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FrameWork methodology for SME innovATion policy SuppOrt within RD tax credits and inceNtives schemes in the EU (WATSON)

Periodic Reporting for period 1 - WATSON (FrameWork methodology for SME innovATion policy SuppOrt within RD tax credits and inceNtives schemes in the EU (WATSON))

Reporting period: 2017-12-15 to 2019-10-14

Most R&D tax credit schemes have not been subjected to detailed quantitative study, impeding comparability and limiting improvement potential to better target the specific needs of a wide array of R&D performing SMEs in Europe. WATSON aimed to further knowledge of innovation funding by providing a foundation for detailed study of SME funding with the data and results obtained integrated into an ICT innovation analytics platform. This will identify gaps in funding of EU tax credit schemes and help better target and improve measures. It is targeted at decision makers, specifically public bodies governing innovation policy in R&D funding. The results will expand innovation support for SMEs through the provision of instruments better targeted to the funding needs of specific SME segments. WATSON aims to set the foundation for innovation benchmarking and help maximize the impact of innovation funding.
The WATSON project has four main Work Packages, 3 research work packages (WPs 2, 3 & 4) plus development of an ICT platform (WP5). A full description of the results and their potential exploitation is available in the public reports accessible on the WATSON website.

In WP2 existing segmentation methods for innovation were reviewed to identify shortcomings and gaps. WP2 aimed to develop a comprehensive database and dataset of variables around SME innovation to support a new segmentation. A database was compiled to enable a realistic segmentation of innovating SMEs including new parameters such as smart specialisation priorities of the regions. Four segments were identified and tested. The data gathered was then used to create a profile of the four segments: Ground-breakers, Conservatives, Casuals, and Traditionalists. Further research is suggested to better understand how measures specifically targeted at this segment could boost value creation for these SMEs. A focus could be the identification of methods to support business model innovation.

WP3 looked at current practices in, and the governance of, R&D tax credits and incentives. Following initial desk research, two empirical studies were carried out, providing better insight into R&D tax incentives in ten selected EU countries.
Primary data was gathered via a qualitative survey aimed at government agencies, stakeholders and SME representative organisations to gain knowledge of issues and barriers to innovation, as well as aspirations for future of R&D tax incentives. Then the impact of R&D tax schemes on SME innovation was researched by quantitative analysis of data gathered from innovative SMEs.

WP4 considered the approach to industrial strategy and R&D policy, suggesting governments should use clearly identified and measured market failures. WP4 considered one key market failure, knowledge spillovers, which imply innovating firms do not invest enough in R&D because social returns are higher than private ones. Hence, governments can increase productivity by specifically targeting particular sectors, technology areas or firms generating higher social returns. A methodology was devised to estimate private returns to innovation which accounts for variations in value of innovations between different technology fields, providing a suggestive ranking of areas for governments to focus on.

Within WPs 2, 3 & 4, the WATSON project aimed to develop a framework methodology. Under WP5, a user-friendly ICT platform was developed into which to implement the results and data obtained.
A key aim of WP2 was to develop a comprehensive database and dataset of variables around SME innovation to support a new segmentation. A confidential bespoke database was compiled to enable a realistic segmentation of innovating SMEs including new parameters such as smart specialisation priorities of the regions. Data gathered has been used to create a new market segmentation based on a profile of four key segments identified.

Research studies under WP3 have gained knowledge on issues and barriers to innovation, as well as stakeholder aspirations for the future of R&D tax incentives. Three principal themes are identified: internal, external and informal barriers. Financial constraints such as lack of private funding, informal asymmetries, such as non-awareness of R&D tax incentives opportunities and positive R&D spill-over, are market failures that can lead SMEs to under-invest in R&D.
Government funding emerged as a prominent issue for stakeholders, specifically a lack of funding available for innovative SMEs. This was matched by responses highlighting the lack of private funding, indicating that innovative SMEs are underwhelmed with the options available for their technically challenging endeavours. Participants declared that the definition of innovation itself is ambiguous and understanding of it is contentious and confusing across SMEs, nationally and on a European level. This vagueness translates to SME R&D schemes implemented by governments and this confusion is fed into how the schemes are then used by SMEs. The SMEs then do not understand whether their innovation is classified as innovative, causing a cyclical effect. Much of the bureaucracy and jargon surrounding R&D tax relief schemes contributes to preventing applications from potentially qualifying innovative SMEs. The research makes recommendations to address these issues.

Under WP4, the researchers have addressed the renewed appetite for vertical industrial policy and strategy in advanced industrialized countries. The motivation is typically a desire to promote economic growth. The researchers suggest that a possible mechanism to guide strategy is the large and persistent differences in the knowledge spillovers generated by different technologies. By directing innovation support to technologies and sectors generating the highest spillovers, governments can have a positive effect on growth. The researchers developed a new way to measure innovation spillovers from patent and balance sheet data called Patent Rank (Prank). This builds on Google’s Page Rank but instead of a probability measure it provides a value measure of spillovers. It takes into account both direct and indirect spillovers and differentiates between global and national spillovers. It is argued that the latter are relevant for a national industrial strategy. It is also shown that there is significant and economically meaningful variation in the value of spillovers generated by different technology areas. The framework also uncovers considerable variation between different countries, between measures of comparative advantage and measures of spillovers as well as between national and global spillovers.

Under WP5, Exodus have worked with the researchers and led on developing a user-friendly ICT platform. There is a lot of potential in improving and adding new services and functionality. There is a lot of potential for adding more data to the system, possibly a direction worth investigating would be adding to the platform secondary data (i.e. collected by professional data collection sources such as Eurostat or even private collections) as primary data collection requires a lot of effort. Possibly, it would be interesting to offer two separate tools, one for Researchers and another for Public Authorities and Private investors (a less complicated version).
Diagram of framework and interaction of main WATSON work packages