Some literature uses another definition than the common definition of the European Commission.
Therefore, sometimes, I am forced to deviate from the common definition. When doing so, this will be
clearly indicated.
4
13
which are responsible for the policy design regarding innovation in the Netherlands
and its implementation (SenterNovem, 2006).
Table 2.1 – Categorical subdivision of SMEs5
Enterprise category
Headcount Turnover
(or)
Balance sheet total
Medium-sized
< 250
≤ €50 million
≤ €43 million
Small-sized
< 50
≤ €10 million
≤ €10 million
Micro-sized
< 10
≤ €2 million
≤ €2 million
(Source: European Commission, 2005)
2.2 – SME’s share in the Dutch economy
As table 2.2 shows 99,77% of the Dutch companies can be qualified as a SME
according to its size. This is a overwhelming majority and partly shows its
importance for the Dutch economy. In addition, the table shows that most of the
enterprises are micro-sized (91,23%), which indicates that more than 9 out of 10
companies have fewer than 10 employees. As a result, SMEs in the Netherlands
account for more than 60% of total employment. This is in line with the EU average,
which indicates that SMEs are of great importance for the European economy
(European Commission, 2005).
Because of the large number of SMEs active within the Dutch Economy, this group of
companies is of great importance for the creation of employment and economic
growth. Therefore, SMEs are important for the competitiveness of the Dutch
economy. Lagging productivity growth within SMEs would harm the economic
growth of the Netherlands since the majority of the workforce is active within these
companies. Therefore, policy should not only be designed toward the needs of large
enterprises (which have the ability to lobby for their interest), but should also serve
the needs of SMEs. For small and medium sized companies it is harder to get in
direct contact with policy makers, since as a single company they are of less
importance to the Dutch economy compared to a large multinational. A SME’s
network is not wide enough to involve in such lobby activities. However, also this
group of companies must be served. One way to serve the needs of SMEs and to
enhance productivity growth for these companies is by an appropriate innovation
policy for small and medium sized enterprises.
In order to qualify as a SME, enterprises must meet the headcount ceiling, and in addition they either
have to meet the turnover ceiling or the balance sheet ceiling, but not necessarily both. Also relations
with other enterprises are considered in the common definition of the European Commission,
especially when they create financial links between companies.
5
14
Table 2.2 – SMEs share in the Dutch economy as of 01-01-20096
Number of
Employment
Enterprises
Category
Absolute Relative Absolute Relative
(x1000)
Medium-sized
3.240
0,45%
498
6,61%
Small-sized
58.205
8,09%
1.954 25,92%
Mico-sized
656.560 91,23% 2.158 28,63%
Total SMEs
Large enterprises
718.005 99,77%
1.685
0,23%
4.610
2.928
61,16%
38,84%
Total number of
719.690 100%
7.538 100%
Enterprises
(Source: CBS Statline 2010 and Forecast key figures SMEs 2009)
2.3 – Sectoral distribution of SMEs within the Dutch economy
As figure 2.1 shows, some differences can be seen between SMEs and large
companies. Large companies are relatively overrepresented in the sectors
manufacturing, transport, communication, financial services and other business
services. Network effects and economies of scale can be the underlying reason for
this result. For smaller companies it is not profitable to enter these markets since
they have to deal with higher costs (because they cannot reap the benefits from
economies of scale) and therefore cannot compete with its larger counterpart.
Manufacturing can be seen as the most innovative sector 7 within the Dutch
economy, which is the case for most countries (Audretsch and Feldman, 2003). This
sector is characterized by a relatively high level of R&D investment, which results in
a relatively high frequency of introduction of new products and processes, and
incremental innovations. 6,3% of the SMEs (micro, small and medium sized
For the creation of this table two datasets are used. The dataset of CBS Statline, and the statistics of
Forecast key figures of SMEs, which both give an indication of the importance of SMEs in the Dutch
economy as of 01-01-2009. In the data, some sectors are excluded, namely: mineral extraction, utilities,
health care, education and the public sector. All of these sectors deal with the provision of public
services and therefore cannot be qualified as a perfectly private company, because they also serve the
public interest. Both datasets exclude the same sectors and use the same distribution of companies
according to size.
7 The most innovative sector here is defined as the sector with the highest share of innovative
companies (and especially frontrunners in innovation). It follows that within the manufacturing sector
the share of innovative companies is highest. However, this does not necessarily mean that the
manufacturing sector is more innovative than the agriculture sector e.g. Cooperation between less
innovative companies could lead to highly innovative processes and services, which would indicate that
despite the companies themselves are not necessarily frontrunners in innovation, the sector as whole is
highly innovative. However, this is hard to measure and available data is not sufficient to measure this.
6
15
companies) are active in this sector, compared to 27,6% of the large companies.
SMEs are relatively overrepresented in less innovative sectors like agriculture,
construction, retail, catering, real estate and professional business services. The
majority of SMEs is active within the sectors retail, professional business services,
construction and agriculture. Off course, also within these sectors innovation is
conducted, however in general less intense than in other sectors8. From this
perspective you would expect that large companies would participate in R&D
projects more frequently compared to SMEs.
Figure 2.1 – Sectoral distribution of SMEs within the Dutch economy
30,00%
25,00%
20,00%
15,00%
10,00%
5,00%
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in
g
0,00%
Micro
Small
Medium
Large
Average
(Source: CBS Statline, 2010 and Forecast key figures SMEs, 2009)
2.4 – Innovativeness of the Dutch SMEs compared to large enterprises
To examine whether or not differences exist between SMEs and larger companies in
its innovative activities, a probit model is used. The dependent variable in this model
is whether or not companies have R&D activities9, the variable takes the value of one
when a company does have R&D activities and 0 when this is not the case.
Therefore, a linear probability model is not sufficient to estimate this model.
Assumed is, that a set of factors, such as size of the company, the sector in which it is
active, market structure etc. explain a company’s decision whether or not to
In these sectors, the share of frontrunners in innovation is relatively low. However, this does not
necessarily indicate that the sector as whole is less innovative, as explained in footnote 6.
9 I used the dummy variable R&D activities as dependent variable, because this is the simplest variable
present in the dataset. For companies, it is easy to answer the question whether or not it has R&D
activities and therefore, the response to this question is highest compared to other innovation
indicators. Indicators like R&D expenses and R&D intensity are more difficult to measure for small
companies and using this variable therefore can give a wrong conclusion about the entire sample as a
result of missing values for SMEs.
8
16
participate in R&D activities. These are characterized as the independent variables
in the model.
(1)
The set of parameters ( ) in equation (1) reflect the impact of changes in (the
independent variables) on the probability that a company has R&D activities. Figure
2.2 shows what a probit model looks like in a graph.
Figure 2.2 – Model for a probability (probit model)
1
0
(Source: Greene, 1993)
To estimate the model with Stata, data from the Community Innovation Survey 2006
is used, which provides the most recent microdata about innovation possible.
Important to note is that micro sized companies (with 1-10 employees) are excluded
in the dataset, this because of a low response rate to the survey. However, no biases
are expected from the exclusion of these companies. The dataset contains
information from almost 10.000 Dutch companies 10 about innovation related
subjects, but also more general subjects are served which makes it possible to
control for certain characteristics of companies that also may have its influence on
the decision whether or not to participate in innovation activities. The main variable
To be precise 9.947 Dutch companies are included in the dataset from which 8.886 companies can be
characterized as a SME and 2.972 conducted innovation activities.
10
17
of interest is the dummy variable which indicates whether or not a company can be
characterized as a SME. The results are displayed in table 2.3.
Table 2.3 – Differences between SMEs and large companies in innovation
participation
(1)
(2)
(3)
(4)
Constant
0,004
0,004
0,785***
0,815***
SME
Small sized company
Medium sized company
-0,603***
-0,201***
-0,787***
-0,394***
Control variables
Manufacturing
International activities
Cooperation
Company is part of
concern
Turnover
Dependent variable: Innovation activity (dummy)
-0,292***
-0,139*
-0,458***
-0,359***
-0,463***
-0,071
-0,466***
-0,359***
-0,454***
-0,101
-0,000
-0,000
Sample: all companies present in the Community Innovation Survey (9.947)
* Significant at 10% level, ** Significant at 5% level, ***Significant at 1% level
The models indicated with (1) and (2) only use dummy variables which indicate the
size of the firm as independent variables. However, this can over- or underestimate
the impact of the independent variables on the dependent variable, whether or not a
company participate in innovation activities. This is because of the fact that the
respective models do not control for company specific factors which also can
influence the probability a company is participating in innovation. Despite this, the
models (1) and (2) give a clear indication that small and medium sized companies
differ significantly from its larger counterpart in participating in innovation
activities. SMEs participate significantly less in these activities. When controlling for
company specific factors, as indicated by model (3) in table 2.3, small and medium
sized companies still tend to differ from its larger counterpart in the probability of
participating in innovation. When looking at small and medium sized companies
separately, an interesting finding is shown. They participate significantly less in
innovation (significant at 1% level). Also medium sized companies participate
significantly less in innovation (significant at 10% level) when controlling for
company specific factors.
18
When looking at the control variables in the respective models (3) and (4), some
interesting conclusions can be drawn. Manufacturing companies tend to participate
more in innovation activities than other companies. The same holds for companies
that cooperate and have international activities.
However, previous analysis stresses some interesting differences between SMEs and
large companies, it does not clarify whether or not there exist any differences
between innovative SMEs and innovative large companies. When SMEs do
participate in R&D activities, are they more or less innovative than its larger
counterparts? To answer this question, additional analysis is necessary. A
subsample11 of all innovative companies is used, so all companies with no R&D
activities are excluded. 2.972 companies that indicated that they conducted
innovation activities are left within the sample. To check for a possible selection
bias, a two-stage Heckmann test is conducted which showed that no bias is present
and that exclusion of non-innovative companies from the dataset is justified. Simple
linear regression models are used to examine the differences between innovative
SMEs and it larger counterparts. Two different innovation indicators as dependent
variables are tested to check the robustness of these indicators, namely “share of
revenue from products new to the market” and “R&D intensity12”. The first is an
output indicator while the second can be indicated as an input indicator. Both
indicators are relative to control for differences in size and turnover. The following
equations are estimated with the use of Stata and the CIS dataset. The results can be
seen in table 2.4 and table 2.5, with respectively “share of revenue from products
new to the market” and “R&D intensity” as dependent variables
(2)
(3)
The first two estimated models in table 2.4 give a first indication that no significant
differences exist in R&D intensity of medium sized companies compared to large
companies. Small sized companies however, do tend to be more innovative than its
larger counterpart. The models (3) and (4), which use control variables to control
for company specific factors that also may influence a company’s innovativeness,
confirm this result. Further, these control variables show that manufacturing
All companies that answered the question whether they participated in innovation activities with yes
are included in this subsample. Non-innovative companies are therefore excluded.
12 R&D intensity is calculated in the following way: R&D man-years/Total employees
11
19
companies13 and companies that are part of concern are less innovative. When a
company is part of a concern, the possibility that R&D is conducted by another
company within the concern is present. In contrast, companies that cooperate with
other parties and companies that are supported by national or European
government tend to be more innovative. Cooperation may lead to positive
knowledge spillovers and the possibility of sharing risk and reaching economies of
scale arises. This makes participating in R&D more attractive. Government support
aims at correcting market failures that restrain innovation and in this sense makes it
more easy for companies to participate in R&D. Other control variables represented
in table 2.4 do not have a significant impact in a company’s R&D intensity.
Table 2.4 – Differences between innovative SMEs and large companies in R&D
intensity
(1)
(2)
(3)
(4)
Constant
5,875*** 5,875*** 3,573*
3,575*
SME
Small sized company
Medium sized company
Control variables
Manufacturing
International activities
Cooperation
Company is part of concern
Turnover
National government support14
European government support
Both national and European
government support
Participation in Syntens
Dependent variable: R&D intensity
-1,486
-2,187*
-0,995
-1,901
-2,518*
-1,588
-3,997***
-2,158
-3,126***
-4,128***
-0,000
-6,142***
10,489**
-8,608***
-4,001***
-2,151
-3,184***
-3,938***
-0,000
-6,137***
10,500**
-8,612***
-1,738
-1,774
Sample: all innovative companies present in the Community Innovation Survey
(2.972)
* Significant at 10% level, ** Significant at 5% level, ***Significant at 1% level
This result may be counterintuitive, but since the variable is a control variable further research is not
necessary. The counterintuitive result for the manufacturing dummy could be the result of the fact that
the CIS dataset did not provide enough control variables to control for company specific factors.
14 National government support, European government support are both dummy variables. Of course,
the size of the support does matter, however the Community Innovation Survey does not provide these
number. Therefore, further research is necessary.
13
20
Next, the results are shown of the same regression, but with “new introduced
products” as dependent variable. In contrast with the input innovation indicator
R&D intensity, now an output indicator is used which measures the commercial
impact of innovations. In the end, (product) innovations have to lead to the
introduction of new products to the market to be economically successful.
Table 2.5 – Differences between innovative SMEs and innovative large companies in
share of revenue from products new to the market
(1)
(2)
(3)
(4)
Constant
6,360*** 6,360*** 1,732*
1,735*
SME
Small sized company
Medium sized company
-0,521
-0,969
-0,180
-1,865**
Control variables
Manufacturing
-1,002*
International activities
-2,321***
Cooperation
-1,138**
Company is part of concern
-0,232
Turnover
-0,000***
National government support
-3,882***
European government support
-1,491
Both national and European
-3,961***
government support
Participation in Syntens
-1,347**
Dependent variable: Share of revenue from products new to the market
-2,784***
-1,363*
-1,041*
-2,343***
-1,208**
-0,069
-0,000***
-3,899***
-1,406
-3,959***
-1,406**
Sample: all innovative companies present in the Community Innovation Survey
(2.972)
* Significant at 10% level, ** Significant at 5% level, ***Significant at 1% level
When looking at the results in table 2.5, the first two models do not show some
significant differences in innovativeness of SMEs compared to large companies. But
when controlling for additional company specific factors, these differences can be
found. Models (3) and (4) show that medium sized companies are significantly more
innovative than large companies. Small sized companies tend to be even more
innovative and introduce relatively many new products. Some differences can be
found in the impact of the control variables. Whether a company is part of a concern
no longer has a significant impact on a company’s innovativeness. The same holds
for participation in European government programs (it even turns out to have a
negative impact, allthough not significantly). In contrast, international active
companies tend to significantly introduce relatively many new products to the
21
market. This makes sense, since internationally active companies can pick up new,
foreign technologies and trends relatively quick and introduce them to the domestic
market. In addition, domestic companies can learn from foreign companies.
To conclude this part, SMEs tend to participate less in innovation activities. This is
an indication that market failures are more sever to SMEs compared to large
companies. But when these companies do participate in innovation they are more
innovative than its larger counterpart. Innovative small and medium sized
companies tend to have a higher R&D intensity and introduce relatively many new
products to the market. Therefore, it is important that the Dutch government aims to
correct the market failures present for SMEs since they can absolutely contribute to
the innovativeness of the Dutch economy. The market failures with respect to
innovation as present for Dutch SMEs are discussed in the next chapter which will
discuss the theoretical framework.
22
3 – Theoretical Framework
The first paragraph of this chapter will discuss the innovation system. Nowadays,
innovation is often the result of a collaboration between multiple parties. Hereafter,
the second paragraph will cover the literature about market failures relevant for
SMEs with respect to innovation and how these restrain innovation from the small
and medium sized companies. Market failures can result in a level of investment in
research and development that is below the socially desirable level. Then, the last
paragraph will describe a theoretical model about the interaction between, on the
one hand national policy, and on the other hand supra-national policy, like this is the
case for the Netherlands. Policy measures can be a good instrument to overcome
market failures and promote R&D activities. Important is that the policy design of
both national governments and the European Union are efficient and not conflicting
with each other. Optimal would be when synergies arise between both government
layers.
3.1 – Innovation system
Innovation often is the result of complex and intense interaction between end users,
companies, knowledge providers and the framework conditions (Berner, Gilsing and
Roelandt, 2001). Companies are more and more dependent of partners and
knowledge providers outside their own company. Collaborations between
companies and collaborations with knowledge institutions can result in positive
(knowledge) spillover which affects the probability of success positively. In the past,
innovation was assumed to be characterised by a linear model in which innovation
was seen as a step-by-step process that starts with fundamental research and ends
with commercialisation. However, nowadays the importance of interaction between
actors in the innovation system cannot be ignored. Figure 3.1 shows the components
of the innovation system.
Besides interaction with other actors within the innovation system, other factors can
be of great importance as well. For companies, the possibility to innovate depends
on a lot of different factors. The framework conditions must be good, the
infrastructure must ease innovation and stimulate interaction with other companies
and knowledge providers. However, most importantly maybe, there must be
demand for new, innovative products. Therefore, it is important that innovations are
demand driven and can be commercialized. However, market failure and system
failure within the innovation system can arise that hinder innovation. This will be
discussed in the next paragraph. This can be a reason for the government (national
23
or supra-national) to step in and it can try to correct this market failure and let the
innovation system work smoothly. However, with government intervention it is
important that the social gains of intervention are bigger than the social costs.
Otherwise, utility of society will go down.
Figure 3.1 – The innovation system
(Source: Berner, Gilsing and Roelandt, 2001)
3.2 – Market failures
When market failures arise, government intervention can be legitimized15. Roughly
six types of market failures can be distinguished for SMEs, within the innovation
system as presented above, which hinder private R&D activities. Those are:
inadequate institutional framework, missing markets, externalities, market power,
incomplete information and bounded consumer rationality16. All these market
As mentioned before, market failures can be a reason for the government to step in and correct the
market failure. Important is however that the social gains of intervention are bigger than the social
costs. Otherwise, utility of society is negatively influenced.
16
In the existing literature, often another market failure is described, namely the market failure of
public goods. But because this type of market failure is not relevant for the topic of this thesis it is
disregarded here.
15
24
failures make SMEs prudent to invest in R&D and to engage in innovative projects.
Important to note is that these market failures are not necessarily present for all
SMEs in the Netherlands. The extent in which market failures are relevant for SMEs
may depend on the sector in which the company is active, the market structure etc..
However, there is no doubt about the fact that the level of investment in R&D is too
low from a social point of view (Martin and Scott, 2000).
3.2.1 – Inadequate institutional framework
Intellectual Property Rights (IPRs)
In the first place, companies innovate to become more competitive and to create a
competitive advantage. SMEs are often active within a strongly competitive market
with many competitors. In this case, innovations can give a SME the opportunity to
escape competition. However, innovations might not only strengthen the company’s
own competitiveness, but it might also strengthen the position of competitors in the
market when innovations spill over to other companies. Therefore, it is very
important that the intellectual property rights (IPRs) are protected to guarantee the
benefits of innovating (Cohen, Goto, Nagata, Nelson and Walsh, 2002). A decent,
accessible patent system and copyright protection is necessary to facilitate
innovation for SMEs. Strong IPR protection will lead to higher economic returns to
the innovator and therefore would create additional incentives to invest in R&D
(Yang and Maskus, 2001). With IPR protection the innovator is shielded from
competition after the innovation and can reap monopoly profits from its invention.
Of course, this harms consumer welfare in the short run, but consumer welfare is
likely to raise in the long run17 (Maskus, 2000). So there exists a trade-off between
protecting companies from spillovers on the one hand and protecting consumers
from high prices on the other hand.
Additionally, decent intellectual property right protection would make SMEs less
prudent to invest in R&D and it would enable SMEs to access external finance more
easily18. This is caused by the fact that the economics gains from innovating and
therefore the expected returns from the investment are more certain. Protection of
intellectual property rights is of course of great importance in the case of drastic
innovations, but also incremental and process innovations will benefit from a decent
IPRs protection.
There exists a trade-off in the sense that IPRs generate monopoly profits that reduce consumer
welfare in the short-run, but are necessary to provide adequate payoffs to innovations. Dynamic
efficiency in the long run is achieved by allocative inefficiency in the short run.
18
Investments in R&D activities are often accompanied with great uncertainty. Therefore, investors
might prefer more conservative investment opportunities. IPRs protection increases the expected
returns from R&D investment and therefore increases the willingness of investors to invest in R&D
activities, which often involve more risk.
17
25
Cooperation with external agents
As paragraph 3.1 showed, for innovation activities SMEs often cooperate with
external agents. Cooperation may be necessary because of mainly two reasons. First,
they might simply do not have the funds to finance the R&D project alone. Second,
the knowledge required is not all present within the company. Especially, for SMEs
that participate in innovation incidentally and which often do not have a systematic
R&D department this might be the case. Therefore, it may be helpful for small and
medium sized companies to cooperate with other companies and knowledge
institutions (Sánchez González and Herrera, 2008). By cooperating with external
sources, companies can grasp economies of scale and/or knowledge spillovers and
share the risk involved (Workgroup innovation and applied research, 2010).
Possible types of agents with which companies can cooperate in R&D projects are:
customers and suppliers, competitors, public R&D agents. Asymmetric information
between the company on the one hand and customers and suppliers on the other
hand makes cooperation between these groups hard. Companies do not know
exactly the needs of customers and suppliers, and customers and suppliers often
have no complete information about the capabilities and goals of the company.
Cooperation between competitors is hindered by the fact that the gains of
innovating have to be shared with competitors, therefore the gains from innovation
may spill over (Nooteboom, 2008). Additionally, because companies do not have
complete information about its competitors’ activities, it is hard to find suitable
cooperation partners. The institutional structure of research centres and
universities (public R&D agents) result in other priorities of these agents than
commercialising their knowledge (Boschma, Frenken and Lambooy, 2002). Public
R&D agents, therefore, are reluctant to cooperate with SMEs despite the fact that
such institutions play an important role in developing technological innovations.
When they do cooperate with private companies, they often approach only the large
companies (Veugelers and Cassiman, 2005). In order to promote more cooperation
between different types of agents, the institutional framework has to ease
cooperation, rather than hinder the process.
International cooperation
In addition, because of the fact that the European Union consists of 27 member
states and each member states has a different culture, legal system, language etc. it
is hard for SMEs to cooperate with foreign agents (Garrett, 1992). Especially since
most of the SMEs often do not have any international activities and experience, these
companies are reluctant to cooperate with companies from other countries. Since
knowledge and technology goes beyond borders, such cooperation often might be
necessary to optimize R&D projects. Social and economic barriers between regions
within Europe (but of course also outside Europe) prevent the reception and
assimilation of external innovation internationally (Rodriguez-Pose and Crescenzi,
26
2006). Therefore, differences in the institutional design between member states of
the European Union should be smoothed.
3.2.2 – Missing markets
Capital market
SMEs often do not have sufficient funds to finance R&D projects, therefore they have
to attract external finance. However, a capital market to finance R&D investments
for small and medium sized firms can be “missing”. External investors are often
reluctant to invest in (risky) R&D projects of SMEs. Beforehand, the expected future
returns are highly uncertain and therefore a lot of risk is involved (Carpenter and
Petersen, 2002). For banks and private investors it is hard to assess whether or not
an innovative project will be successful or not and what the expected returns will be.
In the case of SMEs, this risk often is not covered by sufficient collateral and/or a
reputation which discourages outside investors (Harris and Robinson, 2001). Larger
firms face less difficulties in accessing (external) finance (Workgroup innovation
and applied research, 2010). Even when the expected net present value (NPV) of a
R&D project is positive, investors still might be reluctant to finance the project19.
(4)
20
Like equation (4) shows, the net present value depends on the probability of
success, the expected net cash flows during the project, the duration of the project
and the discount rate. When the gains from the project will pay out in the distant
future, the collateral is not sufficient, or the likelihood of success is low, investors
will be reluctant to invest. The risk involved and the corresponding uncertainty of
the project involved is a decisive factor in the decision making process of investors.
Often, asymmetric information about the project is the basis for uncertainty and
The standard finance theory predicts that when the NPV of a project is positive it is beneficial to
invest in the project. The discounted expected benefits then are larger than the initial investment.
However, when the returns are highly uncertain investors still might be reluctant to invest in a project
of which the NPV is positive.
20 The discount rate is the rate of return that could be earned on an investment in the financial markets
with similar risk.
19
27
therefore the reluctance of external investors to finance (risky) R&D projects of
SMEs, but also larger firms.
New product markets
Drastic innovations lead to new, to customers unfamiliar, products which have to be
introduced to the product market, which means that the product has to be
commercialized. Therefore, customers have to get informed about the existence and
functionality of the product, otherwise demand for the product will not be sufficient
to be profitable (Harris and Robinson, 2001). Incremental and process innovations
on the other hand do not have to cope with this problem, simply because changes to
the final product are little and demand for the product is already present. On
contrast, drastic innovations are unfamiliar to the customers and have to be
introduced to the market. As chapter 2 showed, compared to large companies, SMEs
are responsible for relatively many product introductions (Gilbert, 2006). To
commercialize the new product, potential consumers have to be informed about the
product, which often results in a great struggle for the company. Consumers do not
have any information about the product and therefore is reluctant to buy the
product. On the other hand, preferences and needs of consumers are often unknown
for companies. This means that it is hard to tune the product to the needs of its
potential customers. Asymmetric information and bounded consumer rationality are
key to this problem. As a result, the company has to put in a lot of effort to inform
the consumer and develop a marketing strategy to convince the consumer about the
functionality and quality of their product. This, however, can be very time- and
money consuming which SMEs cannot afford and may hinder their R&D activities.
3.2.3 – Externalities
Like mentioned in paragraph 3.2.1 it is important for companies to be able to extract
some profits from the innovation. Otherwise, companies would not have any
incentive to innovate. However, some of the gains from innovations may spill over to
other. This can be in the form of knowledge spillovers from the innovative company
to competitors. Knowledge can be seen as a quasi-public good and companies can
imitate the innovation or use the knowledge for other innovative projects. However,
when an innovation succeeds, the innovative company is also most likely to steal
some of its competitors business. So the effect to the competitors can either be
negative (in case of a large business stealing effect) or positive (in case of knowledge
spillovers with high benefits). In addition, some of the gains from innovations may
also spill over to a company’s customers (consumers and other producers). The
value for money of the products increases, and customers’ welfare increases. These
are the rent spillovers as indicated in figure 3.2. As figure 3.2 shows, the social
benefits from the innovation are greater than the private benefits to the firm (Baker,
28
2007). Spillovers that affect society’s welfare but not the company’s profits are not
incorporated in the company’s utility function (Ogawa and Wildasin, 2007).
Consequently, privately owned firms are likely to underinvest in R&D activities.
Figure 3.2 – Knowlegde and rent spillovers
(Source: CPB, 2002)
As equation (5) and (6) show society’s utility
is higher compared to the utility
from the innovative company
as a result of an innovation. So, the social gains
from innovation are higher than the private gains of innovation
. This is a
result of the rent spillovers and the knowledge spillovers that characterize
innovative projects (as can be seen in figure 3.2). Finally, this will result in
underinvestment in R&D by private firms, since the externalities are not
incorporated in the firm’s utility function.
(5)
(6)
29
Knowledge spillovers to other companies have to be prevented or have to be
incorporated in the company’s utility curve (Workgroup innovation and applied
research, 2010). In this way, the market could achieve the socially optimal level of
R&D investment. Decent intellectual property right protection could secure some of
the monopoly profits to companies and increases the expected return of the project
(Czarnitzki and Toole, 2009). Another way to overcome externalities is by
cooperation between companies. By cooperating, knowledge may spill over from
one company to another, but the knowledge (and the corresponding benefits)
remains with the collaborating group of companies. In this way, companies can
incorporate spillovers in their decision making regarding innovation.
3.2.4 – Market structure
Competition and innovation
The relation between competition and innovation has been broadly analysed by
Schumpeter. However, Schumpeter developed two contradicting views in his career
on how market structure and innovation may have its influence on each other. The
first view (Mark I) is based on the fact that smaller firms might have more incentives
to innovate than large firms. For large firms, the risk exists that the new products
would cannibalize their monopoly profits (Gilbert, 2006). When a large incumbent is
able to exert market power and therefore make positive profits, a new, innovative
product could replace the old product and evaporate its profits, this is called the
replacement effect. A smaller, or new company does not have to deal with this
problem of evaporating its own profits. Small firms are often active in more
competitive markets and therefore make little or no profits, so they have nothing to
lose. Cannibalizing its own profits is neither an issue for a new company. Therefore,
drastic innovations that replace old products tend to come from small, and/or new
companies that do. In addition, small firms have more market share to gain by
innovating compared to large established firms (Peeperkorn and Verouden, 2007)
and could escape competition by innovating. The incentives to innovate depend on
the differences between pre-innovation and post-innovation profits, they are likely
to be higher for smaller firms. This view is also well-known as Arrow’s view and
predicts a positive relation between innovation and the level of competition, as
figure 3.3 shows (Mark I).
Contradicting, the second view (Mark II) suggests that large firms will invest more in
R&D, and therefore will be more innovative, than smaller firms. Large companies
often can benefit from economies of scale, which lowers the costs per unit produced.
In addition, larger companies often can exert some market power, which means that
they can sell their products above marginal costs. This results in positive profits. As
a result, large companies have the possibility to use their profits to invest in risky,
30
large scale R&D projects. Small and medium sized companies often are active in a
more competitive market, which indicates that their profits are lower or that they
just break-even. Therefore, SMEs have fewer opportunities to invest in R&D, simply
because they have fewer resources to invest. Because of the risk involved with R&D,
SMEs might be more induced to commit their scarce resources to less risky projects,
which provide more certainty about its future returns. Additionally, large firms
might have incentives to innovate because they are better able to capture the
benefits of the R&D program, because they are more likely to exert some market
power and earn monopoly rents (Gilbert, 2006). Innovations also enable the
monopolists to maintain their market position (Brouwer, Poot and van Montfort,
2008). This view suggests that monopolies are not necessarily bad, but promote
dynamic efficiency (Peeperkorn and Verouden, 2007). Therefore, the relation
between innovation and the level of competition should be negative, as can be seen
in figure 3.3 (Mark II).
Figure 3.3 – Relation between competition and innovation
according to Schumpeter (Mark I and Mark II) and Aghion
The last decade, an additional theory was developed. Instead that the relation
between the level of competition and innovation should be characterized as simply
negative or positive, this view suggests that the relation is characterized by an
inverted U-curve. In this model competition may increase the incremental profit
from innovating, labeled the “escape-competition effect,” but competition may also
reduce innovation incentives for laggards, labeled the “Schumpeterian effect.” The
balance between these two effects changes between low and high levels of
competition, generating an inverted-U relationship. In case of weak competition an
increase in competition would increase innovation because of the escape effect, the
firm’s efficiency does affect its profitability. But in case of intense competition an
31
increase in competition would lead to less innovation. The incentives for laggards
are little to catch up, its profits are almost zero anyway, the Schumpeterian effect.
Whether or not a company decides to innovate is the result of the difference between
postinnovation and preinnovation rents of incumbent firms as illustrated by figure
3.421. As a result, intermediate levels of competition would be optimal for firms to
participate in innovation activities (Aghion, Bloom, Blundell, Griffith and Howitt,
2005), the escape-competition effect than dominates the Schumpeterian effect.
Figure 3.4 – Competition, profits and efficiency
SMEs, which are often active in fully competitive markets, may be harmed by the fact
that they do not have the necessary resources for innovation. This may be one of the
reasons why the level of R&D investment of SMEs is below the socially desirable
level. Therefore, some form of market power is necessary to reach dynamic
efficiency in the long run (Schumpeter, 1942). However, competition is also
necessary to give companies the incentives to innovate, to ‘escape’ competition
(Arrow, 1962). These conflicting statements are characterized by Aghion’s inverted
U-shaped relation between competition and innovation.
Entry barriers
Often, R&D projects are characterized by high sunk costs which could be a barrier
for SMEs to participate in such projects. Large firms on the other hand face less
difficulties in financing R&D projects, as discussed in 3.2.2. In this way, the high sunk
21
Assumed is that innovations are step-by-step and not leapfrogging.
32
costs that go along with R&D projects can work as an entry barrier for small and
medium sized companies to participate in R&D (Van Dijk and Van Hulst, 1988). One
way to overcome this problem is by join forces. When companies would cooperate in
R&D projects, together they could finance the sunk costs of the R&D project and
later on reap the benefits. In this way they could also participate in R&D projects
with high sunk costs and stay competitive against larger firms.
In addition to the high sunk costs that characterize R&D projects, also economies of
scale can cause entry barriers for SMEs. Technological conditions in some markets
create economies of scale which mean that large companies can reach costs
advantage when realizing high outputs. Because large firms in these markets have a
cost advantage, small firms cannot enter the market profitable (Barber, 2009). They
are not able to sell their new innovative products in these markets, since
competitors can sell their ‘old’ products for low prices. Also, incumbents can use
foreclosure strategies to prevent that a competitor can profitably introduce a new
product.
3.2.5 – Incomplete information
Roughly four forms of incomplete information which hinder investments in R&D
activities can be described. First, for companies, the probability of success is hard to
estimate beforehand. As a result, companies do not have complete information
about the returns of the project in the future. Off course, this often holds for all types
of investment, however in the case of R&D investment additional uncertainty is
involved and the investment necessary is often high (Kline and Rosenberg, 1986).
There is no comparison with other projects possible, so it is hard to form
expectations and may cause prudence with respect to investments in R&D.
Incomplete information and risk aversion may lead to investment in more
conservative and certain investments instead of risky R&D projects. Second, also
banks and private investors face the problem of incomplete information for
financing R&D projects of companies. These parties also have to deal with
uncertainty about the future returns. Additionally, external investors have little
knowledge about the technology and business processes involved which causes
even greater uncertainty. For these agents, it is even harder to form expectations
about the probability of success of the project. Partly, this is one of the reasons why
a sufficient capital market is missing to finance R&D projects of SMEs. As explained
in paragraph 3.2.2 large companies can overcome these problems by offering
collateral and a reliable reputation. Third, the probability of success is partly
determined by the commercialization of the new products. However, for small
companies consumer preferences are often hard to predict which makes it hard for
these companies to fit the products to consumer needs. Finally, to reap the gains
from innovations the new products have to be sold, however consumers are often
33
not familiar with these new products which makes them reluctant to purchase the
products. Therefore, it is often hard to be the first-mover since companies have to
put in a lot of effort to commercialize the product and reap the benefits from the
innovation. The probability of success and therefore the expected returns are very
uncertain in this case.
Together, these four forms of incomplete information can result in a great struggle
for SMEs to find external finance to finance R&D projects and to commercialize their
new products. Important to note is that incomplete information is closely related to
the missing markets as described in paragraph 3.2.2.
3.2.6 – Bounded consumer rationality
As explained in paragraph 3.2.2, new product developers have to commercialize
their innovation to create demand for their products. However, at first, most of the
consumers are reluctant to purchase unfamiliar, new products. Consumers tend to
wait for reviews about new products before buying it themselves, especially this is
the case for the more expensive goods. When the product has proved itself in terms
of quality and functionality, more and more consumers will be willing to buy the
product. A decent marketing strategy may be helpful in this case. This shows that
consumers do not always act rational. It can be very hard to create demand for
innovative products of good quality and high functionality because of this
phenomenon. For SMEs this may be a serious problem since their marketing budget
is relatively small and consumers remain unfamiliar with the product. This may
affect the probability of default.
3.3 – Interaction between national and European policy
Market and system failure can be a reason for government intervention. The
condition is however that the social benefits of this intervention are greater than the
social costs. Governments can challenge market failures with policy instruments.
However, in the case of the member states of the European Union multiple levels of
government exist. Off course, there is the national government which designs its
policy towards its own preferences. In addition, with the creation of the European
Union there is also a supra-national government which forms policy for all its
member states. However, the harmonization of policies across the union may
conflict with specific national preferences (Alesina, Angeloni and Etro, 2005). On the
other hand, merging and coordination policy instruments across borders can
generate economies of scale and can prevent underprovision of policy instruments.
34
(7)
Income
Public spending of country
Preferences of country
Spillovers
In a decentralized setup, each country would maximize its own utility function as
characterized by equation (7). As the equation shows, a country’s utility does not
depend only on its own actions, also actions of other countries can influence its
utility. Some of the country’s public spending spills over to other countries. In the
case of innovation policy this could be in the form of knowledge spillovers, or for
example companies using their vouchers for innovation abroad (see 4.1.4). The
utility that foreign countries derive from these spillovers is not incorporated in the
domestic country’s utility function. However, also some positive spillovers arise for
country , since a part of foreign public spending spills over to country . But since
the preferences can differ between countries, these spillovers are not necessarily
evenly distributed. As a result, when the provision of public spending is regulated
decentralized, there is underprovisioin of policy instruments. An international union
could incorporate these spillovers in its utility function.
The most extreme option for the international union is complete centralization of
policy making. The national governments lose their authority and all the decision
are taken on supra-national level. It is not difficult to judge that, when countries
differ in preferences strongly, this option is far from optimal (Alesina et al., 2005).
Also when the number of countries in the union is large and heterogeneity is high,
entirely centralized policymaking is not optimal. The countries that are far from the
median country in terms of preferences suffer the most.
So, completely decentralized policy making is not optimal, and also centralized
policy making is not efficient in case of different preferences. A combination
between centralized and decentralized policy making have to be found, a so called
flexible union. In such a union, there is centralized policy making which is financed
by all the member states together. In addition, each member state can choose
whether or not to form additional national policy, this will especially be decided on
by countries that differ substantially from the median country (in terms of
preferences). Compared to completely centralized and decentralized policy making,
utility increases because on the one hand the centralized aspect of a flexible union
incorporates the spillovers in the union’s utility function and on the other hand
35
countries can design policy according to their own preferences. This is showed by
equation (8).
(8)
Public spending of country , decided by country
Public spending decided by the union
Preferences of country
Spillovers
Number of countries in the union
The optimal policy mix within an international union therefore is when the union
sets the basic conditions for policy and that individual countries can supplement this
policy towards their own preferences.
3.4 – Complementary versus substitutable policy instruments
When policy is designed on two levels, one runs the risk that policy instruments can
be substitutable. Policy instruments can be considered to be substitutes when the
following equations hold.
(9)
Participation in Dutch innovation programs
Participation in European innovation programs
Relative costs of Dutch innovation programs22
The relative costs of innovation programs are determined by the ratio between the added value of
the programs and the effort it takes to participate in innovation programs. When the added value
22
36
Relative costs of European innovation programs
Mentioned equations show a positive cross elasticity of demand. When the relative
costs of participating in an European innovation program increases23, companies
will participate more in Dutch innovation programs. The relative costs are
determined by a variety of factors like the administrative burden, the level of
subsidy etcetera.
For complementary instruments, different equations have to hold:
In contrast to the substitutable policy instruments, complementary policy
instruments show a negative cross elasticity of demand. When the relative costs of
participating in a national policy instrument decreases, companies will logically
participate more in the national program. But as a result of the complementary
nature of the instruments, companies will also be more inclined to participate in
European policy instruments. This could be the result of synergies that might arise.
increases (e.g. the subsidy increases), the relative costs decrease. The same holds when the
administrative burden increases (it takes more effort to participate in innovation programs).
23 When the relative costs of an European innovation program increases, automatically the relative
costs (compared to the European program) of the Dutch innovation program will decrease.
37
4 – Dutch innovation policy relevant for SMEs
Government intervention can be economically justified when market failures are
present, however the social benefits of intervention must outweigh its social costs.
In the previous chapter we have seen that SMEs have to cope with several market
failures that restrain innovation. As a result, the (private) R&D investments
generated by the market could be less than socially desirable. While innovation
more and more determines economic growth for most western countries, there is an
important role for the government to play. This chapter will describe the Dutch
innovation policy which aims at stimulating private investments in R&D. The Dutch
policy consists of a generic part and a specific part, these two will be separately
discussed in the following paragraphs. Hereafter, in paragraph 4.3 the differences
between Dutch SMEs and large companies in participation in Dutch government
programs will be discussed. Also the impact of participation on the innovativeness of
SMEs will be discussed. This will be done by using econometric analysis on the CIS
dataset.
4.1 – Generic innovation policy
The generic part of the Dutch innovation policy has as its main goal to let more
companies participate in innovative projects. Because the policy instruments of the
generic part of innovation policy are broad and accessible to practically all
companies that want to participate in innovation, the costs of implementing such
policy are low. Participating companies and their project do not have to be screened
and/or monitored, because all companies are allowed to participate in the
programs. So, screening and monitoring costs are low for the Dutch government in
the case of generic instruments. Additionally, the chance of government failure is
less present since the innovation programs of the generic part are less tailored. The
chance that such instruments do not ‘fit’ a company is smaller. On the other hand,
some dead weight loss might arise. Because of the openness of the generic policy
instrument, some companies might participate in innovation programs of the
government, while these companies might not necessarily need government
support.
The open character of the generic part of the Dutch innovation policy makes this
part accessible for most SMEs. Any company that has the intention to develop R&D
activities can participate in one of the national programs. On the other hand, large
companies benefit more from specific measures, because often large companies
have specific preferences. Therefore, tailored measures, that fit the needs of the
38
company, are preferred by large companies. Smaller sized companies benefit from
accessible measures with a low administrative burden, like the generic instruments
offer. The fact that the generic part dominates the specific part in the Netherlands,
and therefore the innovation policy is more skewed towards the needs of SMEs,
might indicate that market failures are believed to be more severe for SMEs
compared to the larger companies. The total budget for the generic part is €665
million, compared to €349 million for the specific innovation policy in 2010. Table
4.1 shows how this budget is allocated between the individual programs.
Table 4.1 – Budget allocation within the generic part of the
Dutch innovation policy (2010)
Instrument
Absolute budget
Relative budget
(x million)
WBSO
Credit for innovation
Eurostars
Technopartner
Vouchers for innovation
IPCs
SBIR
Syntens
€ 547
€ 40
€1
€ 24
€ 14
€9
€ 30
82,3 %
6,0 %
0,2 %
3,6 %
2,1 %
1,4 %
0,0 %
4,5 %
Total
€ 665
100%
(Source: Workgroup Innovation and Applied Research, 2010)
As table 4.1 shows, the generic innovation policy consists of many policy
instruments targeting the different segments of SMEs. Next, the policy instruments
as designed by the Ministry of Economic Affairs and AgentschapNL will be shortly
discussed and the concerning market failures they want to correct will be indicated.
4.1.1 – WBSO (Wet Bevordering Speur- en Ontwikkelingswerk / Law for
Promotion of R&D)
Most of the budget for the generic part of the Dutch innovation policy is spent on
this law, namely €547 million (from the total €665 million available for the generic
part). The WBSO is a fiscal instrument which makes R&D activities fiscally more
attractive and has two facilities to achieve this. First, when a company has R&D
employees, they have to pay less wage tax. 50% from the first € 220.000 R&D wages
can be subtracted from the taxes to pay and 18% from the remaining R&D wages.
39
Second, as introduced in 2009, there are additional arrangements for starting
companies and sole proprietors. These companies can subtract € 12.031 from the
taxes to pay (when they have R&D employees) and can subtract 64% from the first €
220.000 R&D wages from the taxes instead of 50%. The maximum amount that
companies can subtract from their taxes which they have to pay is € 14 million. By
the facilities, the labour costs associated with R&D investments are partly
compensated by this instrument. In this way, R&D projects are becoming less
expensive and therefore SMEs will be more willing to invest in such projects.
However, the condition is that a company has to have R&D employees and therefore
companies that do not conduct R&D systemically and do not have R&D employees
cannot benefit from the measure. The evaluation of this instrument shows that
especially for SMEs the added value of the program is large. This is mainly caused by
the fact that the accessibility of the program is high, the application is relatively easy
and the administrative burden is relatively low.
In 2009, 16.620 companies participated in the WBSO which is an increase of 23,5%
compared to 2008 (13.450 companies participated). This increase in participation is
due to several reasons. First, the budget of the WBSO has increased and is increasing
further in 2010. Second, the financial crisis has caused that capital is less accessible
for companies, therefore companies are more likely to participate in government
programs which makes R&D projects less expensive. Especially SMEs increased their
participation, particularly micro sized companies (with less than 10 employees)
because of the additional facilities introduced in 2009 for self proprietors and
starting companies.
The market failure the WBSO aims to correct is in the first place the capital market
failure. By lowering the costs of mostly expensive and relatively risky R&D projects,
it becomes more feasible for SMEs to finance such projects by themselves. However,
for most of the R&D projects external investors remain necessary to finance the
project. While the WBSO is lowering the costs of an R&D project and therefore it
increases its expected future returns, external investors might be more willing to
invest in such a project. By lowering the private costs of innovative projects for
SMEs the companies might be less reluctant to invest in R&D. As a result, SMEs will
be less hindered by the externalities involved and will invest more in R&D projects.
4.1.2 – Credit for innovation
Possibly the most important barrier for SMEs that discourages innovation is the lack
of external finance. As explained in chapter 3, investors might be more reluctant to
finance R&D projects of SMEs compared to larger companies. Small and medium
sized companies which want to perform R&D projects, which include technological
40
and therefore also financial risks, face significant difficulties to finance their project
using the capital market. The credit for innovation has as main goal to finance these
risky R&D projects that do have commercial potential, that otherwise would not
have been financed. This instrument is only intended for SMEs and in 2009 81
companies applied for such a credit. From these 81 application, 26 are approved and
the budget of € 37,5 million was totally utilized. Only SMEs that cannot finance their
R&D activities from own resources are eligible for a credit. The credit is limited to
35% of the total costs of the project and the maximum amount of the credit is €5
million. Off course, the credit has to be paid back, but only when the project has
commercial or technical success. Only upward risk for the companies is involved
since in case of failure of the project, the credit does not have to be paid back. The
interest rates a company has to pay are dependent of the corresponding risk, but
lower compared to market rates.
The credit for innovation overcomes the problem of the missing capital market for
SMEs to finance their risky R&D project. Also SMEs themselves can be very reluctant
to perform a R&D project with high risk involved since failure can result in
bankruptcy for the company. The set up of this instrument is excluding the
downward risk of an R&D investment and only leaves the upward risk. As a result,
companies can finance their R&D projects and the risk of bankruptcy of extreme
losses in case of failure is ruled out.
4.1.3 – Eurostars
Eurostars is an international program in which 32 countries 24 participate, the 27
member states of the European Union and some additional countries. Most of the
countries that participate in Eurostars make funds available to finance R&D projects
initiated by SMEs. The projects have to be initiated by at least two parties of at least
two different participating countries and no requirements about subjects are
present. The international component of the program is therefore strongly present.
The target group of the program is SMEs and knowledge institutions. One small or
medium sized high-tech company is leading the project. To qualify as a high-tech
company, a company has to spend at least 10% of its revenue of FTEs to R&D.
Another condition is the fact that the participating SMEs have to finance 50% of the
project and the duration of the project has to be at max 3 years. 2 years after the
project the product, service or process has to be introduced into the market. Dutch
SMEs that participate in Eurostars are supported by subsidies from the Dutch
Belgium, Bulgaria, Cyprus, Denmark, Germany, Estonia, Finland, France, Greece, Hongary, Iceland,
Ireland, Israel, Italy, Croatia, Latvia, Lithuania, Luxemburg, The Netherlands, Norway, Austria, Poland,
Portugal, Romania, Slovenia, Slovakia, Spain, Czech Republic, Turkey, United Kingdom, Sweden,
Switzerland
24
41
government. The percentage for research activities is 45% and for development
activities 35%. The total subsidy for Dutch SMEs that participate in one project is €
500.000.
While it is an international program, the national governments are financing the
main part of it and support the participation of domestic companies. The EU steps in,
in the form of bonuses for successful projects which means that practically the EU is
co-financing the program. However, the program has a strong national character,
since the national governments play an important goal in financing the program and
supporting the participating companies.
Eurostars promotes international cooperation between SMEs. Since knowledge is
not bound by borders, this may increase the probability of success of R&D projects.
SMEs often are reluctant to look across borders for possible cooperation, however
the most suitable companies may be in foreign countries. By stimulating such
cooperation, positive knowledge spillovers may arise in addition to economies of
scale. Additionally, companies are able to share the risks involved with other
companies by cooperating. Altogether, this will make it more beneficial for Dutch
SMEs to invest in R&D, together with international partners. Also, cooperating with
other partners enables SMEs to incorporate some of the knowledge spillovers in
their utility function. Knowledge may spill over from one partner to the other,
however, the gains of the innovation remain within the partnership. This will
increase the initial investment level of SMEs in R&D.
4.1.4 – Technopartner
It cannot be denied that new, high-tech companies (technostarters) often are
responsible for drastic innovation and therefore are important for the innovative
strength of a country (Six Fingers, 2009). However, often barriers arise for starting
an own business and participating in R&D projects. Technostarters can be seen as
pioneers with respect to innovation in the sense that they want to convert their
technological knowledge into marketable products or services. Therefore, it is
important that the business climate for technostarters is favourable and that they
are stimulated to start a business.
Incumbent companies and knowledge institutions can play an important role. With
their experience, they can accompany technostarters in starting a business.
Technopartner is stimulating such cooperation which makes it more easy for
technostarters to start its own business. Cooperating companies are subsidized for
guiding technostarters, providing equipment, conducting research and for applying
42
for patents. However, another struggle for technostarters is finding venture capital
to finance risky R&D projects. Technostarters often do have the necessary
knowledge for R&D projects, financing however is more difficult since it concerns
new businesses that do not have any own resources and also do not have a
reputation on which it can lean. Therefore, Technopartner is co-financing R&D
projects of technostarters. The government steps in in the form of doubling the
initial investment of financial institutions which leads to risk sharing of investors
and better funding opportunities of technostarters. In addition, the government can
provide a TechnoPartner Label which means that the government guarantees some
percentage of the loan which makes investors less reluctant to invest in
technostarters. Finally, there is a Business Angel Program that increases access to
informal venture capital of wealthy private investors. Providing capital is not the
only role of a business angel, it can also provide a solid network, management
experience and technological knowledge which can make life more easy for
technostarters.
However Technopartner is not targeting all SMEs in the Netherlands, it is targeting a
very important group of SMEs since these companies are often responsible for
drastic innovations and contribute to the innovative strength of the Netherlands.
Technopartner is trying to make it more easy for a starting company to penetrate
the market with an innovative product. Often, competition and lack of venture
capital is hindering such penetration of the market. By cooperating with other
companies and knowledge institutions, introducing financial instruments and
setting up a Business Angel Program, these market failures are more or less
corrected.
4.1.5 – Vouchers for innovation
A voucher for innovation is a coupon by which companies (partly) can finance
research at a research institute. There are private vouchers, public vouchers and
patent vouchers. Private vouchers have to be used by private knowledge
institutions, public vouchers have to be used by public knowledge institutions (like
universities and research institutions) and patent vouchers can be used for covering
the costs of patent applications. The vouchers can also be used abroad and in this
sense it also stimulates international cooperation. A company can apply for maximal
two vouchers a year. A distinction is made between large and small vouchers. Large
vouchers have a value of € 7.500, but the SME has to cover 1/3 of the costs (€
2.500). Small vouchers have a value of € 2.500 and the SME does not necessarily
have to contribute to the costs. In the first months of 2010, 8.285 vouchers are
issued, hence the budget for 2010 (€ 14 million) now already is totally used.
43
Because an entrepreneur beforehand does not necessarily has to formulate a
research question, this instrument is very accessible for SMEs. However, the goal of
the project always have to be to improve products, processes, services or the
organization itself. In this way, the interaction between on the one hand SMEs and
on the other hand knowledge institutions is stimulated. Research institutions are
very important for the creation of knowledge, but off course the gains from this
knowledge creation can only be reaped when this knowledge is commercialized.
That is why it is important that businesses and research institutions cooperate and
in this way be able to reap the gains from innovations. Cooperation with knowledge
institutions can improve the innovative strength of SMEs, simply because more
knowledge will be available. Vouchers stimulate such cooperation. .
Vouchers ease the cooperation between SMEs and knowledge institutions by
providing an adequate institutional framework. It aims at decreasing the degree of
asymmetric information between SMEs and knowledge institutions. Relevant
technologies and important trends can be picked up more early in this way, which
increases the probability of success for a R&D project. In addition, by the
international component of the voucher scheme also international cooperation is
stimulated.
4.1.6 – Innovation Performance Contracts (IPCs)
The Innovation Performance Contracts stimulate groups of SMEs (groups of
companies between 15 and 35) to cooperate on a multiannual basis. They can
cooperate to perform a collective R&D project or to strengthen a project of an
individual company. By cooperating knowledge could spillover from one company to
another which finally increases the ‘know-how’ of the companies. This results in a
greater innovativeness of these companies, since the required knowledge in this
way is in-house or present by one of the cooperating companies. Off course, it is
logical that especially the cooperation of companies that have substantive
consistency is stimulated. So, companies which are in the same sector, region
etcetera.
The IPCs consists of two parts, the pre-IPC phase (preparation phase) and the IPCphase (executive phase). The preparation phase is intended for identifying
innovation strategy and to determine an innovation strategy. The maximum length
of this phase is 1,5 years. For this phase, in 2010 a budget of € 1 million is present
and 47 projects were submitted of which 13 were approved. In the executive phase,
the innovation plans are actually implemented and has a maximal duration of 3
years. A condition for obtaining subsidy is that otherwise it would not be possible to
implement the project (for example because of the high risk involved and reluctance
44
of private investors). For participating in this phase, 50 projects were submitted of
which 20 projects were approved. Together, these 20 projects obtained subsidies
worth € 38,1 million.
Also this policy instrument aims at promoting cooperation between SMEs. As
discussed above, this may result in synergies like knowledge spillovers and
economies of scale. In addition, cooperating companies are more inclined to
internalise the externalities involved with innovation. Companies can share the
costs of R&D projects and can bundle their strengths. Cooperating with other
companies can strengthen a company’s innovative and competitive strength.
4.1.7 – Small Business Innovation Research Program (SBIR)
By this research program, the Dutch government outsources socially relevant
innovation research. Possible themes are for example dike monitoring, green energy
and nature-friendly working. The government especially invites SMEs to participate
in the program. Research and innovation in these themes is not necessarily
profitable, however is of great social importance. Therefore the government is
promoting such research by financing the costs involved. Of great importance is the
commercialization of the knowledge, since practical applicability is the main goal.
Most likely, the themes of SBIR will become more important in the future. By
investing in research now, the Netherlands could be increasing its competitive
strength in the future. At the same time, the innovation capacity of the companies
involved is increased.
The SBIR is providing a new market that promotes innovation that is of great social
importance. Often, such a market is missing since economically, such research and
innovation may not be beneficial and involves a certain amount of risk. Often,
possibilities that involve less risk are present (like fossil fuel instead of green
energy) and as a result there are no incentives to invest in such research and
innovation. And when these incentives do exist, it is often hard to finance such
projects because of the risks involved. The Dutch government aims at correcting
these market failures using the SBIR.
4.1.8 – Syntens
Syntens is a nationwide network which aims to promote innovation by providing
information, giving advice and support companies. It does this by personal advice,
organizing workshops for companies, and by creating “innovation groups”. This are
groups of experts, scientists and companies that together work on an innovative
45
project. In this way it wants to increase the cooperation between companies in
innovative projects, advice companies about the commercialization of innovative
ideas and inform companies about trends. Syntens particularly is targeting Dutch
SMEs and in 2010 (Januray – August) already 13.763 companies are served. The
consultancy costs for the companies are free, and on behalf of the government.
Syntens has 15 establishments which are spread across the Netherlands.
By promoting cooperation between companies in R&D projects it tries to provide an
adequate institutional framework which eases cooperation. Together, companies
may achieve economies of scale and/or knowledge spillovers and in this way they
will be able to compete with larger companies. Cooperation also forces the
cooperating companies to internalise the externalities associated with R&D projects.
Gains from innovations may spill over to other companies, but when you are
cooperating with these companies the gains from the innovation will remain inside
the project participants. As a result, cooperating companies will be more inclined to
invest more in R&D projects. Also it aims to overcome the problem of missing new
product markets. By informing the companies about relevant trends and consumer
needs, the new products will be more tuned to consumer preferences. In this way it
tries to overcome asymmetric information between companies and competitors on
the one hand and companies and consumers on the other hand.
4.2 – Specific innovation policy
Besides the generic innovation policy of the Dutch government, also specific
innovation policy is implemented in the Netherlands. The main goal of this policy is
to stimulate cooperation between companies, and between companies and
knowledge institutions. The rationale behind this specific policy for innovation is
that some sectors and geographic areas are characterized by high spillovers and
enhance the competitiveness of the Dutch economy. These sectors and areas require
focus and mass (in terms of budget). When targeting these sectors, because of the
high spillovers many companies will benefit from the policy instruments. The added
value of the specific policy instruments will be higher for the companies involved,
compared to the generic policy instruments. On the other hand, resulting from the
specific character of the policy instruments, the costs of implementing and
monitoring such policy are high compared to the generic innovation policy
instruments. In addition, because the instruments are sector specific and tailor made
for these sectors, the chance of government failure is higher compared to the generic
policy part. The chance that the government will make the wrong choices is higher.
However, the costs and the chance of government failure may be higher, the
probability of dead weight loss is lower. Since the instruments are tailored to
specific sectors and therefore not accessible to all companies, the chance that
companies use the instruments while they do not specifically need the instruments
46
is smaller. The accessibility of the specific policy instruments is lower and therefore
only the companies that need the instruments will participate.
Because of the fact that the specific innovation policy of the Dutch government is
targeting specific (strong) sectors and geographic areas, not all the companies can
benefit from these policy instruments. Often, the sectors and geographic areas of the
specific policy are built around strong multinationals that are important for the
Dutch economy. Therefore, compared to the generic innovation policy instruments,
the specific innovation policy instruments are less accessible for SMEs.
The sectors which the specific policy instruments of the Dutch government is
targeting are the following (Ministry of Economic Affairs, 2006):





High-tech systems and materials
Flowers and food
Water
Creative industry
Chemical industry
These sectors are the key sectors of the Dutch economy and are believed to have a
strong impact on the growth potential of the Dutch economy. That is why they
require additional attention. By targeting these sectors, the Dutch economy can
strengthen its strengths it and can differentiate itself from other economies.
Next, the policy instruments of the specific innovation policy of the Dutch
government and the corresponding market failures are discussed.
4.2.1 – Innovation programs
Throughout the Netherlands ecosystems of large companies, SMEs and knowledge
institutions exists which are active within sectors in which the Netherlands is
excelling. These ecosystems are close partnerships which are focused on innovation.
Together with the private companies and knowledge institutions the Dutch
government is investing in these ecosystems. For 2010, the budget of the innovation
programs was €283,4 million, which is the main part of the specific innovation
budget. Because the sectors the programs are targeting are that important for the
competitiveness of the Dutch economy, these programs are likely to have a strong
impact on the growth potential of the Dutch economy (when implemented
efficiently).
47
Innovation programs are strategic partnerships consisting of companies and
knowledge institutions. Together, they have to formulate a demand driven vision
and strategy. Then, an external strategic board have to give an advice to the Ministry
of Economic affairs whether or not to support this program. When positive, funds
will be granted to this innovation program. Striking for the innovation program is
the fact that the companies and knowledge institutions have to cooperate and must
take the first step. Important to get a positive advice from the external board is that
the innovation strategy must be demand driven. It is important that innovations can
be commercialized and in that way improve the competitiveness of the participating
companies and knowledge institutions.
For each strong sector, which is important for the competitiveness of the Dutch
economy, a separate innovation program is designed to target each of these sectors
specifically. In the past, the following innovation programs are realized:











Food and nutrition delta
Hightech automotive systems
Innovation process chemical industry
Life sciences and health
Logistics and supply chains
Maritime industry
Materials
Point One (nano technology, embedded systems and mechatronics)
Water technology
Service innovation and ICT
(Creative industry)
Cooperation between companies and knowledge institutions make the participating
parties internalise some of the externalities present. The innovation programs also
make it possible for small firms, with little funds, to participate in innovative
projects, because the costs are can be shared with many other parties. Because of
the large scale of the project, also small firms can benefit from economies of scale. In
addition, the government is stepping in as well, which makes it more easier for
companies to finance such projects (especially for small companies 25). By
participating in an innovation program, companies share knowledge with each other
and with knowledge institutions. The degree of asymmetric information between
these companies will decrease because of cooperating. Positive knowledge
spillovers will contribute to the success of the project and will take away part of the
uncertainty regarding the project.
As explained, for small companies it is often more difficult to finance risky R&D projects because of
lack of collateral and reputation. By cooperating with larger companies and knowledge institutions,
costs can be shared and external funders will be less prudent to finance such projects. Because of large
companies which good reputations are stepping in, the whole project can benefit from this reputation.
25
48
4.2.2 – International innovation
Knowledge goes beyond borders, and in a globalized economy it is more and more
important for companies to look beyond borders. That is why the Dutch government
is promoting companies to cooperate not only with domestic companies, but also
with foreign companies. To do so, this instrument is divided into three pillars;
Eureka, industrialized countries and emerging markets. Together, the three pillars
have a budget of €9,2 million in 2010. For all three pillars, there are no specific
requirements for the subject of the innovationproject. However, some requirements
about the process are present. The innovation project must result in a commercial
product, within three or five years after the completing the R&D project, the product
must be commercialized. Also, there must be a technological innovation and must
generate economic value for participating Dutch companies. An external board
reviews the submitted proposals, and the proposals with the highest quality will be
supported by the Dutch government.
As mentioned, the Netherlands is participating in Eureka, a network of 38 countries.
The Dutch government supports companies and knowledge institutions which
participate in international innovation collaborations. Eureka is focused on demand
driven research and development projects, and is accessible for both large and
smaller companies. In addition, participation of knowledge institutions is welcomed
to bridge the gap between academic theory and industrial practice.
The second pillar, industrialized countries, focuses on cooperation with companies
from other industrialized countries that have many knowledge in technology or
countries that could be a interesting market for Dutch companies. The selected
countries are Canada, Japan, Singapore and the United States. When Dutch
companies want to develop a product or service together with a partner from one of
these countries, the Dutch Government is willing to support this process financially.
Finally, the pillar emerging market is aiming at promoting the cooperation between
Dutch parties and parties from emerging markets in R&D projects. In addition, this
project tries to position Dutch companies better in emerging markets. The same as
with the industrialized countries, a selection of emerging markets has been made.
The selected countries are Brazil, China, India, Indonesia, Malaysia, Thailand, SouthKorea and South-Africa. Likely, the economic role of these countries will increase in
the future. Therefore, it is good for Dutch companies to position themselves better in
these countries. Companies that want to cooperate with parties from the selected
countries are supported financially (by subsidies), but also politically. This means
that the Dutch government negotiates with the emerging market about improving
49
the relationship between the countries and therefore indirectly the conditions for
Dutch companies.
Both SMEs and large companies can participate in these programs. However, the
subsidy rate differs between the groups of companies. For research activities large
companies obtain a subsidy of 35% and for development activities this rate is 25%.
For SMEs, this rate is 10% higher which means 45% for research activities and 35%
for development activities. The maximal amount of subsidy for a project with
companies from emerging markets is € 500.000 and for a project with an Eureka
country or another industrialized country is € 750.000.
The degree of asymmetric information between companies from different countries
is often higher than between companies from the same country. Cultural differences
and differences in language implies additional asymmetric information and
uncertainty. The program international innovation tries to overcome this form of
market failure. By cooperating internationally and trading knowledge
internationally, positive spillovers might arise in the form of knowledge spillovers,
economies of scale and risk sharing.
4.2.3 – EG-Liason
EG-Liason is focussing on Dutch companies or knowledge institutions that
participate in European innovation programs regarding innovation. Its main focus
are the participants of the framework program of the European Commission (see
5.1), but EG-Liason can also be usefull for participants of other European programs
(Eureka, Eurostars). EG-Liason informs and advises Dutch companies and
knowledge institutions that participate or want to participate in an European
innovation program. Especially for SMEs this can be helpful, since participating in
European innovation programs can be very timeconsuming and the administrative
burden is often high. Therefore, it can be a great struggle for SMEs to participate in
such programs, and EG-Liason tries to make European innovation programs more
accessible.
EG-Liason aims at making European innovation programs more accessible for Dutch
companies and knowledge institutions. Often, the institutional structure of these
programs makes it very timeconsuming to participate in the programs. EG-Liason
tries to overcome this problem and aims to ease the process of participating in
European innovation programs.
50
4.3 – Empirical analysis
Now that the Dutch instruments to promote R&D activities of SMEs are introduced,
it is interesting to look at whether or not there exist differences between Dutch
SMEs and large companies in participation in government programs. To examine
this possible difference, a probit regression model is used. This because of the fact
the respective dependent variable is a dummy variable which takes the value of 1
when a company is participating in a national government program. As independent
variables, off course variables which indicate whether or not a company is
characterized as a SME are included. In addition, control variables are included to
control for other company specific aspects which also can have its impact on
participation in government programs. Again, data from the CIS dataset is used and
the results are showed in table 4.2.
Table 4.2 – Differences between SMEs and large companies in participation in
national government programs
(1)
(2)
(3)
(4)
Constant
-0,658***
SME
Small sized company
Medium sized company
-0,009
-0,658***
-1,280***
-1,280***
-0,169**
-0,050
-0,053
-0,173**
-0,167**
Control variables
Manufacturing
-0,467*** -0,467***
International activities
-0,528*** -0,528***
Cooperation
-0,191*** -0,191***
R&D intensity
-0,005*** -0,005***
Dependent variable: Participation in national government programs (dummy)
Sample: all companies present in the Community Innovation Survey (9.947)
* Significant at 10% level, ** Significant at 5% level, ***Significant at 1% level
The results show four estimated models. Models (1) and (2) do not use control
variables and only look at the effect of firm size on participation in Dutch
government programs that stimulate R&D activities. No significant effects can be
found in these models. In models (3) and (4) however, that do use control variables
to control for other company specific characteristics, significant effects can be found.
These models show that SMEs participate significantly more in Dutch government
programs compared to its larger counterpart. This can be the result of the fact that
in the Netherlands the generic innovation policy part dominates the specific
51
innovation policy part. In previous paragraphs we have seen that the generic part is
more favourable for SMEs, because these instruments are easily accessible and have
an open and broad character. The differences between small and medium sized
companies are not worth mentioning and are not economically significant. In
contrast, the control variables do show some interesting effects. Manufacturing
companies tend to participate more in Dutch government programs. The same holds
for companies that do have international activities, cooperate with other companies
and have a high R&D intensity. However, the last three effects can also be the result
of reversed causality since the R&D programs of the Dutch government promote
international activities, cooperation and R&D activities. But since these variables are
not of main interest, no further tests are necessary to investigate the causality
between the respective variables.
SMEs tend to participate more in Dutch government programs compared to large
companies, but do these government programs foster innovation activities of Dutch
SMEs? That is an interesting question which following analysis will try to answer. To
answer this question a subsample of SMEs is used from the CIS dataset, which allows
to only capture the effect for SMEs. Simple linear regression is used to examine the
differences between SMEs that participate in Dutch innovation programs and SMEs
that do not participate in these programs. To check the robustness of the outcome,
two innovation indicators are used as dependent variable. The same as in chapter 2,
these indicators are “R&D intensity” and “share of revenue from products new to the
market”. The results of the analysis are shown in tables 4.3 and 4.4.
Model (1) as represented in table 4.3 show that SMEs that do participate in Dutch
government programs have a higher R&D intensity compared to companies that do
not participate in such programs. This is a first indication that the Dutch
government programs succeed in correcting market failures present for SMEs.
Companies that do participate in national government programs invest relatively
more in R&D. But in addition, the R&D intensity of those companies is even higher
than the R&D intensity of companies that participate in European programs and of
companies that participate in both European and national programs. Model (2),
when controlled for company specific factors, confirms this conclusion and shows
some additional effects of variables on R&D intensity of SMEs. SMEs that are active
as a manufacturing company tend to have a lower R&D intensity, the same holds for
companies that are part of a concern. In contrast, cooperating companies tend to
have a higher R&D intensity. Whether a company is active internationally, does not
have a significant impact. Also no significant differences in R&D intensity are
present between small and medium sized firms.
52
Table 4.3 – Differences in R&D intensity between SMEs that do
participate in Dutch government programs and SMEs that do
not participate in these programs
(1)
(2)
Constant
,355***
6,121***
National government support
-6,879***
Control variables:
European government
-1,252
support
Both national and European
-6,623**
government support
Manufacturing
International activities
Cooperation
Company is part of concern
Small sized company
Dependent variable: R&D intensity
-7,719***
-1,725
-6,442**
-6,013***
-1,870
-3,504***
-3,768***
-0,895
Sample: all SMEs present in the Community Innovation
Survey (8.886)
* Significant at 10% level, ** Significant at 5% level,
***Significant at 1% level
Next, the results are shown of the same regression, but with “new introduced
products” as dependent variable. In contrast with the input innovation indicator
R&D intensity, now an output indicator is used which measures the commercial
impact of innovations.
The main results of table 4.4 are in line with the results from table 4.3. SMEs that do
participate in Dutch government programs that aim at stimulating R&D significantly
tend to introduce relatively more new products to the market than SMEs that do not
participate. Again, a confirmation that the Dutch programs succeed in correcting
some of the market failures that restrain innovation. The nice thing about using an
output indicator as dependent variable is that this analysis shows that participating
in national government programs actual leads to relatively more newly introduced
products. Companies succeed relatively more in commercialization of innovations.
This is even higher for small sized companies compared to medium sized
companies. In this sense, the Dutch government programs are more successful than
its European counterpart for SMEs. Participating SMEs in European programs tend
to introduce relatively less new products, although insignificantly. The control
53
variables in table 4.4 reflect the same picture as in table 4.3, although some have
other significance levels.
Table 4.4 – Differences in new product introduction between
SMEs that do participate in Dutch government programs and
SMEs that do not participate in these programs
(1)
(2)
Constant
4,355***
3,425***
National government support
-5,122***
-4,829***
Control variables:
European government
-0,711
-0,862
support
Both national and European
-2,625*
-2,026
government support
Manufacturing
-1,651***
International activities
-1,886***
Cooperation
-2,038***
Company is part of concern
-0,078
Small sized company
-1,326**
Dependent variable: share of revenue from products new to
the market
Sample: all SMEs present in the Community Innovation
Survey (8.886)
* Significant at 10% level, ** Significant at 5% level,
***Significant at 1% level
To conclude this section , both the input and the output indicator indicate that SMEs
that participate in national innovation programs are more innovative than SMEs that
do not participate in the programs. This is an indication that the Dutch government
programs (partly) succeed in correcting the market failures that restrain innovation.
However, one must consider the possibility of reverse causality. It could be the case
that more innovative SMEs participate more in Dutch government programs in
general, a case of self-selection.
4.4 – Conclusion
The Dutch innovation policy consists out of a generic part and a specific part and
aims to correct the market failures as present. In the Netherlands, the generic part
54
dominates the specific part in terms of budget allocation (€665 million vs. €349
million). The open character and the general measures of the generic part makes its
instruments accessible for many SMEs. In contrast, the specific instruments of the
Dutch innovation policy targets specific groups of companies and therefore not all
SMEs are able to benefit from these measures. The specific policy instruments
especially target the strong sectors of the Dutch economy and international
cooperation between companies.
Table 4.5 gives a good overview about the national programs and which market
failures they aim to correct. The darker the colour green, the more important the
corresponding market failure is within the program and indicates the relevance of
the program for SMEs.
The generic part of the Dutch innovation policy is especially targeting the capital
market failure, the degree of incomplete information and stimulates cooperation.
The market failures that restrict international cooperation are hardly tackled at all.
The same holds for the missing market for new products and the problem of
bounded consumer rationality. For the market failures that have to do with
international property right protection and competition, the Dutch government does
not have any authority. The European Union is designing legislation in these fields,
therefore the Dutch government cannot target these market failures specifically.
The specific part is also targeting the capital market failure, the degree of incomplete
information and stimulates (international) cooperation. However, the main
difference is the fact that specific groups of companies are targeted by the specific
part of the Dutch innovation policy. By stimulating cooperation between these
groups of companies, the innovativeness of the sector will increase which enhances
its competitiveness. The same as holds for the generic part, the specific part of the
Dutch innovation policy does not tackle the market failures of the missing market
for new products and the problem of bounded consumer rationality. This means that
the Dutch innovation policy does not correct these market failures at all.
The empirical analysis showed that Dutch SMEs participate relatively more in Dutch
government programs compared to its larger counterpart. This may be the result of
the fact that in the Netherlands the generic part dominates the specific part.
Additionally, the empirics showed that the Dutch government programs have a
significantly positive effect on the innovativeness of the Dutch SMEs. Both the R&D
intensity and the introduction of new products are significantly higher when SMEs
participate in national programs. This is an indication that the Dutch government
succeeds in correcting (some) of the market failures present for SMEs. Next, the
European innovation policy will be discussed.
55
56
Table 4.5a – Generic national instruments and corresponding market failures
Market failure
WBSO
Syntens
IPCs
Vouchers
Credit
Technopartner
Eurostars
SBIR
IPRprotection
Institutional
framework
Missing
markets
Externalities
Market
structure
Cooperation
International
cooperation
Capital
market
New product
market
Externalities
Competition
Entry
barriers
Incomplete
information
Consumer
rationality
57
Table 4.5b – Specific national instruments and corresponding
market failures
Market failure
Innovation
InternaEG-Liason
programs
tional
innovation
IPRprotection
Institutional
Cooperation
framework
International
cooperation
Capital
market
Missing
markets
New product
market
Externalities
Market
structure
Externalities
Competition
Entry
barriers
Incomplete
information
Consumer
rationality
58
59
5 – European innovation policy relevant for SMEs
Besides the innovation policy of the Dutch government as described in chapter 4,
also the European Union is stimulating innovation of private companies. This
chapter describes the policy of the European Union that aims at stimulating
innovation. The European policy nowadays consists of two pillars, namely the 7 th
framework program and CIP. These two parts will be separately discussed in the
following paragraphs. In the previous chapter we already have seen some
instruments with an international character, namely Eurostars and the Eureka
network. However, these instrument are mainly financed by the governments of the
member states and therefore are characterized as national instruments. The 7 th
framework program and CIP are completely financed by funds of the European
Union and therefore are characterized as European instruments. However,
indirectly, also these instruments are financed by contribution of individual member
states to the Union. After describing these instruments, an empirical analysis will be
discussed which will analyze the differences between Dutch SMEs and large
companies in participation in European programs. Also the added value of
participation in these programs will be analyzed for SMEs.
5.1 – 7th Framework Program (FP7)
The 7th framework program for research and technological development is the
successor of the 6th framework program and the program concerns the period from
2007-2013. For this period, the European Commission has reserved a budget of
€50,5 billion, which means a large increase in budget with respect to the 6 th
framework program26. This budget is spent for a large share on subsidies to finance
research, development and demonstration projects. Besides the increase in budget,
the 7th framework program also claims to be more flexible and easier accessible with
less administrative burdens. However, especially SMEs still complain about the great
administrative burden of the framework program and the low probability of success.
Participants from the Netherland are expected to receive €3 billion from the total
€50,5 billion budget. This is equal to roughly 5,9% of the total budget, which is a
relatively high share compared to its GDP (the Netherlands is responsible for 5,6%
of the GDP of the EU). The most important Dutch participants are TNO, GTI,
universities, Philips, Unilever and Stork. Large companies and knowledge
The budget of the 7th framework program increased with 41% with respect to the budget of the 6th
framework program.
26
60
institutions are overrepresented in the 7th framework programme. However, also
Dutch SMEs do participate, but to a small extent. In total, 10.853 Dutch parties
participated in the cooperation program (see below) of KP7, including 1.606 SMEs
which is slightly less than 15%. Main complaints of SMEs are the high administrative
burden and the low probability of success. It is simply not worth all the trouble.
Participation is as follows. The European Commission issues a call for a project
proposal. Requirements for the proposal are laid down in the specific call. Then, a
consortium of at least three companies, knowledge institutions and/or experts have
to be formed from at least three different countries. Together, they have to submit a
project proposal which will be evaluated based on the criteria as stressed out in the
specific call. The proposal that pass this first step go forward to further evaluation.
The average rate of success for Dutch SMEs that want to participate in the
framework program is 22,4%. Which means that, for a SME, four out of five project
proposals are not successful, and therefore do not receive any funds from FP7.
The international character of FP7 is important, it has to be a complement to
national innovation programs, not a substitute. Therefore, the projects have to be
transnational. Actors from different member states have to cooperate in these
projects to qualify for funding through the framework programme. However,
exceptions are made when it concerns groundbreaking scientific research that could
be of a great impact for the competitiveness of the European economy. Because of
the increased importance of cooperation between all the actors within the
innovation system and the trend of globalization, it is important that companies,
knowledge institutions and researchers join forces nationally, but also
internationally. The 7th framework programme is stimulating this cooperation
within the European Union. Actors that can participate in projects from the
framework programme are companies (SMEs but also large companies), knowledge
institutions and individual researchers from European member states but also from
other countries27. So, also parties from countries outside the European Union can
participate in the framework program. Indeed, such cooperation are even stimulated
because of the fact that such collaborations could strengthen the competitiveness of
European companies in other countries and because some challenges are of a global
nature.
By cooperating across borders, the European Union is trying to achieve two
important strategic objectives through the framework program. It wants to
strengthen the scientific and technological basis of the European industry. In
Of course, an actor from one of the member states of the European Union has to be part of the
project. Otherwise, the European Commission will not finance the project.
27
61
addition, it wants to increase the competitiveness of the European industry and
stimulating research.
Within the 7th framework program there exist five specific programs that each target
a specific component of the program. This structure is well displayed by figure 5.1.
In addition, table 5.1 gives an overview about the distribution of the budget between
the specific programs.
Figure 5.1 – Structure of the 7th Framework Program
(Source: European Commission, 2010)
Cooperation program:
For Dutch SMEs the specific program for cooperation is by far the most
important, because the cooperation program is best suited for
companies. Not surprisingly, SMEs are relatively more represented in
this specific program compared to the other programs within FP7. As
will be explained, the people and ideas programs specifically target
individual researchers and are therefore less applicable for SMEs.
62
Table 5.1 – Division of budget within FP7
Specific program
Budget
Percentage
(x billion)
€ 32,413 64%
€ 6,
12%
€ ,935
4%
€ 9, 5
18%
€ 3,475
7%
Cooperation program
Health
Food, agriculture, fisheries and biotechnology
Information and communication technologies
Nanosciences, nanotechnologies, materials and new
production technologies
Energy
€ 2,35
5%
Environment
€ ,89
4%
Transport
€ 4, 6
8%
Socio-economic sciences and humanities
€ ,623
1%
Security
€ ,4
3%
Space
€ ,43
3%
Ideas program
€ 7,51
16%
People program
€ 4,75
9%
Capacities program
€ 4,097
8%
Joint Research Centre
€ 1,751
3%
Total
€ 50,521 100%
(Source: European Commission, 2010)
Cooperation is the core of the framework program and therefore it covers two thirds
of the total budget (€32,4 billion). This specific program stimulates cooperation in
research that is transnational and is meant for companies, knowledge institutions
and individual researchers. At least, three partners from three different countries
have to participate in a project. Often, the number of participating parties is high and
the duration of the project is long. The cooperation program is divided into ten
specific themes that are believed to be of great importance for the European
economy (now or in the future). The European Commission has determined the
following key scientific and technology areas in which it aims to gain leadership in.










Health
Food, agriculture, fisheries and biotechnology
Information and communication technologies
Nanosciences, nanotechnologies, materials
technologies
Energy
Environment (including climate change)
Transport (including aeronautics)
Socio-economic sciences and the humanities
Space
Security
and
new
production
Each theme within the cooperation program is operated autonomously, but
interaction between different themes is allowed and stimulated. Projects within
63
different themes can undertake joint activities and make joint calls for funding. In
the themes “nanosciences, nanotechnologies, materials and new production
technologies” and “energy” SMEs are relatively overrepresented within FP7.
Ideas program:
Within this program scientific excellence is stimulated, only groundbreaking
research will be financed within this program. There are no specific themes
determined as in the cooperation program, the research can cover each conceivable
subject. Another contrast compared to the cooperation program is that
transnational cooperation is allowed but is not obliged to be eligible for funding. All
individual teams, leaded by a principal investigator, can apply for funding by the 7th
framework program. Because projects within the ideas program have to be
investigator-driven projects, they are free from political priorities. As a result, new
and promising areas of research can further be explored. The budget for the ideas
program is considerably smaller than the budget of the cooperation, namely €7,5
billion intended exclusively for individual researchers and is therefore not
applicable for SMEs. This specific program is implemented by the European
Research Council (ERC).
People Program:
In addition to the ideas program, also the people program is targeting individual
researchers. By the people program the European Commission is supporting the
mobility and the career development of researchers within the European Union but
also researchers of countries outside the EU. For this program, a budget of €4,7
billion is available over the period 2007-2013. This seems small compared to the
cooperation program, however compared to the 6th framework program it means an
increase in budget of 50%.
The rationale behind the people program is that the quantity and quality of scientific
researchers is important to promote innovation and promote investments in
research by public and private entities. This specific program will be implemented
through the following actions.
 Initial training of researchers to improve young researchers
 Life-long training and career development
 Industry-academia partnerships to promote mobility and knowledge
sharing
 International actions to attract talent from outside Europe and promote
research collaboration with researchers from outside the EU
 Specific actions to remove obstacles for mobility
64
Again, this specific program is not directly targeting SMEs and other companies.
However, companies may benefit indirectly when the quantity and quality of
European researchers increases. Through knowledge sharing and spillovers,
companies may benefit from this increase of the knowledge base within Europe
which fosters innovation. The same holds for the ideas program.
Capacity Program:
With €4,1 billion, the smallest budget of the specific programs within the 7 th
framework program. The program aims at optimizing the innovation and research
capacities within Europe. The capacity program includes to following activities.
 Improve and optimize the use of research infrastructure like databanks,
laboratories and communication networks.
 Research for the benefit of SMEs to strengthen the innovative capacity of
SMEs. Outsourcing of research activities by SMEs is supported, even as
participation in the cooperation program of FP7.
 Regions of knowledge by promoting the development of research-driven
clusters across Europe.
 Developing the research potential of Europe’s convergence regions
(especially new member states).
 Improve the relationship between science and society to get the public
more acquainted with science.
 Promote international cooperation within the European Union but also
with countries outside the EU.
Logically, Dutch SMEs will benefit from the research for SMEs since this measure
provides favourable conditions for SMEs compared to larger firms. But also the
other measures from the capacity program may indirectly strengthen the innovative
strength of SMEs, while not targeted directly.
Non-Nuclear research actions by the Joint Research Center (JRC)
The Joint Research Center conducts research to support the European Union’s policy
making technologically and academically with a budget of €1,8 billion. Because this
specific program is not relevant for SMEs, further elaboration about the JRC is not
necessary.
In the first place, the 7th framework program is stimulating international
cooperation. In addition, it promotes interaction between knowledge institutions on
the one side and companies on the other side. To stand against companies from
established countries like the USA and Japan, but also from emerging markets like
China and Brazil, it is important that European parties join forces to remain
65
competitive on a global scale. Knowledge diffusion and commercialization of this
knowledge is key in this process, the 7th framework program is promoting this. By
cooperating, participating parties can achieve economies of scale, share the risk
involved and can internalise some of the externalities involved with innovation. As
stressed out, knowledge may spill over to other parties, but when you, as a company,
cooperate with these parties, the knowledge remains within the respective project,
but also the gains resulting from this knowledge. The participating parties are
supported financially by subsidies and are able to share the risk of the project, so
financing (risky) R&D projects becomes less of a problem.
The 7th framework program aims at achieving an institutional framework that,
among other, stimulates cooperation of companies (SMEs and large companies) and
knowledge institutions internationally (the cooperation program). However, FP7 is
dominated especially by large companies and knowledge institutions. For SMEs, the
administrative burden and the low probability of success are great barriers to
participate in the framework program. Sadly, the framework program fails at
achieving an institutional framework for SMEs that promotes international
cooperation. FP7 therefore fails in correcting the present market failures for SMEs in
many cases28. Indirectly, the 7th framework program might be of use for SMEs. By
providing good framework conditions for researchers, the quality and quantity of
research might increase which indirectly may benefit SMEs, when this generated
knowledge is transferred to SMEs within Europe (the ideas, people and capacities
programs).
5.2 – Competitiveness and Innovation Framework Program (CIP)
With a budget of roughly €3,6 billion the budget of the Competitiveness and
Innovation Framework Program is significantly smaller than the 7th Framework
Program’s budget. This budget is spread over a period which runs from 2007 until
2013. Table 5.2 gives a clear overview about how this budget is distributed among
the specific programs within CIP. CIP is specifically targeting the small and medium
enterprises within Europe. It aims at increase the competitiveness of European
SMEs by supporting innovation, providing better access to finance and delivering
business support services. In addition, CIP has some specific components which
encourage the use of ICT, the use of renewable energy and energy efficiency.
Within the Competitiveness and Innovation Framework Program there exist three
operational programmes, which each have its specific objectives. The following
Off course, there are SMEs that participate in the 7th framework program successfully. But, the
probability of success for SMEs is slightly higher than 20% and therefore 4 out of 5 SMEs participate in
FP7 unsuccessfully. For most SMEs, market failures are not corrected by the framework program.
28
66
three programs will be further discussed: the Entrepreneurship and Innovation
Program (EIP), the information Communication Technologies Policy Support
Program (ICT PSP) and the Intelligent Energy Europe Program (IEE).
Entrepreneurship and Innovation Program (EIP):
EIP supports innovation of SMEs in the European Union by multiple actions and
instruments. Together, a budget of €2,17 billion is available to implement these
three actions and instruments, which is 75% of the total budget of the
Competitiveness and Innovation Framework Program. First, the program aims at
making finance for SMEs more accessible. The financial instruments of EIP target
companies in each phase of their lifecycle. So, starters but also established SMEs are
eligible for financial support. Also, investments in innovation are supported. Here,
eco-innovation29 plays a special role and gets additional attention. This is
implemented by the European Investment Fund and selected financial institutions
using financial instruments. With a budget of €1,1 billion it aims at generating €30
billion of new finance for up to 400.000 SMEs within Europe. Instruments like
venture capital and guarantees are used to stimulate entrepreneurship and
innovation of SMEs.
Second, cross border cooperation is stimulated by an “Enterprise Europe Network”.
Also CIP recognizes the importance of cross border cooperation with other
companies and knowledge institutions. Therefore the Entrepreneurship and
Innovation Program supports companies that want to cooperate with foreign
companies and/or knowledge institutions by providing guidance and information
through national networks of service centres30. It informs SMEs about the European
legislation, business cooperation opportunities and funding opportunities (public
programs and/or private funding). This European network is financed by a budget
of €320 million concerning the period 2007-2013.
Indirectly, a third action is undertaken by EIP to support SMEs’ innovative activities.
Namely, it provides support for national policymaking and it gives companies and
public bodies the opportunity to exchange good practice on innovation policy. It
provides research about the latest trends and developments in technologically
important sectors. In this way, it helps national governments to design innovation
policy which suits the needs of SMEs and large companies. To finance this research
and analytical tools, a budget of €650 million is available.
Product, process and service innovations that reduce environmental impacts, prevent pollution or
achieve a more efficient and responsible role of natural resources.
30 For the Dutch case, this service is provided by Syntens and AgentschapNL. Syntens is the
organization that supports companies in the Netherlands which aim at develop innovation activities.
AgentschapNL is implementing the Dutch innovation policy.
29
67
Information and Communication Technologies Policy Support Program (ICT PSP):
Still, ICT has considerable potential to drive growth and jobs in Europe. Compared to
the USA, diffusion and implementation of ICT in company products, services and
processes can be improved. This partly explains the increasing gap in productivity
(growth) between the United States and European member states. Better
implementation of ICT could boost the innovative capacities of SMEs. To achieve
this, pilot projects which test innovative ICT based services in real settings are
financed by ICT PSP. SMEs can apply for such pilot projects. Especially, the use of ICT
to challenge socio-economic problems like ageing and energy efficiency is
stimulated. In addition, SMEs are given the opportunity to join networks to share
their experiences and build consensus with respect to ICT related activities. For ICT
PSP, a budget of €730 million is available for the period 2007-2013.
Intelligent Energy Europe Program (IEE):
With a budget of €730 million, the European Commission is trying to remove market
barriers, change behaviour and create more favourable business environment for
increasing energy efficiency and the use of renewable energy. The program launches
calls for project proposals to which SMEs (but also other companies and publicly
organizations) can apply. When admitted, the funding covers up 75% of the involved
costs. From 2007, over 3.000 organizations have participated in such projects across
Europe. The aim of the projects is to use energy more efficient and to promote the
use of renewable energy. Eco-innovation is stimulated in this way which enhances
the competitiveness of the participating companies but also contributes to the
challenges associated with climate change. In addition, part of the budget is spent on
research concerning energy efficiency and renewable energy.
Table 5.2 – Division of budget within CIP
Specific program
Entrepreneurship and Innovation Program
Financial instruments
Enterprise Europe Network
Eco-innovation
ICT Policy Support Program
Intelligent Energy Europe Program
Total
Budget
Percentage
(x million)
€ 2.170
59,8%
€ .
30,3%
€ 32
8,8%
€ 65
17,9%
€ 730
20,1%
€ 730
20,1%
€ 3.630
100%
(Source: European Commission, 2010)
Most of the budget of CIP is being spent on the financial instruments to ease the
access to finance of SMEs. With the financial instruments the European Commission
is trying to tackle the market failure of the missing capital market for (risky) R&D
projects of SMEs. Further, the program is fostering the innovativeness of SMEs by
68
promoting ICT implementation and innovation related to socio-economic challenges
like energy and health. Also, financial support is provided for SMEs around these
themes. Finally, with the Enterprise Europe Network CIP is promoting cooperation
between companies and knowledge institutions across borders. It provides
information about opportunities for SMEs and in this way it tries to decrease the
degree of asymmetric information31. Interaction may lead to economies of scale, risk
sharing and positive knowledge spillovers spillovers. By cooperating, externalities
can be internalized within the R&D project. However, correcting the market failure
of a missing capital market remains the most important goal of the Competitiveness
and Innovation Framework Program.
5.3 – Empirical analysis
As mentioned in the previous paragraphs, especially FP7 is not very accessible for
SMEs. A high administrative burden and a low probability of success make SMEs
reluctant to participate in the 7th framework program. CIP in contrast especially
targets SMEs but faces the problem of a relatively small budget. Therefore, it is
interesting to look at whether or not there exist differences between Dutch SMEs
and large companies in participation in European government programs. To
examine this possible difference, a binary logistic regression is used. This because of
the fact the respective dependent variable is a dummy variable which takes the
value of 1 when a company is participating in an European government program. As
independent variables, off course variables which indicate whether or not a
company is characterized as a SME are included. In addition, control variables are
included to control for other company specific aspects which also can have its
impact on participation in government programs.
Models (1) and (2) give a first indication between the differences in participation in
European government programs between SMEs and large companies. It turns out
that SMEs indeed participate less in European programs compared to larger
companies. This can be seen of a confirmation that for SMEs participating in FP7 is
hard because of the high administrative burden and low probability of success. And
since FP7 is dominating CIP in terms of budget, this effect will dominate on
European level. No relevant difference between small and medium sized companies
can be noted. When controlling for other company specific factors, these results do
not change much. Still, SMEs tend to significantly participate less in European
programs and no noteworthy differences between small and medium sized
companies are present. From the control variables, only the dummy variable for
It informs SMEs about European legislation public funding opportunities (like FP7), private funding
opportunities, current trends, cooperation opportunities, available research. In this way, CIP is aiming
to decrease the degree of asymmetric information among SMEs about innovation policy, funding,
cooperation and available research.
31
69
cooperation has a positive and significant impact on participation in European
programs. However, this also could be the result of reverse causality since European
programs especially stimulate cooperation between companies. The other control
variables do not have a significant impact on participation in European programs.
Table 5.3 – Differences between SMEs and large companies in participation in
European government programs
(1)
(2)
(3)
(4)
Constant
-1,821***
SME
Small sized company
Medium sized company
-0,382***
-1,821***
-1,998***
-2,000***
-0,339***
-0,377***
-0,385***
-0,329**
-0,345**
Control variables
Manufacturing
-0,143
-0,143
International activities
-0,056
-0,055
Cooperation
-0,221*
-0,223*
R&D intensity
-0,001
-0,001
Dependent variable: Participation in national government programs (dummy)
Sample: all companies present in the Community Innovation Survey (9.947)
* Significant at 10% level, ** Significant at 5% level, ***Significant at 1% level
The results from table 5.3 have showed that SMEs participate significantly less in
European programs compared to large companies. But how about the Dutch SMEs
that do participate in these programs? Are they more innovative than the SMEs that
do not participate in European programs? European innovation programs namely
are aiming at correcting the market failures that restrain innnovation. Previous
paragraphs have shown that they particularly aim at promoting cooperation
between companies and correcting the capital market failure. As a result,
participating SMEs should be more innovative than SMEs that do not participate in
European programs. To see whether this is the case, a subsample from the CIS
dataset is used which captures all SMEs represented in the dataset, so large
companies are excluded. Simple linear regression is used to examine the differences
between SMEs that participate in Dutch innovation programs and SMEs that do not
participate in these programs. To check the robustness of the outcome, the same as
in chapter 4, two innovation indicators are used as dependent variable. Namely,
“R&D intensity” and “share of revenue from products new to the market”. The
results of the analysis are shown in tables 5.4 and 5.5.
70
Table 5.4 show that, with and without the use of control variables, participation in
European government programs has no significant impact on the R&D intensity of
Dutch SMEs. SMEs that participate in European programs tend to have a higher R&D
intensity, although the difference is not significant. So, first, SMEs tend to participate
significantly less in European programs and second, when SMEs do participate, this
leads to no significant increase in innovativeness. This is an indication that
European programs do not succeed in correcting the market failures present for
Dutch SMEs. When looking at the control variables, some characteristics of Dutch
SMEs do tend to have a significant impact on its R&D intensity. The same as in
chapter 4, manufacturing companies and companies that are part of a concern tend
to have a lower R&D intensity. In contrast, cooperating companies do have a higher
R&D intensity. Also participation in Dutch government programs leads to a higher
R&D intensity. European participation, however, does not. Other control variables
do not have a significant impact on a SME’s R&D intensity, for example no significant
difference can be found between small and medium sized companies.
Table 5.4 – Differences in R&D intensity between SMEs that do
participate in European government programs and SMEs that
do not participate in these programs
(1)
(2)
Constant
4,355***
6,121***
European government support
-1,252
Control variables:
National government
-6,879***
support
Both national and European
-6,623**
government support
Manufacturing
International activities
Cooperation
Company is part of concern
Small sized company
Dependent variable: R&D intensity
-1,725
-7,719***
-6,442**
-6,013***
-1,870
-3,504***
-3,768***
-0,895
Sample: all SMEs present in the Community Innovation
Survey (8.886)
* Significant at 10% level, ** Significant at 5% level,
***Significant at 1% level
R&D intensity is not significantly influenced by participation in European programs.
European instruments do not lead to significant higher investments in R&D. But
71
perhaps differences can be found in output indicators, like new introduced products
to the market. The effect of European programs on this output indicator is displayed
in table 5.5.
Again, no significant differences between Dutch SMEs that do participate and Dutch
SMEs that do not participate in European programs can be found. Both models, with
and without control variables, give this result. However, in terms of innovative
output the European programs tend to perform even worse. The programs tend to
have a negative impact on new introduced products, however not significant. In
contrast, international activities, cooperation and participation in national programs
have a significant positive effect on new introduced products. The table also shows
that small sized company tend to introduce relatively more new products compared
to medium sized companies. Again, manufacturing companies are found to be less
innovative than companies which are active within other sectors.
Table 5.5 – Differences in new product introduction between
SMEs that do participate in European government programs
and SMEs that do not participate in these programs
(1)
(2)
Constant
4,355***
-3,425***
European government support
-0,711
-0,862
Control variables:
National government
-5,122***
-4,829***
support
Both national and European
-2,625*
-2,026
government support
Manufacturing
-1,651***
International activities
-1,886***
Cooperation
-2,038***
Company is part of concern
-0,078
Small sized company
-1,326**
Dependent variable: share of revenue from products new to
the market
Sample: all SMEs present in the Community Innovation
Survey (8.886)
* Significant at 10% level, ** Significant at 5% level,
***Significant at 1% level
To conclude this section, in contrast with the national programs, European
programs do not have significant impact on the innovativeness of Dutch SMEs. Both
72
for input and output indicators, no significant differences can be found between
participating and not participating SMEs. One could say that European programs do
not increase the innovativeness of Dutch SMEs, but one should not forget the
possibility of reverse causality. It could be the case that less innovative SMEs tend to
participate more in European programs compared to more innovative firms. A form
of self-selection could be present.
5.3 – Conclusion
To foster innovation and correct market failures for SMEs related to innovation the
European Commission implements two programs which run from 2007-2013. The
Competitiveness and Innovation Framework Program (CIP) is specifically targeting
SMEs and mainly is trying to correct the market failure of the missing capital market
for R&D projects. In addition, it promotes cooperation between companies and
knowledge institutions across borders and provides information to decrease the
degree of asymmetric information. With this program, the European Commission is
reaching a large amount of SMEs (roughly 400.000).
Besides CIP, SMEs can also participate in the 7th Framework Program of the
European Commission which promotes mainly cooperation between companies,
knowledge institutions and researchers across Europe and creates good framework
conditions for individual researchers. Compared to CIP, FP7 is focusing more on
research compared to innovation. Therefore, this program is for a large amount
dominated by large companies and knowledge institutions. Within the cooperation
program (a specific program within FP7), the participation rate of Dutch SMEs is
slightly less than 15%. This is mainly caused by the fact that the administrative
burden is high and the probability of success is low. Therefore, participating in FP7
is too much trouble for SMEs. As a result, the 7th Framework Program does not
succeed in correcting the market failures concerned with innovation for most SMEs.
However, the fact that Dutch SMEs do participate (1.606 SMEs for the period 20072010) is indicating that for those companies, FP7 does generate added value.
Table 5.6 gives a good overview about the two European programs and which
market failures they aim to correct. The darker the colour green, the more important
the corresponding market failure is within the program. CIP is mainly focussing on
the capital market failure. And because CIP is supporting companies in every stage
of “their life” it is also supporting starting companies and companies that want to
commercialize new products. Therefore, also the market failures of entry barriers
and the missing product markets is reduced. In addition, international cooperation
is promoted, by an European network of advisors. These provide information about
current trends, cooperation opportunities and so on. As a result, the amount of
73
incomplete information among SMEs is reduced and cooperation is promoted.
Cooperation lead to risk sharing, economies of scale and positive knowledge
spillovers. Externalities can be internalized in this way, since negative externalities
can be shared and positive externalities remain within the project.
The lighter colours of the 7th Framework Program indicate that in most cases FP7 is
not successful in correcting the market failures relevant for SMEs. This is mainly
caused by the high administrative burden and the low probability of success for
SMEs. However, the SMEs that do participate are stimulated to cooperate abroad.
The same as with CIP, this will lead to risk sharing, economies of scale and positive
knowledge spillovers. These companies are supported financially, which makes it
less difficult to finance R&D projects.
Table 5.6 – European instruments and corresponding market
failures
Market failure
FP7
CIP
IPR-protection
Institutional
framework
Cooperation
International
cooperation
Capital market
Missing markets
Externalities
New product
market
Externalities
Competition
Market structure
Entry barriers
Incomplete
information
Consumer
rationality
74
As the table shows, the European programs especially aim at correcting the market
failures corresponding with international cooperation, incomplete information and
the missing capital market. In chapter 4 we have seen, that the national programs
also target these market failures. This can be an indication that these market failures
are restraining private investments in R&D the most. In contrast, the market failures
corresponding with cooperation with domestic parties, new product markets and
bounded consumer rationality are not addressed by the European innovation
instruments. The same holds for international property right protection, and market
failures that have to do with the market structure. However, these market failures
are addressed by other European legislation. European competition law is aiming to
ensure fair competition that will promote allocative, productive efficiency but
certainly also dynamic efficiency. In addition, competition law tries to prevent that
other companies raise entry barriers against new, innovative competitors. For the
case of international property rights protection, the European Union has set up
guidelines for the member states to ensure international property rights of
companies within the EU.
The empirical part showed that Dutch SMEs participate significantly less in
European innovation programs. This can be the result of the fact that FP7 is
dominating the European “toolbox” and is characterized by a high administrative
burden and a low probability of success. In addition, participating in European
innovation programs has no significant effect on the innovativeness of these
companies. The European programs therefore do not succeed in correcting the
market failures present for the Dutch SMEs. Next, the policy mix of European and
national measures will be assessed for the Dutch case.
75
6 – Analyzing the policy mix: The Dutch case
As described in chapter 4 and 5, for the case of the Netherlands, both the national
government and the European Union use policy measures that aim at stimulating
private innovation to a socially desirable level 32. This does not have to be a problem
when there exists sufficient interaction between both levels of government and the
two government levels aim at correcting different market failures for different
target groups. Then, the policy measures of the two government layers could be
characterized as complementary and could lead to synergies between government
policies which would increase its efficiency (Alesina, Angeloni and Etro, 2005).
Market failures present for SMEs will be better tackled in this way, which will most
likely lead to an increase in the innovativeness of smaller private companies.
However, also the possibility arises that both governments levels focus on
correcting the same market failures for similar groups of companies. In this case, the
policy measures become substitutes of each other and create no added value with
respect to each other. In the worst case, policy measures may even be conflicting
with each other. In this chapter, the complementary elements, the substitutable
elements and the missing elements and the weaknesses of the policy mix for the
Netherlands will be analyzed according to the theoretical framework in chapter 3.
This will be substantiated with an empirical analysis in paragraph 6.4.
6.1 – Complementary elements
When elements of national and European instruments are complementary, the
respective elements strengthen each other. When the relative costs of one program
decreases, not only participation in that program increases, but also within the
complementary program. This could enhance the possibilities of Dutch SMEs to
participate in R&D projects. As a result, companies become more innovative and
competitive. The complementary elements of the Dutch and European instruments
will be discussed below.
In the first place, the national and European programs complement each other in the
field of cooperation. The national programs are mainly focusing on cooperation
between domestic parties (IPCs, vouchers, Syntens and the innovation programs)
while the European programs are stimulating international cooperation between
parties (FP7 and CIP). Cooperation between companies, knowledge institutions and
researchers is important. Positive knowledge spillovers can arise, even as the
32
The same holds of course also for other member states
76
possibility of risk sharing and achieving economies of scale. Logically, national
government are not that willing to stimulate international projects, since part of the
gains from these projects spill over to other countries. However, international
cooperation between different actors within the innovation system is becoming
more and more important. The economy is becoming more and more globalized and
knowledge is not bounded by borders. In addition, emerging markets also become
more and more innovative and therefore competitive. Consequently, it is important
that parties in Europe join forces and bundle their strengths to remain competitive
to their foreign counterparts. So national and European focus on a different field of
cooperation and are in that way complementary. When the relative costs of
participating in national cooperation program decrease, participation in these
programs will increase. However, also participation in international cooperation
programs may increase. Some companies are reluctant to cooperate with other
companies and when they get acquainted with cooperating by participating in
national programs, they are also more likely to participate in international
programs. In addition, by participating in either of the programs, SMEs get familiar
with the regulation and administration that corresponds with the programs.
Participating in the complementary program than gets more “easy” which decreases
its relative costs. Also, by participating in national programs their network will
increase and the chance that they get in touch with international companies
increases. In this sense, the national innovation programs and the 7th Framework
Program are complementary. But also the 7th Framework Program and the national
program international innovation is complementary in the sense that FP7 is
stimulating cooperation within the European Union and international innovation
also promotes cooperation with countries outside the EU.
Secondly, the 7th Framework Program creates good framework condition for
European researchers. In addition, researchers are stimulated to involve in research
that is also of value of companies and specifically SMEs. As a result, the quality and
quantity of research increases which also has a positive effect for SMEs. Small and
medium sized companies are in this way more inclined to cooperate with
researchers and knowledge institutions. Consequently, the knowledge within SMEs
will increase which will increase their innovativeness. So, when more researchers
and knowledge institutions will participate in FP7 because of a decrease in relative
costs, eventually also SMEs will benefit.
Last, EG-Liason and Syntens are providing information for SMEs which want to
participate in European program. Since EG-Liason and Syntens are national
programs, these can be seen as complements of respectively the 7th framework
program, CIP and the national programs. By informing SMEs about their possibilities
to participate in national and/or European programs it wants to optimize their
innovative capacities. When it gets more easy to participate in either Syntes and EG-
77
Liason, SMEs will be more inclined to participate in these programs. As a result,
these companies will be more informed about the respective innovation programs
that fit their preferences and needs. Consequently, participation in these programs
will also increase. In addition, Syntens and EG-Liason also complement each other
because they are related to each other in the sense that they can redirect companies
to each other. When participation in Syntens increases, as a result of lower relative
costs, then it is also more likely that Syntens will redirect more companies to EGLiason.
Together, the complementary parts of the national and the European innovation
policy should strengthen each other and enlarge the possibilities of Dutch SMEs.
6.2 – Substitutable elements
Off course, beside complements, instruments also can be substitutes from each
other. When national and European programs target the same group of companies
and use the same measures companies can substitute one program for the other.
When the relative costs of one program are increasing, companies will substitute
this program for another program. Also, there is no use in participating in both
programs.
This is roughly the case for Eurostars, the program international innovation and the
7th Framework Program. Both programs aim at stimulating international
cooperation between companies. However, Eurostars specifically targets SMEs and
the 7th framework program is also accessible for larger companies. So, in this sense,
the programs are not a substitute for each other. SMEs that want to participate with
other SMEs across borders can participate in Eurostars and SMEs that also want to
participate with larger companies and knowledge institutions abroad can join FP7.
Theoretically, the programs would be complements from each other. Sadly, in
practice this turns out not to be the case. FP7 is not accessible for SMEs because of
the high administrative burden and low probability of success. For many SMEs
therefore it is not attractive to participate in this program. The practice shows that
SMEs substitute participation in FP7 for participation in Eurostars or in the program
international innovation. These are national instruments that are more accessible
for SMEs and more or less reach the same goal, promoting international
cooperation. The fact that the relative costs of participating in FP7 are high (high
administrative burden and low probability of success) results in the possibility that
SMEs substitute this program for a program like Eurostars. It must be noted that
there are Dutch SMEs that participate in FP7 successfully, but evaluations show that
Eurostars is received to be more successful and more easily accessible for SMEs
across Europe.
78
Other instruments that can be seen as substitutes from each other are the credit for
innovation (national instrument) and the financial instruments of CIP. When it
becomes less attractive to participate in for example the credit for innovation (the
credit decreases), companies will be more inclined to participate in financial
instruments of CIP. Both instruments aim at correcting the capital market failure in
providing capital for risky R&D projects. So, when a Dutch SMEs is in difficulty in
finding sufficient capital for its research and development, it can choose between a
national program and an European program. It would be better, when there was just
one program that would provide capital for risky R&D projects of SMEs. Than,
economies of scale could be reach and it would be more clear for companies. Now,
so many programs exists to boost innovation (national and European) that it is
sometimes hard for companies to keep it clear which program targets which
problem.
6.3 – Missing elements
One missing element of the policy mix for the Dutch case can be mentioned. The first
conflicting element is that both the national policy instruments and the European
policy instrument pay little attention to the market failure of the introduction of new
products to the market. Often, a product market for new, innovative products is
missing and consumers in the first place are reluctant to buy these products
(bounded consumer rationality). Therefore, the costs of introducing a new product
and get the market acquainted with the products are high. Products have to be finetuned to consumer’s needs and a marketing strategy has to be executed. Practice
shows that in some cases the costs of this process are often even higher of the costs
of the research and development process. Chapter 4 and 5 show that the Dutch and
European innovation instruments are especially focussing on lowering the costs of
research and development and less on the costs of commercializing of innovation.
Off course, it is important that innovations are commercialized. Otherwise, the
benefits of these innovations cannot be reaped and do not contribute to the
economic success of the company. More simple, when an innovation cannot be
commercialized, the innovation failed and the respective investment has to be
depreciated. Therefore, more attention is needed in the future for this part of the
innovation process.
6.4 – Empirical analysis
The empirical parts of the chapters four and five have showed that Dutch SMEs tend
to participate more in national programs compared to European programs. In
addition, national programs tend to have a positive effect on a SME’s innovativeness,
while for European programs no significant impact could be found. But this chapter
79
tries to answer a different question. Does the interaction between both programs
create added value? Is it beneficial for Dutch SMEs to participate in both national
and European programs? Apparently it does, since some fraction of the Dutch SMEs
participate in both programs, although a small fraction (1,3% of total SMEs
represented in the CIS dataset). For these SMEs participation in both programs is
beneficial, since otherwise they simply would not do so. But do there exist
differences with large companies in this sense? To examine this possible difference,
again, a probit regression model is used. This because of the fact the respective
dependent variable is a dummy variable which takes the value of 1 when a company
is participating in both programs. As independent variables, of course variables
which indicate whether or not a company is characterized as a SME are included. In
addition, control variables are included to control for other company specific
aspects which also can have its impact on participation in government programs.
Table 6.1 – Differences between SMEs and large companies in participation in both
government programs
(1)
(2)
(3)
(4)
Constant
-1,276***
SME
Small sized company
Medium sized company
-0,447***
-1,276***
-1,773***
-1,770***
-0,360***
-0,512***
-0,401***
-0,384***
-0,345***
Control variables
Manufacturing
-0,120
-0,120
International activities
-0,204**
-0,203**
Cooperation
-0,516*** -0,512***
R&D intensity
-0,002**
-0,002**
Dependent variable: Participation in national government programs (dummy)
Sample: all companies present in the Community Innovation Survey (9.947)
* Significant at 10% level, ** Significant at 5% level, ***Significant at 1% level
Table 6.1 shows that compared to large companies, Dutch SMEs tend to participate
significantly less in both government programs. Within the group of SMEs also
differences in participation can be found. Compared to medium sized companies,
small companies tend to participate even less in both government programs. Again,
this could be the result of the high administrative burden and low probability of
success of FP7 that dominates the European toolbox in the field of innovation policy.
In contrast, companies with international activities, companies that cooperate with
other parties and companies that have a high R&D intensity tend to participate
significantly more in both government programs. But in this case, this could be the
result of reverse causality since both government programs have the goal to
80
increase (international) cooperation between companies and its innovation
investments. But since it concerns control variables in this case, no further
investigation is necessary.
Table 6.2 – Differences in R&D intensity between SMEs that do
participate both government programs and SMEs that do not
participate in both programs
(1)
(2)
Constant
4,355***
6,121***
Both national and European
government support
-6,623**
Control variables:
National government
-6,879***
support
European government
-1,252
support
Manufacturing
International activities
Cooperation
Company is part of concern
Small sized company
Dependent variable: R&D intensity
-6,442**
-7,719***
-1,725
-6,013***
-1,870
-3,504***
-3,768***
-0,895
Sample: all SMEs present in the Community Innovation
Survey (8.886)
* Significant at 10% level, ** Significant at 5% level,
***Significant at 1% level
Now it appears that Dutch SMEs tend to participate less in both national and
European government programs compared to large companies, it is interesting to
look at the effect of participation in both programs on the innovativeness of Dutch
SMEs. The same as in chapter 4 and 5, two innovation indicators are used to
measure a company’s innovativeness. One input indicator (R&D intensity) and one
output indicator (share of revenue from products new to the market). Simple linear
regression is used with the innovation indicators as dependent variables. As
independent variables, the dummy variables of participation in government
programs are included and other control variables. To be able to only capture the
effect of this participation for SMEs, a subsample is used which excludes all large
companies from the sample. 8.886 Dutch SMEs are left within the subsample, 1.061
large companies are excluded. The results are shown in table 6.2 and 6.3.
81
It is good to see that Dutch SMEs that participate in both government programs tend
to have a significant higher R&D intensity compared to SMEs that do not participate
in any government program. However, compared to companies that only participate
in national government programs, SMEs that participate in both government
programs have a lower R&D intensity. So, in terms of R&D intensity, no added value
is created by participating in an European program when a company is already
participating in a national program. The other way around this is the case. When a
company is participating in an European program, no significant increase in R&D
intensity is to be expected, but when this company decides also to join national
programs, R&D intensity is expected to rise. But this cannot be the result of
complementary since then, the R&D intensity of companies that participate in both
programs should be higher than the R&D intensity of companies that only
participate in national programs. The added value of national programs over
European programs is only generated because of the fact that European programs
do not have a significant impact on a company’s innovativeness. In addition, also the
variables “cooperation” and “company is part of concern” have a significant effect on
a company’s R&D intensity.
The same as in chapter 4 and 5, also the impact of government programs on an
output indicator is examined. Table 6.3 shows the results of this analysis.
Also this table shows that companies that participate in both government programs
are more innovative than companies that do not participate in any government
program. However, when controlling for other company specific factors, like is done
in model (2), this difference is not significant. So, companies that do participate in
both government program do not introduce significantly more new products to the
market than companies that do not participate in any government programs. In
contrast, participating in only national programs does lead to significantly more
introduced products. So, in terms of new introduced product as output indicator,
participating in the European program when you are already participating in the
national programs has no added value. Companies tend to not increase the
introduction of new products. In contrast, the table shows a reverse effect, relatively
less new products are introduced when participating in both programs. However,
the table shows that companies better participate in both programs than
participating only in the European program, than the introduction rate of new
products is even lower than the rate of companies that do not participate in any
program at all.
82
Table 6.3 – Differences in new product introduction between
SMEs that do participate in both government programs and
SMEs that do not participate in both programs
(1)
(2)
Constant
-4,355***
-3,425***
Both national and European
government support
-2,625*
-2,026
Control variables:
National government
-5,122***
-4,829***
support
European government
-0,711
-0,862
support
Manufacturing
-1,651***
International activities
-1,886***
Cooperation
-2,038***
Company is part of concern
-0,078
Small sized company
-1,326**
Dependent variable: share of revenue from products new to
the market
Sample: all SMEs present in the Community Innovation
Survey (8.886)
* Significant at 10% level, ** Significant at 5% level,
***Significant at 1% level
To conclude, Dutch SMEs participate significantly less in both programs compared
to larger companies. This is mainly caused by the fact that European programs are
not very accessible for SMEs because of the high administrative burden and low
probability of success. However, table 6.2 and 6.3 shows that participating in both
programs does not create added value for Dutch SMEs. When added value would be
generated, the innovativeness of SMEs that would participate in both programs
would be higher than the innovativeness of SMEs that participate in only one
program or none programs. However, the innovativeness (both in terms of input
and output indicators) of SMEs that only participate in national programs is higher
than the innovativeness of SMEs that participate in both programs. This is an
indication that the Dutch and European innovation programs are not entirely
complementary. When this would be the case, synergies would arise and added
value was generated. However, the tables indicate otherwise. This is especially due
to the low impact of participating in the European programs on the innovativeness
of the Dutch SMEs.
83
6.5 – Conclusion
This chapter showed that the policy mix for the Dutch case shows some
complementary elements, some substitutable elements and some an important
missing element. European programs are complementary to Dutch programs in the
field of promoting cooperation. European programs focus on international
cooperation and the Dutch programs focus mainly on national cooperation. Also
Syntens and EG-Liason are complementary. These complementary elements should
enlarge the innovativeness of companies that participate both in the Dutch
programs and in the European programs. But, also substitutable and missing
elements of the policy mix are present. FP7 has high administrative burden and a
low probability of success for Dutch SMEs and therefore has little impact on the
innovativeness of Dutch SMEs. Therefore, Dutch SMEs in practice often choose to
participate in other national programs (like Eurostars). So, FP7 is substitutable for
national programs. Also the financial instruments of the national and European
innovation policy are to some extent substitutable. Concerning the missing element,
both the national and European policy pay little attention to the market failure of the
missing product market.
The empirical analyses in paragraph 6.4 show some interesting findings. In the first
place, Dutch SMEs participate significantly less in both programs compared to large
company. And in the second place, when SMEs do participate in both programs, the
innovativeness of these SMEs is smaller than the innovativeness of companies that
only participate in the Dutch programs. No added value over the national programs
is generated by participating in the European programs too. In this sense, the
programs cannot be seen as complements. Next, policy recommendations for
respectively the Dutch government and the European will be presented.
84
7 – Policy recommendations
In the previous chapters, the Dutch and European instruments that aims at
promoting R&D investments of Dutch SMEs are discussed. Additionally, the
complementarity of these instruments has been assessed. This assessment showed
some serious weaknesses in the policy mix for the Dutch case. Three major flaws are
present, which should be improved in the future to promote the innovativeness of
the Dutch SMEs.
First, neither the national nor the European policy instruments pay attention to the
market failure of the missing product market for new introduced products. In the
first place, SMEs (and also other companies) innovate to become more profitably
and to be able to reap the benefits of innovating, products have to be
commercialized. The assessment of the Dutch and European instruments showed
that especially costs associated with research and development are lowered by
participation in government programs. However, the costs associated with
commercialization of products can also be a great barrier to participate in
innovation activities. Therefore, new financial instruments should be introduced to
lower the costs of commercializing products, or existing financial instruments would
have to be adjusted in a way that also the costs of commercializing products is
lowered. This would preferably be arranged on the national level, so that each
government can design the respective instruments towards its own preferences.
Second, in the future the European Union should focus more on generic measures
and should entrust the specific policy measures to the individual member states. The
7th Framework Program therefore should not focus on specific sectors but should
promote international cooperation of companies for all sectors. Specific national
programs that target “strong” sectors within an economy, should also allow
international cooperation with foreign “strong” sectors. Specific policy instruments
that target specific sectors should be entrusted to national governments so that they
can design the policy measures towards the preferences of the respective economy.
The European Union should focus on generic measures that improve the
institutional structure and the framework conditions that ease innovation. Examples
are, legislation that secure property rights and promote completion, improving the
functioning of the single European market (for example labour mobility of
researchers) etc. Also, generic instruments that have a clear international character
or instruments that may benefit from economies of scale can be arranged on
European level. One could think of measures that promote cooperation within
85
European borders and financial instruments that benefit from the large European
capital market.
Third, while currently especially the 7th Framework Program can be characterized
as too specific for the European level, another problem arises with respect to this
program. The administrative burden is way too high for SMEs which is causing that
the program currently is dominated by large companies and knowledge institutions.
In the future, the European program should improve its accessibility for SMEs by
decreasing the administrative burden. Making the program more generic like
suggested above should already help, since less strict requirements would be
necessary to participate in the program. This is particularly important to reach SMEs
and increase their innovativeness as well.
86
8 – Conclusion
Innovations of companies nowadays more and more determine economic growth in
western economies. However, market failures are present that hinder companies
from participating in innovative activities. A special group of companies in this
context are SMEs. Small and medium sized companies are responsible for roughly
60% of European employment and therefore play a crucial role in the development
of economic growth. But empirical analysis shows that compared to large companies
(with more than 250 employees) SMEs participate significantly less in R&D
activities.
For SMEs, different types of market failures are present that restrain innovations.
Government intervention could (partly) correct these market failures which would
lead to more innovation activities of SMEs, and consequently more economic growth
and an increase in welfare. However, this is only the case when the benefits of
government intervention are larger than the costs of intervention.
This thesis focuses on the Netherlands. For the Dutch case, policy is designed both
on the national level and on the European level. Both government layers have
designed generic policy instruments and specific policy instruments that aim at
correcting market failures and therefore should promote R&D activities of SMEs.
Empirical analysis shows that SMEs significantly participate more in the Dutch
innovation programs compared to larger companies. This could be the result of the
fact that the Dutch innovation policy consists largely of generic measures. Empirical
results indicate that participation in national programs significantly increases the
innovativeness of Dutch SMEs. Companies that participate in national innovation
programs have a higher R&D intensity and introduce relatively many new products
to the market. However, important to note is that this also could be the result of selfselection and further research is necessary. Also, further research is necessary by
including more control variables and by replacing the dummy variables for
participation in government programs by absolute values.
Regarding European policy measures empirical analysis shows that Dutch SMEs
participate significantly less in European programs compared to its larger
counterpart. This effect is caused by the high administrative burden for companies
that participate in European programs and the low probability of success.
Participating therefore can be too costly for SMEs. In contrast with the national
87
programs, small and medium sized companies that do participate in European
programs are not more innovative than companies that do not participate in such
programs. This result is remarkable since more and more people suggest that
innovation policy should be designed on European level instead. However, empirical
analysis shows that this may be not a good idea.
When looking at the policy mix of national and European measures some important
things can be noticed. Some market failures are not addressed by the policy
measures. The market failure of missing product markets for new products is not
tackled by policy measures. Also substitutable elements are present within the
policy mix which is not desirable. European innovation policy in the future should
become more generic and easy accessible for companies. It should create decent
framework conditions and a good business environment. Hereafter, national
governments should have the opportunity to design its policy towards the specific
preferences of its companies. Currently, the European innovation policy is too
specific and is in some sense conflicting with national instruments because some
programs can be classified as substitutes from one another. In addition, because of
the fact that policy is designed for 27 member states, European policy measures can
not be in line with preferences of all the respective member states. This is endorsed
by the theory of Alesina et al. and is confirmed by the empirical analysis. The
empirical analysis showed that national policy measures create more added value
for SMEs compared to European measures. National policy instruments are more in
line with preferences of Dutch SMEs. Even SMEs that participate both in European
and national programs are less innovative than SMEs that only participate in
national programs.
This brings me to the following policy recommendation. European policy
instruments in the future should become more generic and should focus on creating
decent framework conditions for innovative SMEs. Nowadays, European measures
are too specific and have a high administrative burden. Specific policy measures
should be designed on a national level. This is in contrast with the opinion of many
people nowadays who want to design innovation policy more and more on an
European level. Also, it is important that the market failure of missing product
markets for new introduced products is addressed. Economic success depends on
successful commercialization of innovations.
88
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93
Appendix A1 – Explanation of CIS Dataset
Community Innovation Survey dataset
9947 companies
8886 SMEs
2972 innovative companies
Table A.1 - Explanation of variables incorporated in this thesis
33
Variable
SME
Type
Dummy
Small sized company
Dummy
Medium sized
company
Dummy
Manufacturing
Dummy
International activities
Dummy
Cooperation
Dummy
Company is part of
concern
Turnover
National government
support
Dummy
European government
support
Dummy
Both national and
European government
support
Dummy
Continuous
Dummy
Explanation
1 = ‘Company has between 10-25033
employees’
0 = ‘Otherwise’
1 = ‘Company has between 10-50
employees’
0 = ‘Otherwise’
1 = ‘Company has between 50-250
employees’
0 = ‘Otherwise’
1 = ‘Company is active within the sector
manufacturing’
0 = ‘Otherwise’
1 = ‘Company is participating in
international activities’
0 = ‘Otherwise’
1 = ‘Company is cooperating with other
parties to innovate’
0 = ‘Otherwise’
1 = ‘Company is part of a concern’
0 = ‘Otherwise’
The company’s turnover in 2006
1 = ‘Company is participating in national
innovation programs and receives
financial support’
0 = ‘Otherwise’
1 = ‘Company is participating in European
innovation programs and receives
financial support’
0 = ‘Otherwise’
1 = ‘Company is participating in both
national and European innovation
programs and receives financial support’
0 = ‘Otherwise’
Micro sized companies (companies with 1-10 employees) are not incorporated in the Community Innovation Survey, since response
from these companies is often very low.
94
Participation in
Syntens
Dummy
R&D intensity
Continuous
Share of revenue from
products new to the
market
Continuous
1 = ‘Company is receiving information
w.r.t. innovative activities from the
government’
0 = ‘Otherwise’
(Input) innovation indicator
Total R&D manyears / Total employees
(Output) innovation indicator
Percentage of total revenue that is the
result of new introduced products to the
market
95