Europe must innovate to keep the innovators

Complex and restrictive state aid rules need to be reformed, writes José Rivas

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May 09, 2017
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Necessity is the clichéd mother of invention, and the EU could do with some parental guidance if it hopes to hang on to its innovators in an increasingly competitive world.

Europe is falling well behind the likes of the US, Japan and South Korea, which operate systems of aid to research, development and innovation that are more effective than those in the bloc. Despite research and development being fundamental to any economy and social welfare programmes, the EU is not meeting its target to spend 3 per cent of gross domestic expenditure on innovation.

Nevertheless, EU public financing of private research and development significantly exceeds national public financing. Between 2007 and 2013 57 per cent of public funding to business-related research and development activities was financed at EU level, while 43 per cent came from public national resources.

Outside Europe, the US has been a driving force for innovation through its public procurement policies. But the EU cannot copy the US system without profound legal reform. EU state aid rules add a complex, time-consuming and restrictive legal layer to each member state’s national innovation policies. There is no equivalent abroad because non-EU countries do not need to build an internal market out of 28 member states. They already have their own.

EU competition law starts from an assumption that research and development public financing constitutes state aid, and it does not consider economic characteristics that profoundly differ from production. But legal reform should not be difficult; Brussels officials should immediately consider a package of improvements.

Leading the way is the issue of distorting competition on the product market. This allows for the particular nature of research and development to be considered while significantly reducing the number of notifications required and making the handling of those notified quicker and more efficient.

The incentive effect of aid should be presumed – or its demonstration significantly simplified – when the risk of distorting competition is limited. Other more efficient jurisdictions apply one or two levels of financing, whereas the EU applies more than 30. This imbalance should be corrected. And the research, development and innovation definitions used for state aid control since 1986 should be updated.

On the institutional side, the future framework for state aid control should not be the exclusive responsibility of competition regulators. And the internal governance at the EU commission should better reflect the need for innovation and competition policies to be merged.

These improvements will make the EU’s aid system more effective, and bring the jurisdiction into a more competitive position alongside the likes of Japan and the US.

José Rivas is a partner at the Brussels office of City of London law firm Bird & Bird; Serge Durande, a counsel at the firm and a former high-ranking official in the European Commission’s competition directorate, contributed to this article

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