Is effective the European SME Instrument to support the innovation?

Small and medium-sized enterprises (SMEs) account for 99 % of the companies operating in the EU non-financial business sector, 66 % of total employment and 57 % of value-added. If the EU wants to establish as an influential area able to compete against the US and China, it is essential that it should strive to generate a business network with high added value based on Research, Development and above all Innovation, which is where there are the highest weaknesses in the European Union.

Under the Horizon 2020 research framework programme, European Commission set up the SME Instrument to support innovation in SMEs in the EU and 16 associated countries with an overall budget of €3 billion for the period 2014-2020. Its objective was to develop and capitalise on the potential of SMEs by filling the gap in funding for early stage high-risk projects and increasing private-sector commercialisation of research results. The instrument comprises three not sequential phases to provide grants to high-potential companies to either support them:

  • in developing a feasibility study (up to €50 000 in Phase 1)
  • in conducting research and development and market-testing (€2.5 million in Phase 2)
  • providing assistance through coaching, mentoring or other business acceleration services (Phase 3).

The overall budget of the SME Instrument was distributed over these three phases as follows: approximately 7% for Phase 1, 88% for Phase 2 and 2% for Phase 3, with the remaining 3% being invested in other expenditures (see Figure 1).

How has this SME Instrument worked? Has it been effective?

The European Court of Auditors has developed a performance auditing of the SME Instrument to evaluate if this programme is effective and innovative to support to SMEs in developing their innovation projects.

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Participation in the SME Instrument varies markedly between countries. This is partly due to external factors but also because of the varying levels of support provided by National Contact Points and limitations in the European Commission’s marketing and communication activities. Graph 1 shows the distribution of SME Instrument funding per Member State in absolute terms. Spain is the country that has received more funding, a total amount of €332.5 million, and followed by Italy with a total funding of €179.1 million.

However, when we analyse the distribution of the SMEs Instrument funding by the number of SMEs, GDP and population of the countries (Graphs 2, 3 and 4), Denmark, Finland and Ireland are the Member States that receive more funding by number of SMEs, GDP and population (more than 19 Euro per capita). Spain drops to eighth position with 124 Euros per SME.

Graphs 1, 2, 3 and 4 show that the participation in the SME Instrument varies markedly between countries. This is partly due to the innovation ecosystem and number of SMEs in the country, the existence of a national strategy on the SME Instrument, the effort made to promote the SME Instrument; and the support provided by the Commission’s marketing and communication activities -National Contact Points (NCPs) and the Enterprise Europe Network (EEN)-.

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Differences in success rates between countries are partly explained by existing variation in the levels of innovation. Graph 5 shows a strong correlation between success rates in the SME Instrument and the European Innovation Scoreboard Summary Innovation Index. Among the highest values of both variables, they are Denmark, Austria, Ireland and Sweden.

A common characteristic of participant countries with high participation and success rates in the instrument is the presence of an active national innovation agency (NIA), which acts as intermediary with the innovative SMEs. Conversely, in the three Member States with the lowest level of participation (compared to the number of SMEs in the country) and the lowest success rates, there is no NIA (Romania, Bulgaria and Slovakia).

The performance auditing of the SME Instrument allows verifying that this programme provided effective support to SMEs in developing their innovation projects and that having the EU branding that comes from receiving EU support helps companies to attract additional investment. In fact, Phase 1 of the instrument dedicated to support feasibility studies provides effective support, thanks to its simple and fast selection process, the EU branding, and access it gives to business acceleration services. However, it imposes disproportionately high administrative costs on the Commission’s administration and its relevance is diminished in countries where similar programmes already exist.

Phase 2 of the instrument, the grants to innovation projects have been also very effective, providing a higher level of support with the aim of bringing the innovation to market, enjoys the same positive outcomes as Phase 1 and also helps SMEs in raising additional investment and offers a higher business orientation than the alternative national programme. Graph 6 shows the average investment raised per Phase 2 beneficiary after receiving funding of the SME Instrument, with significant differences among participating countries. Beneficiaries in the north-west of Europe manage to raise more private resources than SMEs in the south and east. Such as Finland which is the country that more average investment raised per beneficiary (€7.5 million), following by Netherlands, Germany and the United Kingdom. However, in countries as Poland, Belgium, Italy, Denmark, Norway, Spain or Iceland, the potential of innovation projects have not been fully exploited, because the projects have managed to raise less than €1 million of additional average investment.

In order to evaluate the possible risk of technological loss for the EU, it is relevant to analyse the flows of additional investments above €10 million to beneficiary countries, broken down by country of origin. Graph 7 shows that of the €1.8 billion in additional investment raised by Phase 2 beneficiaries, approximately €400 million comes from investors headquartered in the United States and €181 million from investors in China. The largest single investor in Phase 2 beneficiaries is based in the United States, and three of the five biggest investments (above €50 million) are from investors outside the EU. This predominance in raising non-EU foreign investment shows that the maturity of the capital market affects the growth of the beneficiaries and at the same time questions the effectiveness of the SME Instrument, whose main objective was to improve innovation and technological capacity in the EU area, compared to the two blocks of competitors, such as the US and China.

Finally, Phase 3 that includes the coaching and business acceleration services has the potential to amplify effects of the instrument but, having been launched late, are not sufficiently visible and only a small share of SMEs made use of the services. The resources allocated are limited and the services could be more tailor made and better target the demand side.

Performance audits are very useful tools for achieving improvements in public management, making better use of public resources. By reviewing ex-post the results of public policies not only under economy and efficiency principles, but also effectiveness, it is possible to introduce improvements in the design of programmes to make public policies more effective. In that sense the audit of SME Instrument has allowed introduced improvements in the new EIC Accelerator programme of Horizon Europe 2020, substitute for the SME Instrument. The main aim consists on facilitating the consolidation of these innovations and technologies within the European Union area. As the majority of beneficiaries still need additional financing to support their innovative endeavours and bring their projects to market, in the new programme the Commission creates synergies with other EU-backed financial instruments, and the opportunities for cooperation with national promotion institutions are exploited, in order to manage additional investments, trying they come mostly from the EU countries, avoiding that innovation will be acquired by investors from non-EU countries.

Innovation is the only way for the EU to maintain a strong, sustainable and competitive economy. And after the Coronavirus pandemic, it is even more relevant Europe supports a knowledge and innovation-based economy to get a strong, sustainable and competitive recovery.

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