No increase in Member States' R&D state aid
The majority of EU Member States have reduced their state aid in relation to GDP, and in line with Commission recommendations, have redirected remaining state aid towards 'horizontal' objectives, which should include research and development (R&D). But according to a new state aid scoreboard, published by the European Commission, R&D aid as a percentage of GDP barely changed between 1997 and 1999. This second edition of the state aid scoreboard is intended by the Commission to further increase transparency and to raise awareness of the need for state aid control. This control has been tightened by the Commission in recent years, thus ensuring that Member States only award aid that serves the common EU interest. In 1999, 79 billion euro of state aid was awarded in Member States, which the Commission argues has a considerable distorting effect on competition in the internal market. Using figures from 1997 to 1999, the scoreboard shows that R&D aid as a percentage of GDP was highest in Finland at 0.14 per cent (which also had a higher R&D expenditure as a percentage of GDP at 2.93 per cent), followed by Denmark and then Austria, whereas Greece allocated no state aid to R&D activities, and the UK, Portugal and Ireland only 0.01 per cent. However, figures show that R&D aid as a percentage of GDP changed very little in all 15 Member States between 1997 and 1999, with the level of aid remaining the same in nine Member States, falling by between 0.01 and 0.02 per cent in five and rising by 0.01 per cent in Luxembourg. Overall R&D expenditure as a percentage of GDP did however increase between 1997 and 1999, with most of the extra money coming from business, which overall increased its R&D spending in the EU from 1.19 per cent of GDP in 1997 to 1.25 per cent in 1999. On average, governments' contributions fell from 0.28 per cent to 0.27 per cent and the contribution of higher education remained constant at 0.39 per cent. Overall, 11 Member States demonstrated a downward trend in state aid in relation to GDP between 1997 and 1999, with Portugal cutting its aid the most significantly at nearly one per cent. Some 12 Member States redirected their aid towards horizontal objectives, which include safeguarding the environment, energy saving and support to small and medium sized enterprises as well as R&D. Luxembourg and Italy did this to the greatest extent, where the relative share of aid granted to horizontal objectives in the EU as opposed to regional or sectoral objectives increased by over 20 per cent. A lot of the redirected aid went towards employment and training, with SMEs (small and medium sized enterprises) also benefiting. The precise impact of R&D aid is unclear. In the scoreboard document, the Commission states that production efficiency is influenced by R&D, but that that the level of patenting and the growth of labour productivity vary considerably from one Member State to another and that there is no apparent correlation between either of these indicators and the level of R&D aid, so countries with a relatively high level of R&D aid do not necessarily generate a large number of patents or enjoy a high rate of labour productivity growth. The Commission adds however that the generation of patents is not the primary aim of R&D, and that the number of patents is dependent on the sector in which the research is conducted. The Commission recommends that future surveys include a wider range of indicators in order to gain a better insight into the relationship between R&D aid and economic performance. The Commission concedes that R&D is an area where state aid is necessary as 'market forces alone may not ensure a socio-economic optimal level of research and development effort.' The Commission justifies state aid support for R&D by saying that whilst investment decisions by businesses are determined by the benefits it will bring them, the total benefits to society of an R&D programme may be significantly greater due to spillover effects, such as researcher mobility, technical publications and conferences and patent documents. Furthermore, research that does not lead directly to new products cannot be protected by patents, so there is not return on investment, and small firms and start up firms in particular are likely to struggle to fund research programmes because of the high level of risk attached to them. These deterrents lead businesses to carry out less R&D than could be desirable. Whilst the Commission is therefore favourable towards state aid for R&D, it must not be allowed to distort competition and consequently is only permitted when it serves as an incentive for firms to undertake R&D activities in addition to their normal day-to-day operations.