The high-value-added nature of R&D projects has brought research and innovation funding to the forefront of EU policies in recent years. There has been much discussion about Europe trailing behind competitors in the US and emerging markets in the East.

A green paper published by the European Commission in February identified research and innovation as the key drivers of social and economic prosperity. It also highlighted the key problems facing the EU in terms of its R&D policies, such as “costly duplication and fragmentation” due to a lack of cohesive and coordinated EU-wide policies.

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Europe’s laggards

The EU has set itself the objective of increasing spending on R&D to 3% of gross domestic product by 2020, although this is unlikely to close the spending gap between Europe and its rivals worldwide.

Invest Northern Ireland’s managing director of innovation and capability development, Tracy Meharg, says: “Europe is behind in a global context post-recession, and with the US and Asia spending increasing amounts on R&D, the challenges are bigger for Europe because it is always lagging behind.”

There have been various initiatives put forward by the EU in the current programming period (2007-13), such as the Seventh Framework Programme (FP7) with a budget of €53.3bn. This is aimed at implementing programmes of co-operation, ideas, people and capacities, but appears to have been of limited success. There has also been a push in various European countries to boost R&D and create a better environment for companies to carry out research with some success.

France's tax incentives

Tax incentives have been crucial to encouraging investment in R&D for a number of European countries. France claims to offer the best tax incentives in Europe with its crédit d’impôt recherche (CIR) – research tax credit. According to the figures provided by investment promotion agency Invest in France, this initiative appears to have been very successful.

The tax credit is set around the volume of R&D corresponding with the volume of expenses. All R&D expenses are taken into account, including staff costs and sub-contractor fees for French companies. It covers 40% of R&D spending in the first year, 35% in the second year and 30% in the following years to the tune of €100m in total – a very high cap. Due to a refining of the system in 2008 to increase efficiency and attract investors, the number of companies benefiting from the tax credit has risen to 15,000 – up from 4000 in 2007.

“The R&D tax credit is refundable after three years if companies are not able to offset tax credits against income tax. They are made cashable through banks, so [ultimately] companies will get their cash and this makes it very attractive,” says Rémi Montredon, a partner at PricewaterhouseCoopers (PwC) France specialising in the CIR. This is something neither the US or Japan offer, two countries seen to be among Europe’s main rivals in the R&D sector. 

According to Jean-Cristophe Saunière, partner in charge of innovation at PwC France, the key to attracting investments in research projects is stability. “The stability of the tax credit is very important and in France the rules have not changed since 2008. Companies can’t invest all that money on an assumption that the tax credit will remain or [in] a country that doesn’t have attractive innovation incentives,” says Mr Saunière.

The main challenge that France now faces is uncertainty over elections next year and the potential changes to R&D policies and tax incentives a change in leadership could bring. This is very much related to the issue of cohesiveness identified in the green paper published by the European Commission. There are calls for an EU initiative to create cohesive policies that encourage investment which could create a stable environment for investment in European R&D as a whole. 

Northern Ireland grant scheme 

Another approach that has had some success is offering grants to companies to carry out R&D, something that has been practised in Northern Ireland.

“A lot of money has been put into grants; it has doubled in the past three years. Statistics for 2009 showed that Northern Ireland had increased business R&D expenditure by 76%, the largest figure since 2001, but this was driven by a small number of large companies. It is imperative to get smaller businesses to carry out R&D,” says Invest Northern Ireland’s Ms Meharg.

There has been a focus on small and medium-sized enterprises (SMEs) in Northern Ireland to try to encourage R&D investments. Innovation advisors are available to smaller companies to talk them through something they may never have done before and get them onto ‘innovation escalators’.

An example of the support Invest Northern Ireland has made available to SMEs is innovation vouchers. This simple programme provides vouchers of up to £4000 (€4617) to allow small enterprises to engage with 41 knowledge providers – universities, colleges and other publicly funded research organisations – across both Northern Ireland and Ireland. 

Invest Northern Ireland is keen to stress that the success in the past year has not only been down to grants – theirs is a multi-faceted approach to helping sustain growth in R&D with an open innovation concept. R&D tax credits and tax relief are also options.

“Success depends on company performance. Northern Ireland companies need to succeed and the trend needs to improve. Spending on R&D projects is cyclical and there is lagged data – I suspect 2010 figures will be good but then it will level out. Our quality of life and skills base is key for Northern Ireland. We need to focus on our individual strengths in certain areas and promote the skills we already have,” says Ms Meharg.

Sweden's capacity building

A third approach that appears to have been successful in Sweden is capacity building – putting into place a strong base of skills, research and knowledge as a draw for companies to invest in R&D. In 2008, the country's government put forward a research and innovation bill, called A Boost to Research and Innovation.

Government appropriations for research came to SKr29.5bn (€3.19bn) in 2010, with most central government funds going to higher education institutions (SKr11.5bn in 2008, expected to increase to SKr13bn in the period 2009-12). The funds are distributed subject to a quality assessment based on the ability of the higher education institution to draw in external funding, and the number and quality of scientific papers that are published. This means that funds are distributed to those institutions that are successful.

In PwC’s Cities of Opportunity 2011 report, which ranks how 26 global centres of finance, business and culture perform across various key indicators, Stockholm ranked first in Europe and fourth globally, coming behind only North American cities. Specifically, in terms of gross domestic expenditure on R&D, it came first globally, as it did on the intellectual property protection score, indicating that it is competing on the world stage in terms of R&D.

Stockholm also ranked first in Europe in quality of life, health system performance and literacy and enrolment, perhaps showing the impact that government spending in the right areas and the creation of a strong research and knowledge base might have on social and economic development. Despite all of this, Stockholm actually ranked as one of the lowest in terms of attracting FDI, in terms of both capital investment and greenfield projects.

Success stories

Despite Europe lagging behind its competitors, there have been success stories, and research and innovation is clearly now a key priority for the EU. “The EU recognises its market failure in terms of R&D. It wants to drive R&D and is giving huge flexibility and higher levels of support on this side of things,” says Ms Meharg. 

Perhaps the EU could learn from the individual successes of some of its member states. The building of the Common Strategic Framework proposed by the budget review will certainly help to build more cohesive and attractive policies. As well as the importance of Europe competing on a global stage, the development of countries in the East also provides new markets for Europe to target in terms of products and services, an opportunity it needs to take to remain competitive. 

According to PwC France's experts in CIR, Mr Montredon and Richard Juan, French policies are very much weighted towards French companies and repatriating R&D activities back to France. Is this something the EU could practise on a regional level? Studies have shown that the French system is very attractive on a global scale, not just for French companies but also for multinationals.

More than 2000 foreign companies have claimed back the CIR for R&D spending in 2008 and huge multinationals such as Google and Microsoft have R&D centres in Paris. Currently all member states practise different approaches so it seems that policies of consistency, stability and cohesiveness are crucial for the EU to be competitive in terms of R&D.