A strong economy needs strong innovations

POSITION | DIGITISATION AND INNOVATION POLICY | FP10

Invest in Research. Secure innovative Strength.

Recommendations from German industry for a future 10thResearchFrameworkProgramme(FP10)

A strong economy needs strong innovations

24 May 2024

In times of geopolitical uncertainty and upheaval, it is crucial to establish a strategically orientated and coordinated industrial and innovation policy in order to make Europe a strong location for innovation and business in the future. The aim must be to secure Europe's technological leadership in the world in order to strengthen our global competitiveness and at the same time to tackle key challenges such as climate change, demographic change, resource scarcity and urbanisation together. European research and innovation policy is a decisive lever in this respect, which must be complemented by a holistic industrial strategy Central elements of this are:

▪ Targeted increase in research spending: There needs to be a clear commitment from the EU and EU member states to invest massively in research, particularly in future and key technologies at European, national and regional level. Research programmes and research initiatives must be better interlinked at all levels in order to create synergies. The budget of the tenth research framework programme should be doubled to 200 billion Euros and used effectively

▪ Strengthen transfer and secure innovative power in Europe: The interface between statefunded research and marketable production and scaling must be strengthened by accompanying industrial policy measures so that innovative solutions emerge from research that secure value creation here in Europe

▪ Strengthen industrial research along the entire development chain: Innovations must be considered holistically. Key and future technologies in particular play an outstanding role as the basis for economic and social transformation processes. Public and private cooperation in public-private partnerships(PPP) must bemaintained and mademoreagile through unbureaucratic organisation.

▪ Reducing complexity and focussing on agility: The complexity and administrative effort involved in submitting and implementing applications must be reduced and procedures speeded up and made more efficient

Securing innovative strength in global competition

Up to now, research and innovative capacity have primarily been factors for a globally competitive European industry – as the basis for growth and prosperity. Today and in the future, however, research and innovative power will also determine whether Europeans can defend their values in the global competition between regions and live in democracy, freedom and stability. Innovation policy has also long been a geopolitical instrument that is increasingly being used strategically. Both the United States and China are spending hundreds of billions of US Dollars to gain an innovative and technological edge in certain core areas. China has caught up significantly in its research spending over the past 20 years. Spending on research and development (R&D) in China totalled around USD 620.1 billion in 2021. In the United States, the spending in the same year was around USD 709.7 billion.1 This means that the United States spent around 3.5 per cent of its gross domestic product (GDP) on R&D in 2021, while China spent around 2.4 per cent.2 The United States will significantly expand its position in the coming years through planned investments totalling USD 200 billion in the US Science Act. With 2.1 per cent the EU is lagging behind and has once again fallen far short of its three per cent target from the Lisbon Strategy, which was adopted back in 2000. This means that Europe has barely moved forward in more than 20 years and is far from a level playing field. The figures illustrate dramatically that Europe is falling far behind in a global comparison. We must vigorously oppose this development if we want to maintain our prosperity, stability and freedom here and assert ourselves against an increasingly aggressive location policy of countries such as the United States and China. Particularly considering the discussions surrounding the European strategy for economic security, it is important to find a balance between promoting and protecting against risks in research, technology and innovation policy so that research processes and innovation can continue to develop free of borders and organisations. Against this background, a critical evaluation of the principles of the Open Science Strategy and Open Data Directive is also required.

Targeted increase in research expenditure

The coming years are crucial in order not to lose touch with countries that advertise with billion-euro subsidies and attractive location conditions and to ensure a reorientation of competences and the preservation of technological resilience in Europe. A look at the United States (3.5 % of its GDP for R&D), China (approx. 2.4 %), Israel (5.6 %), South Korea (4.9 %) or Japan (3.5 %) makes it dramatically clear that Europe must significantly increase its investment in research and development if we want to continue to see ourselves as a centre of innovation and industry. Investment in research and innovation in Europe must be significantly increased and raised to three per cent of European GDP. We therefore need a clear commitment from the EU and the EU member states to invest massively in research, particularly in future and key technologies, in order to achieve a sustainable, resilient and competitive European Research Area In the first half of the ninth research framework programme, the success rate of German projects up to January 2024 was around 20 percent 3 This discourages many companies from investing time and money in Horizon Europe applications, only to come away emptyhanded in the end. Existing resources are scarce and must be utilised in a targeted and efficient manner and synergies and complementarity must be created across the entire funding landscape In addition to concrete measures to increase the effectiveness of the use of funds, the budget for the tenth

1 Cf. Statista: UNITED STATES vs. China - Total R&D expenditure (R&D) in comparison | Statista

2 Statista: Spending on research and development in selected countries | Statista

3 Study on German participation in the EU Framework Programme for Research and Innovation on behalf of the BMBF, status 2024

research framework programme must be expanded, particularly in the area of applied industrial research. The budget of the tenth research framework programme should therefore be doubled to 200 billion Euros in order to come one step closer to the three percent target. The use of funds from the research programme for other political priorities or other budgetary bottlenecks must be avoided at all costs - this practice has led to immense planning uncertainties in the past. Even if political and strategic prioritisation isfundamentally important and correct, the use of research funds for other purposes jeopardises existing, strategically important research activities. New priorities also need new money. In parallel to such a well-funded and efficient EU research framework programme, effective incentives are needed to increase R&D investment in the EU member states

Strengthening industrial research along the entire development chain

Companies account for two thirds of all research expenditure in Europe Support through public R&D funding is proving to be a key lever for the entire research ecosystem and incentivises cross-company cooperation in a pre-competitive framework and close links with science and SMEs. For strategic and industrial policy reasons, the topic of industrial research must therefore play a central role in the research framework programme. This is because the catalytic effect of R&D funding strengthens the value chain, enables early standardisation and accelerates innovation.

Bringing research projects into industrial application - keeping value

creation in Europe

The central focus must be on bringing the research projects into the breadth of industrial application practice. The interface between state-funded research and marketable production and scaling - i.e. the "transfer" - must be improved Accompanying industrial policy measures must ensure the international competitiveness of industry, which in many cases is facing immense challenges as part of the transformation. After all, the ultimate aim is to bring a research result to market maturity Therefore, the entire development chain must be included and linked in the future - from the initial idea or discovery to the market readiness of the finished product and the development of standards Higher TRLs (Technology Readiness Levels, from TRL 6 on) should also be promoted through synergies with other European and national programmes such as the EU Innovation Fund. Furthermore, more calls for proposals in the TRL 4 and 5 area would be necessary to ensure the development of future technology modules Furthermore, incremental research should not be ignored. The focus should not be exclusively on "new" paths and ground-breaking innovations, but on improvement (through innovation) for society. Ultimately, the goal must be to maintain and improve value creation here in Europe. Innovations must therefore be considered holistically. Key and future technologies in particular play an outstanding role here, as they are the basis for economic and social transformation processes. This requires early analyses and screenings in order to identify future technological and industry-relevant developments. Open-technology and open-topic funding opportunities that enable both incremental and disruptive innovations are therefore important. More cross-thematic calls that affect different sectors equally, such as topics like cybersecurity, health, non-CO2 emissions, noise, circular economy, raw material security, artificial intelligence or critical materials, would also be welcome. At the same time, there is also a need for very focussed calls, for example on the topic of transport, in which the particular specifics of the individual modes of transport (air, water, rail and road) are taken into account.

Seeing industry as a partner

Industry is underrepresented in many advisory bodies, such as the European Innovation Council or the Commission Expert Group on the Interim Evaluation of Horizon Europe, but also in the more smallscale selection and evaluation committees, compared to universities, research institutes and start-ups. This affects both large research-based companies and research-intensive SMEs. This is critical

because it is primarily the research-based and innovative companies with their regulatory and application-related knowledge, resources and infrastructure that are needed to bring innovations to the market. When it comes to turning inventions into products and adding value to technologies, industrial companies are an indispensable partner in the research ecosystem Their experience and assessments are therefore also crucial for advisory bodies to fully understand and map the innovation ecosystem. This will also help to ensure that potential hurdles on the further path of innovation can be recognised and tackled at an early stage. The participation of industrial research in the advisory bodies should therefore be enabled and facilitated, for example by reducing the administrative burden of the application process, so that the costs and benefits for companies are kept in a reasonable balance. In future, the entire value and development chain must be better represented in the selection and evaluation of projects. Mechanisms that facilitate SME participation should continue to exist and be further expanded. The competitiveness of industrial supply chains should also be given greater focus. Furthermore, the EU Commission should ensure greater transparency in the selection criteria for evaluators and make greater efforts to recruit expertsfrom industry. Cooperation with already associated third countries should be continued in order to achieve the best possible results and at the same time be able to draw on the best infrastructures and resources.

Evaluate the combination of social and industrial challenges in Pillar 2

Currently, the second pillar of Horizon Europe combines "industrial competitiveness" with the aspects on societal challenges. German industry fully supports the European Commission's efforts to tackle major societal challenges and achieve the Sustainable Development Goals in order to improve people's lives in the Union and worldwide. The innovation of green and digital technologies is an important driver for the success of this endeavour. Tackling industrial and societal challenges are two sides of the same coin and must therefore be considered together. However, a clear demarcation is needed in the funding of research and innovation technology projects. In our experience with Horizon Europe, combining calls under the second pillar to address societal challenges with calls to promote European industrial competitiveness has not led to the desired results. It would therefore be better to introduce a separate pillar just for industrial competitiveness and at the same time to provide enough calls and funding for both thematic priorities.

Excellence and impact as decisive selection criteria

In order to ensure efficiency, maintain the best possible research results, technological leadership and the importance of the EU framework programmes and to be able to tackle social problems with innovation in the best possible way, excellencemust be retained as the central criterion for project selection in the new research framework programme. At the same time, impact, i.e. added value for society, must be retained as a further criterion for solving the challenges facing the entire society However, this requires a clear definition of the impact of a research project in order to avoid overloading programmes and projects. In the area of industrial research, the impact should therefore be focussed more strongly on the competitiveness and productivity of EU companies. All stakeholders should also take a separate look at the concrete benefits of research results. Funding is not always aligned with the needs of innovators, the economy and society. An open and cooperative process with all stakeholders in advance could create more synergies in order to provide funding where it is necessary and useful.

Reduce complexity and create agility

The complexity and administrative effort involved in submitting and implementing applications must be reduced and procedures accelerated and made more efficient. All companies, but especially small and medium-sized enterprises (SMEs) and mid-caps, are deterred from participating by high bureaucratic hurdles The participation of SMEs is very important, as they are an essential part of the value and development chain. For this reason, the entire ecosystem must always be kept in mind in all measures in order to ensure optimal participation and mapping of the entire value chain. One suggestion for improvement is the introduction of a two-stage procedure to speed up the process, as is often used by companies when selecting start-ups for their incubator programmes:

While the first round only involves the evaluation of the basic idea on the basis of a brief project outline (determination of basic eligibilityforfunding), which can also be submitted by a single actor, the second round comprises the formal evaluation criteria and the complete research consortia. In this procedure, the focus is on the project's mission, while lengthy negotiations between the research partners only begin once the basic eligibility for funding has been confirmed. Greater flexibility in the forms of collaboration should also be created. Although it generally makes sense to have a wide range of different research partners on board, the selection of partners is often costly and time-consuming. Accordingly, the partner composition should be determined by the idea and the mission and not by the need to fulfil application criteria. In addition, not all partners always have to be on board for the full duration, which increases the workload for all parties involved and creates barriers. Consideration should therefore be given to making participation more flexible, including for later entry into projects, and facilitating temporary participation in EU research projects – for example in the form of smaller sub-projects – in order to introduce a larger number of stakeholdersto EU research at alow threshold and improve the transfer of results.

Agility as a driver of innovation

More emphasis should be placed on agility. The best example of this is the development of the coronavirus vaccine, which shows that crisis situations often mobilise the rapid implementation of good ideas. This agility should also be strengthened in the innovation system beyond the crisis. To this end, the procedures in the innovation system and in research funding must be simplified, hurdles removed, and processes streamlined. The Commission Expert Group could help to identify weaknesses and remove blockages. In principle, processes should be shortened overall, especially in collaborative research More agility and flexibility could help with calls, for example through the possibility of adaptation, reformulation or reallocation withinthe research projects. Moreflexibilityin termsof duration would also be welcome. It is also necessary for project objectives to be formulated clearly and specifically. In this way, uncertainties in the interpretation in companies can be avoided and applications for individual projects can be more targeted. However, the question of how the basic project objective is to be achieved must be absolutely open.

Maintain public-private partnerships and make them more agile

The European partnerships launched in 2021 are successful positive examples of public and private cooperation The aim of public-private partnerships under Horizon Europe is to address global challenges and priorities that require a critical mass of project partners and resources as well as a longterm vision. Thanks to this cooperation, capacities and resources are shared and ideally utilised by all project participants. This makes PPPs an essential component for the development of innovative and complex solutions. The co-programmed partnerships, for example on 2Zero, CCAM, Made in Europe

or AI, Data and Robotics, as well as the joint undertakings on chips or clean aviation, have proven to be important platforms for prioritisation and innovation transfer. They are positive examples of successful public-private cooperation and must definitely be continued. However, these PPPs must be made considerably more agile and less bureaucratic in future in order to ensure the participation of industrial companies and thus a focus on the needs of industry. In particular, it is important to avoid higher administrative costs and to dispense with in-kind contribution to additional activities (IKAA reporting) in future. The industry's commitment and willingness to invest in research, development and innovation are clear from the companies' annual reports. Anonymised and aggregated figures at partnership level do not represent any added value but lead to an unnecessary increase in administrative work for both the member companies and the public-private partnerships. For this reason, IKAA reporting for PPPs should not be continued in FP10. National and European roadmaps should be better dovetailed via partnerships, particularly in the so-called tripartite programmes

Adapt billing modalities to business practice

In principle, accounting practices should be in line with standard business practice. For example, when calculating personnel cost rates, companies should switch back to the standard practice of hourly rates in future. What looks like a smart simplification from the outside often means a significant increase in the calculation effort for companies in internal processing. Furthermore, the requirement for a manager to confirm the expenses in funding projects on a monthly basis is completely unusual in business practice, as time recording is carried out fully electronically. It would also be helpful to harmonise national requirements for the calculation of personnel cost rates in funded projects with those of the EU. Lump sums are relatively new in application. Therefore, the effects of the method in practice cannot yet be conclusively assessed and should continue to be monitored. Only after a final evaluation its application can be expanded.

Simplify the role of the project coordinator

According to the official guidelines of the European Commission, a beneficiary of the consortium must be designated as "coordinator" in a project proposal for Horizon Europe. This role involves a lot of responsibility and additional workload. The coordinator also distributes the payments receivedfrom the granting authority to the other beneficiaries and is therefore responsible for the financial management of the funding. As a result, the granting authority passes on the financial, legislative and accounting responsibility to the consortium leader. This task is a heavy burden that makes many potential consortium leaders (especially SMEs) reluctant to take on the coordinator role. In the tenth framework programme, the EU Commission should structure the role of the coordinator in such a way that the administrative burden and level of responsibility remains limited and manageable. The usual practice under HEU that the consortium leader of a project receives all funding from the EU Commission and passes it on to its partners could be in conflict with the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz, ZAG) in Germany if the consortium leader does not have a licence for financial transactions from the Federal Financial Supervisory Authority (BaFin). However, the corresponding licence is very expensive and would effectively rule out a role as consortium leader for most German companies. At the same time, this task also represents a considerable bureaucratic burden and thus makes the role of lead manager less attractive. In the interests of legally secure and attractive consortium leadership, the distribution of funding under FP10 to the participating organisations should therefore be carried out by the EU Commission or project management organisation

Transparency of the assessment basis for determining the solvency of project coordinators

Companies seeking to participate in EU-funded projects under Horizon Europe as potential project coordinators or project participants must pass a solvency check as proof of business activity during the project term. In principle, carrying out such an audit is the right thing to do. At present, however, some companies are repeatedly given a "poor" rating by the European Commission, even if reputable, traditional rating agencies categorise these stakeholders positively. This categorisation practice leads to great uncertainty for companies and an increased administrative burden in order to prove solvency. The economic basis for this determination must therefore be made more transparent and accessible. This is because it is not yet clear which valuation basis is used for the assessment A clarification of the basic procedure and the data requested or used for solvency audits would enable companies to provide the data that could lead to a realistic and appropriate assessment, taking into account the valuation approaches of the accounting standard used. The separate solvency audit of parent companies and subsidiaries participating in projects should be retained in order to minimise the administrative burden.

Strengthening deep tech start-ups

Deep tech start-ups provide new impetus and technologies for the innovation ecosystem. However, there are many hurdles, both in the transfer of intellectual property (IP) from universities and in cooperation with established companies, due to excessive bureaucracy and with regard to financing. This is because deep tech start-ups in particular need investors who are prepared to invest risk capital (especially patient money) in them. There is often a lack of the right mindset in Europe and Germany in thisregard, which meansthatmanydeep tech start-upsare lost to non-European countries. Although the European Innovation Council (EIC) is responsible for precisely such projects, the procedures are often too bureaucratic and lengthy, meaning that many start-ups cease to exist before they even receive funding. More agility, efficiency and speed are urgently needed here. There is also a need for a European network, a deep tech start-up hub, which provides an infrastructure for testing and validating prototypes. European deep tech hubs, with the possibility of using real-world laboratories, could take different forms – from digital platforms to individual rooms or buildings to entire neighbourhoods. Realworld labs promote collaboration between different stakeholders, such as companies, research institutions and users. Real-world labs are an essential approach for developing and testing innovations in an open process. For deep tech start-ups, real-world labs are an innovation method based on open innovation, participatory formats and co-creation. They make it possible to investigate interactions between innovation and the environment in a clearly defined setting. In contrast to simulations and modelling, real-world labs offer a realistic environment. Here, products and technologies can be tested under real conditions. In addition, incentives should be created to link more industrial companies to existing start-up networks and clusters and thus transfer deep tech solutions to the market

Research infrastructures

A functioning European research infrastructure network for academia and industry should be promoted in order to achieve better coordination of the scientific infrastructure of science and academia, the technology infrastructure of research organisations and the industrial infrastructure (so-called test benches). The aim should be to break down the silos of these three separate infrastructures, to keep an eye on the entire development chain and lifecycle and to establish joint risk minimisation in the technology maturation process.

Strategic orientation of missions

In principle, a strategic and interdisciplinary orientation of certain missions makes sense in order to advance social challenges through research and innovation. These must be designed in such a way that industry can also contribute and gain access to the missions. This is because industry can offer important added value in missions on smart cities or climate change impact, for example, especially if the missions are more specific, for example regarding the circular economy Overall, the missions should therefore be clearer, more goal- and market-orientated and contain milestones to be achieved. It could also be helpful to present the intended output of some missionsmore clearly. A clearer strategic orientation and definition of the missions would therefore make sense in order to incentivise valueadding industry participation Funding for missions should also be organised differently in order to support the transformational character, e. g. by including structural funds. Furthermore, the BDI considers the introduction of an evaluation of the missions to be important in order to draw lessons from the process of continuously adapting and improving the research programme. The social and political impact of industrial research should also be considered

Imprint

Federation of German Industries (BDI)

Breite Straße 29, 10178 Berlin www.bdi.eu

T: +49 30 2028-0

Lobby registration number: R000534

EU Transparency Register: 1771817758-48

Editorial office

Stefanie Ellen Stündel

Senior Manager Digitalisation and Innovation

T: +32 23792-1015 s.stuendel@bdi.eu

BDI document number: D1925