Author Archives: Margaret Pesuit

The Smart Specialisation Strategy and Economic Transformation in Europe

– prepared by Sandor Richter, WIIW

The Smart Specialisation Strategy (S3) is an integrated, place-based agenda for economic transformation, which provides policy support on key national/regional priorities, builds on each country’s or region’s strengths, competitive advantages and potential for excellence, supports innovation, gets stakeholders fully involved, is evidence-based and includes sound monitoring and evaluation systems. S3 policy mixes are expected to include policy tools with both a direct and indirect contribution to S3 goals and to adopt a wide approach for the policy mix across policy domains and governance levels; to scrutinize interactions between the policy mix components and identify a variety of sources of tension among the tools; and bring in an outward-looking dimension while designing the polices, treating the region as a local node in global networks.

Social innovations are embedded in basic cultural patterns and processes of social change. They depend on historical, regional, and political conditions. Research results suggest that governments are both a driver and a barrier for social innovations. Though many practices of social innovation exist, research is lagging behind; a theory on social innovation is still missing. Conceptually, social innovations are situated between private and public sector innovations but social innovations as a concept can legitimize socially oriented and solidarity-based political economy. Some of the public sector innovation falls into the category of social innovation. The European Public Sector Innovation Scoreboard (EPSIS) is a knowledge sharing tool that presents good practices and is a kind of award for the countries placed at the top of the list.

The European Commission has emphasized the crucial role of social dialogue and the quality of industrial relations as centrepieces of the European social model. Despite this, the social partners’ involvement in implementing the Innovation Union has not been investigated so far. Literature on the involvement of the social partners in the innovation union is scarce or almost non-existent and Commitment 28, related to the consultation of social partners on the interaction between the knowledge economy and the labour market, is still in the early stage of implementation.

Innovation and Access to Finance

– prepared by Michele Cincera, ULB, Solvay-iCite and Anabela Santos, ULB, Solvay-iCite

Access to Finance is a key driver in the creation (Cassar, 2004; Popov and Roosenboom, 2013; Kim et al. 2016), survival (Tsoukas, 2011) and growth (Rahaman, 2011) process of firms, particularly for small businesses (Beck and Demirguc-Kunt, 2006) and innovative firms (Lee et al., 2015). Small and innovative firms have more constraints and difficulties when they try to access financing, because they tend to have riskier projects and business models (Lee et al., 2015). Since access to finance is important for these firms’ activities, it can consequently foster economic growth (Kim et al., 2016) and positively influence innovation (Wang, 2014; Brown et al., 2009). Furthermore, it has been demonstrated that innovation has a positive impact on economic growth (see e.g.  Hasan and Tucci, 2010; Galindo and Méndez, 2014).

Promoting Research and Development (R&D) activities is the main goal of the EU 2020 Strategy in order to achieve a level of total (public and private) R&D spending of at least 3% of GDP. The Innovation Union is one of the seven flagship initiatives of the EU 2020 Strategy, which has the following aims: to improve access to finance for R&D; to get innovative ideas to market; and to ensure growth and jobs (European Commission, 2014b). This initiative is divided into 34 commitments and WP3’s first deliverable focuses on identifying and explaining the main mechanisms related to commitments 10 to 13. To this end, a report with the background theory and literature review of ’Innovation, Access to Finance and SMEs’ was prepared. On the other hand, another task was to collect several data indicators linked to working package thematics. This first step has provided us with all the instruments and knowledge in order to start the second phase of the project: assessing the impact of enhancing access to finance for innovation activities (commitments 10 to 13).

More than 80 scientific articles related to the present-day working package thematics, i.e. innovation and access to finance, were retrieved from several electronic platforms, such as, ScienceDirect, SpringerLink, Taylor & Francis, Wiley Online Library, JSTOR, EconLit and Google Scholar. We have selected a range of papers based on keywords such as innovation, finance, R&D, SMEs, venture capital, business angels, matching, cross-border and state aid. While priority has been given to studies focusing on Europe, research based on other regions and countries in the world has also been assessed.

More than 30 indicators were collected in order to assess the impact of ‘access to finance’ in Innovation. The sources of these data were: i) the European Venture Capital Association, ii) the European Investment Bank, iii) the European Commission, iv) the European Central Bank, v) the World Bank, vi) Eurostat, vii) the World Economic Forum, viii) the Damodaran website, and ix) the European Trade Association for Business Angels, Seed Funds and Early Stage Market Players.

A review of current literature on the subject revealed some very interesting challenges. According to the Community Innovation Survey (CIS) and the Survey on the Access to Finance of Enterprises (SAFE), ‘access to finance’ is one of the top five main obstacles of EU innovative enterprises. In addition, innovative SMEs are more likely to apply for funding than other firms, yet have less access to funding (Lee et al., 2015). According to the European Commission, financial markets and financial institutions are traditionally reluctant to invest in R&D projects, because they have a higher uncertainty/risk, compared to more traditional business projects. When financial markets don’t work properly, government intervention is needed in order to close the market gaps in investing in innovation. Under the seventh Framework Program (FP7), the European Commission launched two financial debt instruments, i.e. the Risk-Sharing Facility Financing (RSFF) and Risk Sharing Instrument (RSI) in order to help firms with high-risk projects to have access to bank loans.

Aside from debt financing instruments, innovative firms can use private sources or apply to Venture Capital (VC) or Business Angels (BA) investors’ funds. The presence of VC firms has a positive impact on growth (Davila, Foster and Gupta, 2003; Paglia and Harjoto, 2014) and in company size (Colombo and Grilli, 2005), measured by the number of employees (increase in jobs). However, the duration of this impact is brief (Paglia and Harjoto, 2014). The presence of VCs or PEs seems to enhance productivity (value added per employee) but only in the short term (year of VC entry) (Capizzi et al., 2011:224). Some authors (Engel and Keilbach, 2007; Capizzi et al., 2011; Guo and Jiang, 2013) also found evidence that VCs do not improve innovation. Indeed, after a VC investment, the difference between venture-funded and non-venture-funded firms in the probability that they will apply for at least one patent is insignificant (Engel and Keilbach, 2007). Some explanations could be that VCs seem to focus on the commercialization of existing innovations and growth of the firm (Engel and Keilbach, 2007) or their implicit aim to consolidate the firms’ results (Capizzi et al., 2011).

Business Angels also played an important role in financing entrepreneurial businesses when banks and venture capitalists reduced their levels of investments (Mason and Harrison, 2015). Business Angels (BA) and Venture Capitalists (VC) can be complementary as well as competitors (Hellman and Thiele, 2015). On the one hand, BAs need VCs to provide the follow-on funding of their company and VCs need Business Angels for their own deal flows. However, when at the later stage the VCs no longer need the BAs to provide the investment funding, they become competitors (Hellman and Thiele, 2015). Business Angels and early stage VCs have a similar impact on the innovation rate of supported firms, as measured by patent applications. However, regarding their success in the commercialization phase, the impact of VCs is higher compared to that of Business Angels (Dutta and Folta, 2016).

To enhance access to finance, matching both the demand (entrepreneurs) and the supply (investors) sides is very important, because entities such as venture capitalists are not equally distributed among European regions. Networking of financial intermediaries could mitigate the effects of distance in cross-border venture capital (Jääskeläinen and Maula, 2014). In addition, foreign VCs appear to add more value to firms than domestic VCs after the initial investment (Guo and Jiang, 2013). Another way to enhance access to finance and foster innovation is through public support to R&D activities (see e.g. Falk, 2007; Un and Montoro-Sanchez, 2010; Afcha and López, 2014; Radas et al., 2015). However, Antolín-López et al. (2015) found that some instruments are more effective than others in fostering product innovation, in function of the firm’s state of maturity.

 

Set out an EIT strategic agenda

– prepared by Adam Karbowski, SGH-WERI

The review of relevant theoretical and empirical literature suggests that collaboration (coordinated by EIT actions) between higher education and research institutions and industry (business firms) enhances innovation performance in Europe. The EIT actions are expected to appropriately address European knowledge policy concerns, i.e. (i) a limited capacity to convert knowledge into commercial opportunities, (ii) difficulties in promoting an innovation culture in research and education, (iii) difficulties in developing critical masses of resources in innovation and (iv) difficulties in rewarding excellence in research and education. However, European policy-makers and researchers should bear in mind that potential tensions resulting from the inappropriate implementation of the EIT agenda, i.e. tensions occurring within the knowledge triangle (tensions (1) between education and innovation, (2) between education and research and (3) between research and innovation), as well as the risks associated with industry-university-research collaboration. This review paper allowed, among other things, the identification of the fundamental dimensions of EIT impact on innovation in Europe, i.e. (1) the impact of EIT actions on European industry-university-research collaboration, (2) benefits from creating in Europe effective innovation networks and (3) the impact of EIT actions on solving grand societal challenges.

Strength, science base for policy making through JRC; Forum on FLA

– prepared by Marzenna Anna Weresa, SGH-WERI

JRC and EFFLA have been committed by the EU Member States in the Innovation Union strategy in order to strengthen a science base for policy-making. Therefore, the main research questions asked in the impact analysis of commitment 8 was: what is the theoretical framework for assessing the impact of science-based policies?

This analysis shows that effective policy development requires a high quality and effective system of scientific policy advice as well as appropriate use of evidence and advice by policy makers.  There are at least two strands of scientific advice that can improve policy making. The first one is related to solving current economic and societal problems, and is often referred to as evidence-based policy. The second one is foresight, which is aimed at foreseeing future development trends, identifying future problems and addressing them with appropriate policy tools. Both strands can viewed as broad categories of science-based policy.  Furthermore, there is a growing recognition in the literature that identifying solutions to policy challenges often requires research that goes beyond one discipline. In such cases, a multidisciplinary or interdisciplinary approach to science-based policy is needed.

The most interesting findings of the literature review were as follows:

  • The theory of public policy underlines the following factors that can determine the impact of science-based policies on innovation:
    • Content of scientific input (quality of evidence and its relevance),
    • The appropriate use of scientific evidence and rationality of its application,
    • The organisational aspects of the policy advice process: the stage of the policy cycle in which scientific input is used and policy models — the scientific interface, the size, type and power of the scientific advisory body and the nature of the advisory body mandate.
  • A majority of scholars agree that there is no linear relationship between research results and policy outcomes. Therefore, the role of science in policy making and the impact on innovation and competitiveness should be based on the assumption of non-linear interrelationships between them.

Ensuring stronger involvement of SMEs in future EU R&I programmes

– prepared by Valentina Vučković, EIZ, EFZG and Nevenka Čučković, EIZ, IRMO

Commitment 7’s economic rationale is to ensure an integrated EU funding scheme tailored to the innovation needs of SMEs, in order to limit market failure in access to finance. The literature review focuses on examining and summarising the empirical and theoretical foundations and rationale for increased public funding through the EU R&D programmes targeted specifically to SMEs. We survey the results of available empirical studies which used both econometric and qualitative data analyses and examine their evidence and outcomes which point towards statistically significant and positive direct and indirect (dynamic) impacts on the level of innovation activities in SMEs in EU Member States. Part of the review focuses on assessing the impact of FP7 and Horizon 2020 programme funding on innovation in SMEs. The literature review examined four channels of potential impacts on SMEs: 1) Participation of SMEs in innovation investments; 2) Knowledge spillovers; 3) Innovation production and 4) Innovation performance.

The most interesting findings were as follows:

  • The empirical evidence points towards significant positive effects of participation in EU-funded programs on incentivising the innovation activities and performance of SMEs;
  • The SMEs, especially fast growing ones, are dynamic agents of change and are both important innovation drivers as well as conduits for knowledge spillovers;
  • The results of a number of empirical studies demonstrate that SMEs that participated in EU-funded projects delivered a substantial number of innovations, especially in the later stages of the projects;
  • Participation in these projects is beneficial for advancing innovation and commercialisation activities, knowledge spillovers and collaboration, as well as for improving the technological and economic performance and the efficiency of recipient SMEs.

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