vision and characteristics of multi kets pilot lines -...

Multi-KETs Pilot Lines Vision and characteristics of multi-KETs pilot production activities

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Vision and characteristics of multi KETs pilot lines Intermediary report Date: 5 September 2013 Authors: Marcel de Heide, Maurits Butter, Danny Kappen, Axel Thielmann, Annette Braun,

Michael Meister, David Holden, Finbarr Livesey, Eoin O’Sullivan, Christian Hartmann, Mirari Zaldua, Nicolo Olivieri, Leo Turno, Matthias Deschryvere, Janne Lehenkari, Patricia Ypma, Peter McNally, Mark de Vries

Number of pages: 58 Number of Annexes: Version 5.0

This report represents an intermediary deliverable of the mKETs-Pilot line project. Its aim is to create a level playing field for discussion on policy recommendations for multi-KETs Pilot production activities by introducing current thinking on relevant key-concepts. In the course of the project, this report will further evolve; key-concepts will be further defined, using the outcomes of the workshops, additional insights through expert interviews and desk research, and Phase II Demonstrator case studies. Elements of the report should subsequently be regarded as preliminary hypothesis, to be refined and finalised in later stages of the project. The opinions expressed in this study are those of the authors and do not necessarily reflect the views of the European Commission


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No part of this publication may be reproduced and/or published by print, photo print, microfilm or any other means without the previous written consent of the mKETs-PL consortium. Submitting the report for inspection to parties who have a direct interest is permitted. The project partners of the mKETs-PL consortium are:

Netherlands Organisation for Applied Scientific Research TNO

Fraunhofer-Gesellschaft

Commissariat à l'énergie atomique et aux énergies alternatives (CEA)

Cambridge University Technical Services ltd.

VTT

Fundación TECNALIA Research & Innovation

Technology Foundation Partners

Joanneum Research

D’Appolonia S.p.A

Spark Legal Network and Consultancy ltd.

Strauss & Partners

Noblestreet


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Content

1 Introduction to the paper ................................................................................................................................. 4

1.1 Context of the study .................................................................................................................................. 4 1.2 Study description ....................................................................................................................................... 4 1.3 Study objectives ......................................................................................................................................... 4 1.4 Objective of this paper .............................................................................................................................. 5 1.5 Backgrounds to the approach .................................................................................................................... 6

2 A view on (multi) Key Enabling Technologies ................................................................................................... 8 2.1 Introduction to the chapter ....................................................................................................................... 8 2.2 Key Enabling Technologies as drivers for innovation ................................................................................ 8 2.3 Six Key Enabling Technologies ................................................................................................................. 10 2.4 Multi KETs versus single KETs and crosscutting KETs .............................................................................. 12

3 Gaps in the innovation chain .......................................................................................................................... 16 3.1 Introduction to the context ..................................................................................................................... 16 3.2 Valley of death: The three-pillar bridge approach................................................................................... 16 3.3 Combining Technology readiness with Manufacturing readiness ........................................................... 17 3.4 Innovation: Bridging what valley? ........................................................................................................... 19 3.5 ................................................................................................................................................................. 21 3.5 The industry value chain: Creating value ................................................................................................. 22

4 Defining Pilot activities ................................................................................................................................... 24 4.1 Introduction ............................................................................................................................................. 24 4.2 The context of pilot activities .................................................................................................................. 24 4.3 Defining Pilot production activities ......................................................................................................... 26 4.4 Concluding: Characteristics of pilot activities .......................................................................................... 28 4.5 Rationale for structuring pilot production activities ............................................................................... 30

5 Pilot activities and policy ................................................................................................................................ 35 5.1 Introduction ............................................................................................................................................. 35 5.2 Rationale for intervention: the concept of market failure ...................................................................... 35 5.3 R&D and Innovation and the State Aid rules ........................................................................................... 37 5.4 Policy intervention: addressing the investment decision of firms .......................................................... 39 5.5 Barriers associated to PPAs ..................................................................................................................... 41 5.6 Linking barriers to policy approaches for the different scenarios ........................................................... 44 5.7 Preliminary criteria for selecting pilot activities for the different scenarios ........................................... 52 5.8 Horizon 2020 and additional public support to PPAs .............................................................................. 52

5.8.1 State Aid rules and co-funding.......................................................................................................... 52 5.8.2 Examples of financing of PPAs .......................................................................................................... 53

Literature ............................................................................................................................................................... 57


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1 Introduction to the paper

1.1 Context of the study The European Commission has identified 6 Key Enabling Technologies

1 as being crucial to the further

development of the European economy [EC, 2009b]. Applications of KETs are considered to stimulate competitiveness and generate jobs, growth and wealth in the economy. However, Europe can make better use of the enabling character of these KETs and the Commission acknowledges that a tri-partite approach is needed (cooperation Industry-National government-EU-government). Especially bridging the so-called “Valley of Death” to upscale new KET technology based prototypes to commercial manufacturing often is a weak link in successful use of the potential of the KETs. To bridge this gap, pilot activities are needed to initiate the first experience with the new technologies and enable commercial manufacturing.

1.2 Study description On the 7

th of January 2013, the Multi-KETs Pilot lines project started. This ambitious project assigned by EC- DG

Enterprise and Industry aims at the preparation of a common understanding of what these pilot activities are and how they can be supported by the European Commission. The 24 month project distinguishes between two phases: 1. M1-M6: Analysis of the state of play and preparation of pilot production activities; 2. M7-M24: Demonstration: Assessment of two case Pilot production activities.

The project will result in a tentative implementation roadmap that can be used for the further development of a systematic EU policy to support pilot activities and other KETs activities. The consortium offering these services has been carefully set up to include the full range of expertise needed to fulfil the requirements of the project. The main partners in the consortium are the 3 largest Research and Technology Organizations in Europe: TNO (NL), FhG (GER) and CEA (FR). They are complemented by a number of country expert organizations, including Cambridge University (United

Kingdom), D’Appolonia (IT), JOANNEUM RESEARCH (AU), The TECHNOLOGY PARTNERS Foundation (POL), Tecnalia (ES) and VTT (FIN). Additionally, a specialized organization for legal issues: Spark has joined the consortium (UK), as well as Noblestreet (NL) to cover the development of the project website and Strauss & Partners (BEL) to cover the organization of workshops and conferences.

1.3 Study objectives The overall goal of this project is to prepare and foster a common understanding and consensus for future actions in Europe focusing on multi-KETs pilot activities. This will be done with the help of an assessment of the policy and industrial initiatives in this field, and an in depth practical analysis of two pilot activities. This information is used to provide concrete evidence and lessons to further shape the EU policy on future large scale multi-KETs pilot activities in respect with States aids and competition as well as the World Trade Organisation regulations.

1 Nanotechnology (NT), Photonics (PHOT), Industrial biotechnology (IB), Advanced materials (AM), Micro- and nano-

electronics (NME), Advanced manufacturing technologies (AMT).

Core to the study is the development of a policy supporting so-called Pilot lines. These industrial activities focus on the “scaling up” of product prototypes to low volume, but commercial production. During the desk research, interviews, country assessments and workshop it has become clear that the term Pilot lines is too limiting the scope of the activities and should be changed to pilot production activities (PPAs).


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Although there is a broad consensus within Europe on the benefits of Key Enabling Technologies for the economy and society at large, a clear view of the concepts, what kind of policy initiatives are already being implemented and what pilot initiatives can be seen. And this is not only focused on the EU, but also non EU countries should be assessed. The overall objective of the project on this assessment of policy and industry can be formulated by the following:

A shared vision for the efficient development of multi-KETs pilot activities, including a conceptual framework, common definitions as well as view on policy.

An overview of EU member state policy initiatives that focus on supporting (multi) KETs pilot activities and the initiatives in 5 non EU countries (national, regional, local).

An overview of EU based pilot activities that are under construction, publicly and privately financed, and the initiatives within 5 non EU countries.

In depth benchmark case studies of EU and non EU countries on their policy supporting pilot activities, as well as significant pilot activities.

A tentative policy roadmap for successful implementation and a long term agenda for actions at EU and national level by public authorities and stakeholders (2014-2020).

Core in the study are two multi-KETs pilot activity projects (i.e. Demonstrators), where single industry owners or consortia are up scaling their KET based prototype products to prototype demonstration in an operational environment. In these projects, selected existing pilot activities are monitored supported and used as demonstrator for third parties. The objective of these Demonstrators is twofold:

Gaining practical experiences in conducting pilot activities as input for policymaking;

Demonstration of pilot activities to third parties in order to share experiences (Demonstrators). The gaining of practical experiences is done in order to get a view on what the issues are in the up scaling. This is important input for further development of a policy roadmap, and enhance contribution to better shape existing and new policy initiatives as well as funding instruments to ensure that they contribute directly and efficiently to the EU strategic goals. Issues that are to be assessed refer to:

Legal, policy and political structures (e.g. IPR, transnational laws and regulation, policy support, connection to existing policy);

Economic, technological and societal feasibility (e.g. market demand, identification of market opportunities, societal acceptance, technological barriers);

Firm capacities (e.g. human capacities, network position, access to financial capital). The demonstration activities within the Demonstrators are to share experiences of the industrial partners with third parties. These activities aim at the following:

Increasing the capacity of SME’s, research organisations, and intermediary organisations to engage in pilot production activities;

Enhance the visibility and awareness of industry and research to the issue of pilot production activities;

Facilitate dialogue and create a common understanding, coherent vision and consensus within government, industry and research on pilot production activities.

1.4 Objective of this paper This paper includes a consolidated view on the mKETs and Pilot production activities and provides a second step towards the definition of the concept of multi-KETs pilot activities and translation to policy. Where the first versions had a more information collection character, this version will also include some hypothesis to be tested and refined as basic approaches to policy development.


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1.5 Backgrounds to the approach This document is based on the extensive desk research, interviews, workshops and the online survey. During this first stage of the project, the following activities were conducted:

Preliminary desk research for the first conceptual views and visions on pilot production activities (PPAs) and multi-KETs.

Some 200 interviews, both within the framework of more general information collection to the concept of mKETs and pilot production, as well as input to the 20+1 country studies.

Desk research to enhance the information basis on the 20+1 country studies.

Two expert workshops to discuss both diverging views on mKETs and PPA, as well as converge the views into more consolidated conceptual definitions and elaborate them with practical experiences.

A survey among 679 experts in Europe, Asia and America (20 countries). Often these experts were experienced in PPAs, both as representatives of government, research and industry.

Development of 20+1 country studies, in which provided information (desk research and interviews) were assessed and integrated to a consolidated view on country specific policy and industrial strategies concerning mKET PPAs.

An benchmark assessment of the 20+1 countries including the main differences, similarities and conclusions to be drawn.

A legal assessment, looking at European and Member State level, analysing the influences from State Aid laws, IPR, Competition law and other relevant legislation.

Discussions in the project Steering Committee on preliminary outcomes on the study and conclusions to be drawn.

In addition to these more formal activities, also many discussions were conducted among various project partners to incorporate the views from the work done. The stage of this report is now that the views and information is integrated in several concepts, but also translated in a first view on potential policies to support PPAs. However, not all findings are integrated yet:

The further general demarcation and definition of mKETs is refined based on outcomes of the country studies, survey, interviews, workshops and desk research.

An analysis of the innovation chain and valley of death is provided, based on the interviews, workshops and desk research.

The concept of PPA is further defined and demarcated (based on interviews, workshops and desk research) and a preliminary categorisation of four types of pilot production activities is provided, including a first characterisation. A further refinement and consolidation is still needed based on the country studies and survey.

A preliminary assessment of important barriers to these four types of PPAs is conducted to test the approach and create a first view of possible outcomes. This assessment must be further refined with the outcomes of the benchmark study, the individual country studies and survey. Also feedback from additional external experts will be organised (e.g. Steering Committee members).

This document is the fifth version of a working document that will be one of the main results of the mKPL project. Initiated at the start of the project, a conceptual broad document has now evolved in a more focused paper that highlights the different aspects of the environment of multi-KETs Pilot production activities. Still, the document must be seen as an intermediary discussion paper; the fifth and adjusted version after the second mKPL workshop. Results of the discussions during the second workshop are integrated, as well as additional views on market failure, State Aid rules and four refined types of pilot production activities. However, not all findings are included yet and the document includes a number of hypothesis that are going to be analysed and further refined based on the country studies, benchmark study and the survey.


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An assessment of the consequences of State Aid law and legislation is made, leading to a view on the consequences of legislation to policy supporting PPAs. A further refinement of these consequences with the country studies and survey is scheduled.

The preliminary characteristics and identified barriers for the four types of PPAs are translated into related market failures and potential policies. This preliminary policy assessment provides a systematic first view on potential policies, but still needs a full assessment based on the country studies and survey.

The conclusion can be that the definition and demarcation of mKETs and PPA are well established, but the further translation into types of PPAs and related potential policies must be seen as a hypothesis that will be tested in the coming months. Next to that, a further refinement by the demonstrator activities (Phase II) will enhance the quality and information of the outcomes. Also an assessment of the consequences of the individual KETs is scheduled (e.g.: Do individual KETs show different PPAs?), as well as a more in depth economic analysis (e.g. expected jobs, related market structures, EU value chain).


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2 A view on (multi) Key Enabling Technologies

2.1 Introduction to the chapter The concept of Key Enabling Technologies is introduced by EC policy makers as a building block for the formulation of a growth strategy [EC, 2009b]. Looking at the future of the (global) industry, it is expected that the shape and potential of industries worldwide will be transformed within the coming next 5-10 years and technological development will be one of the driving forces. Technological innovation is seen as being key to meeting the grand challenges that lay ahead, like the shift to a low carbon, knowledge based economy, as well as ensuring welfare, prosperity and security. In its Communication about KETs [EC, 2009], the Commission has identified 6 key enabling technologies that are seen critical to this transformation and key to meeting the societal challenges that lay ahead. Within this project, the concept of multi-KETs is a core element, based on the foreseen potential cross-fertilisation of the individual KETs. The premise is that the combination of several KETs will open up a new corridor of products, with high innovative character. This chapter will focus on creating a more detailed view on the aspect of KETs and Multi-KETS that is needed to better understand the later implications to pilot activities and the supporting policy. In this chapter, an assessment will be made of the KETs and multi-KETs perspective of the study. What are the core characteristics of KETs and how can multi-KETs be defined, also in regard to crosscutting KETs?

2.2 Key Enabling Technologies as drivers for innovation Core to the KETs policy strategy is the concept of Key Enabling Technologies. Before defining multi key enabling technologies, the question is first what Key Emerging Technologies are. In this section, the core characteristics of the KET-concept are assessed in order to enable a discussion on the core characteristics and definition of multi-KETs later on.

The conclusion that some key technologies are crucial to address the economic and societal challenges is not new. Already in 1994, DeGreori & Sheperd stated that technology is crucial to provide the social need and create a balance to the supply of nature and use by mankind [DeGreori & Sheperd, 1994]. But even in 1994, this was considered a basic understanding. The adoption of the concept of key general purpose technologies in policy is also not new. The Rand Corporation in the 90s of the previous century published studies where an overview is provided of “critical technologies” for our economy and society at large [Wagner, 1999] and in 2009, 85 “Technologies Clés” were identified as being

crucial to the future of France. But the actual incorporation of key technologies as being the foundation for a strategy for economic policy is relatively new. Various countries use technological areas as structuring mechanism for policy (e.g. the US: Platform technologies and Chinese Industrial technologies), but they normally have limited focussing and demarcating mechanisms. However, the country studies show that the use of the concept of KETS as structuring mechanism for policy in the EU member states is almost not supported. Often, existing strategies are rephrased to align strategies.

Key technologies as a common concept Key technologies are more commonly used as a priority mechanism for innovation policy. The US government uses the term subject areas, including Bioscience & Health, Building and Fire Research, Chemistry, Math, Physics, Electronics & Telecommunications, Energy, Environment/Climate, Information Technology, Manufacturing, Materials Science, Nanotechnology, Public Safety & Security, Quality, Transportation. The British government has identified six technology areas as candidates for national centers: High value manufacturing, energy and resource efficiency, transport systems, Healthcare, ICT and electronics/photonics/electrical systems. Often, these technologies are considered General Purpose Technologies that can affect an entire economy and will drastically alter societies

through their impact on pre-existing economic and social structures.


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The EU Key Enabling Technologies are limiting the scope of EU policy by stating that the six KETs are considered the priority technologies for industrial development. Specific policy is now developed on this limited number of technologies, which will be accompanied by financial investments in these KETs. However, the concept of KETs does not originate from industry, and their actors subsequently have not yet fully adopted this terminology (i.e. the industrial actors in the value chain in general do not classify their activities (e.g. production) according to specific technologies (such as KETs).

2 Also, the six technologies are broadly defined (technology and application

domain), creating indistinctness and political working space. In the Communication of 2009 and the COMMISSION STAFF WORKING DOCUMENT, the Commission provided a definition of KETs:

KETs are knowledge intensive and associated with high R&D intensity, rapid innovation cycles, high capital expenditure and highly-skilled employment. They enable process, goods and service innovation throughout the economy and are of systemic relevance. They are multidisciplinary, cutting across many technology areas with a trend towards convergence and integration. KETs can assist technology leaders in other fields to capitalise on their research efforts.

There are several aspects of a KET that can be distilled from this definition:

They are knowledge and R&D intensive and need highly-skilled workforce;

They are accompanied with high capital expenditures;

They initiate and enable innovative new products, goods and services and can assist the valorisation of research in other domains;

They are systemic to the industry base, the economy and the society and can be seen as industrial technologies.

These aspects create a view on the KETs. It is clear that they emerge from extensive research and create a competitive advantage that cannot be easily “copied” due to their knowledge base and long term investments. On the other hand, the KETs are crucial for the economy to keep being cutting edge, innovative and competitive, and being in the forefront of market developments (emergence and growth). They increase the competitive character of the economy with regard to quality and functionality, but can also stimulate cost competitiveness by offering innovative solutions. Concluding, the KET emerges from research and are essential building blocks for a competitive and innovative economy.

Furthermore, the KETs must be seen as a first step in a chain of developments towards a product. The key enabling technologies are just the starting point of a series of metamorphoses, like a butterfly that changes its appearance during its life cycle. A KET is a key knowledge on how to solve certain problems with tools, machines, or other techniques. But these technologies are the first step and will transform into technological components of products (KETs based components), which in their turn will transform into end-user products (KETs based products). Stimulating KETs must be seen as the first stage of this metamorphoses process, finally resulting in an end-

user, KETs based product. Furthermore, this final product is essential to benefit from the investments in technologies and components by economic and social

benefits. At the final stage, most jobs are created, societal challenges are addressed and economic growth is stimulated at full range.

2 See Interim Report of Feasibility study for an EU Monitoring Mechanism on Key Enabling Technologies (July 2012)

Figure 1: Metamorphoses of KETs - evolution from Technologies, to Components, to end-user products.


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The characteristics of these KETs-based products are (based on ([EC, 2012]; [Van der Velde et al, 2012],[ HLG, 2013]):

Enabling innovative goods and services: an enabling product for the development of goods and services enhancing their overall commercial and social value;

Unique by its (multiple) use of KETs: unique properties/functionalities induced by constituent parts that are based on nanotechnology, micro/nano-electronics, industrial biotechnology, advanced materials and/or photonics;

Using advanced manufacturing technologies: The manufacturing of KETs-based products is not only using KETs for the product functionalities, but also is using advanced manufacturing technologies.

2.3 Six Key Enabling Technologies The previous section discussed the more general characteristics of the KETs. Six KETs have been identified that meet these requirements. Although the process of identification is unclear, the identified KETs can be further demarcated based on previous work, e.g. by the High Level Working groups. The first KET is MNE: Micro- and nano-electronics. This set of technologies refers to the semiconductor components, as well as the microelectronic subsystems (MEMS). These micro/nano-electronic components are becoming more and more ubiquitous and integrated in every part of our society. The KET is focused on only the hardware component of the electronics and its most important future trend is the further miniaturisation to the nano-level. These KETs will enable incorporation of intelligence in almost all products, especially because of its on-going reduction of size, enhanced functionalities and cost reduction (product and process). The KET includes the advanced semi-conductor technologies (e.g. transistor technologies, capacitors, inductors, micro-antennas, etc.), but the KETs-components include e.g. computer chips, sensors, micro-actuators and MEMS. Based on these components, a vast number of KETs-based products are “enabled”, from mobile phones to cars, from computers to logistical systems, and even robotised harvesting systems. NT: Nanotechnology is a very diverse, naturally multidisciplinary cross-cutting concept that covers a wide range of developments from novel approaches for the development of new materials to structures with tailor-made unique properties. The KET Nanotechnology emerges from the study of the controlling of matter on the nanoscale. Generally nanotechnology deals with structures sized between approximately 1 and 100 nanometre (10-9 metres) in at least one dimension, and involve developing materials, structures or devices within that size. The technologies include both the ability to control and manipulate matter on an atomic/molecular scale, as well as the understanding of properties and behaviour of nano-scale structures. Using these technologies, KET-components can be designed and produced. IB: Industrial biotechnology can be separated into two different elements. The biotech component focuses on the use of living systems and organisms to develop products, including technologies based on biological processes, like enzymes. The industrial component demarcates its application to industrial processes (production of industrial goods). These can include substances and chemical building blocks also produced by traditional processes (but usually with less resources and more specific outcomes), but also can produce products with specific and often complex specifications, or be used in environmental technologies. Manufacturing of biotech based pharmaceuticals and agricultural biotechnology is excluded.

The policy conclusions are:

To ensure the optimal benefits, a KETs policy must provide support to all stages in the life cycle of a KET in an integrative way. Supporting a part can lead to ineffective policy and suboptimal use of governmental investments.

KETs are highly research intensive, so this integral policy needs to incorporate a balanced support of research, development, innovation and valorisation.


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PHOT: Photonics is “the science of harnessing light. Photonics encompasses the generation of light, detection of light, management of light, through guidance, manipulation, and amplification, and most importantly, its utilization for the benefit of mankind” [Photonics21, 2010]. The field of photonics started with the introduction of the laser in 1960 and is used to describe the area of electronics that researches the field that studies the use of light to perform functions. The in the early stages application domain was mainly on telecommunication, but application has broadened to energy, healthcare, manufacturing and several other industries. Materials are perhaps the most applied domain of technologies within our society, as they are the building blocks of every physical product. AM: Advanced materials are not defined in previous work by the HLG, but key segments identified are metals, synthetic polymers, ceramics, composites and biobased polymers [HLG, 2011]. A recent study on the feasibility of a monitoring system on KETs has pointed out that an important criterion for demarcation is their continuous development and that they are not yet in the stage of final form of application. The last KET is AMT: Advanced manufacturing technologies. This crosscutting additional Key Enabling Technology is often of critical relevance to the other five KETs. It focuses on the development of the needed technologies and innovations that can be seen as a crucial driving force for the actual creation of the KETs-based products that are enabled in the other KETs. The HLG defines this KET as “Comprising production systems and associated services, processes, plants and equipment, including automation, robotics, measurement systems, cognitive information processing, signal processing and production control by high-speed information and communication systems” [HLG, 2010]. Advanced manufacturing technologies comprise all technologies that significantly increase speed, decrease costs or materials consumption and improve operating precision as well as environmental aspects such as waste and pollution from manufacturing processes. Looking at these six descriptions of the KETs, it is important to conclude that there is overlap. Not only is Photonics seen as part of electronics, also other technologies are overlapping, like nanotech-photonics, advanced materials-nanotech, and advanced materials-industrial biotech. And although IB and AM have less overlap with the other KETs, even micro/nano electronics-industrial biotech is presently emerging with e.g. biosensory technologies. And by definition, AMT is crosscutting to the other KETs. The conclusion can be that between these six KETs, many multi-KETs and crosscutting KETs pre-exist due to their definition, its consequence being that a separate policy on each single KET needs strong focus. Second is the issue what the priorities of other countries are in perspective of the concept of KETs and the six selected technology areas. As said, several countries show a similar policy approach towards the use of technologies being a driver for innovation and economic developments. And although the six KETs selected by the European Commission most of the time are addressed, especially software, life sciences and energy related technologies are also incorporated. Also, priorities technologies are often not been made and the technologies cover a broader spectrum.

The policy conclusions are:

A different, more dynamic approach to the selected KETs will better anticipate on future new emerging enabling technologies. When policy will include wild cards and quick incorporation of these new technologies, research and industry can adopt more quickly to emerging opportunities.

If the objective of the KETs approach is to choose priorities, better demarcation of the selected KETs is needed. If their selection is to initiate high-tech, enabling new and inspiring

innovation initiatives, new and adjacent enabling technologies need to be allowed.


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2.4 Multi KETs versus single KETs and crosscutting KETs An important objective of the study is to further enhance the view and vision on what the concepts of MULTI and CROSS-CUTTING are in relation to KETs. The concept of Multi-KETs (and cross-cutting KETs) is new, and introduced in the European Commission's Communication "A European Strategy for Key Enabling Technologies: A Bridge to Growth and Jobs", which was adopted on 26 June 2012. It states in particular that:

"While individual KETs are recognised as indispensable sources of innovation, the cross-fertilisation of different KETs is vital, in particular for the transition from R&D to pilot and industrial scale production. A considerable part of the KETs activities planned under Horizon 2020 will be dedicated to cross-cutting activities, which will bring together different KETs for developing innovative products and for contributing to solving societal challenges".

Also a recent (draft) report from the HLG provides a definition of the concept of multi-KETs [HLG, 2013]:

“Multi-KETs activities are defined as the combination of Advanced Manufacturing technologies/processes and at least two other KETs in a way that value is created above and beyond the mere combination of the individual technologies”

The question is what the difference is between multi-KETs, cross-cutting KETs and the individual KETs from a policy perspective: What other policy is needed to address multi/cross KETs, compared to the single KETs? The first aspects to be assessed are the semantic differences between the “single” and “multi” characteristics. Crucial in this discussion is the concept of technology. The Merriam-Webster dictionary offers a definition of the term: "the practical application of knowledge especially in a particular area" and "a capability given by the practical application of knowledge". So, the combination between application/capability and knowledge is crucial. Looking at this definition, the following types can be identified as different combinations of technologies:

Multi technology: Creating a single capability using several fundamentally different scientific disciplines. In this case, technology is used as a noun.

Multi-technology application: Using several technologies in a single application. In this case, technology is used as an adjective.

This assessment does provide insight towards how better to use the term multi. If the term is used as a noun, new technologies are created that on itself might also again be seen as a single technology. DNA computing can be seen as an example, using both biotech and informatics. This technology oriented approach even creates

new trans/multiple disciplinary sciences and are highly relevant for research. If the term multi-technology is seen as an adjective to components and systems, technologies are combined. This can be related to the discussion in section 2.2 on the various stages of KETs (KET->KETs-components->KET-based products). Combining several technologies can create new and more inspiring components/products, which can be seen in the various studies on converging technologies that have been conducted in the last decade [Nordman, 2004]; [van Lieshout et al, 2005]; [Smith, 2004]. Some

examples of (emerging) multi-KET application areas are bio-photonics, nano-materials and photo-sensory systems. It is clear that the combination of technologies result in unique product properties / technology features, which “could not have been obtained with single technologies”. A third approach to the term multi is more process oriented. Because of the six KETs there is a third fundamentally different combination, emerging from the different character of process and product of the AMT KET. This third type combines process/product technologies.

Figure 2: Three different types of multi-KETs


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Looking at the recent definition of multi-KETs provided by the HLG, the number of KETs is increased to 3, where the presence of AMT is required. This enhanced view on multi-KETs results in a further limitation of the initiatives that can be selected as multi-KETs initiatives. As the HLG states, the value created by combining the KETs must be “above and beyond the mere combination of the individual technologies”. Looking at the assessment made in section 2.3 that some KETs already intrinsically include several KETs, it can be concluded that it can be expected that number of multi-KETs where IB and some areas of AM are present will be limited. But also a family of initiatives where focus is on the further scale up of products that incorporate several KETs but not show challenges in AMT will be excluded.

For the demarcation of the concept of multi-KET (selection criteria), it can be discussed how many KETs should be integrated. Within the survey the respondents were asked to provide insight which KETs they address in their initiatives. This information allows for an indication of how the number of KETs effects the percentage of initiatives relevant to multi-KETs. It is to be expected that the outcome shows a strong emphasis on single KETs, but the assessment of the survey information shows that the limiting mechanism is significant but not exponential. About 30% of all initiatives characterised in the survey are considered to be addressing 3 or more KETs. It should be noted that this information is influenced by the set-up of the survey and should be analysed in full.

The next step is also to assess the multi-KETs character of the individual KETs. Looking at the previous section on the demarcation of the six KETs, it was stated that several are multi-KETs already. MNE, PHOT and NT show much overlap that e.g. addressing PHOT in most cases will already also address NT and PHOT. This characteristic is considered less relevant for IB and AM. This more theoretical assessment can also be evaluated looking at the survey. The survey initiatives are more or less balanced concerning the individual KETs, although the difference between AMT (45%) and IB (20%) is significant.

Figure 3: Results from survey: number of KETs addressed in respondents initiatives


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Table 1: Significant correlations for combination of technologies: green, positively correlated (combination more likely); red, negatively correlated (combination very unlikely). The data is given for all EU industrial respondents involved in pilot production.

NT PHOT IB AM MNE AMT Other Significant correlation:

NT

>0.2

PHOT

>0.1

IB

none

AM

<-0.1

MNE

<-0.2

AMT

Other

It is clear that looking at the set of data collected in the survey, correlation is positive only on MNE/PHOT, NT/AM and AMT/AM. No other significant correlation is to be found, even negative multi-KETs in IB. Although the analysed initiatives not might be fully representative, the conclusion can be drawn that there is indication that some KETs show intrinsically connection to others and the connection of AMT with other KETs is unlikely (besides AM). Correlation with 3 KETs is highly unlikely. This leaves the issue on the differences between multi and cross-cutting. The discussion on the distinctions between interdisciplinary, cross-disciplinary, multi-disciplinary and trans-disciplinary research is relevant in order to draw conclusions on the differences. The underlying issue here is that disciplines are governed not only by scope (i.e. what is considered within the boundaries) but also by method (how one carries out research and understands it to be valid). For example, physics is based on maths methods in a way that chemistry is not (Salmons & Wilson, 2007). Multi-disciplinary can be seen as “making use of several disciplines at once” and cross-disciplinary is “a coordinated effort involving two or more disciplines”. So, the difference between multi-KETs and cross-KETs can be seen as Multi: integrating KETs in a new discipline and Cross: parallel, but separate usage of disciplines. It can be concluded that in practice these differences have no policy consequences and can be used interchangeable; the objective of policy is to stimulate activities that are societally desirable and the fine line between these two concepts do not lead to different policy needs or potential societal outcomes. However, the criterion suggested by the recent HLG status report [HLG, 2013] that AMT is required within the definition of multi-KETs, has impact on this conclusion. As within the framework of crosscutting KETs AMT is not required, the difference between multi and crosscutting can be found here.

Looking at the interviews, survey and workshop discussions, the consortium conclusion is that fundamental principle of multi-KETs should be about the cooperation of different KET-communities to create new and inspiring routes of innovation. This cooperation should result in new products and processes with unique technical properties that could not have been obtained with single KETs or other technologies.


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Policy conclusions are:

The differences between multi-KETs and crosscutting-KETs is not relevant from a policy perspective. However, policy could look at multi KETs as bringing together or combining different Technologies to stimulate and accelerate innovation and the time to market (focus on producing and deploying KETs based components and products) and at cross KETs as selection principle to focus on cross-cutting innovative technologies that can contribute to specific solutions (societal challenges) and where Europe has specific strength or may be competitive (e.g. build up lead markets) in the future.

There are three different types of multi/cross KETs: 1) Integrating science disciplines in a new technology; 2) Integrating two product technologies in an innovation; 3) Using KETs to both

innovate the product and the process.


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3 Gaps in the innovation chain

3.1 Introduction to the context The concept of Pilot lines is introduced as an important step to the valorisation of research into commercial activities. It directly addresses the challenge of “Bridging the gap”. Basic to this concept is that it focuses on the industrial activities getting a prototype to a stage in which low-volume, first commercial production process is developed. The development of supporting policy on these activities should increase the actual economic and social benefits of research. Adoption of the KETs concept by policy makers now goes hand in hand with a new approach towards supporting innovation. No longer is there a primary focus on knowledge creation. The new approach foresees also support in the later stages of the innovation process, in order to address the valley of death. This chapter will focus on creating more context to pilot activities, especially looking at the concept of the valley of death and corresponding innovation chain. A clear and more holistic view is needed to later create an efficient and effective policy to support the up scaling activities. In this chapter the focus is on the pilot activities that take place during this valley of death, but the discussion will also provide more contextual information by looking at the innovation chain and the industry value chain.

3.2 Valley of death: The three-pillar bridge approach The core reason to develop a policy in Pilot activities is found in the observation that the valorisation of research towards economic and societal benefits is suboptimal. Within this context, the so-called three-pillar bridge approach is put at the centre of the discussions. This approach was introduced by the KETs-HLG and provides a vision on the creating an integrated strategy to develop KETs. The approach differentiates the innovation chain of KETs and KETs-based products into three

fundamental stages, from basic research to competitive manufacturing: 1. Technological research, where European scientific

research on KETs transforms fundamental research into technologies.

2. Product demonstration, where KETs are exploited to create product prototypes and develop facilities to fabricate a significantly quantity of innovative products to establish a product validation and demonstration in terms of user performance.

3. Competitive manufacturing, where the validated products and production systems are fully developed to enable competitive production in economic viable and international environments.

The three pillars can be seen as a simplified broad representation of the innovation chain a KETs

component will experience during its development process. Essential in this approach is the observation that new technologies will not cross the bridge to the market. The stage of Product demonstration is crucial, allowing the transformation of product prototypes to market oriented (mass) production; the actual economic and social benefits can only be realised after the product has entered the stage of mass production and use.

Figure 4: Valley of Death: The three-pillar bridge approach


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However, combining this approach with the observation made in the previous section of KETs definitions, the conclusion is that this approach is too simple. The innovation ecosystem on KETs is not a sequential chain linked model, but more a network of research and industrial activities. The notion that innovation is initiated by research is wrong most of the time [Rosenberg &Kline, 1982; HOC, 2013]. Even without research, many innovations will still be developed. A policy on reducing this commercial valley of death will often not be centred around a single technology, but faces multiple technology challenges. And not all of these will be in sync, so multiple policy approaches are needed to create an efficient and effective policy. For example, supporting a pilot activity not funding R&D, can be ineffective when new manufacturing technologies also need to be researched and developed. Furthermore, this discussion on a valley of death does not provide enough details on the problems concerning the barriers in the innovation process. The Breakthrough Institute analysed the valley of death concerning clean energy [Jenkins &Mansur, 2011] and came to the conclusion that there are two valleys of death: The technological and the commercial valley of death. The Technological valley of death is positioned between the first and second stage of technological development, as laboratory research seeks capital to develop a commercial product and to prove its market viability. The Commercial valley of death occurs in a later stage of technological development, as entrepreneurs seek capital to fund first stage commercial manufacturing and demonstration, as well as creating an operational view on the potential markets they can address (including e.g. acceptance, distribution and partnerships). The last type of Commercial valley of death is core to the Pilot activities.

3.3 Combining Technology readiness with Manufacturing readiness The three pillar approach was implemented in the KETs strategy along the innovation chain by applying the so-called Technology Readiness Level approach. It supports getting a more detailed insight in the evolution of a product and assess if these products are in a pilot stage. Technology Readiness Level (TRL) is a measure used to assess the maturity of an evolving single technology

3

during its development and in some cases during early operations. Different definitions exist (NASA 1980’s, U.S. Department of Defence (DoD) 1999). Although they are conceptually similar, significant differences exist in terms of maturity at a given technology readiness level. For KETs the ESA classification was adopted. These TRL levels are the primary mechanism to position Pilot activity in the innovation process (innovation chain). Looking at the TRL scales, it is clear that the “commercial valley of death” is about getting prototype products from the laboratory (TRL4) to the final stage of design (TRL9). In earlier discussions [HLG WG##], the pilot activities has been at the levels TRL5-7, where the product prototype is scaled up to demonstration in an operational environment.

3 E.g. devices, materials, components, software, work processes


The valley of death to be addressed with a policy on pilot activities should focus on addressing the commercialisation phase of product developments and its manufacturability. In this phase, investment risk is the main barrier to be addressed.

Although the main focus of a pilot activities oriented policy aims at reducing investment risks, the systemic nature of innovation can also lead to the conclusion that policy should aim at the technological pillar, or the competitive

manufacturing. An integral approach is needed to ensure efficient and effective policy support.


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Based on the discussions during the workshop, interviews, as well as conducted desk research, the conclusion must be drawn that there are issues with using the concept of TRL as a definition mechanism for Pilot production activities only:

An important difficulty with this approach is that it focuses on one technology. Especially within multi-KETs pilot activities, multiple KETs are to be addressed, with multiple innovation chains connected;

It also does not address in detail the development of the manufacturing technologies needed for the mass production. The core element of Pilot activities is the creation of a manufacturing process for KETs-components, or products.

As both elements are crucial to the definition of multi-KETs Pilot activities, the approach needs to be refined before it can be used to select and characterize mKETs-Pilot activities. The solution can be found in introducing of the concept of Manufacturing readiness level (MRL). This approach models the evolution and characterizes stage of the production process, of which a Pilot line is a part. Combining TRL to MRL can therefore address the issue of the missing manufacturing side. The MRL approach was developed also by the US-DoD and aims at the quantitative measurement of the maturity of a given technology, component or system from a manufacturing perspective. The MRL definitions were developed by a joint DoD/industry working group under the sponsorship of the Joint Defence Manufacturing Technology Panel (JDMTP). The aim was to create a measurement scale that would serve the same purpose for manufacturing readiness as Technology Readiness Levels ("TRLs") serve for technology readiness – to provide a common metric and vocabulary for assessing and discussing manufacturing maturity, risk and readiness. MRLs were designed with a numbering system to be roughly congruent with comparable levels of TRLs for synergy and ease of understanding and use. Assessing MRLs is performed to:

define the current level of manufacturing maturity;

identify maturity shortfalls and associated costs and risks;

provide the basis for manufacturing maturation and risk management. Table 2: Nine scales of technology readiness (blue=Pilot activities)

1 Basic principles observed and reported

2 Technology concept and/or application formulated

3 Analytical and experimental critical function and/or characteristic proof-of-concept

4 Technology validation in a laboratory environment

5 Technology validation in a relevant environment

6 Technology demonstration in a relevant environment

7 Technology prototype demonstration in an operational environment

8 Actual technology system completed and qualified through test and demonstration

9 Actual technology system qualified through successful mission operations

Table 3: Ten scales of manufacturing readiness (blue=Pilot activities)

1 Basic manufacturing implications identified

2 Manufacturing concepts identified

3 Manufacturing proof of concept developed

4 Capability to produce the technology in a laboratory environment

5 Capability to produce prototype components in a production relevant environment

6 Capability to produce a prototype system or subsystem in a production relevant environment.

7 Capability to produce systems, subsystems or components in a production representative environment

8 Pilot line capability demonstrated. Ready to begin low rate production.

9 Low Rate Production demonstrated. Capability in place to begin Full Rate Production.

10 Full Rate Production demonstrated and lean production practices in place.

Pilot activities from the perspective of Technology Readiness level are by definition positioned at TRL 5-7 [EC, 2009b]. TRL8 can be seen as focused on demonstration activities, although some activities might also be part of


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pilot production. In these levels, the technology is further developed from a scientific insight to an applied technology in a product. However, these TRL levels do not cover the development of manufacturing principles that are normally the core barrier for commercialisation (Valley of Death). The investment risks accompanied by this trajectory are the result of high investments needed to set up the manufacturing process. Even at the last TRL level 9 it can be the case that a single technological system can be fully tested and qualified in an operational environment; no high volume production is mentioned. A custom made, one time, high-tech product used in defence or other highly specialized industries are good examples (e.g. production of specific vaccines). This is also the result of the origin of the TRL scale being the US Department of Defence. The conclusion must be that the concept of TRL by definition does not deal with the commercial valley of death, as this is focused on manufacturability. The Manufacturing Readiness Level approach does address the investment risks. This scale is used to assess the level of readiness of the manufacturing to enable crossing the commercial valley of death. Being developed in the US-DoD, the scale has been suggested to be used in other US departments. However, this has shown to be difficult as many departments have indicated that is too detailed and US policy in principle do not support pilot activities; being a full developer of equipment, the US-DoD is an exception

4. The possible application in the EU

policy on pilot activities can have merit, as this is focused on manufacturability. Looking at the objective of the EU policy on pilot activities to bridge the commercial valley of death, the MRL scale can be used to select initiatives to be funded. As it is about reducing investment risks, some applied research must already be conducted. However, the first step might be that laboratory manufacturing capabilities can be developed (MRL4; this requires a sound product concept and can be part of researching manufacturability. On the other side of the scale, funding of up scaling to a commercial production volume might distort markets and is not possible due to State aid rules; the conclusion being that highest MR level that can be funded is MRL8. The comparison between the TRL and MRL scale shows that for Pilot activities the majority of the product technology is well available and does not need fundamental research and development. Yet the manufacturing side is different; here pilot activities sometimes include full research and development of technologies to create a feasible manufacturing process. Looking at the TRLs, the conclusion could be that support on research is not needed, yet when one looks at MRL, it is clear that bridging the gap towards commercial manufacturing sometimes requires high investments in research. A combination of TRL and MRL will provide better selection mechanism to pilot activities that need policy support.

3.4 Innovation: Bridging what valley? This study focuses on bridging the gap between research & development and commercialisation of the product with an economic viable manufacturing process. However, the optimal support mechanisms for policy to initiate or speed up these processes needs a systematic view of the stages in this innovation chain, including their relations. This will help to identify policy measures that are the most efficient (lowest costs) and effective (highest output).

4 Interview Greggory Tassey, NIST


By definition, TRL can be used to assess the position of a product to the technological valley of death. The TRL approach cannot be used as a criterion to assess if support is needed to cross the commercial valley of death.

Multi-KETs is enhancing this problem, as by definition more than one technology is to be assessed on its TRL level.

The MRL scale can be used as an additional selection criterion. Initiatives in MRL4-8 are

suggested to be eligible for policy support.


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To incorporate the findings of the previous section that product with the process need to be combined, a new integrated view on the innovation chain is developed. The basis for this integrative view can be found in the Chain linked model developed by Kline in the mid 1980-ties [Kline, 1985], which was subsequently applied by the OECD [TEP, 1992]. The Kline model was conceived primarily with commercial industrial settings in mind and includes many feedback loops between research, development, and commercialisation. However, limited attention was given to the process component of the innovation chain where the pilot activities are situated. A more integrative model (process/product) of the innovation chain can be found in the following figure.

Figure 5: Integrative model (process/product) of the innovation chain

In this model, the innovation chain is seen as an interactive process, where the process and product developments are “merged” into a process of commercial manufacturing. Design and development of products and processes is seen as two semi-separate trajectories, the commercial valley of death is positioned there where product and process need to be integrated into manufacturing (manufacturisation). Crucial in this model are the feedback loops, where the commercialisation can lead to changes in the process design, as well as in the product design. Again, often the innovation process starts with design and from these activities a need for research emerges. This model addresses an important problem often seen in the valorisation: there is an innovative product, but the process technologies are not ready, or not even commercially feasible. Furthermore, it makes clear what the difference between the TRL and MRL approach is and how they are connected.


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The full innovation chain can be described as follows. From design and development activities, new inventions will emerge. These inventions are transformed into prototypes in a laboratory type environment, but then need to be scaled up towards commercial manufacturing. Further research needs can emerge on the product side, but often even more important are the research needs on the manufacturing processes to be able to manufacture the component on a commercial level. These needs are often legging behind the

design/development of the product. Furthermore, insights in the limitations of the manufacturing process will lead to adjustments in the product as well, which subsequently leads to new emerging research questions on the product side of the component. After several iterative feedback steps, the pilot activities led to a full understanding of the commercial manufacturing process. The last step of the innovation chain is then to create full volume commercial manufacturing to be able to produce the component on a commercial scale. However, even this model of the innovation chain covers only a part of the full industrial innovation ecosystem involved in a cradle to grave approach of a product. As was made

clear in the description of the KETs, several evolutionary stages can be distinguished between KETs, KETs-component and KETs-based product. Although the KET can be

seen as evolving from applied research, the innovation chain discussed can be seen as producing KETs-components. A second innovation chain can follow one chain, leading to a KETs-based product. Even a third chain can be attached, where the KETs-based products are seen as input to new innovative goods and services. This model of the innovation chain is a generic view, which must be modified within the different KETs. It is clear that for example the manufacturing component of MNE enabled products is often much more complex than of industrial biotechnology enabled products. Furthermore, some product/process combinations, as well as the size and number of organisations involved are fundamentally different, leading to a different innovation chain. However, the essential aspects of 1) combination of product and process; 2) Interactive loops over the innovation chain are relevant for all.

3.5 Policy conclusions are:

Addressing the problems in the innovation chain that blocks commercialisation of products need an integral approach, allowing feedback mechanisms. Efficient and effective pilot activity supporting policy includes support in earlier stages and later stages of the innovation chain.

To ensure optimal benefits from policy support, also the connected other stages of the KETs life cycle must be addressed and their development supported. This can lead to support of KET-component production, as well as KET-subsystem development, or even KET-product

production to ensure that funding was not in vain.

Figure 6: Innovation chain of KETs-component, KETs-based product, KET-enabled goods/services


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The industry value chain: Creating value The conclusion that there is not one innovation chain, but more an interactive network of value chains needs some elaboration with respect to the industry innovation ecosystem. From the previous section it can already be concluded that the added value of a KET increases along this value chain. Added value is very much connected to the concept of industry value chains, yet the question is how one should perceive the concept of the innovation chain. Figure 5 can be seen as part of the upstream and downstream activities in relevant industry value chains. To enhance the view on these value chains, this section will discuss this aspect of Pilot activities to put them into an industrial perspective. The concept of industry value chains was popularized by Michael Porter (1985), but was already widely used in the 1970s, e.g. in French studies on “filières de production” and other industrial organisation studies. The purpose of a value chain analysis is to categorize the generic value-adding activities of an organization. A value chain analysis represents the various economic and technical activities that are involved in the production of a specific type of products and services. It is based on the notion that different entities provide different added value in a chain of activities, from creating products out of raw materials to the actual delivery of the product to the user. The Industry value chain includes various activities that, when combined, represent the process from raw materials production to the delivery of the final product. In a recent study on the Future impact of Artemis and ENIAC, a graphic representation was developed of the Industrial value chain of ICT component and systems industry. This can be seen as an example for the discussion on Pilot activities.

Figure 7: The Industrial value chain of ICT component and system industry and the positioning of the various pilot production activities.

As an example, the Figure shows that various industrial activities can be distinguished which are all part of the value creation process. However, this example also makes clear that the positioning of pilot activities is not straightforward. Although the picture does not even show the full extent of the downstream activities (the


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logistical elements and user services are not included), this value chain potentially already includes a large number of pilot activities, e.g.:

Creation of raw materials;

Development and production chips;

Development and production of subsystems;

Development and production of end-user systems;

Development and production of lithographical systems. It can be concluded that here the issue on multi KETs is emerging, but it also opens up the discussions on upstream and downstream industrial activities and the selection criteria regarding these activities. Important is that on an absolute scale most economic value and jobs creation will take place in the right side of this value chain. The pilot activities need to stimulate this value adding process. Even more complicated are KET based products where the ICT industry value chain is connected with non ICT industrial value chains (e.g. connection with bio-medical materials value chain in medical devices). An additional interesting element emerges from this assessment. The most important reason to develop a policy on pilot activities is to create jobs, directly or indirectly and value added (export=income). It is safe to say that the number of jobs created by pilot activities upstream of the industry value chain is smaller than downstream pilot activities. Production of components (upstream) is, in general, highly automated and done by large companies. This is mainly due to the fact that the complexity of the product increases in later stages, with fewer opportunities for automation. In general the multi-aspect KETs of pilot activities will increase downstream as a result of this. Another conclusion that can be drawn from this assessment is the fact that these industrial value chains include many stakeholders. These can be found in different locations all over the world. Again, the combination with the life cycle of a KET is of important. Subsystem producers can act on a global market, including making use of components manufactured by non-EU producers. If these components are commodities, EU presence is not important. But if these components are highly innovative, close proximity can be an important factor to the success of downstream activities. However, also innovative component producers can act on their on merit, delivering mostly to non EU clients and close proximity of downstream activities is not needed for success. The final conclusion is that industries today are globally oriented and due to high expertise, invested capital and other production factors the industrial value chain will often be globally distributed.

The policy conclusions that can be drawn are:

To gain optimal result from pilot activity supporting policy, it must be ensured that the right side of the value chain will optimally make use of left side supporting activities.

Looking at the industrial value chain, pilot activities can be seen upstream (components) and downstream (products). A political discussion is needed to select which pilot production activities in which part of the value chain are to be supported. Upstream pilot activities will be significantly different than downstream activities and may require fundamentally different policy.

Industry value chains are often globally oriented. The conclusion is that requirements on full coverage of the value chain in Europe can be contra productive, as many innovative value

chains will have non-EU partners.


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4 Defining Pilot activities

4.1 Introduction After positioning pilot activities in the innovation chain, the second element of the study is the assessment of possible characteristics and the development of a vision on what Pilot activities are. Crucial in this discussion is the idea that the concept of Pilot activities must be broadened to Pilot activities, since from the interviews, workshop and desk research it has become clear that pilot activities is a concept only used in a part of the research and industry community involved in up scaling activities. In this chapter the context and issues concerning these up scaling oriented Pilot activities are analysed, converging towards a common understanding of the context and definitions/characteristics on the Pilot activities concept. The paragraph is structured as follows. In the first section, the broader context of pilot activities is described and analysed. The earlier analysis of the innovation chain is used to create a better understanding of up scaling activities, enhanced by the insights on the industry value chain. This will position the pilot activities in relation other activities within the innovation chain and allows a better characterisation of the pilot activities. Using the preliminary definition included in the HLG workgroup as a starting point (see 4.3), the contextual information gathered in the second section and the various examples collected in the desk research were used to develop a vision on pilot activities. This section will conclude with an overview of types of pilot activities, including pilot activities, but will provide other terms as well to better capture the concept of pilot activities. The third section will focus on creating a better understanding of the types identified in the second section. Using identified examples of pilot activities in countries a full description of the various types will be given. From the examples and types of pilot activities, the main characteristics that are distinctive are identified. The chapter will conclude with an analysis of possible barriers pilot activities can encounter, as these are the point of departure of policy.

4.2 The context of pilot activities Pilot activities are part of a broader innovation chain. In this section pilot activities will be related to this innovation chain. The objective of this section is to assess the relations of other parts of this innovation chain to pilot activities in order to identify dependencies. Within the innovation chain, pilot activities are primarily found at the pilot production and market validation step. The related TRL levels are 5-7, focusing on the upgrading of a product from a stage where it is getting from the laboratory towards a stage where the product is demonstrated in an operational environment. The position of the pilot activities within the MRL level is more difficult to locate. It can be concluded that during up scaling of the product from prototype towards low rate production, MRL levels 4-8 are relevant. Often the product prototype is already developed within a laboratory environment, but the manufacturing technologies are not developed. Especially when the manufacturing process needs new technologies, concepts might be identified, but not yet made operational at any scale. So, where the need for additional R&D to up scale the product will be limited, the additional R&D for the manufacturing process can be significant. The process side of the pilot activities will therefore include the full development of the manufacturing process until low rate manufacturing (full functionality, but with limited volume to ensure operational manufacturing).


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Figure 8: Where are pilot activities positioned in the innovation chain?

Looking at the innovation chain, the pilot activities can be positioned at certain steps. However, these pilot activities are highly influenced by other steps in the innovation chain. The product strand includes three basic steps: product design, product development and laboratory validation. The relation between these steps and pilot activities are found in the observation that the functionalities and characteristics of the actual commercialized product are often strongly influenced by operational implications of the manufacturing process. An example is the Kinect, where the prototype (2009) was significantly changed before full launch in 2010, with significant redesign of the sensory system due to cost reduction in production (limiting resolution and excluding the microprocessor). The relation between the three basic steps in the process strand and pilot activities are even stronger. Not only can several steps in the process strand be considered part of the pilot activities, also the more conceptual process design is highly relevant for pilot activities. An interactive relation can be seen here, since the process of a pilot activity often has to be fully redesigned when one encounters problems in the up scaling process. An example is the early manufacturing of photovoltaic solar cells, where new product concepts are changed because manufacturing is not economically feasible.

The alignment between the process and product strand is of vital importance to pilot activities. Main purpose is to tackle entangled innovation processes, especially in multi-KET activities. Different stakeholders along the value chain, both from academia and industry need to cooperate to conceptually and operationally combine different aspects of manufacturing. It is in particular specialists for materials, components, process integration, equipment, and measuring techniques who are involved. A joint development of product-prototypes and related process technologies is

clearly a key success factor. An example is the IC designs, benefiting from the advancements in chips manufacturing. The last interactive feedback mechanism is the relation with

Figure 9: Pilot production, orchestrating activities of different stakeholders.


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the final steps within the innovation chain that focus on the full commercialisation of the manufacturing. Here creation of market demand is crucial (market articulation). High market demand will reduce problems within the pilot activities by reducing financial risks due to enhanced turnover and lowering costs of manufacturing. And on the other hand, when the technology is maturing and ready for market introduction, higher market demand leads to higher volume production leads to more rapid learning curves and faster decrease of production costs leads to lower cost/ more competitive products. An example here is LED lighting, where full low cost commercial mass (mature) production is not yet achieved, which leads to reduced market demand and higher prices, which again leads to higher product prices. Deployment projects, or demonstrator projects are used to bridge this last step of the value chain, yet they can also lead to a new iterative process triggering new pilot activities.

4.3 Defining Pilot production activities After this more contextual assessment, now a more detailed view on pilot production activities can be obtained. A first view on a definition of pilot production activities (then still Pilot lines) has been discussed in the first generation HLG- Working Group 4 and defined as:

A KET Pilot Line develops and fine-tunes manufacturing technology, and delivers KET-based pilot prototype products, materials, or manufacturing equipment to lead customers such that they can be sampled and subsequently introduced successfully into the customers’ production lines. Said pilot prototype products, materials or equipment enable new product innovation for the downstream industry earlier than with existing capabilities. [HLG-WG4].

In short, Pilot production activities aim at transforming prototype products to a usable form for customers (B2B), so they can integrate those products into their production lines (B2C). To get a clear view on why this is important, the HLG-WG4 states that the existence of these pilot activities speeds up the innovation process that integrates these new products into innovative end-products, allowing rapid gaining of market shares and reduction of production costs. The production process is further developed for low volume manufacturing, possibly changing some characteristics of the product. Demonstration can also be part of the objectives of the pilot line. The conclusion can be that the pilot activities discussed in the HLG-WG4 are focused on the creation of a low volume manufacturing of KETs based components. However, the interviews conducted during the study, as well as the desk research and the workshop show that this definition does not cover all of the issues raised by the experts. Sometimes the issues raised by the experts are even contradictory to the views of HLG-WG4. Some issues are concerned with the term pilot lines, which is mostly used within the semiconductor industry, but are called pilot plants in the industrial biotech industry. Another example are more infrastructural activities that facilitate pilot activities (including applied R&D), not

covered as such in the definition above, but considered key to the up scaling of prototypes. A third issue is that the mentioning of prototypes in the definition is ambiguous with regard to the TRL scale; prototype activities are part of laboratory activities and not covered by pilot lines. The conclusion can only be that further refinement of the concept of Pilot lines needs a more fundamental discussion on the origin of the definition: the commercial valley of death.

Pilot plants are facilities that are created for the purpose of conducting a production process on a relatively small scale. Depending on the outcome of the evaluation of this limited process, the facility may serve as the blueprint for the creation of full-scale plant that is capable of producing much larger quantities of goods. Many businesses use the pilot plant model to work out issues of logistics and procedure before investing resources in the creation of a fully operational facility. [Wise geek]

The policy conclusion that can be drawn is:

Addressing the pilot activities (valley of death) does not imply that the actual pilot activities need to be supported. Next to directly support pilot activities, supporting related adjacent steps in the innovation chain can reduce problems in the pilot activities and lowers the barriers for the industry to initiate pilot activities. An integral and holistic view is needed to

develop the most effective and efficient policy.


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The first issue to discuss is the use of the term Pilot lines. As already stated, this term is often used within the context of the semiconductor industry. Within other industrial sectors and technological areas, other terms are used like Pilot plants, Pilots and Demonstrators Although some of these terms are not fully covered by the vision to address the valley of death, they are still highly relevant. Not to be discriminatory to one of the KETs, we will further use the term Pilot production activities (PPA) as an umbrella term for these activities. Looking at the industrial and policy experts consulted as well as discussions in the (applied) science community on innovation policy and management, the commercial valley of death is believed to focus on the valorisation of knowledge gained in design and development of the product, turning them into commercial products. The activities focus on proving that a product can be economically and technologically viable in a commercial production process. This needs small, but fully operational manufacturing and all process technologies and product outcomes must be validated for its quality (answering market demands, continuous quality, etc.). One of the key advantages of these pilot activities is the ability to carefully evaluate each step in the production process. Since the plant is operating on a very small scale, the investment of resources into the project is kept at a minimum. Generally, the plant is configured to be just large enough to explore any issues that could occur in a larger plant, and to deliver enough output to validate the product/component. But it is also small enough to prevent the waste of raw materials, labour, and other common operational expenses. The objective of the outcomes of these pilot activities are fully focused on the reduction of risks to set up a full scale production facility (with large investments); when these risks are reduced and profit is ensured, investors will in principle not have problems to invest, which would mean that governmental support is not needed.

Figure 10: Types of pilot activities

During the assessment in the interviews, workshop and desk research several types of pilot activities were identified. An overview will provide more insight in what kind of activities might be relevant for later support:

Pilot lines: A term often used within the electronics industry (but also some other industries) that is used for an operational production process to manufacture discrete products. This process includes several manufacturing steps and aims at the assessment of technological and economic viability of the commercial production or these products.

Pilot plants: A term often used within the (agro) chemical industry, as well as the biotech industry, and is used for a small scale production facility to produce materials, compounds and energy. This process typically uses chemical and/or biological processes and aims at the assessment of technological and economic viability of the commercial production of these products.


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Pilots: Application of a single products or systems in an actual user environment to assess the user needs and adapt/align product characteristics. Pilots can also aim on the further development of products. Downstream industry and users are included, but there is in principle no attention to the manufacturability of the product, but full focus on the environmental testing of the prototype

5.

Demonstrators: These pilot activities aim at showing potential clients both the production process and the commercial produced products. They can be seen as part of the Deployment activities [HLG-WG4 Pilot activities, 2011].

Next to these terms, also other terms are mentioned. Pre-production is used for the first batches of commercial production that aim at the fine tuning of the production process, before full scale production. The production installation used is prepared for full scale production. This can take place in a pilot line, or plant. Small scale production is the first full operational, but low volume manufacturing/production installation, often used for the full commercial production of products. The limitation of production output is often due to uncertain markets, but also fine-tuning of the production process can be conducted before full large scale manufacturing. This also can take place in a pilot line, or plant. Next to these pilot activities, there the technological infrastructure is often mentioned as being crucial for pilot activities. Prototyping facilities are a more general development facility, offering equipment which can be used to develop prototype products and test especially the technological viability (part of the technological valley of death). These facilities are often crucial for SMEs to develop their prototypes. Testing facilities are used as a more general production facility that can be used to test the economic and technological viability of new prototype products. With especially industrial biotechnological products, the production facilities are up to a certain level standardized and a testing facility can be used to test the possibilities for production. These facilities are often crucial for SMEs to upscale their product prototypes. A subcategory are testbeds, or test labs. Demonstrator facilities are dedicated facilities to show potential clients both the production process and the commercial produced products. The installation is not primarily used for the testing of the process, but more used as demonstration. In principle, two basic types of shared facilities can be distinguished between: 1) Shared access facilities pointing to the organisational structure (e.g. prototyping or testing facilities) i.e. rather public/University/RTO driven; 2) Shared financed facilities pointing to the financial risk (e.g. for MNE historic examples would be the Crolles Alliance or IBM Alliance), i.e. rather industry driven. These facilities can address both upscaling of TRL3-6, as well as MRL4-8.

4.4 Concluding: Characteristics of pilot activities The desk research, interviews, country studies and survey shows that various characteristics highly differ among the identified types of industrial pilot activities. A discussion on these variables will allow better understanding of the characteristics that can lead to the selection criteria and have impact on the different policy approaches needed.

5 If the pilot is aimed at manufacturing equipment, the end-users are users of the equipment.

The policy conclusion that can be drawn is:

The term Pilot lines only covers a certain type of the up scaling and commercialisation activities in the industry. An important other type of activities are pilot plants (same “beast”, but other industry). The term Pilot production activities (PPA) should be used to cover both.

The term Pilots focus on product developments and in principle do not include the commercial up scaling of the production system.

Shared facilities are often mentioned, but can be seen as potential policy instruments to reduce the financial risk by sharing expensive equipment and joining expertise. This is

especially of importance to SMEs.


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It is clear that the primary difference between the analysed pilot production activities is their objective. Although the core and broad objective is the increase of commercialisation of a product, still some different aspects of these up scaling activities can be distinguished between:

Development of the manufacturing process: A first objective is the actual experience gained with bringing a product prototype to production. Both insights in the way the production process can be established, as well as the manufacturability of the product itself. This can lead to conclusions on the technological, organisational and economic aspects of the production process, as well as product changes needed to improve these production process aspects.

Completion of product characteristics: Some initiatives are focused on getting improved insights in the product requirements by testing them in user environments. The aim is to identify the changes needed in product functionalities and other characteristics that will improve usability and market demand. The actual technological system is completed, tested and demonstrated.

Market articulation: Close connected to the previous objective is the objective to create market demand. Usually initiatives focusing on this objective include activities where clients are involved to align the product and process characteristics to their needs and by doing this stimulate market demand. Small volumes or batches of products are produced in order to allow potential clients to test them in their products.

Creation of value chains: A more network oriented objective is to bring together supply and demand and create product ecosystems/networks to improve informal and formal cooperation (research, development, communication, marketing, etc.). The underlying result is the improvement of the efficiency and effectiveness of cooperation and synchronisation of efforts and investments.

Although shared facilities are not pilot production activities as such, they can be seen important supporting technological infrastructures and industrial environments where relevant skills are available for multiple users. Their main objective is to reduce costs by sharing technical infrastructure. Often this technical infrastructure is either too expensive to a single organisation, but also the return on investment can be negative as the equipment is used only for a limited time during the innovation process. A second objective of these facilities can be that high-tech personnel is shared. The objective than is to have access to the skills needed and often not present in (small sized) companies. A second crucial characteristic that is the construction of the partnership of the initiative. This aspect has several elements, both the consortium characteristics (organisational model), as well as the type of the organisations participating (size and institutional nature):

The organisational model can vary from a single ownership to a joint venture, consortium and even a dynamic, open innovation organisation. In a single owned initiative, activities are organised and used by one single organisation; this will not need policy that supports networking. On the other hand, IP and related competitiveness issues are more likely to be of importance to ensure competitiveness. If multiple organisations join effort, cooperation oriented activities become more important and part of the activities, requiring more funding to support these activities. Another aspect emerging in initiatives with multiple organisations, is that multidisciplinary research, development and commercialisation is more likely to take place. A last aspect is that also these activities are likely to cover more elements from the innovation and industry value chain. In this case even cooperation with potential customers can be included.

The type of organisations participating in the initiative can involve basically three different institutional stakeholders: Industry, research, or government. Industry: These activities normally show a high readiness level and include often a strong confidential character because of competitiveness and IP. They can include product dedicated activities, as well as more infrastructural activities. Research: Pilot activities within research often are at a lower TRL/MRL level and often offer shared facilities (e.g. prototyping, testing). Some participation from industry can be seen and often institutional governmental funding has been used. Government: Especially in several Asian countries, but also in the US governmental owned pilot related activities are present. In e.g. China these are often State owned companies and in US more research


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oriented organisations (e.g. US-DoD testing facilities). However, in Europe, the US and other Asian countries government is often merely an investor or supporter.

A crucial aspect of the initiatives is the size of the organisations involved. Small and medium enterprises are more sensitive to the investment risks during pilot activities. The sheer size of the possible initiatives that SMEs can participate in is in principle lower than pilot activities where larger companies are involved in; participation and sharing risks are more important. Also the complexity of the initiative is likely to be lower and issues with availability of high skilled personnel might occur. Initiatives in large companies can have higher complexity, higher budget needs and have more high skilled personnel available more easily. Also funding needs are different and often not require subsidies, but enhance access to private investments can be beneficial. A recent study by the UK Technology Strategy Board shows that bridging the commercial valley of death needs a policy approach that distinguishes between large companies, medium companies and small companies [House of Commons, 2013]. Medium sized companies show difficulties with pilot activities due to e.g. financing and access to research facilities. But start-up, one person companies again experience different problems, like (innovation management) skills. Even although access to capital can be a major issue in large companies, they differ from the type of financial issues of medium sized companies, as e.g. the investment/turnover ratio is fundamentally different.

4.5 Rationale for structuring pilot production activities The first distinctive perspective is based on the observation that there is a fundamental difference in actual focus of the pilot production activity between the development of the manufacturing process, or the further development of the core product. This perspective originates from the core distinction described in the section on MRL and TRL. Where TRL characterises the stage of development of the core product to be produced, the MRL characterises the stage of development of the manufacturing process. This translates in the fundamental difference in objective and actors participating:

Manufacturing: Development of the manufacturing process that produces a first batch (low volume) production output in order to evaluate and fine-tune economic and technological feasibility of the manufacturing process and offers a first output to be evaluated by users.

Product: Co-innovation of the manufacturing process and the product by evaluation of small scale produced products in an operational environment. Objective is to further fine-tune the product based on technological, economic and user-demand feasibility.

The second perspective is based on the observation that large companies and small/medium sized companies show fundamentally different problems in pilot production activities because of their available skills and network situation. Addressing these different problems by policy requires fundamentally different policies:

Small scale: The size of participating organisations are small and medium size and their cooperation has a consortium character with most participants on an equal basis. Consortia show a limited number of members. The investments needed are limited in absolute terms, but high when looking at the turnover of the core partners.

Large scale: Size of the participating organisations are large and the organisational form in general is a strong core small partnership (e.g. joint ventures), combined with a number partners based on subcontracting. The investments needed are high in absolute terms, but also high looking at the turnover of the core partners.

This view is a generalised view and will only cover 80% of the activities. Also these two perspectives are not black and white and there will be a gradient shift from one type to another. For example, product and production development can be linked in a fundamental way. However, often the focus of the innovation process will be on one of them, as in an innovation process the product innovation is done by another (type) organisation than the process innovation and policy is fundamentally different due to its support needed. Also the difference between small scale and large scale initiatives (e.g. based on costs and size of companies) shows a gradient shift. However, also here policy to support large scale initiatives is fundamentally different that policy to support small scale initiatives.


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Figure 11: Structuring pilot line activities

Large scale pilot production initiatives are projects that aim at the development of a small scale production facilities to produce first batches products:

Objective: Develop a first operational manufacturing system to produce a specific product, in order to evaluate both the economic and technological feasibility of the production process, as well as the production of a first batch of products for demonstration purposes.

Object: A single dedicated complex, high-tech production systems (AMT). These systems are not stand alone, but also make use of parts of available elements in existing (more general) production and testing facilities. The systems are capital intensive and need highly specialised skills. Most of these systems will produce a vast quantity of products.

TRL/MRL: Focus of the initiative is to enhance the manufacturing readiness, even from lower levels to high level (MRL4=>MRL9). The increase of the more product oriented technology readiness is of less importance, although during the initiative also the product can be further adjusted due to production requirements, e.g. limiting functionalities due to production costs (TRL5=>8)).

Timeframe: The object is the outcome of a long term research and development trajectory (10-15 years).

Budget: Due to the long-term research and development, as well as the complex nature of the systems, the budget are high: M€ 10-1,000

Organisation: One or a limited number of organisations (often joint ventures), with support of mostly subcontracted organisations (equipment suppliers and research organisations). The initiative is industry owned and networked cooperation (supply of equipment and research) with suppliers is dedicated but still mostly on a subcontract basis. Long term cooperation with suppliers crucial as subsystems will not be developed and manufactured by the owners due to specialised expertise.

Actors: Main direct participants are large industries, with suppliers often being SMEs and some other large industries. Outsourced contract research is mainly RTOs, with limited use of universities. Financial capital is mostly organised through own funding, loans (banks), and capital market lending.

Geographic: The core components of the manufacturing system will be located in an industry owned facility, but due to its complex nature subsystems can be developed and produced in other locations. The consortium of actors (industry value chain) can be regional/national, but even will have international partners due to the highly specialised expertise needed.

Economic impact: As the pilot initiative is high-tech, complex and will produce high volume, much of the manufacturing process is to be automated. The economic impact is found in high volume based automated turn-over, with high economic revenues but limited jobs. The indirect jobs (suppliers and other supporting


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economic activities) can be expected to be significant, but also limited (general estimation is 1:6). The overall economic for the European economy must be found in the innovation enabler for downstream use of the products produced.

Barriers addressed: Support of these initiatives can be found in the high capital investment needed. Often, the investments are too high for a single investor, not because of the chance of failure, but because in case of failure the sheer amount can jeopardise the viability of the investor. Also, these initiatives are active in a global market and public economic support often disrupts the level playing field.

Second type of pilot production activity are Small scale manufacturing initiatives that aim at the development of less complex manufacturing systems:

Objective: Develop a first operational manufacturing system to produce a specific product, in order to evaluate both the economic and technological feasibility of the production process, as well as the production of a first batch of products for demonstration purposes. Also the industry value chain is developed and articulate the market.

Object: A single dedicated, high-tech production system (AMT). These systems are often stand alone, but also make limited use of parts of available elements in existing (more general) production and testing facilities. The systems are capital intensive and need highly specialised skills. Most of these systems will produce a limited but significant quantity of products at first (more niche products), but can at a later stage can show exponential increase of markets.

TRL/MRL: Focus of the initiative is to enhance the manufacturing readiness, even from lower levels to high level (MRL4=>MRL9). The increase of the more product oriented technology readiness is often connected, but as it can lead to adjustment in the product due to production requirements, e.g. limiting functionalities due to production costs (TRL5=>8)).

Timeframe: As the initiative is less complex and small scale, the object is the outcome of a medium term research and development trajectory (3-5 years).

Budget: Due to the medium-term research and development, as well as the manufacturing nature of the systems, and company size participating, the budget are limited but still high: k€ 500-2,000

Organisation: One or a limited number of organisations, with support of equipment suppliers and research organisations. The initiative is industry owned and networked cooperation (supply of equipment, distribution and research) on often a partner basis.

Actors: Main direct participants are SMEs, with partners often also being SMEs. Research is mainly with RTOs, with limited use of universities, often also based on partnerships. Financial capital is mostly organised through own funding, business angels, venture capital, governmental subsidies and loans (banks).

Geographic: The core components of the manufacturing system will be located in an industry owned facility. Due to its limited complexity the consortium of actors (industry value chain) is mostly regional/national.

Economic impact: As the pilot initiative is high-tech but will produce in limited volume, still manual labour is highly relevant (limited automation). Although the scale is small, a relative high number of jobs are created and there is significant added value to the GDP. The indirect jobs are less extensive, but still significant (partners and indirect economic activities). The overall economic for the European economy can be found in either direct production, as well as innovation enabler for downstream use of the products produced.

Barriers addressed: These initiatives are in need of seed funding and start-up funding. Not the amount of investment needed is problematic, but the uncertain chance of success and potential profit. Barriers can be found in the limited company skills to get access to funding and a potentially poorly developed network (value chain) is limiting successful outcome. For investors the unclear viability of the company, uncertain markets and unclear potential profit are essential. Institutionally, the present limited available financial capital in our society due to the recession is an important factor.

Large scale product piloting initiatives focus on the testing of a product in an operational environment (TRL5=>8) and preparing it for mass production:


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Objective: The further development of a prototype product to a fully operational product that is tested in an operational environment and ready to be sold to customers. Main focus of the activities is on the product, but the product is produced in a low volume production system. However, this production system is based on state of the art technologies and existing capabilities.

Object: The complex and high-tech product has system characteristics. It needs technological and organisational synchronisation with other complementary technologies and products (embedding in existing infrastructures). Cooperation between various stakeholders are therefore needed without many parts of the value chain. The volume of products to be produced can be both high (e.g. cars) and low (e.g. drones).

TRL/MRL: Focus of the initiative is to enhance the technology readiness of the product (TRL5=>MRL8). The increase of the more production oriented manufacturing readiness is connected, as it can lead to adjustment in the production due to adjusted product requirements, e.g. including new steps in the production system due to new product functionalities (MRL7=>8)). However, these adjustments are based on existing state-of-the-art production capabilities and needs limited participation of equipment manufacturers.

Timeframe: Although the product is complex and high-tech, most technologies are already developed and focus is on embedding the product in its operational environment. This includes a medium term development trajectory (3-5 years).

Budget: The further adjustment of the product to the operational requirements takes significant efforts due to its system characteristics. Although production can use state-of-the-art technologies, the budget are still high because of the number of partners involved: k€ 500-2,000

Organisation: As most of the developments are product oriented, the participating organisations are product oriented (horizontal value chain). However, the complexity leads to the involvement of the user-environment. Limited participation of equipment manufacturers is needed, as well as research organisations. The full consortium is large and complex.

Actors: Main direct partners are large companies, often accompanied by SMEs (partnerships). Participation of research is limited, but participation of product end-users crucial. Financial capital is mostly organised through own funding, governmental subsidies and loans (banks).

Geographic: As the product is complex, the partnership can show national and international cooperation. This can even include global distribution of production of subsystems.

Economic impact: The expected economic turnover of the product is high, but the jobs involved vary based on the level of production. High cost specialised products will include strong jobs development, as limited costs high volume production will be highly automated.

Barriers: These initiatives mainly face problems to adjust the characteristics of the product to the user-environment and organisation of participation within the value chain. Also high costs are involved to create testing environments that show limited return on investments. A last barrier are the high investments needed to the adjustment of the product characteristics and product production.

Small scale product piloting initiatives also focus on the testing of a product in an operational environment (TRL5=>8) and preparing it for mass production. However, due to its limited complexity, characteristics are different:

Objective: The further development of a prototype product to a fully operational product that is tested in an operational environment and ready to be sold to customers. Main focus of the activities is on the product, but the product is produced in a low volume production system. However, this production system is based on state of the art technologies and existing capabilities.

Object: The high-tech product has limited system characteristics and cooperation with other stakeholders is limited. The volume of products to be produced is can be both high (mass market consumer goods) and low (niche markets). The number of technologies involved is limited.

TRL/MRL: Focus of the initiative is to enhance the technology readiness of the product (TRL5=>MRL8). The increase of the more production oriented manufacturing readiness is connected, as it can lead to adjustment in the production due to adjusted product requirements, e.g. including new steps in the production system due to new product functionalities (MRL7=>8)). However, these adjustments are based


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on existing state-of-the-art production capabilities and needs limited participation of equipment manufacturers.

Timeframe: Although the product is high-tech, most technologies are already developed and focus is on embedding the product in its operational environment. This includes a short term development trajectory (1-3 years).

Budget: The further adjustment of the product to the operational requirements takes limited efforts due to its system characteristics. However, production costs are relatively high to the companies involved: k€ 200-1,000

Organisation: As most of the developments are product oriented, the participating organisations are product oriented (horizontal value chain), but emphasizing the connection to the customer. There will be limited participation of equipment manufacturers is needed, as well as research organisations. The full consortium is limited.

Actors: Main direct partners are a limited number SMEs and some research organisations. Participation of research is limited, but participation of product end-users crucial. Financial capital is mostly organised through own funding, angel funds, venture capitalists, governmental subsidies and loans (banks).

Geographic: As the product is not complex, the partnership can show regional and national cooperation. A limited global distribution of production of subsystems, but mostly based on subcontracting of non-essential components.

Relative economic impact: Medium economic turnover is to be expected, but a high direct employability because of limited possibilities to automate. Indirect employability is expected also to be high.

Table 4: First preliminary overview of characteristics types of pilot production activities (PPAs)

Characteristics Initiative

Large-scale manufacturing pilots

Small scale manufacturing pilots

Large scale product pilots

Small scale product pilots

Type of organisation project

Single industry owned, or jointed ventures Subcontracted partnerships

Consortium based Limited value chain coverage (mostly upstream)

Consortium based Broad value chain coverage Special focus: User

Single industry owned Limited number of partners Special focus: User

Actors Core: large multi-nationals Supplier network Research organisations Funding: Own capital, Banks, Capital market

Small sized companies Research organisations Funding: Own capital, Banks, Angels, Venture Capital

Multiple and diverse Large and SMEs Research organisations Funding: Own capital, Banks, Venture Capital

SMEs (Single large companies) Funding: Own capital, Banks, Angels, Venture Capital

Objective of project

Development manufacturing process Development value chain

Development manufacturing process Development value chain

Testing & validation final product in operational environment Development value chain

Testing & validation final product in operational environment Development value chain

Object of project Complex production system High-tech production High capital intensive High volume production

Single production system High-tech production Medium capital intensive Limited volume production

Complex product High-tech product High capital intensive

Single product High-tech product Medium capital intensive

TRL/MRL stage TRL5-7, MRL6-8 TRL3-7, MRL6-8 TRL5-8, MRL7-9 TRL5-8, MRL7-9

Relative expected economic impact

High economic turnover Limited direct employability Medium indirect employability

Medium turnover High direct employability Medium indirect employment

High turnover High direct employability High indirect employability

Medium turnover High direct employability High indirect employability

Costs M€10-1,000 k€500-5,000 k€500-5,000 k€100-500

Geographic International Regional (Inter)national Regional

Timeline 10-15 years 3-5 years 3-5 years 1-3 years


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5 Pilot activities and policy

5.1 Introduction This section first introduces a series of key-concepts in policy formulation in order to create a common basis for a discussion on strategy and actions. The rationale for intervention is introduced, as well as the translation of this rationale for intervention in a legal framework for R&D and Innovation support: the State Aid rules. In order to define an optimal intervention, we subsequently introduce a model for the investment decision of firms in R&D&I. Based on an analysis of the barriers for set-up of PPAs (i.e. barriers that makes firms decide not to invest in R&D&I), we identify relevant types of market failure and link that to potential forms of intervention by the government. This chapter closes with a set of criteria for selection of PPAs to be addressed by policy intervention, and briefly refers to co-financing issues.

5.2 Rationale for intervention: the concept of market failure As a basis for a discussion on policy recommendations, this section introduces the rationale for policymakers to intervene and define a strategy and supporting instruments addressing PPAs. Note that such a discussion is not an academic one amongst innovation policy makers. The policy field addressed by the recommendations concerning PPAs is covered also by industry/entrepreneurs, scientists, innovation policy researchers and economists. These different actors have adopted different definitions for innovation, and subsequently have diverging viewpoints on, and rationales for intervention that might be in conflict with what is allowed under international regulations. (Economic) theory on policy formulation assumes that there is a role for a government in society if the allocation of resources (i.e. production factors) resulting from the behaviour of producers, consumers and other institutions in a free market is not efficient.

6

In a market economy, actors (i.e. consumers, firms, institutions) take decisions concerning their demand for, and supply of goods and services. This will result in a certain combination of goods and services produced, with a corresponding allocation / distribution of resources (i.e. production factors). These goods and services are subsequently consumed in specific quantities and rations, given the preferences of individuals and distribution of income. These individuals derive a

certain level of utility (welfare) from the consumptions of these goods and services. 7

The corresponding distribution of

resources (production factors) is called (Pareto-)efficient if no other distribution is possible such that the utility of at least a single individual increases without decreasing welfare of another individual.

6 A free market is a market structure in which the distribution and costs of goods and services, wage rates, interest rates —

along with the structure and hierarchy between capital and consumer goods — are coordinated by supply and demand unhindered by external regulation or control by government or monopolies. 7 Economic policy theory embraces utility theory as a theoretical basis for the analysis of the distribution of welfare in

society. The concept of utility provides a basis for the representation of preferences of a certain set of goods or services. Preferences have a (continuous) utility representation so long as they are transitive, complete, and continuous. Budget constraints (resulting from a given income distribution) in combination with utility levels derived from consumption provide insight in demand (and the corresponding demand curve) for a certain good or service. Supply and demand together define price and quantity of a good or service traded in the market, and subsequently define the distribution of resources in the economy.

This chapter is based on desk research and some of the conducted interviews and must be seen as a hypothesis and basis for further development.


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In a market economy, an efficient allocation of production goods is not always a given. Market failure occurs when such an efficient distribution is not established.

8 An inefficient allocation resulting from market failure

leads to a loss in welfare. Market failure as such is therefore regarded as a rationale for intervention.9

Specific forms of the market failures result in suboptimal levels of investments in R&D&I. Underinvestment occurs when the incentives for private actors in the economy to allocate budget (i.e. financial resources) to research and innovation do not result in the socially optimal level of expenditure. Market failure as such is a rationale for policy intervention aimed at strengthening the innovation system. The concept of market failure constitutes the legal framework for intervention: the State Aid rules. The next section describes the State Aid rules for R&D&I, and the main forms of market failure identified as a basis for intervention.

8 Sometimes a broader (i.e. more ‘political’) definition of the concept of market failure is adopted by governments. They

argue that market failure occurs not only if the market does not establish an efficient allocation, but also when the resulting distribution is not socially desirable.

The allocation of production factors in an economy results in a certain distribution of welfare (utility). The government decides if this distribution of welfare is socially desirable (i.e. results in distributive equity). There is no objective measure for what is socially desirable; the evaluation / interpretation of the distribution of welfare is politically motivated.

In practice the allocation of goods and services can be efficient without being socially desirable. Assessing efficiency and (distributive) equity could result in intervention by the government in order to modify the distribution of income that defines the allocation resulting from the functioning of the market. 9 In general, four generic forms of market failure (referring to efficiency) are identified that justify action by the government

aimed at changing the behaviour of the actors in an economy:

For some goods in an economy, it is (close to) impossible to exclude individuals from consumption, while the actual consumption by an individual does not happen at the cost of another individual. Such goods are called public goods. In a market economy, such a good will not be (or very limitedly) supplied by actors. Examples are healthcare and education.

External effects occur when activities of an individual or institution (firm) have an impact on other individuals and institution with respect to cost or benefit, and this impact is not reflected (i.e. discounted) in the price.

For an efficient allocation resulting from the functioning of the market, it is essential that prices for goods and services reflect de marginal benefits (from consumption) and marginal cost (of production). A precondition for this to happen is that consumers and producers have no influence on the market price.

9 This occurs under competition with many

consumers, but not under limited competition (as in case of a monopoly), resulting in a (potential) loss of welfare. The functioning of the market results in an efficient allocation of resources only if the market is transparent (i.e. adequate information available to make choices), or there are sufficient ways to cover the risks resulting from the lack of information. In practice this does not always occur: information in the market concerning for example the quality of products and production factors is not always available, and the means to address future risks are not always sufficient.


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5.3 R&D and Innovation and the State Aid rules As stated in [E C, 2012a] concerning policy intervention aimed at supporting PPAs: “The size, scope and costs of these industrial research and experimental development activities, often an order of magnitude higher than fundamental research activities, require a more effective use and coordination of public resources. In addition, these innovation projects are closer to the market and, where constitutive of State Aid, public support is subject to State Aid rules. The purpose of the pilot line is to deliver early-stage prototype products through production in low volumes. If the pilot line is co-funded with public money, these volumes should be sufficiently low, as to avoid market distortion.” Part of the foreseen support for PPAs results from Horizon 2020. In practice, Framework Programmes addressing R&D&I are exempt from the EU State Aid rules (see [EC, 2006]). But for example for co-financing of PPAs by Member States and Associated States, it is important that intervention by the Member states and Associated States fits the current (interpretation of the) State Aid rules (which are in line with the WTO Disciplines on Subsidies). The State Aid rules on R&D&I define a framework of conditions for support the intervention should adhere to in order to be eligible (see [EC, 2006]):

10

(1) Is the aid measure aimed at a well-defined objective of common interest (e.g. growth, employment, cohesion, and environment)?

(2) Is the aid well designed to deliver the objective of common interest i.e. does the proposed aid address the market failure or other objective?

11

(i) Is State Aid an appropriate policy instrument? (ii) Is there an incentive effect, i.e. does the aid change the behaviour of firms? (iii) Is the aid measure proportional, i.e. could the same change in behaviour be obtained with less aid?

(3) Are the distortions of competition and effect on trade limited, so that the overall balance is positive?12

10

Rules on State Aid are set at the European level, article 107 TFEU in particular. In essence the State Aid Framework for R&D&I stipulates that State Aid that can distort competition by favouring certain undertakings is incompatible with the single market. Where an undertaking receives aid from more than one source (an ‘accumulation’ of State Aid), these amounts must be added up in order to determine if the aid stays below the threshold. In order for notified aid granted for R&D&I to be compatible with the internal market, it must pass the balancing test. It is first necessary to demonstrate market failure. This can be done by reference to econometrics (where sufficient data are available) or by the use of benchmarking analysis. Having satisfied itself as to the existence of a market failure, the Commission assesses the compatibility with the remaining conditions. 11

The second condition implies that the following issues should be addressed:

Is the proposed instrument appropriate? What is assessed here is the appropriateness of the proposed aid measure. Is there another policy tool that can achieve the same objective without creating a distortion of competition? The Member State should satisfy the Commission that it has considered other policy options, but that the use of the aid measure is the most appropriate.

Does the aid measure have an incentive effect? It is vital that the aid measure will actually encourage innovation. The recipient of the aid must do something as a result of the aid that it would not have done in the absence of the aid. If the company would engage in the R&D&I even if it weren’t granted the aid, it cannot be said to be incentivised by the aid. To show this, Member States could submit figures to the Commission showing that the cost of capital is too high to engage in the activity, but a reduction in the amount of capital required that is equal to the proposed aid amount may reduce the cost of capital to a level where the activities are worth engaging in.

Is the aid measure proportionate? The aim measure is proportionate only if the objective cannot be achieved in a manner which is less distorting of competition. It is necessary to satisfy the Commission that the R&D&I activity cannot be achieved with less funding. However, the Commission cannot presume that the measure will be distorting of competition. It should provide reasons and evidence for its conclusions, including information on the relevant market, and the pattern of trade of the products in question.

12 The third condition implies that the negative effects of the aid to R&D&I need to be assessed. The negative effects are

normally higher for higher aid amounts and for aid granted to activities which are close to commercialization of the product


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The first and most important condition for our report implies that intervention should address market failure. As stated in [EC, 2006]: “[…] R&D&I takes place through a series of activities, which are upstream to a number of product markets, and which exploit available R&D&I capabilities to develop new or improved products and services and processes in these product markets, thus fostering growth in the economy. However, given the available R&D&I capabilities, market failures may prevent the market from reaching the optimal output and lead to an inefficient outcome for the following reasons.” In [EC, 2006], different types of specific market imperfections are identified:

13

Positive externalities/knowledge spill-overs: R&D&I often generate benefits for society in the form of knowledge spill-overs. However, left to the market, a number of projects may have an unattractive rate of return from a private perspective, even though the projects would be beneficial for society because profit seeking undertakings neglect the external effects of their actions when deciding how much R&D&I they should undertake. Consequently, projects in the common interest may not be pursued unless the government intervenes.

Public good/knowledge spill-overs: For the creation of general knowledge, like fundamental research, it is impossible to prevent others from using the knowledge (public good), whereas more specific knowledge related to production can be protected, for example through patents allowing the inventor a higher return on their invention. To find the appropriate policy to support R&D&I, it is important to distinguish between creation of general knowledge and knowledge that can be protected. Undertakings tend to free ride on the general knowledge created by others, which makes undertakings unwilling to create the knowledge themselves. In fact, the market may not only be inefficient but completely absent. If more general knowledge was produced, the whole society could benefit from the knowledge spill-overs throughout the economy. For this purpose, governments may have to support the creation of knowledge by undertakings. In the case of fundamental research, they may have to pay fully for companies’ efforts to conduct fundamental research.

Imperfect and asymmetric information: R&D&I are characterized by a high degree of risk and uncertainty. Due to imperfect and/or asymmetric information, private investors may be reluctant to finance valuable projects; highly-qualified personnel may be unaware of recruitment possibilities in innovative undertakings. As a result, the allocation of human resources and financial resources may not be adequate in these markets and valuable projects for the economy may not be carried out.

Coordination and network failures. The ability of undertakings to coordinate with each other or at least interact, and thus deliver R&D&I may be impaired. Problems may arise for various reasons, including difficulties in coordinating R&D and finding adequate partners.

The State Aid rules governing support by Member States in practice seem to refer to market failures associated with more traditional intervention addressing the early stages of the innovation process. Support of PPAs however should address higher levels of TRL/MRL, and requires a higher intensity of support. In literature also other forms of market failure associated with R&D&I are identified, which are relevant for the support of PPAs:

When firms obtain market power, they are in the position to show ‘strategic behaviour’, such as the creation of excess capacity, ‘limit pricing’, or collusion as to limit access to a specific market by other companies.

14 Market power can subsequently hinder innovation and imitation, as it raises barriers for

entry of innovative start-ups: (1) innovation projects require large risk-intensive investments that cannot

or the service. Therefore aid intensities should generally be lower for activities linked to development and innovation than for research related activities. Furthermore, in the definition of eligible costs it is important to ensure that costs that can be considered to cover routine company activities are not eligible for aid. Also, characteristics of the beneficiary and the relevant markets have an influence on the level of distortion. Such aspects will be taken into account in more detail for the cases which will undergo a detailed assessment. 13

These specific types of market failure associated to underinvestment in R&D&I refer / address the generic types of market imperfections as discussed in Footnote 9. 14

Factors contributing to gaining market power are: a lack of transparency in the market, cost associated with conversion to a competing product or service endured by consumers, natural monopolies, and ‘sunk cost’ resulting for example from building up a market position (i.e. reputation).


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be covered by small firms; (2) complex innovation projects require access to external knowledge, which cannot be obtained by smell firms because of the associated high fixed cost; (3) implementation of certain innovation requires that firms obtain permits or licenses, which can be difficult for small firms to cover because of the associated cost.

Networks can create external effects for the whole economy. And the higher the number of users, the higher the number of additional users wanting to join. And this tendency results in an even higher value of the network: network externalities. Potential market failure arises when participants in the network use their position to establish market power, and limit the access of others (see previous bullet). But market failures associated to network externalities also result from behaviour of consumers: (1) they might consider to wait until adopting a new technology (i.e. excess inertia); or (2) might prefer embracing an inferior (existing) technology because the new technology has not been widely adopted (i.e. momentum).

From a legal perspective, mKETs are truly challenging phenomena, pulling together a wide range of, and often colliding, set of interests and corresponding stakeholders. Strategic areas such as protection of intellectual property rights, competition law, state aid restrictions and free movement have created an unprecedented legal ecosystem within the European territory. The regulatory system impacting on mKETs is the result of balances which have been struck between these different legal areas. However, the constantly shifting social, economic, technological, cultural, and environmental landscape in which mKETs function requires constant re-evaluation as to whether the balances which have been struck are still appropriate. The tensions between these legal areas tend to be starker at certain points on the mKETs value chain, For example, the diagram below demonstrates the important role which patent protection and State aid measures play in encouraging the development of mKETs. However, later in the value chain, the point is reached where a balance must be struck between the stimulation of mKETs provided by these areas and the need to prevent distortion of competition on the market. Patent protection is important as it allows for the appropriation of the results of R&D&I, which incentivises investment in R&D&I. State aid measures are important as they can bridge the gap between the private investment required for R&D&I and the amount of private investment which is forthcoming in practice. A difficulty arises for legislators and policymakers alike in determining the appropriate point on the value chain at which the stimuli to mKETs provided by State aid measures and patent protection should be tempered, and the extent to which they should be tempered, by the need to prevent distortion of competition on the internal market. If the development of mKETs is incentivised too close to the market, competition will be distorted. On the other hand, if the incentives provided by the regulatory framework are stopped too soon, the regulatory framework might contribute to the valley of death. MKETs pilot activities are at the point on the value chain where these concerns are becoming acute.

5.4 Policy intervention: addressing the investment decision of firms As indicated in the previous section, market failures result in underinvestment by private companies in R&D&I. In this section we therefore analyse this investment decision by a firm as a basis for the definition of policy. We therefore model the decision to invest in R&D&I, as a generic representation of the investment decision concerning PPAs. We subsequently define in the next sections the issues that influence the decision to invest in innovation. We will then use this in the following sections to link specific forms of intervention to specific barriers (and underlying market failures), for the different types of PPAs.


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Figure 12: Risk and cost associated with innovation.

Literature indicates that firms either have an implicit or explicit strategy concerning their investment decision in R&D&I. In practice, this implies that they compare their initial profit with the expected profit after completion of the innovation process.

15 Literature also indicates that if we simplify / model this investment

decision, it signifies that a firm will initiate an innovation project if and only if the expected net gain in profit resulting from successful completion of the innovation process exceeds the associated cost of conducting the innovation process (see [de Heide, 2011], and the box underneath).

16

Based on the abovementioned literature, we assume that a firm decides on investing in a PPA by assessing the probability of success of such an activity, the corresponding potential impact on the results of the firm, and the associated investment required to initiate the project (see Figure 12 representing a density function for risk and investments associated with the set-up of a PPA). We subsequently argue that if a firm is not willing to conduct such an activity, a government could consider intervening:

It could do that by addressing cost of the innovation project, for example by providing subsidies, loans or grants.

It could also try to address the probability of success of the innovation project. This can be done in general by maintaining / sustaining a high knowledge capacity of the innovation system (including LLL).

It could also address the net gain in profit resulting from successful completion of the innovation project. This could be done by means of tax measures, but also by means of IPR and standards. Intervention refers to strengthening the position of the innovative firm on the market.

The actual objective of the intervention (i.e. which aspect of the investment decision of the firm to address), which actors to address, and which modality of the instrument, depend on the specific barriers encountered by the different types of PPAs and the corresponding type of market failure. Rationale for intervention would be a specific type of market failure. Condition for such a decision would be an increase in total surplus, given the cost of the intervention.

We model the investment decision of firms on R&D and innovation, based on [de Heide, 2011]. We adopt a series of specific assumptions concerning the innovation process. These assumptions reflect the behaviour of firms concerning their decision on conducting innovation, and the way they are supported in this by governments.

For the sake of simplicity we assume that the innovation process is conducted within the framework of a predefined project. We subsequently assume that corresponding cost are fixed (i.e. constant) and predefined (i.e. based on an

15

Note that the actual investment decision is defined by the perception of risk and value of the individual. 16

The net profit equals total profit without the investment.


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estimation of the required input (e.g. use of equipment and deployment of researchers)). Such a set-up of an innovation project is in line with for example what is suggested according to the best practice guidelines for industry-oriented research by the US National Science Foundation. We therefore define the project cost as .

We assume that successful execution of the innovation project involves a certain risk, as argued by (Stiglitz and Mathewson 1986). We therefore define as the probability of failure of the innovation project. We furthermore assume that the firm has a clear perception of this probability of failure, based on an assessment of the project, given his knowledge and experience.

We assume furthermore that the innovation project originates from an idea addressing a specific problem (i.e. a problem driven innovation strategy). We subsequently presume that the outcome of the innovation process in case of successful completion of the project, and the corresponding impact it will have on the firm (i.e. the eventual return) is predefined. This is in line with what is argued by (Rogers 1995): "The innovation-development process often begins with the recognition of a problem or need, which stimulates research and development activities designed to create an innovation to solve the problem or need. [...] Scientists [...] perceive a future problem and launch research to find a

solution."17 We define as the initial profit, and as the net profit after successful completion of the innovation project (i.e. profit without the investment).

The decision the firm now faces when considering investing in the innovation process can be modelled as follows:18 19

( )( )⏟

( )⏟

The term on the left of the inequality sign represents the expected pay-off for the firm in case it decides to conduct the innovation project (i.e. the sum of the expected pay-off in case of success and failure of the innovation project). The firm now will decide to implement the project if and only if this expected pay-off exceeds its initial profit.20 21 Reformulating the inequality gives:

( )⏟

( )⏟

⏟

This implies that we argue that a firm will decide on conducting an innovation project by comparing the expected net gain in profit resulting from successful completion of the project (i.e. product of probability of success and net gain in profit, which in practice equals the total maximum amount the firm would be willing to invest), with the foreseen project cost.

5.5 Barriers associated to PPAs As stated, the core starting point to develop policy is the barriers that an initiative faces. In the next section we describe the barriers that influence the investment decision of the firm in investing in the innovation process, such that the valley of death is not crossed. Different types of PPSs face different barriers that address probability of success, investment or foreseen net gain in profit. In the succeeding section, we describe for the most relevant types of PPAs the potential instruments that could address the underlying market failures of the specific barriers.

17

In practice only a limited number of sectors appear to be able to sustain an innovation model which is not problem driven, but which is purely R&D based. For these sectors, potential technological breakthroughs are likely to result in a dominant competitive advantage with high payoffs exceeding the considerable and risky investments [Chesbrough, 2003]. 18

Note that we consider the decision problem for the firm to be as a decision under risk, given the probability of success and cost of the project, and the foreseen impact on the firm. 19

Note that we assume for simplicity a linear perception of risk and pay-off (i.e. utility) by the firm (i.e. expected value theory). 20

Note that we assume that the firm is ‘rational’ (in economic terms, in that it opts for the highest pay-off). 21

Note that we assume that the firm will also implement the innovation process in case the expected pay-off associated with implementing the innovation project equals the initial profit. We argue that conducting the innovation project in that case will create a competitive advantage that in the longer run will result in a more dominant market position for the firm.


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Barriers for innovation can be defined as factors, obstacles that preventing or slowing down the innovation from occurring. The traditional division used is making a distinction between internal (endogenous) and external (exogenous) factors [Piatier, 1984]. The external factors are based on the more contextual factors, where the internal factors are intrinsic characteristics of the initiative. Examples of external factors can be the market structure, competition in the market and regulation; these need more general policy to adjust the framework conditions. The internal factors focus on organisational issues, as well as intrinsic technological and networking capabilities of the organisation. The following main barriers are identified based on the interviews and desk research:

Access to financial capital: This barrier limits the innovation process due to the limited availability of financial capital that the initiative needs to be developed. This is considered an external factor and the consequence of reluctance of financial institutions to provide funding for these types of activities.

Available human capital: Core to successful pilot production activities are e.g. the technical, managerial, organisational, marketing skills of personnel. If these skills are not available in the project team, realisation of the pilot production is under pressure.

Available technological infrastructure: As multi-KETs are high-tech, technological infrastructure is crucial to support the pilot production activities. This includes e.g. testing equipment and basic multiple usage production equipment.

Low quality industrial value chain: Often the pilot production activities require cooperation in the industrial value chain. Suppliers of input materials as well as equipment suppliers need to synchronize their activities, but also cooperation with complementary producers and end-users can be crucial to increase the efficiency of the production eco-system.

Limited market articulation: To reduce financial risks, reduction of market uncertainty is crucial. Markets need to be articulated and market demand expressed.


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Table 5: Preliminary assessment of PPAs and barriers

Large Scale Production Pilot Small Scale Production Pilot Large Scale Product Pilot Small Scale Product Pilot

Financial Capital Too much capital investments required for a single investor (absolute)

Reluctance of financial markets to invest due to investment climate

Difficult to assess risks for investors

Level playing field

Too much capital investment required (relative)

Lack of reputation of organisation

Limited network to investors


Investors reluctant due to uncertain market

Investors reluctant due to technical and economic feasibility


Level playing field

Lack of reputation of organisation

Limited network to investors


Investors reluctant due to uncertain market

Investors reluctant due to technical and economic feasibility

Human Capital Lack of available high-skilled personnel (mainly technicians)

Lack of company skills (technical, IPR, management, market, etc.)

Lack of available high-skilled personnel (mainly technicians).

Lack of company skills (technical, IPR, management, market, etc.)

Technology Infrastructure Lack of standards for production High initial production investments cannot be recovered because of limited use.

Lack of testing facilities.

Lack of standards

High initial production investments cannot be recovered because of limited use.

Demand articulation Limited insight in structure of cost of production

No insight in structure of cost of production

No first batch of products available for testing

Limited insight in market structure and market demand.

No insight in market structure and market demand.

No first batch of products available for testing

Value Chain Value chain is clear, but not optimally organised

IPR to be organised

No clear view on value chain

IPR organisation unclear and risky

Value chain is clear, but not optimally organised

IPR to be organised

User demand not activated in value chain

No clear view on value chain

IPR organisation unclear and risky

User demand not activated in value chain

Multi-KETs Pilot Lines

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5.6 Linking barriers to policy approaches for the different scenarios In this section, we link the identified barriers for the different PPAs to specific types of market failure. We subsequently identify in the next section the appropriate forms of intervention that address these market failures, based on the State Aid rules on R&D&I (EC 2006), our assessment of existing PPA initiatives and additional literature. Note that we identify only types of market failure that are associated to R&D&I (see Table 6). This implies that in practice not all barriers are addressed. Those referring to ‘framework conditions’, such as the fact that a level playing should be created for EU firms, or that banks are reluctant to provide loans due the impact of the financial crisis and the subsequent regulatory framework governing them, should be addressed by other policy interventions (e.g. trade / competition policy, monetary policy, etc.).



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Table 6: PPAs, market failures and instruments: Market failure associated to barriers identified (preliminary).


Financial Capital Imperfect and asymmetric information hinders financiers in assessing project proposal.

Market power hinders entry of new firms.

Imperfect and asymmetric information hinders financiers in assessing project proposal as well as credibility of applicant for financial support.

Imperfect and asymmetric information hinders financiers in assessing project proposal.

Market power hinders entry of new firms.


Positive externalities / spill-over effects limit incentives to innovate: limited potential to recover cost or improve profit; and better to copy results from innovation from others.

Human Capital Imperfect information resulting in difficulties in attracting highly-qualified personnel.

Imperfect information resulting in difficulties in attracting highly-qualified personnel.



Technology Infrastructure Coordination and network failures / Network externalities: lack of standards for production limits impact of innovation process.

Lack of financial resources hinders new firms to enter a market.


Imperfect and asymmetric information hinders financiers in assessing project proposal.

Coordination and network failures / Network externalities: lack of standards for production limits impact of innovation process.

Lack of financial resources hinders new firms to enter a market.


Demand articulation Imperfect information resulting in difficulties in assessing cost structure of production.

Imperfect information / limited market power, resulting in difficulties in assessing cost structure of production.

Insufficient information dissemination / externalities and lack of coordination, resulting in difficulties in assessing cost structure of production.

Imperfect information resulting in difficulties in assessing cost structure of production.

Imperfect information / limited market power, resulting in difficulties in assessing cost structure of production.

Insufficient information dissemination / externalities and lack of coordination, resulting in difficulties in assessing cost structure of production.



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Value Chain Coordination and network failures resulting in limited interaction between the actors in the value chain (e.g. difficulties in coordinating R&D and finding adequate partners).

Network externalities and Coordination and network failures resulting in an ‘incomplete’ value chain and / or limited interaction between the actors in the value chain (e.g. difficulties in coordinating R&D and finding adequate partners).

Coordination and network failures / Network externalities: lack of standards for production limits impact of innovation process.





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Based on our analysis of PPAs, and the assessment of the relevant barriers, we argue that supporting PPAs requires a Policy Mix approach. Because of the multi-dimensional issues and associated types of market failures hindering the set-up of PPAs, a balanced set of instruments addressing the specific types of market failure should be developed, such that the intervention is effective and efficient (see (de Heide 2011)). We describe the intervention based on three dimensions: actor to be addressed, objective of the support (i.e. targeting probability of failure, impact on company result, and modality of the instrument, see Table 7Error! Reference source not found.). In line with Tinbergen-rule, we argue that for each independent policy objective (related to a specific type of market failure), a government should implement a specific independent measure. And in line with the Mundell-rule, we argue that a specific tool should be targeted towards that objective for which the expected impact is the highest. Our suggestions for policy are given 8. Our suggestion for potential measures is based on (EC 2006). The European Commission has identified in that document a series of measures addressing specific types of market failure for which State Aid may, under specific conditions, be compatible with Article 87(3) (c) of the EC Treaty when addressing R&D&I. The European Commission furthermore defined the exact levels of support for different types of R&D&I, and for different actors involved (see Table 9). When the identified market failures in (EC 2006) do not cover adequately the barriers identified in the previous section, we suggest an alternative rationale for support based on market failures as described in the literature. The types of market failure and suggestions for measures addressing these imperfections mentioned in (EC 2006) are:

Aid for projects covering fundamental and industrial research and experimental development is mainly targeted at the market failure related to positive externalities (knowledge spill-overs), including public goods. The Commission considers it useful to maintain different categories of R&D&I activities regardless of the fact that the activities may follow an interactive model of innovation rather than a linear model. Different aid intensities reflect different sizes of market failures and how close the activity is to commercialisation.

Aid for technical feasibility studies related to R&D&I projects aims at overcoming the market failure related to imperfect and asymmetric information. These studies are considered to be further away from the market than the project itself, and therefore relatively high aid intensities can be accepted.

Aid for industrial property rights costs for SMEs is targeted at the market failure related to positive externalities (knowledge spill-overs). The aim is to increase the possibilities for SMEs to sufficiently appropriate returns, thereby giving them greater incentive to undertake R&D&I.

Aid for young innovative enterprises has been introduced to deal with the market failures linked with imperfect and asymmetric information, which harm these undertakings in a particularly acute way, damaging their ability to receive appropriate funding for innovative ventures.

Aid for process and organisational innovation in services targets the market failures linked to imperfect information and positive externalities. It is meant to tackle the problem that innovation in services activities may not fit in the R&D categories. Innovation in service activities often results from interactions with customers and confrontation with the market, rather than from the exploitation and use of existing scientific, technological or business knowledge. Furthermore, innovation in service activities tends to be based on new processes and organisation rather than technological development. To that extent, process and organisational innovation in services is not properly covered by R&D project aid and requires an additional and specific aid measure to address the market failures that hamper it.

Aid for advisory services and innovation support services, provided by innovation intermediaries, targets market failures linked with insufficient information dissemination, externalities and lack of coordination. State aid is an appropriate solution to change the incentives for SMEs to buy such services and to increase the supply and demand of the services provided by innovation intermediaries.

Aid for the loan of highly qualified personnel addresses the market failure linked with imperfect information in the labour market in the Community. Highly qualified personnel in the Community are more



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likely to be hired by large undertakings, because they tend to perceive large undertakings as offering better working conditions, and more secure and more attractive careers. By contrast, SMEs could benefit from important knowledge transfer and from increased innovation capabilities, if they were able to recruit highly qualified personnel to conduct R&D&I activities. Creating bridges between large undertakings or universities and SMEs may also contribute to addressing coordination market failures, and supporting clustering.

Aid for innovation clusters aims at tackling market failures linked with coordination problems hampering the development of clusters, or limiting the interaction and knowledge flows within clusters. State aid could contribute in two ways to this problem: first by supporting the investment in open and shared infrastructures for innovation clusters, and secondly by supporting cluster animation, so that collaboration, networking and learning is enhanced.

Table 7: Classification of instruments

In order to cluster instruments that support Pilot Project Activities (PPA) we adopt a framework that allows for the description of their characteristics, modality of support and actors involved (based on (de Heide 2011)). Our framework builds on the concept of System of Innovation (SI) (Nelson 1993), (Lundvall 1992). According to the SI approach, innovation is an interactive, non-linear process in which firms interact with a manifold of other organizations (e.g. research institutes, customers, authorities, financial organizations) and institutions (e.g. Intellectual Property Rights, regulations, culture). The SI concept enables the identification of actors involved in R&D and innovation, and the analysis of their role and functioning, based on the assessment of the flows of funding and knowledge between the stakeholders (Barber 2003). The SI approach has been adopted by many policy makers as a basis for policy formulation (Klein Woolthuis et al. 2005). Based on the SI approach, we define a framework for clustering of instruments implemented by governments to intervene in the market in order to strengthen the innovation system which introduces three dimensions: Actor (‘who’), Objective (‘what’) and Modality (‘how’). Categorising instruments according to these three dimensions allows for their unambiguous clustering and description: 1. Actor, which refers to the targeted group of the measure:

Industry (small and medium-sized enterprises, (high-tech) start-up, MNEs, etc.).

Research Institutes (public as well as private, RTOs, etc.).

Higher Education (i.e. universities and polytechnics).

Bridging Institutes. 2. Objective, which refers to what aspect of the investment decision of the firm concerning conducting (R&D and)

Innovation is addressed by the intervention:

Cost of conducting R&D and innovation.

Probability of success associated to conducting the innovation process. Examples include (but are not limited to) Education and Training of Human Resources (as people are "carriers" of knowledge, and therefore play a role in the transfer of knowledge); and Life Long Learning.

Impact of the innovation process on the performance of the firm (i.e. the net gain in profit resulting from successfully implementing innovation results). Refers to market conditions.

3. Modality, which refers to the functionality of measures implemented (i.e. how it accommodates the innovation process):

Regulations & Standards such as Intellectual Property Rights (IPR). An important aspect of this type of intervention is that it allows for cooperation (e.g. between firms and other actors of the innovation system in the form of for example Public Private Partnerships (PPPs)) and collaboration (between firms) in R&D and innovation.

Public Procurement involving the purchase of innovative products, services or processes through ‘public demand’.

Direct Support involves a transfer of actual funds aimed at supporting innovation, which are not reimbursable by the government from the actors. Examples are: Grants; Subsidies; Vouchers; Rebate on social security premium; Basic funding.

Indirect Support (i.e. Fiscal Measures) refers to tax relief on turnover or profit from products resulting from conducting R&D and innovation.

Access to infrastructure. With this kind of support a government tries to compensate for the cost of innovative firms not by transferring funds, but by providing in kind resources. Examples are access to (R&D) equipment and facilities, but also Science Parks.

Loans and Guarantees (including revolving funds) involves the transfer of actual funds, but which have to be



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reimbursed by the actors to the government (sometimes with a certain interest rate).

Participation of a government in innovative firms by providing financial resources in return for (partial share of) ownership (e.g. government as venture capitalist)

In practice, the application of the different modalities of instruments is defined by the stage of the innovation process addressed by measures. Within the framework of this paper, we will adopt the prevailing assumptions concerning the appropriateness of specific types of instruments aimed at supporting PPAs:

In general, direct measures are implemented to address high capital needs, especially (but not exclusively) in the early stages of the innovation process. (Note that within the framework of this paper, we will not distinguish between the different types of direct support). Loans / credits and guarantees (i.e. financial support that has to be reimbursed in case of successful completion of the R&D&I project) are implemented further down in the innovation process. Rationale for this is that governments assume that the desired change in behaviour (i.e. investment in R&D&I) in the later stages of the innovation process can be obtained in such a way with less financial resources (i.e. more efficient intervention). Theoretical research however indicates that, under the assumptions we adopted to assess the innovation decision for firms concerning R&D&I (i.e. linear perception of risk and utility), the expected contribution required for a government to initiate of innovation process is similar for these instruments (see for example (de Heide 2011).

Fiscal measures are also implemented in the later stages of the innovation process, as it requires firms to make an actual profit.

Even further in the innovation chain, non-financial measures are implemented providing support to the actors involved in conducting R&D&I, for example by means of advice and information provided by Bridging institutes. It is assumed that these instruments have a less disruptive effect on the functioning of the market.



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Table 8: PPAs, market failures and instruments: Measure suggested (preliminary)


Financial Capital Direct support for firms in order to address cost of the PPA.

Loans / Guarantees for firms/banks to address the cost of the PPA .

Direct support for firms in order to address cost of the PPA.

Loans / Guarantees for firms/banks to address the cost of the PPA.





Access to infrastructure in order to address cost of the PPA.

Human Capital Direct support for firms for attracting human capital (e.g. contribution to the loan of highly skilled workers, on a project base), in order to address probability of success of the PPA.

Direct support for firms for attracting human capital (e.g. contribution to the loan of highly skilled workers, on a project base), in order to address probability of success of the PPA.



Technology Infrastructure Government to set standards (possibly as producer / provider) in order to address impact (i.e. net gain in profit) of the innovative firm involved in the PPA.

Direct support for firms in order to address cost of the PPA, as well the probability of success of the project (by means of for example a technical feasibility study).




Government to set standards (possibly as producer / provider) in order to address impact (i.e. net gain in profit) of the innovative firm involved in the PPA.

Direct support for firms in order to address cost of the PPA, as well the probability of success of the project (by means of for example a technical feasibility study).


Demand articulation Direct support for firms in order to address cost of the PPA by means of for example a technical feasibility study.

Direct support for advisory services and innovation support services, provided by innovation intermediaries addressing the skills of the firms and subsequently the probability of success of the PPA.

Direct support for firms in order to address cost of the PPA by means of for example a technical feasibility study.






Vision and characteristics of multi-KETs pilot production activities Intermediary report - draft V5.0

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Value Chain IPR, in order to allow for collaboration between firms. This allows for sharing the cost for the PPA



IPR, in order to allow for collaboration between firms. This allows for sharing the cost for the PPA.

Direct support for advisory services and innovation support services, provided by innovation intermediaries involving knowledge brockerage, subsequently addressing the skills of the firms and thereby the probability of success of the PPA.


Access to infrastructure in order to provide access to knowledge infrastructure, thereby improving the probability of success of the project.


Government to set standards (possibly as producer / provider) in order to address impact (i.e. net gain in profit) of the innovative firm involved in the PPA.


Direct support for advisory services and innovation support services, provided by innovation intermediaries involving knowledge brockerage, subsequently addressing the skills of the firms and thereby the probability of success of the PPA.


Access to infrastructure in order to provide access to knowledge infrastructure, thereby improving the probability of success of the project.



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5.7 Preliminary criteria for selecting pilot activities for the different scenarios This paper focuses on the backgrounds of pilot activities in the domain of multi key enabling technologies for the development of supporting policy. An important element of this policy will be the criteria that can be used in order of project being eligible for actual support. The main conclusion from the assessment is that pilot activities cannot be addressed with a single policy instrument to fund pilot activities. This would result in an inefficient (costly) and ineffective (limited results) policy. A policy-mix is needed, where both different target groups and different stages of the innovation chain are incorporated. The target groups to be distinguished between are Medium sized enterprises and Large enterprises:

Policies for medium sized enterprises should focus on both creating access to financial capital, as well as increasing skills and creating access to infrastructural technologies (shared facilities). Also market articulation activities are highly relevant, as well as other kinds of support (e.g. IP services). TRL/MRL levels can be low and high, budgets needed are limited in regard to the large enterprise initiatives.

Larger enterprises usually are less diverse in their needs for policy support. Main issue is to limit the financial risks of investments by either better access to capital, or direct support. Also market articulation oriented activities could be supported, including Public procurement.

Additional, more indirect supporting policies are to be found in training and education. Support to skills development can be more general (education policy), but should be focused on the capabilities needed to develop pilot production activities. Also training the investors is a crucial supporting policy, which will be crucial to enhance access to financial capital (both public and private organizations).

Looking at the basic criteria for pilot activity initiatives, it is clear that this highly depends on the actual support instruments. However, some basic criteria can be identified looking at the selection of pilot activity initiatives:

At least AMT plus 2 other KETs need to be addressed (2013 HLG);

The MRL level is between 4-7 and the TRL level of at least 2 KETs between 5-7;

There is an strong industrial participation, including significant financial investments and ownership;

Connections with European markets (strength/competitiveness) need to be established and addressed in the activities;

The products should address the societal needs (to assure the sustainability of the demand for the future);

Existing European R&D should have a leading position in the world but connection to downstream industry until lead customer and end-user should be established;

The impact of the investments should have a proven impact on jobs creation by initiating downstream economic activities;

Cross country activities (to separate from what local/national governments can do).

5.8 Horizon 2020 and additional public support to PPAs

5.8.1 State Aid rules and co-funding The EC has appropriated a considerable budget to the support for the set-up of PPAs. This support will be allocated by means of Horizon 2020. The EC indicated that successful policy aimed at supporting these PPAs requires additional public support from Member States and Associated States. The Framework Programmes are exempt from the State Aid rules. Co-funding by Member States for Pilot activities however should be in line with [EC 2006]. Within the boundaries set by EU law, Member States have a great degree of policy freedom. Accordingly, they can set their own rules, for instance disallowing cumulation



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of aid for certain sectors or setting thresholds at levels lower than those allowed by the European State Aid rules. The rules for co-funding at national level are mostly based on national policy considerations, provided that the aid given does not violate the boundaries set by European rules. All State Aid measures must be notified, unless they benefit from an exemption under Regulation 800/2008. There is such an exemption for State Aid for R&D&I, subject to maximum monetary and aid intensity thresholds. Transparency requirements provide a summary of the un-notified aid measure to the Commission. If a State Aid measure which requires notification is not notified, the aid granted is unlawful and the Commission can order the Member State in question to recover the aid. Such un-notified aid can also arise in the proceedings of national courts, which should rule that it is illegal. Once aid is notified, the Commission assesses its compatibility with the internal market.

Table 9 Aid intensities for different type of R&D&I and actors

Small Enterprise Medium sized

Enterprise Large Enterprise

Fundamental research 100% 100% 100%

Industrial research 70% 60% 50%

Industrial research subject to:

collaboration between undertakings; for large undertakings: cross-border or with at least one SME or

collaboration of an undertaking with a research organization or

dissemination of results

80% 75% 65%

Experimental development 45 % 35 % 25 %

Experimental development subject to:

collaboration between undertakings; for large undertakings, with cross-border or at least one SME or

collaboration of an undertaking with a research organisation

60 % 50 % 40 %

Note that in theory it is possible for State Aid to be granted not via the R&D&I framework, but through another category of State Aid such as the Regional Aid Guidelines (RAG). This could be of relevance for higher levels of TRL / MRL. The types of market failure to be addressed differ in that case from the ones linked to R&D&I.

5.8.2 Examples of financing of PPAs The co-financing principle stipulates that part of the cost of an action or of the running costs of an entity is borne by the beneficiary of the grant or by contributions other than the European Commission's contribution, such as EU member states or regional governments.

22 Three types or ways of co-financing were identified:

through structural funds, through Joint Technology Initiatives and via the European Investment Bank. Co-financing through structural funds

22

http://ec.europa.eu/europeaid/companion/document.do;jsessionid=Qtn6RBGYZpPyJsYTWqddLsR74JTT3DcxkyyqSpD0QgpmqvvZMHfb!1001692867?keyword=Parallel+co-financing&locale=en





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Co-financing of pilot production activities generally takes place through dedicated policy programs aimed at the development of regions or countries. Such programs are supported by the European Regional Development Fund, with some support coming through sub-programs such as INTERREG IV. Although these programs are not specifically focused on the funding of pilot lines, several examples of pilot line projects were identified in these programs. In Slovenia, the national government installed several Centers of Excellence which aim on promoting the concentration of knowledge at priority technological areas and creating horizontal linking along the entire chain of knowledge development, which should be realized by strategic partnerships between the private sector and the academic sector

23. This cooperation should lead to more effective transfer of knowledge and

result in new products, services and processes, and new dynamic high-tech companies. Centers of Excellence include all stages of knowledge development from basic research to development of commercial application. The policy measure is implemented through grants. Centers of Excellence are co-financed by the Structural funds (e.g. ERDF and ESF) and the Ministry of Economic Development and Technology (MEDT). The actual call is running from 2009 to 2013, a further call after 2013 can be expected. The overall budget for the actual call is € 84 million, with 85 % of the total financial support coming from ERDF.

24

In Germany, co-financing takes place through the structured support of several regions. For example, Dresden and its surroundings has established all kinds of competences around the issue of process development and production in semiconductors, nano- and micro-electronics. Examples include the Advanced Mask Technology Center (AMTC) in 2002, Fraunhofer CNT (Center for Nanoelektronic Technologies) and NamLab, as public private partnership. Latest establishments were Fraunhofer IZM-ASSID (All Silicon System Integration) and ALD Lab (atomic layer deposition). All these activities have been related to pilot production or run shared facility for pilot production activities. In addition to the support from the federal government, a lot of expenses came from the state of Saxony in connection with ERDF-financing. The total ERDF contribution included about 3 bln Euros, with close the 1 bln Euros invested by regional and national governments.

25 Today an important

public funding source is the Top Cluster grant from the German Ministry of Education and Research for the activity “Cool Silicon”.

26

In Italy, the National Operative Programme aims on developing the economically lagging southern regions. The programme for 2007-13 has the objective of “convergence”, and involves the implementation of seven programmes, three of which specifically addresses funding for research and development projects, to promote the competitiveness of the economic system of these regions:

National operative programme (Programma Operativo Nazionale – PON) for Research and Competitiveness 2007-2013;

Regional operative programme (Programma Operativo Regionale – POR) for Research and Competitiveness 2007-2013;

Inter-Regional operative programme (Programma Operativo Interregionale – POIN) for Research and Competitiveness 2007-2013;

The financial resources for NOP come from the EU Structural Funds of 138 mln Euros in total, with national funds in kind.

27

23

http://www.arhiv.mvzt.gov.si/en/areas_of_work/science_and_technology/centres_of_excellence_and_competence_centres/ 24

http://erawatch.jrc.ec.europa.eu/information/country_pages/si/supportmeasure/support_mig_0002 25

http://www.isi.fraunhofer.de/isi-media/docs/p/de/arbpap_unternehmen_region/ap_r3_2009.pdf?WSESSIONID=3 26

http://cool-silicon.de/Startseite/Spitzencluster.html 27

http://ec.europa.eu/regional_policy/country/prordn/details_new.cfm?gv_PAY=IT&gv_reg=ALL&gv_PGM=1163&LAN=7&gv_per=2&gv_defL=7

http://www.arhiv.mvzt.gov.si/en/areas_of_work/science_and_technology/centres_of_excellence_and_competence_centres/

http://www.arhiv.mvzt.gov.si/en/areas_of_work/science_and_technology/centres_of_excellence_and_competence_centres/

http://erawatch.jrc.ec.europa.eu/information/country_pages/si/supportmeasure/support_mig_0002

http://www.isi.fraunhofer.de/isi-media/docs/p/de/arbpap_unternehmen_region/ap_r3_2009.pdf?WSESSIONID=3





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In Belgium the Bio Base Europe Pilot Plant was launched and provides the facilities and equipment to develop and scale up bio-based products and processes up to production scale. The plant was financed through the INTERREG IV Flanders – The Netherlands programme, as part of the European Regional Development Fund, with about equal distributions from the Dutch government, the Flemish Government and ERDF, mounting to 21 mln Euros in total.

28

The Bioprocess Pilot Facility in the Netherlands was funded by universities, companies, the European Union,

the Dutch Ministries of Agriculture, Nature & Food Quality and Economic Affairs, the Province of South Holland and the Municipalities of Rotterdam, Delft and The Hague. The facility is organized as an Open Innovation facility consisting of separate modules, incorporating various methods of biomass pre-treatment, fermentation, recycling and purification to advanced bioprocesses

29. As far as the research programme part of

the public-private partnership is concerned, the majority of the €120 million is financed by private partners of the project, with the remainder being shared among public entities, with the ERDF (12.8 mln) and the ministry of Economic Affairs (8 mln) taking the largest proportion.

30

Co-financing through Joint Technology Initiatives

31

Joint Technology Initiatives (JTIs) have been initiated in 2007, representing a new instrument within the Seventh Framework Programme to support large-scale multi-national research activities. Each JTI is implemented by means of a Joint Undertaking (JU), a legally established community body set up on the basis of Article 187 of the EC Treaty. Members of the JTIs / JUs are the Community (represented by the European Commission), EU Member States or other countries associated to the Seventh Framework Programme, Industry (corporate companies, SME's and not-for-profit industry-led associations) and R&D actors (research organisations and universities). JTIs have their own dedicated funding provided by the Community. The maximum Community contribution to cover running costs and research activities differs per JTI: EUR 1 billion for Innovative Medicine; EUR 420 million for Artemis; EUR 450 million for Eniac and EUR 800 million for Clean Sky

32. Member States are to make

in-kind contributions to the running costs (by facilitating the implementation of projects), and to provide financial contributions of at least 1,8 times the EU contribution. Co-financing with another source of EU funding, such as structural funds, is not allowed, and will lead to exclusion of JU funding

33. In-kind

contributions are also to be provided by research organisations participating in projects, which must be at least equal to the contribution of the Commission and the Member States

34. The allocation of funding provided by

Member and Associated States differs per JTI; in two JTIs (Artemis and Eniac) the Member states provide funding directly to the participants, in other JUs (Fuel Cells and Hydrogen, Clean Sky and Innovative Medicine), the distribution of funds is done by the JTI. The organizations participating in projects incur costs that are partially seen as eligible and can partially be reimbursed by the JTI up to a maximum of 50%. The Public Authorities Board decides which percentage of the R&D costs incurred by participants in projects will be funded by the Joint Undertaking. The percentage will not exceed 16,7% of these costs and is equal for all participants eligible for JTI funding in projects in any given call

28

http://www.grensregio.eu/2011/02/11/bio-base-europe/ http://www.bbeu.org/sites/default/files/Bio%20Base%20Europe%20press%20release%20final_0.pdf 29

http://www.star-colibri.eu/files/files/Deliverables/ppp-opportunities.pdf 30

http://ec.europa.eu/regional_policy/sources/docgener/evaluation/pdf/eval2007/expert_innovation/2011_synt_rep_nl.pdf 31

This paragraph was drafted with the help of the governing board of Eniac. 32

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/misc/97834.pdf 33

Structural funds were sometimes used to cover national contributions to beneficiaries of projects, see http://eca.europa.eu/portal/pls/portal/docs/1/19626834.PDF, p. 10 34

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2013:006:0018:0026:EN:PDF

http://www.grensregio.eu/2011/02/11/bio-base-europe/

http://www.bbeu.org/sites/default/files/Bio%20Base%20Europe%20press%20release%20final_0.pdf

http://www.star-colibri.eu/files/files/Deliverables/ppp-opportunities.pdf

http://ec.europa.eu/regional_policy/sources/docgener/evaluation/pdf/eval2007/expert_innovation/2011_synt_rep_nl.pdf

http://ec.europa.eu/regional_policy/sources/docgener/evaluation/pdf/eval2007/expert_innovation/2011_synt_rep_nl.pdf

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/misc/97834.pdf

http://eca.europa.eu/portal/pls/portal/docs/1/19626834.PDF

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2013:006:0018:0026:EN:PDF



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for all proposals 35

. At the moment, the contribution of the JTIs launching pilot production activities is 15% for Eniac

36 and 16,7% for Artemis

37, as decided by the respective Public Authority Boards

38. The EU country report

describes the various pilot line projects funded through JTIs in more detail, as well as the selection procedure used by JTIs to select among project proposals

39.

Co-financing through European Investment Bank To conclude, co-financing can take place through the joint efforts of the European Investment Bank and EU Member States. For example, NEOTEC is a Spanish-based EUR 183m fund-of-funds launched in February 2006 by the EIF in cooperation with the Spanish Centre for the Development of Industrial Technology (CDTI). It is aimed at supporting the creation and development of technology based companies. Companies get a flat interest rate loan, which can be amounted up to 70% of the costs approved in the five year business plan (limited to €250,000). Company gives returns of the loan as positive cash-flow is generated. To date, NEOTEC has approved 12 funds, including co-investments, for a total of EUR 134.3m, of which EUR 129m have been signed accounting for 70% of the fund size and catalysing over EUR 700m of commitments from other investors.

40

35

See http://www.eniac.eu/web/downloads/projects/ENIAC-PAB-4-08-pub.pdf, p. 2. 36

http://www.eniac.eu/web/calls/ENIACJU_Call9_2013-2.php 37

http://ec.europa.eu/research/participants/portalplus/static/docs/calls/fp7/artemis-2013-1/1562638-eligibility_criteria_and_funding_rates_call_2013_v7_en.pdf 38

In fact, this percentage can vary from year to year and was already lowered in the Eniac JTI from 16,7% to 15%, due to diminishing contributions from Member States, see http://www.eniac.eu/web/downloads/PAB%20Minutes/eniac-pab-86-12_summary_19th_pab_meeting.pdf 39

The selection procedure of project proposals is adopted by the Public Authorities Board and is based on the principles of fairness, transparency, impartiality and confidentiality. For the Eniac JTI, this procedure can be found via http://eniac.eu/web/downloads/PAB%20Decisions/eniac-pab-4-08_evaluationselectionprocedures.pdf. An overview of the Eniac pilot lines executed last year can also be found via http://www.eniac.eu/web/downloads/Annual%20Reports/eniac-gb-165-13_adopting_annualactivityreport_2012.pdf. 40

http://www.eif.org/what_we_do/resources/neotec/

http://www.eniac.eu/web/downloads/projects/ENIAC-PAB-4-08-pub.pdf

http://www.eniac.eu/web/calls/ENIACJU_Call9_2013-2.php

http://ec.europa.eu/research/participants/portalplus/static/docs/calls/fp7/artemis-2013-1/1562638-eligibility_criteria_and_funding_rates_call_2013_v7_en.pdf

http://ec.europa.eu/research/participants/portalplus/static/docs/calls/fp7/artemis-2013-1/1562638-eligibility_criteria_and_funding_rates_call_2013_v7_en.pdf

http://www.eniac.eu/web/downloads/PAB%20Minutes/eniac-pab-86-12_summary_19th_pab_meeting.pdf

http://www.eniac.eu/web/downloads/PAB%20Minutes/eniac-pab-86-12_summary_19th_pab_meeting.pdf

http://eniac.eu/web/downloads/PAB%20Decisions/eniac-pab-4-08_evaluationselectionprocedures.pdf

http://www.eniac.eu/web/downloads/Annual%20Reports/eniac-gb-165-13_adopting_annualactivityreport_2012.pdf

http://www.eniac.eu/web/downloads/Annual%20Reports/eniac-gb-165-13_adopting_annualactivityreport_2012.pdf

http://www.eif.org/what_we_do/resources/neotec/



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