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Comments by ACCA
January 2004

The context for the consultation

The European Commission's consultation on the new Framework Programme for Competitiveness and Innovation should be considered in the context of the findings of the Facing the Challenge report from the High Level Group chaired by Wim Kok. This report examines progress on the Lisbon objective for the EU to become, by 2010, �the most dynamic and competitive knowledge based economy in the world.'

In March 2000, the 15 EU leaders at the Lisbon Spring Council agreed that the EU should commit to raising the rate of growth and employment in ways that would to underpin social cohesion and environmental sustainability. This was to compete with the mounting economic challenge from the US and Asia and the slowdown of European population growth. The Kok report states that �halfway to 2010 the overall picture is very mixed and much needs to be done in order to prevent Lisbon from becoming a synonym for missed objectives and failed promises'.

There have been significant changes in the economic environment since the introduction of the Lisbon strategy, which includes the growth of the EU itself from 15 to 25 member states and the increased competitiveness of Asian economies. This has made the implementation of the Lisbon agenda more difficult and has implications for the continuation of past policies and the introduction of a new framework.

It is noted that the CIP consultation is taking place �without prejudice' to the results of the midterm review of the Lisbon agenda in spring 2005. The review should include an examination of the extent to which the current EU schemes, which relate to competitiveness and innovation in particular, have contributed to EU performance. It will also be an opportunity to consider the introduction of new initiatives. The CIP consultation, which proposes to integrate a number of existing and planned EU programmes, may therefore be discarded in favour of a raft of new initiatives which could better address the EU's performance on competitiveness and innovation.

The community response

The consultation document states that the benefit of introducing a new framework for competitiveness and innovation would be its promotion in relation to other EU programmes and this would make it possible to create synergies with the programmes. It also claims that it would �contribute to the improvement of the international competitiveness and sustainable growth of the EU economy by orientating it towards innovative, productive, environmentally sound and resource efficient approaches'. The document, however, fails to provide any detail about how these advances could be achieved.

The consultation also fails to make reference to alternative policies, approaches and instruments that could be introduced into the framework, rather than the straightforward absorption of the existing multi-annual programmes into the framework. Given the results of the Kok report and the anticipated results of the midterm review, this constitutes a missed opportunity to make the framework a robust and successful initiative.

The relationship between Member States, on a National level, and the Commission, on a European level, is discussed at various points within the consultation, although the document is not specific about how it proposes to deal with the anticipated tension. The consultation quotes the Kok Report's recommendation that each Member State should draw up national plans to boost growth and jobs. The consultation then goes on to point out that �equally there is a complementary role for Community action to support coherence and consistency in implementation'. The framework should address how it can fit into Member States' agendas.

The findings and recommendations in the Kok report

The CIP consultation does not address many issues highlighted in the Kok Report and this has the effect of undermining the thrust of the consultation. As an example, the Kok report notes that �The positive aspect of enlargement is that it offers the prospect of the new Member States achieving rapid rates of growth in GDP and productivity as they catch up with the European average, so creating an area of economic dynamism in eastern Europe'. The expansion of the EU-15 to the EU-25 and further proposed enlargement, which can be considered as a significant influence on competition and innovation, is not mentioned.

ACCA believes that there should be clear added value in any action at the EU level and that intervention should be focused on addressing market failures. We also believe that there should be a clear impact assessment included in the consultation, detailing the expected economic, social and environmental impacts of the envisaged new programme

Encourage innovation and the sustainable use of resources

ACCA believes that the issue of Intellectual Property Rights (IPR) is an important action point for the EC to address. In the UK , 90% of small enterprises are in the service sector. The nature of many of these businesses is knowledge based and their assets primarily consist of intellectual property. Research in the UK , however, indicates that small businesses are reluctant to use formal methods of registering intellectual property and that there is a lack of knowledge and understanding about this area.

The recognition of intellectual property through registration of IPR not only protects the property but can also be a basis for the valuation of the business. This is critical for small businesses when raising external finance and for transferring the business. For example, a large proportion of owner-managers of small knowledge-based enterprises who retire or move on to another opportunity simply close down their businesses, believing that they have no value because there are very few, if any, tangible assets. They fail to recognise the value of the intellectual property of the business. The act of registering intellectual property recognises value in the business. This would attract potential purchasers and bring welcome funds for the outgoing owner-manager.

There are a range of valuation methods that can be applied to intangible assets such as intellectual property. It should be remembered that the valuation of businesses is unlikely to be scientifically accurate but does represent an equitable way of establishing a value that can be used in terms of collateral or negotiation in the transfer of a business to different owners.

ACCA believes that if small knowledge-based firms are to prosper, the EC should work with the accountancy profession to promote best practices where the value of intellectual property will be recognised.

Ensure the mastery and best use of ICT

ACCA agrees that businesses' adoption of Information Communications Technology (ICT) is important in improving productivity and growth. We believe that, when formulating actions in this area, the EC should consider recent evidence, which suggests that there is a divide between the size of businesses and whether they have embraced ICT and the Internet. There is a clear trend towards small and micro businesses �clicking off', with many now questioning the value of the Internet and ICT. In the UK, business connectivity (defined as �businesses that have a website, and/or have 25% or more of employees making daily use of email') for micro businesses has decreased from 62% in 2001, to 50% in 2002 and was down to 45% in 2003. In small businesses it has decreased from 77% in 2001, to 70% in 2002 and has fallen to 69% in 2003. In contrast, business connectivity for medium-sized and large businesses has remained the same, or increased, in the same period.

One of the primary reasons is cost. Large businesses have the advantage of cheaper connections, together with the facilities to employ specialist ICT personnel. There is also an increasing focus, not on whether businesses have Internet access, as was the case in the late 1990s, but on the speed and type of access. Large businesses again have the advantage of being able to afford almost unlimited bandwidth. We believe that there needs to be a focus on the benefits that ICT investment can bring to SMEs, along with a greater understanding of the constraints on small and micro businesses. Policies should be developed to redress this imbalance.

Improve SMEs' access to finance

Access to finance is generally not seen as a major problem by small businesses in the UK . The latest data from the Bank of England reveal that there is little evidence of firms facing difficulty accessing debt finance. Concern about access to bank finance is not something that members of UK small business organisations are raising with them. The Small Business Research Centre's European Survey for Lloyds TSB found that access to finance was a constraint on growth for only around 1% of businesses.

ACCA recognises that, although access to finance is not a significant problem for many small businesses, there is evidence that a number of groups, such as ethnic minorities and women, do have problems in raising finance. The Consultation Paper is right, therefore, to aim to bridge market gaps in SME finance.

In the UK , a number of specific groups and sectors have been identified as facing distinct challenges when accessing finance. Women, for example, receive one-third of the level of finance received by men when starting up in business. The newly formed National Council for Graduate Entrepreneurship will examine the issue of student debt and how this affects the ability of graduates to access finance to start a business. As recognised within the UK Treasury's response to �Bridging the Finance Gap' � December 2003, high-technology firms face specific issues in accessing finance. High-technology firms are more likely to trade on their intellectual property (IP) and, therefore, often find it difficult to capture money and support.

Facing the challenge , Report from the High Level Group chaired by Wim Kok, 3 November 2004 .

�Facing the challenge', Report from the High Level Group chaired by Wim Kok, 3 November 2004 .

Booz, Allen, Hamilton (2003),). Business in the Information Age. International Benchmarking Study . DTI.

Ibid.

Bank of England . Finance for Small Firms � A Tenth Report , April 2003.

Institute of Directors and Confederation of British Industry, i n Bank of England , Finance for Small Firms - A Tenth Report , April 2003.

Hart, M. (2003),). Lloyds TSB/ Kingston University , European Small Business Survey . Small Business Research Centre, Kingston University .

Carter, Anderson and Shaw (2001). Women's Business Ownership: A Review of the Academic, Popular and Internet L i terature .

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