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Centre for Policy and Business Analysis Gregersensvej

DK - 2630 Taastrup

Tel: +45 7220 2000 www.dti.dk

www.teknologisk.dk

Peter Bjørn Larsen Chief Consultant

Tel: +45 7220 2672 E-mail: pbl@teknologisk.dk Hanne Shapiro

Centre Manager

Tel: +45 7220 1415 E-mail: hsh@teknologisk.dk

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Towards a smart and sustainable Europe- ways forward?

The effects of the economic crisis across the Member States and a growing recognition that this will have significant impact upon us all if they remain unaddressed, necessitates that we find new avenues which can genuinely pave the way for a Smart, Sustainable and Inclusive Europe. It is on this background that the European Commission in 2009 published the Communication Preparing our future: Developing a common strategy for key enabling technologies1 in the EU2.

The Communication states that whilst the EU has research and development capacities in some key enabling technology fields, these have not been successfully transformed into high value commercialised manufactured goods and technological services. The Commission therefore also announced an international benchmark analysis of high technology policies in other leading and emerging countries, such as the US, Japan, Russia, China and India, with the purpose to also explore the scope for closer cooperation3. This study was later awarded to Danish Technological Institute within a framework contract on compe- titiveness in Europe.

The Communication thus called for a common European strategy on the deployment of Key enabling Technologies

KETs in European industries, and it was re-emphasised in the Commission 2020 flagship initiatives An Industrial Policy for the Globalisation Era4, Innovation Union5 and A Digital Agenda for Europe6.

As a follow up to the Communication on Key Enabling Technologies, the European Commission established a High-Level Ex- pert Group on Key Enabling Technologies (HLG). The Expert Group was tasked with assessing the competitive situation of the specific technologies with focus on industrial deployment and their potential to address great global challenges. It was to as- sess public and private research in the field of KETs in the EU, and on that basis to develop a coherent European strategy for six KETs: micro and nanoelectronics, nanotechnology, industrial biotechnology, photonics, advanced materials, and advanced manufacturing systems.

1 The European Commission‘s has identified the following technologies as Key Enabling Technologies (KETs): Nanotechnology, Micro- and nanoelectronics, Industrial biotechnology, Photonics, Ad- vanced materials and Advanced manufacturing technologies.

2 COM(2009) 512.

3 COM(2009) 512, 9.

4 COM(2010) 614.

5 COM(2010) 546.

6 COM(2010) 245.

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GLOBAL FOCUS ON KETS - INCREASED AND CHANGING NATURE OF COMPETITION

Why the strategic focus on KETs?

KETs are pervasive by nature. They underpin not only technologically based product innovation, but also process innovation and new opportunities for highly tailorable technological services with a potential global demand. The impact of KETs spans strategic sectors in the European economy, and could play a key role in making new produ- cts and services in a range of areas affordable for the po- pulation at large, for example through renewable energies, safer and more energy efficient transport, or medicine - for example through gene therapy. KETs could medium term offer solutions to great global challenges - and in affordable ways as the technologies mature through applied research, tests, and large scale demonstrators. Not only could this open up new markets for European firms, but at the same time it could contribute to a more sustainable pathway to globalisation.

In the past few decades significant parts of manufacturing activities have been sourced to regions outside the EU such as the US, Japan, Korea, China, Russia and India. Another BRIC country such as Brazil has also gained ground. During that time period global outsourcing strategies have gra- dually changed. Where global outsourcing strategies in the beginning were motivated by access to cheap labour and to emerging new markets, companies in Europe have increa- singly pursued strategies which have led to outsourcing of also high value added manufacturing and R&D based on access to a growing global market of graduates in science, technology, and engineering in the outsourcing destinati- ons.

Source: High-Level Expert Group on Key Enabling Technologies (2011): Mid-Term working document.

Figur 1: The KET value chain - from basic research to market

Additive Manufacturing 3D print

Recently the phenomenon of additive manufacturing proces- ses, or, as it is widely becoming known, 3D printing technology have caused intense debates about future manufacturing busi- ness models not least since the Economist published a number of articles on the phenomenon. Some have suggested that 3D printing could undermine the advantage of low-cost, low-wage countries. Advances in material technologies have brought about the prospects of directly manufacturing finished com- ponents1. Some believe that these emerging manufacturing platforms could reduce the advantages of sourcing production to low wage countries, and according to the Economist that European design and manufacturing firms are more advanced at both creating and utilizing additive technologies than their US counterparts. One of the European companies that have embarked upon the development of an integrated digital plat- form to serve global markets in the Belgian firm Melotte2. They have found that it so far has led to a factor 12 in cost savings on materials in for example the production of dental prosthe- ses. However, many obstacles still need to be overcome before AM can be considered as a realistic manufacturing choice. Also in the UK the opportunities of additive manufacturing proces- ses are being explored through a 3m funded, which is looking at the opportunities to deploy additive technologies in the aerospace and automotive industries3.

1 http://www.economist.com/node/18114327 2 http://www.melotte.be/

3 http://www.theengineer.co.uk/in-depth/the-big-story/the-rise-of-additive- manufacturing/1002560.article

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What has been less discussed in Europe is the risk of losing highly tacit knowledge from the deployment of KETs in industrial production, and the impact this could have on future market opportunities in technological services7.

Because KETs are knowledge and capital-intensive tech- nologies associated with high research and development (R&D) intensity, Europe needs to join forces not only to have sufficient scale in investments and in the knowledge base, but also because European and national innovation policies need to be substantially transformed in order to support rapid and integrated innovation cycles, which will need to be the foundation for achieving European competi- tiveness in the deployment of KETs. For a small country like Denmark, it is particularly critical to develop a coherent collaborative framework if Denmark in any way is going to harvest the enormous benefits from KETs in new technolo- gical products, services and processes8.

UNDERSTANDING THE INNOVATION PROCESS FOR KETS

Beyond linear models of innovation- challenges to the innovation policy framework?

The innovation process for KETs has traditionally been considered to be a linear process in which basic research results in new products marketed through a ‘value chain’

of science, technological research, product development, and scaling through competitive manufacturing facilities, cf.

Figure 1.

Within such an innovation approach, the key challenge for Europe would be to overcome the various barriers to com- mercial deployment of R&D base, the ‘Valley of Death’9, by creating a more integrated policy framework which links the various parts of the knowledge and innovation chain using for instance tech transfer mechanisms and demon- stration projects, and creating favourable market conditi- ons for innovative (yet often relatively expensive) products through public procurement.

Among the many SMEs in Europe, innovation opportuni- ties may be deployed through the creative application of existing technologies in partnerships with suppliers and customers to accommodate for limitations in size.

7 See for example National Science Foundation- Science and Engineering Indicators 2010http://www.nsf.gov/statistics/seind10/pdf/c03.pdf

8 See High Level Expert Group – Final report on Key Enabling technologies from 2011 9 The road between the discovery of from basic research till a product hits the commercial market is called Valley of Death to describe the funding gap at the intermediary stage of a linear innovation process.

This suggests that industrial deployment of KETs will require other policy instruments than technology transfer mechanisms and demonstration projects. KETs are further- more not just a potential for advanced technology intensive industries. KETs can play a central role in sectoral restruc- turing due to their pervasive nature provided that the right enabling policy framework is in place.

Regional policies based on smart specialisation can provide such a framework by identifying core assets in the region relative to other regions and countries, through strategic prioritization processes involving all key stakeholders, through the use of foresight methods to enable sound and plausible – but out of the box thinking- and by integrating innovation, employment and education policies, as has been the case of Bremerhaven.

Smart Specialisation in RES: the case of Bremerhaven (DE) Traditionally the economy of Bremerhaven has been based on shipbuilding and commercial fishing in strong downturn since end of the 1990’s. Through an open strategic process ‘offs- hore wind energy’ was identified as a new potential building on core assets of the locality including institutional structures.

An integrated innovation strategy was developed, which also consisted of mapping core competencies to thoroughly un- derstand the linkages and nature of core competencies over- lapping between the shipyard industries and off shore wind.

Bremerhaven has developed into a major hub of offshore wind in Germany with 4 major manufacturers and more than 1,000 jobs created.

Source DG Regio.

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Because Policies in support of KET are deeply embedded in strategies for smart specialization, from which also follows that strategies for KETs can strengthen competitiveness through an application oriented approach – within and across sectors as is the case with the Finish Pulp and Paper Industry:

The Finnish Pulp and Paper (P&P) industry views nanotechnology as promising source of valuable applications innovations, and its firms are taking steps to assess this potential. Some of the P&P companies are responding to these opportunities by increasing their overall internal R&D investments, which are aimed not only at implementing available technologies but also explore recent advances in areas of nanotechnology and biotechnology. In the development and assessment of a regional specialization strategy to assessment criteria could be: (the potentials of one or the com- bination of KETs to renew the knowledge base within one specific industry that plays an important role in a specific region, and secondly the potential scope of spill- over effects to other sectors/

industries within the value chain including sector convergence within sectors of economic importance to the region or country.

There is an obvious role for national policy in enhancing the whole process and mitigating problems relating to lack of human capital, which in this context of the pulp and paper industry could also mean revision or development of new vocational qualificati- ons at tertiary and upper secondary level relating to the diffusion of technologies.

Source DG Regio.

Because the pervasive and disruptive nature of KETs open and collaborative innovation processes across sectors and value chains can offer the framework to fully exploit the transformative nature of KETs – and is by many seen as a possible avenue for SMEs to engage in R&D for the deploy- ment of KETs.

However, data from the OECD show that larger firms tend to engage in open models of innovation more frequently than SMEs10. These findings suggest that limited resources may prevent SMEs from deploying open innovation prac- tices more broadly and on an international scale in order to identify the right strategic partners in research and in industry and in relation to KETs.

There is also evidence that despite globalisation, geogra- phic proximity still matters in open innovation. This could have implications for the design of innovation program- mes in support of trans-border cooperation on KETs, where RTOs could potentially play a vital role in identifying and brokering such strategic partnerships, and in ensuring the commercial perspective and providing support to this.

Demand side factors also need to be taken into considera- tion as part of the enabling policy framework for KETs- in particular to stimulate market demand in the initial phases, when a new product or technological solution is brought to the market.

Advanced demand through public procurement can have the double function of furthering the functionality and the technological services linked to a particular product or KET based solutions in the critical steps to the market and in terms of increasing the demand in the early market phases, as has been in ICTs11. Without enabling demand side the risk could be that KETs may not become the lever to sustainable manufacturing in Europe - and furthermore that Europe could also lose competitive advantage in the deployment of KETs in the emerging markets for techno- logical services relating to the great global challenges.

The interdependency between critical mass in KETs and international market opportunities relating to technological services stemming from KET deployment should therefore not be ignored.

10 Backer D,López-Bassols K.V, Martinez C. (2008), “Open Innovation in a Global Perspec- tive: What Do Existing Data Tell Us?”, OECD Science, Technology and Industry Working Papers, 2008/04, OECD Publishing

11 Berlin, Kenneth (2010): The Second Valley of Death, http://tpmcafe.talkingpointsmemo.

com/2010/12/08/the_second_valley_of_death_by_ken_berlin/

To further enhance the strength of the Grenoble cluster, the European Clusters of Dresden and Grenoble announced in March 2010 the foundation for a structured and strengthened cooperation in the areas of R&D, Education, Industry, and Institutions related to Nano-Electronics and Nano-Technolo- gies. As the most important European Clusters in Nano-Electronics and Nano-Technologies1, they have agreed to strengthen their collaboration on a broad based innovation strategy comprising education, research and development, industrial deployment, and SME coordination and involvement.

An action plan defines priorities in each domain. Quoting Geneviève Fioraso, Deputy Mayor from Grenoble:

“Microelectronics is a key technology for European industry competitiveness. Dresden and Grenoble, the major poles in Europe, have agreed to work together to be competitive facing Asia & US. As public authorities we ask to support this process.”

1 http://www.grenoble-isere.com/eng/News/Dresden-and-Grenoble-Nano-Electronics-Clusters-pave-the-way-for-strengthened-cooperation

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KET CHALLENGES FOR EUROPE

For each of the six KETs there are a number of challenges that are common for all six, and for each KET only a few that are specific12.

Alignment and prioritisation to achieve sufficent scale

Large investments in KETs in leading and emerging regions are starting to pose a considerable threat to Europe’s com petitive position in high-tech industries. One of the con- cerns is that the prioritisation of investments in the diffe- rent EU programmes is to too broad in scope, and it is thus difficult for Member States to create sufficient synergy with EU-level prioritisations.

The result is lack of critical mass in investments and hu- man resources and talent deployed. Member States pursue their own research and innovation agendas relating to KETs, and in particular for the small Member States there remains a major challenge simply because investments remain minimal compared to those made in leading and emerging regions; and furthermore, the specific industrial research and innovation communities within a particular field of KET remain beyond critical mass to achieve global excellence.

Europe 2020 and the related flagship initiatives are provi- ding a comprehensive vision for Europe’s future. Howe- ver, the range of programmes and initiatives at EU level result in a broad and rather unclear focus, and there is an inherent risk, as pointed out by multiple stakeholders, that it is so broad that it will set new requirements to ensure sufficient synergy between national strategies and with other EU programmes such as the Research Framework Programmes (FPs). Policy coordination and policy integra- tion is called for to ensure genuine impact and return of investments.

12 The main report includes deeper coverage of those challenges

There are scattered albeit promising examples of coordi- nating efforts from both industry and policy from which important lessons may be deduced. In microelectronics, for example, the clusters in Dresden and Grenoble are colla- borating, and some of Europe’s leading research institutes collaborate through Heterogeneous Technology Alliance (HTA)13 and European initiatives such as Joint Technology Initiatives (JTIs)14 .

However, in most cases current research relating to KETs in the EU is generally diverse and lacks critical mass both when it comes to investments made and to knowledge and skills deployed and developed. Thus, the basis to compete with other leading regions is relatively weak. One way forward is to increase cross-border cooperation and colla- boration in the EU to create this critical mass, as well as a nts and initiatives in Europe as suggested by stakeholders interviewed.

In the USA the issue of scale and impact is of growing concern in the national debate on energy. The National Academy of Engineering recently called for a new research paradigm consisting of a national network of regionally- based commercialisation oriented energy discovery- innovation institutes (e-DIIs) that would serve as hubs in a distributed research network linked through “spoke”

relationships to other concentrations of the nation’s best scientists, engineers, and facilities. The DII concept, de- veloped by the National Academy of Engineering (NAE), is characterised by institutional partnerships, interdisciplinary research, technology commercialisation, education, and outreach - and scale!

Need for demand-side measures

Support for the creation of markets for KET-based products through regulation or pre-commercial public procurement could help drive innovation in Europe. However, policy in- struments at the EU level and in Member States so far only

13 http://www.hta-online.eu/uploads/media/HTA-2010_web.pdf 14 http://cordis.europa.eu/fp7/jtis/

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provide such support to a limited extent and primarily re- lated to ICT. In general, EU instruments and Member Sta- tes have not deployed enabling technology policies through public ‘super consumer’ models such as those launched by the US Departments. The US Departments have in several instances used public procurement to test new ideas and drive innovation in various technology domains. A clear EU strategy based on addressing the grand challenges in Europe could be a first step.

Transfer and uptake of research in industry Europe leads the rankings in terms of formal knowledge production – expressed in publications and articles. Howe- ver, the speed from when new knowledge is produced till it becomes a commodity has changed dramatically due to ICTs. Even if Europe could have a potential advantage in terms of a world leading pool of knowledge on KETs, the processes of knowledge creation and commercial exploi- tation are not sufficiently intertwined, and thus the formal knowledge base on KETs remains insufficiently deployed for economic and societal value added compared to competi- tors outside Europe.

One of the criticisms brought forward is the design of the European R&D Framework Programmes (FP). They are often characterised by early-stage technological research.

Research consortia are often led by universities with more interest in patent filing and production of peer-reviewed articles. The outputs of research efforts tend to be at a low technological readiness level, which means that more investments are needed in order to commercialise the results - and given the time delay from when Framework program consortia are formed till projects are selected and completed, the commercial potential might also become substantially reduced.

Evaluation criteria with emphasis on market potentials and criteria for appointment of evaluation teams to ensure industry involvement and industry expertise could be in- struments to increase the likelihood of a commercial output

of the Framework Programmes. In leading and emerging regions outside the EU, different policy instruments are deployed to increase commercial uptake. In China, for example, major strategies are to decrease public funding for R&D over time to force research institutions to link up with industry partners and to encourage R&D institutions to set up companies to exploit commercial value.

Countries such as the US, Korea, and Japan all have initia- tives supportive of commercialisation of research results, especially support to find potential investors for the next stage of development – the stage in the innovation process called the ‘Valley of Death’ in Europe. Addressing the ‘Val- ley of Death’ is a key priority for the HLG as pointed out in their mid-term report15.

In 2000, the Korean government introduced the Technology Trans- fer Promotion Act. The idea behind the act was to change focus from quantity to quality of patents and technology, the advantage being that high-quality patents and technology will increase market interest. The Korean Invention Patent Association (KIPA) reviews the technology to be sold, assesses the commercial viability of the market and industry trends, and identifies poten- tial licensees or partners. Furthermore, the KIPA offers support for legal issues and deal closing.

See Korean Innovation profile in Annex 3.

Interviews carried out with companies, research organisa- tions, and Technology Transfer Offices (TTOs) indicate that across the EU there is a lack of incentives for researchers at universities to commercialise their research or collabo- rate with industry, as research careers depend on peer- reviewed publications/articles and the number of patent applications, rather than on the quality of those in terms of their commercial potentials.

15 http://ec.europa.eu/enterprise/sectors/ict/files/kets/hlg-working-document_en.pdf

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Another barrier is the lack of capacity in parts of the indu- stry to engage actively with research. Both within Europe and outside Europe there are many examples of how a for- malised facilitator function has helped to increase strategic collaboration. However, the case studies show that such structures are not yet the norm. Given the European indu- stry structure with many SMEs, there is even more need for enabling structures than in some of the leading compe- titor countries, as many SMEs do not have the capacity to engage directly with research environments.

The skills base- and the situation of the competitors High tech companies in the EU in KET-related industries are concerned about their access to high-skilled labour and access to R&D facilities, and many research institutes mention difficulties in attracting PhD students in science, technology and engineering. In terms of the total number of science and technology researchers, the U.S. and the E.U. experienced moderate annual growth of about 3%

between 1995 and 2006, while growth in the Asian region outside Japan ranged from 7-11%. China averaged nearly a 9% growth annually in researchers over this period, and the number of Chinese researchers nearly tripled, from just over half a million to more than 1.4 million, boosting its global share from 13% to 25%.

The U.S. higher education system maintains critical strengths – especially U.S. research universities, which perform 56% of U.S. basic research and educate the majority of future scientists and engineers – but its posi- tion continues to decline in terms of S&E graduates. U.S.

students earned only 11% of the world’s 4 million S&E first university degrees (equivalent to an undergraduate degree) awarded in 2006, compared to 21% in China and 19% in the European Union. S&E degrees are only about one-third of U.S. bachelor’s degrees, compared to 63% in Japan, 53% in China, and 51% in Singapore. Only about 5% of U.S. bachelor’s degrees are in engineering, compa- red to 20% total in Asia and around 33% in China.

After a long period of growth, China now produces an equal or greater number of natural science and engineering (NS&E) doctoral degrees compared to the United States, rising four-fold from approximately 5,000 in 1997 to over 20,000 in 200716. A large portion of these degrees in the United States are awarded to foreign students, which is of growing concern in the USA because countries such as China, India and Korea are investing massively in research infrastructures and the development of attractive career opportunities to attract native PhD holders to return to their home countries.

The combination of policy instruments to improve the re-

16 Science and Technology Indicators 2010 US Science Foundation.

search science, technology and engineering infrastructure, and knowledge base in the emerging competitor countries, could increasingly pose a challenge to European competi- tiveness relating to KET deployment - because it increa- singly becomes attractive to locate high value development and R&D KET activities in competitor countries.

However, since the deployment of KETs will span different phases in the innovation process, and a range of sectors it will be important not only to focus on the production of candidates and PhDs within the tradition fields of science, professional tertiary vocational education and also advan- ced vocational education could play an important role in ensuring the full deployment of KETs across industries to take full advantage also of incremental innovations stem- ming from KETs.

Because KETs are so pervasive in nature, it can be quite complex to understand and follow how skills demands may be changing as a result of KETs deployment across sectors and job functions. There are lessons to be learned from the e-skills initiative and how that has evolved over time to avoid major skills gaps and mis-matches, but also to avoid the type of hype that has been seen in relation to ICTs as that could result in production of graduates with rather narrow profiles and subsequent limited opportunities in the labour market.

Lack of support for large scale demonstration and commercialisation activities

EU-wide state-of-the-art pilot test facilities located around Europe could dramatically boost the capabilities of SMEs not least to test and create prototypes which can be brought to the market quicker and without having to enga- ge in larger R&D projects – a view shared across research institutes, policy makers, and companies interviewed in this study. Policies to support Europe taking the lead as an advanced test and prototyping facility for KET-based tech- nological solutions in areas where the demand will likely increase dramatically could prove to be a way forward, not least taking into account European industry structures.

The interviews with the companies and research institutes suggested that pilot test facilities can create opportunities to enhance the economies of scale for a specific product and can stimulate the manufacturing of products by crea- ting intensive knowledge on prototypes and the scaling process. Parts of the knowledge processes underpinning manufacturing are highly tacit in nature and therefore

“sticky”; on the other hand this tacit knowledge is often the critical resource to exert full control over the value chain in the commercial exploitation of a technology.

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Both in the United States and in the EU there is a growing recognition that the outsourcing of manufacturing could come at a larger cost than ever expected, because the im- portance of the tacit knowledge to innovation in manufac- turing has only recently been fully recognised.

Cluster and network policies can be one way to influence value creation within the value-chain in some industry fields, though cluster policies will not be sufficient to capture sticky knowledge in fully globalised value chains.

Large scale demonstrators and pilot test facilities and the EU Technology Platforms such as Manufuture17, 18, offer the potential to develop new competitive manufacturing strategies and innovation models, which could provide an opportunity to retain high value and flexible production in Europe19. Minatec in France is an example of a regional initiative providing pilot test facilities. The High Tech Buil- ding houses project teams, allowing them to continue their projects right through to the prototyping phase, and even to zero-series production.

Organisations like Minatec in France are creating critical mass by involving several industrial and academic partners in their activi- ties. This in turn allows them to offer state-of-the-art equipment, which is often too expensive for an individual company or univer- sity to buy. Moreover, through their offering they are an important attraction factor to industry, as companies gain access to the best lab facilities, knowledge, and skills on pilots and prototypes. This allows them to compete again major companies in Japan, the USA, and China.

17 See also http://www.manufuture.dk/ which is the Danish key technology and research platform for elaborating new approaches to maintaining high value manufacturing in Denmark through different strategic approaches.

18 http://www.manufuture.org/manufacturing/

19 Interview Martin Spät, ESIA

However, in Europe there are only national or even regional examples of these facilities, whereas large scale demon- strators are funded and made publicly available in compe- ting regions and leading countries, such as the US.

Such large scale demonstrator projects are not publicly funded in Europe, which, according to the company inter- viewees, is creating an uneven playing field.

Access to risk capital

Two major challenges were identified in regard to access to risk capital:

• Funding for basic or early stage research is focused on technology and not on market potentials.

• Banks, venture capital funds, and business angels are reluctant to invest in high-risk projects.

Limited market potential in EU research programmes The Framework Programmes are the most important R&D funds available in Europe for technological research. Indu- stry is concerned, though, that the funding models do not take into account the whole R&D process for KETs. When the funding from the framework programmes come to an end, the outcomes of the specific projects are typically at a “technological readiness level”, where the technological outcomes are not close to commercialisation. According to some stakeholders the problem is that the framework pro- grammes put too much emphasis on the development of the formal knowledge base at the expense of projects with a genuine commercial breakthrough potential.

In many of the research initiatives and programmes in emerging and leading regions there is a focus on market potential in the selection criteria.

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SBIR/STTR Program (US)

The programme focuses considerably on market opportunities when selecting proposals for funding. The NSF webpage states that ‘all proposals submitted must describe a compelling business opportu- nity to be enabled by the proposed innovation. The proposal must show scope and nature of the business opportunity. All proposals shall provide evidence of a market opportunity’1 . According to interviews with Mr. James Rudd and Mr. Murali Nair from NSF, ap- proximately 25% Phase 1 and 50% of Phase 2 the selection criteria are related to market potential. For more info, see US Innovation profile in Annex 3.

1 http://www.nsf.gov/eng/iip/sbir/program.jsp#PhaseI

In the European Framework Programmes there is less focus on market potential in both the design and selection criteria of the programmes. The Commercialisation Division at the ARPA-E20 at the US Department of Energy (DoE) stresses that focus on market potential and commerciali- sation support from the start of projects that are funded is vital to ensure commercial success.

Risk capital - high risk projects

Access to risk capital is a major issue in high tech compa- nies, as the return of investment can occur with a substan- tial time delay and furthermore can be highly uncertain.

There is some evidence that attracting high-risk capital remains a challenge, but also that European firms are more reluctant to approach venture capital funds, unlike companies in the US. This is a question of mind-sets which is hard to change through policy interventions.

20 Advanced Research Projects Agency – Energy

Lack of access to risk capital can result in relocation of high tech companies to destinations outside Europe. There are greater opportunities to obtain risk capital in for example the USA, Japan, China, and Russia. However, the precondi- tion is often that the company has to relocate to the given country to secure funding21.

One example where this particular funding gap has been addressed is Korea. The “New Growth Engine Fund” ad-

21 See examples in main report section 5

Source: KIAT, 2011

Taiwan Multinational Innovative R&D Center.

The Program of Multinational Innovative R&D Center in Taiwan is an important element in the International Innovation and R&D Base Plan, which forms part of the National Development Plan.

The aim is to stimulate collaborate on between multinational firms and local Taiwanese firms so that Taiwan can establish itself as a regional R&D centre within the Asia Pacific region. This in turn will help to support multinational production activities, the- reby enhancing the role which Taiwan plays in global R&D, giving the R&D activity of Taiwanese industry greater depth and encou- raging Taiwanese companies to focus on cutting-edge research.

Implementation of the plan began in 2002. So far, several leading international corporations including Intel, HP, Dell, Sony, Micro- soft, IBM and Ericsson have established 43 R&D centres in Taiwan.

The introduction of key technology by these R&D centres will help Taiwan to become a valued partner to the world’s multinatio- nal corporations in the area of technology, and will contribute to the further development of Taiwanese industry.

Source: http://investtaiwan.nat.gov.tw/matter/show_eng.

jsp?ID=433

Figure 2: New Growth Engine Fund, Korea

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dresses the “Valley of Death” barrier in regards to access to risk capital. The figure below shows that the R&D stage, including the start-up phase, is well supported in Korea, as it is in Europe.

However, the New Growth Engine Fund supports medium- sized companies at the growth stage in Korea, where fun- ding at that stage is scarce in Europe, especially for high risk projects. The fact that these types of funds are avai- lable in leading and emerging regions outside Europe and not in Europe may be a major risk for the global compe- titiveness of KETs, as the commercial exploitation of KETs in emerging new global markets requires sufficient risk capital. Also in the USA there are funds available similar to the purpose of the New Growth Engine Fund.

Due to the limited market focus in the European research projects, large European companies increasingly participate and invest in research projects outside Europe according to informants. Research projects in especially the USA and China have a strong commercial focus and/ or market opportunities and are well funded. In addition, substantial investments are made in the Chinese national research infrastructure, which also includes the involvement of international leading edge research environments to lift the quality of the research base in China. Also in Taiwan, innovation policies are designed to attract the location of R&D units from international companies. Particularly for small European countries, the policy implications could be that it becomes increasingly important that national funds for commercially oriented R&D and innovation with focus on KET open up to participation and funding of internatio- nal participation, if Europe is going to be in the Ivy League of commercial exploitation of KETs.

Gaps in the continuous support to all firms in the value-chain

Manufacturing activities are an integral part of the in- novation value-chain, and efforts to retain or restore the KET value-chain in Europe are vital to product, process, and market innovation. For instance, the USA has launched several initiatives to re-establish manufacturing activities in various KET domains, such as Manufacture America – Rethink, retool and rebuild, and Japan provides support of industrial clusters (see main report section 3).

One of the key strengths in Europe is the strong clusters and networks built up over many decades supported by regional, national and EU policies. However, the whole value chain must be supported in order to build on these strengths, and for the globalised value chains this is not necessarily the case22.

22 Results from a study on Global Value Chains’ impact on Competitiveness policies, Danish Technological Institute 2011 ( not yet published)

The multinational companies have substantial funds and are likely to carry out most R&D internally, and SMEs be- nefit from a large range of public support opportunities at both European level and in the Member States. However, many mid-cap firms (or médiane in French), which do not come under the SME definition, face many of the same challenges encountered by SMEs, such as lack of internal means to ensure the deployment of KETs. Company repre- sentatives from the mid-cap category of firms intervie- wed for this study state that it is very difficult to obtain funding for deployment activities. R&D projects with a high potential may remain unexploited because national funding schemes will not allow inclusion of foreign companies23.

Several of the large companies interviewed also mention that sub-contractors are increasingly found outside Europe and that many R&D programmes outside Europe take in the whole value-chain.

CONCLUSIONS AND POLICY POINTERS

The study has identified a number of challenges for suc- cessful deployment of European policy initiatives in Europe and in emerging and leading regions outside Europe.

The study presents several good examples of international initiatives, but it is important to note that the study has not analysed challenges and gaps in policies in the regions out- side Europe. Examples of such challenges include lack of access to qualified labour, dependence on inflow of foreign scientists, and challenges for companies in high-tech/high risk sectors to attract private funding in the USA, limited research infrastructure in China, and limited success with commercialisation of R&D results and patents taken out in Korea. In especially the USA and in Korea, several measures have been launched to overcome the barriers to commercialisation.

In terms of global competitive advantage the work of the HLG shows that Europe has maintained a constant level of patent applications over the last years. However, it also stresses that Asia has accelerated its efforts and has over- taken Europe, whereas the USA has lost ground. Europe still has significant strengths in both research and industry in all KETs. Emerging regions and leading regions outside the EU are also facing challenges to overcome “the Valley of Death”.

There are several areas where the right mix of EU policy instruments could spur an increase in the industrial deploy- ment of KETs and thereby strengthen Europe’s competitive position in a global economy with increased focus on KETs.

23 Interview Alfred Hoffmann, Infineon

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Some of the interesting policy initiatives identified outside Europe cannot automatically be transferred due to differen- ces in framework conditions. Nevertheless these initiati- ves are an important source for policy learning, not least because our economies are increasingly inter-connected.

The findings from this study lead to a conclusion that the four areas below are important to address:

• Create critical mass in knowledge and funding through increased synergy and coherence in priorities;

• Increase market focus on R&D projects;

• Large scale demonstrators and pilot test facilities; and

• Provide post-R&D commercialisation support.

Create critical mass in funding and knowledge through increased synergy

As one geographical entity, Europe has the potential critical mass in knowledge and funding needed to compete with leading and emerging regions. However, as the EU consists of 27 Member States with different agendas, strengths and weaknesses, cultures, and funding schemes, the benefit of size is not used to its full capacity. Due to costs and tech- nology complexity there are areas related to KETs where Europe needs to increase critical mass to keep up with its competitors that invest heavily in the KET value chain.

Investment strategies should be based on a holistic ap- proach comprising research, investments in demonstration and innovation activities, and in education and training, to stimulate the soft side of technological innovation relating to the quality of human capital.

Emerging and leading regions outside Europe have clear long-term strategies for their research programmes in the KET areas, with an integration of program design from idea to commercialisation of project outcomes.

European research programmes need to be more focused to align the European initiatives and national strategies. A joint prioritised EU strategy could guide investments and

initiatives within the KETs. If this strategy is focused it will result in a coherent funding framework for technological advance and innovation in Europe, and it would allow for sufficient critical mass in funding and knowledge creation to fully exploit innovation opportunities stemming from KET deployment. For Member States, a coherent strategy would provide a guiding framework whereby they could prioritise and align national strategies with focus on KETs. As an ad- ded benefit, this would likely also contribute to an increase in cross-border collaboration.

Increased cross-border collaboration will especially benefit small and new Member States and address the lack of cri- tical mass in terms of access to funding, knowledge, large industrial partners, and facilities (research infrastructure).

Finally, it should not be forgotten that KETs are central to solving some of the great global challenges – offering the opportunity for Europe to become a central player in driving sustainable innovation in emerging new growth regions in the world. KETs are also critical to sustainable manufacturing and as the basis for developing an advanced service economy, as brought forward by the High Level Expert Group on service innovation.

A more strategic orientation in the deployment of the Structural Funds could provide the funding basis for large-scale demonstrators and pilot test facilities in which KET-based technological solutions are deployed to address specific national/regional challenges. This could boost nati- onal/regional innovation capacity. Such measures would be likely to contribute considerably to creating positive spill- over effects from European R&D to national and regional innovation priorities. Finally, this could also strengthen the clusters and value-chains in Europe operating in KET areas, and it could spur internal innovation capacity in SMEs and increase their ability to work actively with the knowledge system.

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Nationally funded projects often exclude participation of foreign companies to ensure that the taxpayers get a return on investment. This poses a barrier to innovative companies in small Member States with lack of critical mass in a particular technology. Models for trans-border cooperation in KETs within national program structures should be explored as an opportunity to increase the inno- vation effects of KETs R&D. National or regional innovations programs opening up to trans-border cooperation within a certain financial frame would likely increase the accrued benefit for the given Member State or region, even if it involved some level of funding to external partners.

Increase market focus on R&D projects

Basic research is essential for remaining competitive, but part of the European Research Programmes, such as the Framework Programmes, should have a clear strategy for commercialisation of results in areas where European research and innovation can contribute to the creation of new markets – also in a global context. Though there is a growing shared understanding of what constitute the grand global challenges and thus new market opportunities, new challenges may develop over time. This calls for supportive instruments such as foresights to ensure a dynamic policy framework. It also requires new monitoring frameworks to better understand the global uptake of KET-based techno- logical solutions as the basis for strategic policy interventi- ons.

The speed of research advance and thus innovation po- tentials relating to KETs poses particular demands to the capacity of evaluator teams appointed by the European Commission. Evaluators need to have an insight in and un- derstanding of emerging market potentials. Consequently, industry representatives or persons with global industry insights as well as insights in research and technological innovation advance need to be included in the evaluation process, and there should be increased requirements for state-of-the-art pre-assessment of market potentials and commercialisation plans. One option would be to use the technological readiness levels as a tool for assessing the results and expectation of the projects.

Enhancing the market opportunities would likely increase the commitment and involvement of highly innovative European companies in the Framework Programme. It will also increase the potentials for industrial deployment after the end of a project.

The funding framework for European R&D projects is not coherent in terms of the project cycle from idea to pre-commercial product, as brought forward by several stakeholders. There are examples from emerging and leading regions and countries of more integrated funding frameworks, which could function as a source of inspiration both for the European Commission and the Member States.

Large scale demonstrators and pilot test facilities An important step in increasing technological readiness le- vels is to test prototypes in large-scale demonstrators and pilot test facilities.

Large scale demonstrators and pilot test facilities create opportunities to enhance the economies of scale in the ex- ploitation of R&D and stimulate the manufacturing of pro- ducts by creating intensive knowledge on prototypes and the scaling process. Many Member States have invested in test equipment, but this is often not on a commercial scale.

Small Member States and companies without internal test facilities could benefit from European state-of-the-art large scale demonstrator and pilot test facilities available to the public in order to exploit R&D results.

Heavy public investments in large-scale demonstration and pilot testing facilities are made in competing regions. It may be necessary for Europe to go the same way. This will strengthen the clusters and encourage cross-border colla- boration. In addition, if Europe could offer an advanced test infrastructure also with access to “leader users” in different application areas, this could also attract leading foreign companies to locate part of their activities in Europe.

Below is an example of such as facility at a national level (see the Irish case study in Annex 2 for more examples).

In order to ensure results, a two-phase programme could be an option to boost commercialisation. The proposal for the first stage should provide evidence of commercial potential, whereas after the feasibility stage a new proposal should be submitted where both technological progress and commercialisation plan should be inclu- ded. This is inspired by the US SBIR/STTR programme.

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Nanofab1

NanoFab is one of the first European laboratories applying nano- technology to industrial production. Created to promote interaction between the nanotechnology and business communities, it offers businesses access to advanced laboratories in order to support tech- nology and scientific expertise transfer. The Nanofabrication Facility is a 2,500 sq m R&D lab to be utilised by both universities and inno- vative companies. NanoFab proposes itself as a reference point for scientific consultancy through its own facilities as well as through its links with national and international academic institutions. It offers a wide variety of high tech products and services aimed at satisfying the specific demands of its clients. Companies can place orders for R&D projects stemming from the company’s team of researchers or can merely use the laboratories with their own technical staff. The Nanofabrication Facility is managed by Nanofab s.c.a.r.l., a non-pro- fit organisation created by the Park of Science and Technology VEGA and by the CIVEN Association. The Region of Veneto has invested €14 million in order to create the laboratories that cover an area of 2500 sq m and employ 12 fulltime researchers.

For more info, see Italy innovation profile in Annex 3

1 http://www.venetonanotech.it/en/industry/nanofab/,76

The RTOs such as TNO in the Netherlands, Frauenhofer in Germany, VTT in Finland, and the Approved Technologi- cal Service Centres in Denmark, could offer the start of a sustainable European network-based infrastructure, allo- wing also that within the European infrastructure different institutions could be Centres of excellence for a particular KET area.

Provide post-R&D commercialisation support As many of the European R&D projects are early-stage research and in a pre-commercialisation stage, it is neces- sary to spur continuous innovation by matching the results of R&D projects with potential investors. As shown in this study, this can be achieved in many ways.

First, matchmaking measures could ease the process of fin- ding investors for the projects in need of further research or investment capital. This would require the outcomes of research projects to be managed and filed in a way that provides a transparent gateway for potential investors, be they large private companies or funds (venture capital, business angels, European Investment Bank).

Second, some sort of brokering mechanism could make it easy for investors to identify attractive opportunities so that especially SMEs participating in the European programmes could obtain support for commercialisation.

This would not require an increase in the funding for the Framework Programme (FP).

The European Commission could choose to prioritise parts of the FP budget for the above-mentioned activities. This could increase the attractiveness of the research results and thus attract more investors for high-risk projects – currently a major challenge for European businesses working with KETs. The main report provides several such examples.

This policy Brief draws on the analytical report:

Cross-sectoral Analysis of the Impact of International Indu- strial Policy on Key Enabling Technologies, produced by Da- nish Technological Institute and IDEA for DG Enterprise- in the context of a framework contract on European Sectoral Competitiveness.

http://ec.europa.eu/enterprise/sectors/ict/files/kets/ket- report_en.pdf

CONTACT

Peter Bjørn Larsen Chief Consultant Tel.: +45 7220 2672 pbl@teknologisk.dk

Hanne Shapiro Centre Manager Tel.: +45 7220 1415 hsh@teknologisk.dk

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Centre for Policy and Business Analysis works with the enabling factors that are critical to sustaining innovation in countries, regions, a value chain or a company. We add value for our customers by being able to combine our international knowledge on governance of innovation, en- abling technologies, education systems and the skills base as the point of departure for identifying how innovation performance can be improved in a company, in a region or in a country.

Innovation is crucial to sustainable growth - yet funding for innovation is scarce and competing with other policy priorities: therefore it is important that decisions on investments are based on solid evidence- and that imple- mentation is properly supported and monitored to yield the intended effects. This is the very core of our value proposition.

We count the European Commission, the OECD, UNESCO and the Institute for Prospective Studies among our inter- national clients. We also work with international

governments developing strategies and benchmarks in

areas such as ICT for effective governance and innovation, skills based innovation strategies, sector competitiveness or review of a particular policy field.

In the Danish market, our client list includes ministries, re- gions, local authorities and private enterprises. We have a strong methodical foundation and expert knowledge in our core areas whether we carry out an impact assessment of a technological demonstration programme, assist a region in developing a long term strategy for the development of their human capital in the context of smart specialisation within tourism, or assist a government in developing an e-government strategy to improve efficiency and transpa- rency in governance.

We have considerable international experience in com- bining our analytical strength with our process capacity such as scenario and foresight methodologies as the basis for testing common assumptions and critical uncertain- ties and for developing shared and robust implementation strategies.

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