Consultation on Next EU Strategic Work Programme 2016-2017 iii Executive Summary Small and medium enterprises (SMES) are vital to the European economy and a key focus
but also service and other sectors involved in organisational and market innovation (e g. new business models). The Innovation Environment is Changing
and SMES Must Adapt SMES'ability to respond to global challenges and shorter-term market trends is influenced by factors affecting the wider innovation environment.
These include: Internationalisation of innovation, with large companies organising their innovation activities on a global basis and fierce competition for the best talent and resources.
New technologies and business models mean that even micro businesses are able to operate effectively in international markets without the scale
and infrastructure needed in the past. Increasingly competitive business environment, driven by technological advances, shorter innovation cycles and globalisation.
EU initiatives have to reflect these conditions and offer greater flexibility for SMES. Open innovation offers major opportunities for SMES,
but they face particular issues and challenges in adapting to the new models. The emergence of new patterns of competition and collaboration based on more open and customer-centric approaches.
Innovation-driven SMES engage in innovation-related projects of different types and for many different reasons.
Opportunities to improve the innovation environment here are addressed in our recommendations below. 3) Business renewal in SMES taking risky business ideas based on novel business models, technology-based inventions, service models
Phase 2 funding under the SME Instrument raises important, as yet unresolved, issues for both SME applicants (who may face major liquidity constraints),
In addition, we highlight the key role of communications in attracting the right kind of applicants and evaluators,
Rec 4. 1) b. Incentivise private funding sources to provide financing facilities to overcome the liquidity gap constraints likely to be experienced by applicants receiving Phase 2 funding.
a communications campaign; and a special expert panel to oversee the process. Rec 4. 5) f. Develop
and implement a communications strategy and professionalized communications campaign for the SME Instrument that enhances the programme's reputation for quality.
Rec 4. 6) g. Engage and collaborate with national innovation agencies or equivalent so as to improve the quality of applications.
Rec 5. 1) b. Experimenting with European Sandboxes novel value chain-based approaches that provide innovation-driven SMES with opportunities to experiment with new solutions at European scale in a controlled manner.
and target marketing and communications efforts to draw them into collaborative Horizon 2020 projects. Rec 6. 1) b. Pursuing a more bottom-up approach to calls under the SME Instrument
Rec 6. 5) 4) Tailor communications and procedures to the needs of SMES. Despite the efforts made to simplify access and procedures,
The communication and‘marketing'of H2020 innovation support measures targeting the SME sector should be tailored to the needs and special business environment of SMES.
a. Consolidating into one administrative unit for instance EASME the leadership for practical programme communications for all Horizon 2020 opportunities for SMES
Consultation on Next EU Strategic Work Programme 2016-2017 1 1. Introduction Small and medium enterprises (SMES) are vital to the European economy and a key focus
or profit cited as the economic impact. So the picture that emerges from FP7 is of SMES as passengers in somebody else's car,
and indeed this diversity constitutes one of their key strengths for the European economy. Our focus in this report is driven on innovation and growth-oriented SMES in all sectors:
and processes but also those in service and other sectors involved in organisational and market innovation (e g. new business models).‘
and small midcaps EU equity is available via risk capital funds that have signed (up to 499 employees) an agreement with the European Investment Fund (EIF).
It consists of venture capital and quasi-equity investment that have been earmarked to support innovative SMES & small midcaps.
European Regional Development Fund ERDF funding can be used in complement with funds from Horizon 2020
COSME Access to Finance Finance facilities under the Competitiveness of Enterprises and Small & Medium Enterprises programme €1. 4bn until 2020 ESIF-COSME-H2020 SME Finance Initiative
& Small Midcaps R&i Loan Service €180m earmarked from H2020, plus €180 from COSME Enterprise Europe Network With 600 member organisations,
the Enterprise Europe Network helps small business to make the most of the European marketplace,
What are the key trends shaping the environment for innovation driven SMES? Question 3: Looking to this business environment,
which are the bottlenecks preventing SMES to anticipate on or to play into these trends?
Consultation on Next EU Strategic Work Programme 2016-2017 5 2. Challenges and Trends for Innovation-Driven SMES The innovation environment for SMES is shaped by both long-term global challenges
and service robotics will expose consumers to a whole variety of new digital services in their daily lives.
The market opportunities for SMES are huge. For instance, General electric forecasts that embedding Internet technologies into machines could add $10-$15 trillion in economic growth worldwide over the next 20 years. 3 The quest for resource efficiency will become an increasingly important driver,
as we seek to balance the finite availability of natural resources against escalating human demand. Solutions that aim at the gradual uncoupling of economic growth from resource consumption are essential for the sustainability of entire economies.
Climate change will drive innovation across the economy and society. With climate change becoming more and more a reality for Europe and the world,
innovative solutions and approaches will be required to mitigate and adapt to its effects. This creates opportunities far beyond the obvious sectors, such as energy, transport and smart cities,
and will affect every citizen and business. Growing global demand for healthcare/elder care. Despite the economic crisis, healthcare budgets around the world continue to increase,
driven by escalating demand, new clinical practices, and advances in medical and biotechnologies. At the same time, the growing number of older citizens is creating a demand for new technologies
services and business models to support independent living and active ageing. Small businesses will play an important role in the future of healthcare and elder care,
both as service providers and technology enablers. Ensuring products and services are inclusive and efficient.
Inclusive innovation is related to growth that is inclusive and impactful. It addresses real needs in new markets (such as active ageing
and climate change) while favouring employment and social inclusion at the same time. Technological and economic growth must be inclusive and accessible to those who need it.
This concept is recognised strongly in the H2020 subtheme on Inclusive Innovative and Reflective Societies but so far has not been considered an important factor in the SME support programmes.
One important aspect of inclusiveness, of course, is gender balance. While this is not explicitly an objective of the Horizon 2020 programmes,
it is now such an accepted part of overall EU policy that the Commission should be building gender awareness into its SME programmes, especially in monitoring of results. 3 Evans, Peter C,
Consultation on Next EU Strategic Work Programme 2016-2017 6 All of these global challenges present major new business opportunities for SMES,
The scale of the opportunity is not in doubt: SMES'ability to respond to these challenges,
thus shaping the wider innovation environment. Innovation is Internationalizing Innovation has long been an international phenomenon
Emerging economies, such as India and China, are moving up the value chain and becoming major innovation players in their own right.
in order to provide affordable solutions to the mass of new customers (e g. solutions that are 10-100 times cheaper, still with high quality) 4. Meanwhile,
new technologies and business models mean that even micro businesses are able to operate effectively in international markets without the scale
while also creating opportunities within Europe. In business-to-business (B2b) sectors, increased international competition means firms have to address global markets
and not just local ones to generate added value. On the one hand, the migration of many production and manufacturing activities to lower-cost economies shifts the emphasis towards developing intangible assets
and licensing them to international players; this is already a developing practice in various sectors ranging from semiconductor (fabless IP business models), to biotech, to telecommunication and software industries.
This is challenging for SMES as it requires access to international networks further beyond Europe and very specialized skills (e g. on IP management & licensing execution)
while raising specific issues associated with the knowledge economy (e g. it is easier to transfer intangible assets,
On the other hand, the growth of niche and additive manufacturing is creating opportunities for manufacturing SMES and suppliers within European markets and for investors.
for example, is developing game-changing healthcare services and energy solutions that will be difficult to meet with approaches used in US/EU. 5 Wohlers & Caffrey, 2013. http://wohlersassociates. com Horizon 2020 Expert Advisory Group Innovation in SMES:
Global corporate and finance players are likely to be more reactive and faster to invest in such markets than the public sector. SMES Need Flexibility in a Fast-Moving World The business environment for SMES is becoming ever more competitive.
making the business environment more competitive and increasing risk. EU initiatives have to reflect these conditions and offer greater flexibility.
creating problems for SMES who often have limited liquidity. This lack of flexibility may encourage‘project hopping'firms jumping from one project to another simply to collect the grant;
which held that new products trickle down in a linear manner (from research, to development, to prototype,
to encompass not just products and processes but also services, organizational structures and business models. No company, large or small, can possess the knowledge
and work together with their customers and partners to co-create novel and useful value.
Open innovation offers major opportunities for SMES. Open innovation is becoming an important tool in innovation development for SMES
For research-intensive SMES, open innovation processes provide new opportunities to license IPR instead of having to develop them into own products and services.
New Patterns of Competition and Collaboration are Emerging The ability to understand customers and markets,
and turn those insights into effective business models and attractive value propositions are key to success. Today the market is no longer supply driven.
and services coming from all parts of the world. Competition is now global. Areas of previous competitive strength (low-cost distribution, production efficiency, effective marketing, etc.
which relied on efficient usage of internal resources, are no longer sufficient for success. Successful SMES are able to understand customers and markets, know how to exploit niche markets and specialisation,
and turn those insights into effective business models and attractive value propositions. In this new environment, the ability to import
and absorb new technologies is as important to innovation as the ability to commercialize academic research.
Too often innovation policy has assumed that SMES need to undertake research themselves for them to grow
improvement of absorption capacities of SMES and availability of innovation services that facilitate the utilization of new knowledge
smaller companies have been shown to be particularly successful in innovation based on interaction with customers, value chain partners
Absorptive capacity is the capability of a company to profit from external knowledge, e g. through RTD or business cooperation.
which requires more investment on the supply side of knowledge creation; there is also much to be gained from working to enhance the demand side.
By increasing their absorptive capacity firms will be able to draw in, assimilate and deploy new knowledge more effectively.
and companies assess the quality of newly developed goods and services. Acknowledgement of asymmetric information however, also encourages entrepreneurs to search for new business opportunities,
leading them to an ever more detailed picture of demand and supply. Therefore, information asymmetry plays a dual role as it both generates market failures
and gives birth to entrepreneurial opportunities. High costs of adaptation: Some innovations that are technologically superior fail to break through
because a large number of potential users have chosen already inferior alternatives, thus making the adaptation costs too high.
Economists call this‘path dependence'or hysteresis. The classical example is the DVORAK keyboard, which is considered superior to Horizon 2020 Expert Advisory Group Innovation in SMES:
The EAG has had the opportunity to discuss relevant issues with them and shares their analysis and views on key points.
firstly, at a conceptual level (the role of risk finance in bridging the liquidity gap;
EU Funding as a Means of Reducing Risk and Addressing the Liquidity Gap For SMES, one of the main benefits of EU (and national) grants is as a risk reduction measure rather than the direct funding
but it does not solve the short-term liquidity problem for an SME. Despite prepayments, grant conditions often put liquidity pressure on SMES.
Substantial costs have to be paid upfront and it can be many months before these are reimbursed.
liquidity is limited of concern. For an SME, cost reduction is nice but the liquidity challenge remains a stumbling block.
However, potential investors and loan providers for such grant-supported innovation projects will see their risk exposure reduced, partly by the reduction in funding requirement,
and (ii) the liquidity gap caused by the payment schedule connected to most EU grants.
The potential impact of public funding on an investment case is illustrated in Box 2. It shows that business cases which were impossible to fund suddenly become attractive investment opportunities.
Bridging the Liquidity Gap In our example the capital requirement for the new project is €2. 000 K,
Investment case company value‘as budgeted'Investment case company value‘risk adjusted'However, budgets are often more dreams than reality.
the entrepreneur can invite the investor to join the venture at the same 33%ownership conditions
and only request an investment of €600 K. Now the investor will be smiling! Even if he maintains his risk assessment of 65,
and similar refined instruments introduced in the shareholders'agreement, in order to make a fairer distribution of the exit value.
value at investment Budgetted company value at exit Investment/exit value for investor-5, 0000 5, 000 10,000 15,000 20,000 25,000 Year 1 Year 2
year 3 year 4 year 5 Budgetted company value at investment Budgetted company value at exit Risk adjusted Company value Horizon 2020
and private investments in order to strengthen European competitiveness. By decreasing the risks associated with early stage innovations
Investors would recognise promising opportunities and flock around the companies concerned. This risk reduction aspects needs to be communicated much more clearly.
Phase 2 funding under the SME Instrument raises major liquidity issues which demand urgent attention.
and ii) funding the liquidity gap caused by EU payment principles (small prepayment, majority of payment based on cost statements of cost incurred).
For a €1 million project with 70%Phase 2 funding the total liquidity requirement can easily be around €500k 600k.
€200k-300k is needed to cover the liquidity gap until final EU payment is received. This could be a fatal draw which, in principle, needs special attention;
Incentivise private funding sources (business angels/venture capital funds) to provide financing facilities to overcome the liquidity gap constraints likely to be experienced by applicants receiving Phase 2 funding.
Investment fund managers tend to favour sectors and companies that are seen as being less risky
and that offer good short term returns over longer term development opportunities. In order to increase companies'chances of securing external investment,
it will be essential to establish a high quality deal flow from the SME Instrument Phase 1 & Phase 2,
but also for the companies concerned, allowing the start-up to offer itself as a‘verified business opportunity'.
Address the high transaction costs associated with small investments: For the investor community the transaction costs related to due diligence, project monitoring
In particular, a quality due diligence assessment is a significant cost barrier for small investments, especially for small funds.
Beneficiaries of Phase 1 grants could be allocated their own‘account manager'who would be responsible for connecting them to a range of support services (e g.
New support actions or other instruments could be setup specifically to make screened and qualified investment opportunities visible and easy accessible for the investment community.
Consultation on Next EU Strategic Work Programme 2016-2017 14 efforts to better communicate the risk reduction potential of a Phase 2 grant (as mentioned above) as part of a coherent communications strategy
Furthermore, the Commission should consider the creation of a European Hub for Excellence in high-value coaching services and coaching experts.
such as the European Enterprise Networks (EENS), would create their own coaching pools from this hub, from
which are providing products or services to e g. the public sector around Europe. Often SMES are disqualified solely in principle because of size
o A targeted communications campaign for skilled evaluators with a relevant business background: It should appeal to evaluators'desire to help build a better Europe
'These‘gurus'in entrepreneurship and investing could help the Commission vet prospective evaluators, monitor their performance,
a coherent communications campaign to attract the right kind of evaluators; and a special expert panel to oversee the process.
tough competition suggests that only the excellent can win. That is good for the winners, as it provides them a badge of honour;
and is an opportunity to demonstrate what has been achieved. The Commission should plan a positive, high-profile event for autumn 2014 showcasing some of the first successful applicants,
These aspects should also be reflected in the basic communications literature. o Develop a communications strategy,
Looking to the longer term, there is a need for a concerted communications campaign focused on attracting the desired
The current communications budget allocated specifically to EASME (around €200k in 2014) is inadequate for the kind of market segmentation, channel research,
Established innovation agencies across Europe provide relevant benchmarks here: Vinnova in Sweden, Tekes in Finland, the Technology Strategy Board in the UK.
All spend significantly more on communications than EASME, as a proportion of their total grants.
Develop and implement a communications strategy and professionalized communications campaign for the SME Instrument that addresses the Horizon 2020 Expert Advisory Group Innovation in SMES:
Consultation on Next EU Strategic Work Programme 2016-2017 17 needs of applicants, the media, the Member States and other stakeholders.
National contests could be held, e g. the Venture Cup, and the EU could collaborate with national schemes
Increased private investments, also private equity financing; Reduced time from idea to market; and Increased participation of first time applicants in Horizon 2020.
a wide range of policy actions can be envisaged that will contribute to improve the innovation environment in innovation-driven SMES:
For these circumstances, innovation development is a search for scalable business models, and hence requires early,
fast and frequent iterations with customers and partners to determine a successful path towards business success and growth.
as proposed by economists such as Eric Reiss9, Steve Blake and Bob Dorf10. We recognize, however, that such reforms have to be considered as a long term objective.
We urge the Commission to accelerate discussions internally between DGS Competition, Internal Markets and Enterprise to develop new policies in this field.
Stimulate and promote innovative public procurement (with emphasis on‘innovative':'Customer demand is crucial for the success of any business
risk-taking and demanding reference customers. If only a share of the public procurement budgets, representing 16 percent of GDP in the EU,
Hence, it is important to balance supplyside measures to push innovation with demand-side measures that drive innovation development by providing market opportunities
Consultation on Next EU Strategic Work Programme 2016-2017 19 between customers/users and suppliers.
For instance, they could run open competitions, as is often done for architectural projects, seeking innovative ideas and then choosing the best.
where ideas are being sought for an online electricity pricing portal to simulate competition in the electricity market.
emphasizing the need for innovation in the procurement process itself as well as in the products and services on offer.
and business models puts pressure on more established players (including large companies) to innovate. SMES need business-oriented environments to thrive
but often the market is too immature to accept innovative solutions, especially in public sector markets where complex regulations may apply.
Sandbox environments would allow SMES to experiment with new solutions (services and products) at a small (yet Europe-wide) scale in the early stages,
cybersecurity, etc in strictly controlled environments rather than on live systems. Horizon 2020 Expert Advisory Group Innovation in SMES:
either directly or through corporate venture funds. Examples of potential‘sandboxes'in the European context include:
o High quality but cost-effective sustainable manufacturing for longer lasting consumer products, adapted to the European market. o Personalised medicine and innovative health services (incl. prevention),
as well as new solutions and services for the ageing population. o Innovative‘DIY'products and services around 3d printing and additive manufacturing, including attention to European regulation/standards/risk management. o Challenges
Experiment with novel value chain-based approaches European Sandboxes that provide innovation-driven SMES with opportunities to experiment with new solutions at European scale in a controlled manner.
which allow them to develop their own businesses in collaboration and competition with other firms in the cluster/network. o Access to business network contracts/virtual organisations:
since 2012 as a new tool to aggregate small and micro enterprises in a legal entity for accessing public calls. 14 A VO,
or more enterprises that share the common goal of improving their potential of innovation and competitiveness while remaining independent.
Start-up and early-stage companies can often benefit from business assistance services in order to lead them to the competitive marketplace.
Only roughly half of new enterprises survive their first five years. Business incubation programmes offered by academic institutions and other support organisations assist companies in managing innovation and growth.
Such incubators must be recognised of a quality, however; not simply an employment scheme for second class innovation advisors (as sometimes appears to be the case.
and supported in order to multiply their experiences, especially around international opportunities. Recommendation 5. 4: Provide focused support for business incubation
and acceleration programmes for startups and innovation-driven SMES, including on the opportunities and challenges of commercializing innovation in the international context.
Measures should also be put in place to ensure the quality assurance of such incubation services. Promote effective IP management practices:
On the other hand, the increasing importance of intangibles, IPR protection and enforcement in the success of economies and individual businesses mean such issues cannot be ignored.
however, the cost of highly specialized legal advice for large, early-stage R&d studies is beyond the reach of many SMES.
coaches and managers, filling the gap between the elite commercial services and the basic IP training Horizon 2020 Expert Advisory Group Innovation in SMES:
These could possibly provide traceability from the European SME innovations sourcing to the final products/services (for sectors in which transparency is desirable.
and services to be competitive in the overall market, such labels will help publicize them
and service innovation SMES to explore new niche business models and understand the value of intangible assets (design thinking (see Box 4), creative thinking process, culture of innovation).
o Set up new schemes dedicated to design and/or marketing. Innovation voucher schemes can be particularly effective in allowing SMES the time
Design thinking In the design thinking perspective15 everything is at the service of the individual, whether it is the design and production of objects, environments, management of organizations,
or the design and implementation of activities. At the basis of the principle of design thinking is the alignment of the result (product,
process, service) with the customer's needs. The culture of design management allows companies to combine the creative
and management skills within the process of the creation of products/services (from concept and design through to product 15 See, for example, Design for Growth and Prosperity:
Report and Recommendations of the European Design Leadership Board, European Design Innovation Initiative, DG Enterprise and Industry, 2012. http://ec. europa. eu/enterprise/policies
the innovation indicator and its components (particularly the share of high growth enterprises) proposed by the Commission,
What communications channels reach them? How, specifically, could the EU help SMES rise to the challenge of the broad trends described earlier in this report?
which have highlighted how the innovation environment varies from one sector to another (for example, IPR-driven in pharma/biotech;
largely capital-driven in energy. However, the lessons from these studies have yet to be digested fully in terms of how to improve the targeting and effectiveness of the programmes,
or could, interact with EU programmes. 16 http://ec. europa. eu/environment/beyond gdp/index en. html 17 The Assembly of European Regions, www. aer. eu Horizon 2020
programme targeting, communications and internal organisation. The Problem of Themes To date, much of the EU's innovation agenda in relation to SMES has been structured in terms of‘themes':
and entrepreneurs to make commercial sense out of the research investments. Business, 18 European commission. Performance of SMES within FP7:
Rather they define themselves through the problems solved, the business models used; and through the products and services they provide.
Companies are distracted from areas of high potential: As noted above, most breakthrough business innovation takes place at the crossroads between different technologies:
rather than those companies exploiting disruptive business opportunities. Thus, in relying on themes/technology-defined structures to the exclusion of other, more open,
Besides little biopharma or biotech companies, ICT, nano, personalised services and other sectors are relevant for healthcare projects.
Planning, marketing, communications, help desk, matchmaking events and other services to attract SMES will all be necessary.
Recommendation 6. 1: Prioritise areas in collaboration programmes with clear SME interest and potential, such as nano, healthcare and ICT;
and target marketing and communications efforts to draw them into collaborative Horizon 2020 projects. Pursue a more open, bottom-up approach within the SME Instrument:
Certain areas represent special opportunities because of the need for solutions: it is recommended not to convert these areas into new and narrow‘themes'.
A scheme should also be put in place to fund‘graduate innovation assistants'in enterprises, recognising that business knowledge is a relevant asset for graduates.
Consolidating SME communications: The high priority given to SMES in EU policies is both a blessing and a curse:
however, navigating their way through the maze of programmes to identify opportunities and schemes of relevance to their needs presents a major challenge.
The Commission has made a good effort to consolidate some of its SME communications in the Participants Portal
For this, there needs to be one and only one, portal for practical programmatic communications with SMES across the EU institutions.
'A good starting point would be to unify for instance, in EASME all practical, client-centred communications and marketing for virtually all SME programmes within Horizon 2020.
Our concerns over the budget available for communication activities and the opportunity to benchmark communication efforts against national innovation agencies have already been noted in relation to the SME Instrument
Consolidate into one administrative unit for instance EASME the leadership for practical programme communications for all Horizon 2020 opportunities for SMES
Such activities should be observed based on discrepancies between MS policies, new opportunities or existing blind spots. This would help to define topics for‘Innovation in SMES'.
Overtext Web Module V3.0 Alpha
Copyright Semantic-Knowledge, 1994-2011