H2020 SME innovation support: „first great success“?

In recognition of the inadequate funding for SME innovations, the EU has created a special financial instrument targeted specifically at SMEs. The first cut-off date passed on 18 June 2014, and 2 666 grant applications have been submitted. To put this number into the perspective – the general expected success rate for applications in this cut-off date is only of 6.2%. Lithuania has put forward 16 applications, thus Lithuanian SMEs will be lucky if one application is funded.

The majority of SMEs applied individually, and most consortia were of two SMEs. Given the European definition of the SME (which is accommodative to rather large companies), in an economy the size of Lithuania very few companies are disqualified. Nevertheless, assuming the costs involved, many micro enterprises (<10 employees, €2m turnover/assets) and even small enterprises – arguably the biggest disruptors and innovators, especially in small peripheral economies – are discouraged to apply.

Considering the ultra-low interest rate environment that we are in for several years already, the volume of applications shows how starved are innovative SMEs for capital and investment into innovation. It also shows how inadequate are H2020 (and also national) allocations to innovative SMEs, compared to other beneficiaries (e.g., universities). I am not going to expand on the quality of university innovation and technology transfer, the lack of which are the reasons to create direct SME funding instrument at the EU level in the first place.

According to one recent economic commentary describing current macro-economic environment – 20 percent of the economy, the listed companies and banks, get 100 percent of the credit and political capital available. Meanwhile, the 80 percent is suffocated through banks being unable to lend to them because of excessive bureaucracy and frequent late payment of invoices by governments. This means the credit due to the 80 percent is transferred to the listed companies, effectively lowering their cost of capital.

The above describes very well the current innovation funding environment, which is completely risk averse and favors the 20 percent – the incumbents with the track record of past public funding and political capital. Governments are unable to support the 80 percent of innovative SMEs due to excessive bureaucracy and lack of past support by the governments themselves! Even official criteria for H2020 SME instrument emphasize preferences for companies „based in an innovation hub, [having] received grants or venture capital funding, received innovation-related tax benefits, or won an innovation prize in the last 2 years“. Note that in small economies all venture capital funding is at least 50% tax payer’s money.

Some may argue that support for innovative SMEs and micro enterprises is a local (national) policy matter. Unfortunately, the 20/80 rule is fully valid at the local level as well – political capital, formal criteria and risk aversion (in many cases – enterprise aversion) prevails over quality of innovation. Moreover, allocation of public funding for such causes is clearly inadequate.

Lastly, it is worth noting the costs, distraction and lost opportunities of failed H2020 grant applications on the SMEs, and especially on micro enterprises. In many cases they prohibit the application altogether, but even if the application is somehow produced, the 6.2% success rate is hardly an encouragement to try again.

Unless something is done urgently to correct this imbalanced innovation system, which is ignoring the real disruptors and innovators, the innovative breakthroughs facilitated by public funding will remain a wishful dream.

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