Innovation Business Partnering in the EU (i): An Alternative to Mergers & Acquisitions for European Small and Medium-Sized Enterprises

J. Sean Curtin (Fellow, GLOCOM and Asia Times)

An alternative to mergers and acquisitions (M&A) is an effective equal partnership within the EU Framework of FP6/7 programmes according to a recent report, "European Innovation," by Prof. Ruth Taplin, Director, Centre for Japanese and East Asian Studies, that interviewed the directors of small and medium-sized enterprises (SME) and mid-sized (MS) companies in Western and Eastern Europe.

This report is particularly timely as the recent verdict of the French and Dutch referendums have left a vacuum which needs to be filled by sound economic/business practice to move the success of the EU forward.

According to Peter Davies, CEO of Pera, a technology innovation company with sites in six member states and a leader in establishing pan-European industrial consortia for product and process innovation, they can assist SME and MS companies to obtain at least a 20 percent return on their investment, 3 to 5 years from joining a consortium project and some companies are achieving well over 30 percent per annum on the original investment. The European Commission has estimated says Pera's Davies that the long-term net return is 7 Euros for every 1 Euro invested in a collaborative programme.

Most large companies in Europe have developed in size through M&A, unlike the US companies which have grown out of smaller ones. This has meant that while many large companies in Europe are moving explicitly to a new model of corporate innovation, pro-actively building a global network of innovation partners, setting up cost-sharing innovation consortia, SME/MS companies are not fulfilling their potential.

A major reason for this is that R&D costs for innovation are beyond the means of the average SME/MS in Europe, which undertake seven to eight times less research activities than their American counterparts. This comparative weakness is all the more acute in light of the fact that SMEs account for 65 per cent of European GDP, but only 45 percent in the US. Another striking difference is that 75 percent of large firms founded since 1980 in the US have grown from small beginnings in contrast to similarly aged firms in Europe that are the result of M&As.

Prof. Taplin's report published in time for the forthcoming UK Presidency of the EU, finds the need for more innovative SMEs that grow into MS and large companies successfully.

This can be accomplished by innovative consortia that not only share R&D costs, knowledge, provide indirect opportunities for marketing through consortia partners, and also diffuses the envy, failure, blame culture that pervades European society. This is through partnerships spreading the risk and responsibility because two or more companies have the ability to detect and resolve problems early on.

British companies wait too long to deal with problems and consequently become bankrupt. All the companies interviewed in the report reflected the fact that once branded a failure a company will be perceived as such and denied further assistance while in the US there is always another chance on offer and business failure is not stigmatised.

Peter Davies notes that more effective involvement of SMEs and the inclusion of SME companies in the forthcoming Framework Programme 7 is essential if Europe will raise investment in R&D and reach the objectives of 3 per cent of GDP and with a globally competitive knowledge-based economy respectively the Barcelona objectives and Lisbon objectives.

Anthony Murphy, Director of European Strategy at the DTI, notes that as Europe moves into the second half of Lisbon economic reform, innovative individuals and organisations will have an even greater role to play in building European competitiveness and narrowing the productivity gap between Europe and the US and other global competitors.

Just as the cost of R&D for high-tech companies is beyond the capabilities of just one company, so too is the task for the vast majority of medium and low technology SME companies (97 percent of small firms) with limited resources progressing towards higher value products and being more knowledge intensive without pooling their resources with other companies.

Geoff Haswell, the Managing Director of Piezotag Ltd, noted the international dimension is imperative because the wider the pool to search for innovative ideas the more likely originality will be found. This is best accomplished by a project being undertaken together with an innovation facilitator who already has a network of research contacts in companies, institutes, universities or other innovation facilitators such as the Fraunhofer Institute or Pera.

Thus making equal partnerships the viable alternative to mergers, acquisitions and indeed the opening of new markets and broadening of existing markets, the EU will make available over 73 billion Euros between 2007 and 2013 to facilitate the targets set by the Lisbon accords. To achieve this it will be important for equal partnerships to forge a clear link between research and development and entrepreneurship.

Peter Davies believes that innovation should be market led, and not driven by the generation of new scientific and technological knowledge as is currently the case. Regional and national support mechanisms need to be put in place to help firms with the new product ideas that will create the demand for new scientific and technological knowledge.

Partnering is essential to enable SME/MS companies to grow to new levels of strategic thinking research/knowledge intensity and economic growth and to open new routes to markets and suppliers. This will necessitate a behavioural change in attitude towards the relative importance of innovation within many SME/MS companies in the UK.

While keeping an eye on the market, opportunities and risks need to be viewed and studied working with a facilitating organisation such as Pera that can solve many of the induction hurdles within a flexible context and with a vision together with the use of innovation facilitators in a few pioneering regions in order to develop the key skills assisting SME/MS companies to generate and bring out opportunities in partnering.

However simply throwing money at SME/MS companies is counter productive, resources given out need to be carefully targeted and results need to be followed up meticulously.

SME/MS should be left to develop as the market progresses but when necessary government back-up should be readily available. This is shown by the Development Bank of Japan using a bankrupt or failing company's IP as leverage to assist with re-starting at medium or high levels of risk. The programme has been successful from which the European Construction and Redevelopment Bank can learn.

Notwithstanding such support SME/MS companies need to be encouraged to spend within their budgets to reduce risk and create extra value. These are skills that need to be imparted by experienced innovation practitioners at the level of commercialisation as understanding the value of a product/IP is essential to market success. Given this the establishment and management of an innovation consortium has some very different features to normal supply chain management. Clearly there are pitfalls for a company inexperienced in this area.

The chances of a successful expansion depends on a clear strategy at the outset but also on having a methodical and thorough risk and opportunity analysis of the total route to supply the product or service, in volume, in a new market and with potentially new suppliers. This requires having the best possible partner-search process and professional assistance in consortium building which could be pan-European or global.

The second part of this article can be found here.

Note

The report "European Innovation" can be obtained from Ruth Taplin Ruth.Taplin@btinternet.com