The pros and cons of innovation in programs financed by the EU

In recent years, innovation has become one of the most commonly used terms determining the strategic direction of EU policies and Polish development strategy. What’s particularly important, in perspective of the 2007 – 2013 budget (especially in the case of Operational Program Innovative Economy) innovation has also become, at least formally, one of the main prerequisites for granting EU funds to projects executed by entrepreneurs. And in the current perspective of 2014 – 2020 budget, innovation is in for a chance to become a fundamental matter since, in the case of entrepreneurs, the available support provided mainly by the Operational Program Smart Development (OP SD) will be primarily spent on research and development (R&D, previously supported mostly in the case of scientific institutions).

Therefore, we should take a closer look at what the concept of innovation actually means for EU funds and what traps this concept may entail in practice.

As far as certain activities are concerned, the concept of innovation is defined directly in the provisions regarding the granting of support. In particular, technological innovation is distinguished from product innovation. The prerequisite of technological innovation is – dependent on activity – the use by the beneficiary of the technology whose period of world-wide use does not exceed a predetermined number of years (most often three or five) or whose world-wide penetration level does not exceed a certain percentage. On the other hand, product innovation means the technology used by the beneficiary results in putting on the market a new or significantly improved product. Verifying innovation thus understood, relevant bodies assessing requests for funds are usually under the obligation to rely on the opinions prepared at the beneficiary’s request by a relevant specialized entity.

Although this manner of determining whether innovation prerequisites are fulfilled seems quite transparent, there are certain practical problems and, moreover, abuse in certain cases is not avoided. In particular, the opinions on innovation do not always take into consideration actual conditions prevailing on the market, as a result of which the funds are granted (often despite the firm opposition of rival companies) to beneficiaries that are using the exact same technologies, or technologies with simply insignificant modifications, that have already been in use for a long time. There is, moreover, some controversy regarding the fact that, in the case of not particularly innovative projects as well, not only the actual costs of research or assets strictly related to such research are financed, but also the costs of acquiring current production assets that are only indirectly related to innovation.

In the case of certain activities in which the beneficiary is supposed to commence industrial production with his/her own innovative solutions, there is a problem of how to use the achieved innovation in practice. It turns out that although the material scope of investment has been fulfilled by the beneficiary, the original, optimistic estimates of the beneficiary regarding the sale volume or market interest towards the product have not been reflected in reality. Innovations that positively passed lab tests sometimes prove to be completely incompatible with industrial production. As a consequence, the beneficiary is incapable of achieving such indicators of results as the share of foreign sales in total sales or even the commencement of production on the date specified in the co-financing contract. Small and medium-sized enterprises commonly run into problems associated with sound project management, including dealing with new research results or technical obstacles that emerge in the course of works. Moreover, terms and conditions of co-financing sometimes fail to intersect with intellectual property law, for example when rights to generated knowledge are granted by virtue of law to entities other than the beneficiary. It is also worth mentioning that, in the case of projects co-financed by EU, the possibility of the beneficiary being taken over by a new investor, which in many cases is the only way in which the beneficiary could successfully manage difficulties in performing or implementing stages of the project, are significantly hampered due to the obligation of maintaining project sustainability in the period of three or five years.

In the case of activities in which the beneficiary are supposed to carry out a research phase and a separate implementation phase, the fact that the bodies monitoring the execution of the project possess no expert knowledge sometimes leading to prolonged discussions about the actual innovation involved in the project, compliance of the obtained results with assumptions in the application for financing or making the acquired assets compatible with the results of the research phase.

In the new perspective, the financing rules providing for support mainly to R&D works conducted by entrepreneurs and no possibility of obtaining support for implementation, will most probably eliminate some of the aforementioned risk areas. What’s more, according to the declarations of competent institutions, the aforementioned imperfections of programs intended to support innovation are to be, to the greatest extent possible, removed in the new period of financing. A novel measure is also the creation of National Smart Specializations that specify priorities to which the financing of R&D activities in Poland will be limited in the new perspective. This mechanism is to prevent the dispersion of funds supporting innovation on the economy as a whole (which was the case during the period 2007 – 2013) in order to achieve more visible results in certain vital areas, described as healthy society, agri-food, forest and environmental bioeconomy, balanced power industry, natural resources and waste management as well as specifically designated innovative technologies and industrial processes. New rules regarding financing innovation will also be, on Polish ground, a huge challenge for entrepreneurs because they will be to a greater extent based on repayable instruments (instead of traditional subsidies), and will also require the increase of private expenditure on innovation as well as tightening the cooperation of business with the scientific community and thus improvements in fields that are underdeveloped in Poland.

At the moment, entrepreneurs intending to apply for funds for innovation in the period of 2014 – 2020 should then carefully watch (beyond the competition calendar) how in practice, in still pending programming documents regarding specific operational programs (including, in particular, OP SD) and activities, innovation and the manner of assessing it will be defined. A legal and organizational audit, based on experiences gained from controls and proceedings in the perspective of 2007 – 2013, may prove very helpful in order to avoid legal risks typical of financing innovation. Due to co-financing implementation activities being excluded from the new perspective we should also consider how institutions and entities (including, for example, the Industrial Development Agency will expand the scope of its activities to include financing innovation) may support (especially small) entrepreneurs in financing the commercialization of elaborated solutions. Beside the expected improvement of effects of R&D in enterprises, appropriate legal protection of created intellectual property should not be disregarded, especially since separate funds will be intended for this purpose.

By the way, it is worth mentioning that apart from EU funds other support measures propose different definitions and verification procedures (including, for example, reductions on new technologies provided for in the provisions on the income tax). Separate rules regarding assessing innovation may also be stipulated in the case of framework programs financed directly by the Commission, without the intermediary of the Polish government.