Study on the International Market Distortion in the Area of Kets: a Case Analysis Final Report

Study on the international market distortion in the area of KETs: A case analysis Final Report

Client: DG Enterprise and Industry

Copenhagen, 13 May 2013

Study on the international market distortion in the area of KETs: A case analysis

Within the Framework Contract for Industrial Competitiveness and Market Performance – ENTR/90/PP/2011/FC

Final Report

Client: DG Enterprise and Industry

Compiled by the following partners of the ECSIP consortium:

 Danish Technological Institute (DTI)  IDEA Consult  Ifo Institute  ECORYS

13 May 2013

About ECSIP

The European Competitiveness and Sustainable Industrial Policy Consortium, ECSIP Consortium for short, is the name chosen by the team of partners, subcontractors and individual experts that have agreed to work as one team for the purpose of the Framework Contract on ‘Industrial Competitiveness and Market Performance’. The Consortium is composed of Ecorys Netherlands (lead partner), Cambridge Econometrics, CASE, CSIL, Danish Technological Institute, Decision, ECIS, Euromonitor, Fratini Vergano, Frost & Sullivan, IDEA Consult, IFO Institute, MCI, and wiiw, together with a group of 28 highly skilled and specialised individuals.

ECSIP Consortium p/a ECORYS Nederland BV Watermanweg 44 3067 GG Rotterdam

P.O. Box 4175 3006 AD Rotterdam The Netherlands

T. +31 (0)10 453 88 00 F. +31 (0)10 453 87 55 Email [email protected]

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Table of contents

List of abbreviations 7

1 Introduction 9 1.1 Objectives of the study 9 1.2 Structure of this report 10 1.3 Key concepts used in this study 10 1.4 Theoretical approaches for the promotion of R&D&I 11 1.5 Methodology 14

2 Specific policy measures put in place by selected third countries 16 2.1 Introduction 16 2.2 United States 16 2.2.1 Overall policies in the KETs area 17 2.2.2 Specific measures 17 2.2.3 Advanced Technology Vehicle Manufacturing Incentives Program 19 2.2.4 The Section 1703 and 1705 Loan Guarantee Programs 20 2.2.5 Biomass Program 22 2.2.6 Biorefinery Assistance Program 23 2.2.7 The Advanced Research Projects Agency - Energy 24 2.2.8 Make it in America 24 2.2.9 State level initiatives 25 2.2.10 General innovation support 27 2.3 China 28 2.3.1 Overall policies in the KETs area 28 2.3.2 Specific measures 30 2.3.3 Policies on Encouraging Development of the Software Industry and Integrated Circuit Industry 30 2.3.4 Special Fund for Research and Development of the Integrated Circuits Industry 31 2.3.5 Science and technology industrial parks 31 2.3.6 National High Technology R&D Programme (863 Programme) 32 2.3.7 Corporate income tax law 33 2.3.8 R&D tax credit 34 2.4 Singapore 35 2.4.1 Overall policies in the KETs area 35 2.4.2 Specific measures 35 2.4.3 The Pioneer Incentive (fiscal measure) 36 2.4.4 Research Incentive Scheme for Companies (RISC) (grant) 36 2.4.5 Technology Enterprise Commercialisation Scheme (TECS) 37 2.4.6 Technology Innovation Program (TIP) 37 2.5 Taiwan 38 2.5.1 Overall policies in the KETs area 38 2.5.2 Specific measures 40 2.5.3 Multinational innovative R&D centres 41 2.5.4 Science Parks 41 2.5.5 The Si-Soft project 43

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2.6 Korea 44 2.6.1 Overall policies in the KETs area 44 2.6.2 Specific measures 45 2.6.3 Foreign Investment Promotion Act (grants) 46 2.6.4 Special Taxation Restriction Act (fiscal incentives) 46 2.6.5 Foreign Investment Zones – location support 46 2.6.6 General innovation support 47 2.7 Japan 48 2.7.1 Overall policies in the KETs area 48 2.7.2 Specific measures 49 2.7.3 Bill on Special Measures for the Promotion of Research and Development by Certified Multinational Companies 49 2.7.4 Subsidy Program for Projects Promoting Asian Site Location in Japan 50 2.7.5 The Innovation Center Establishment Assistance Program 50 2.7.6 Subsidy Program for Domestic Site Location 51 2.8 Cross-cutting view of measures 52

3 Case studies of KETs investments in third countries 55 3.1 Market distortion cases 55 3.1.1 Case A 56 3.1.2 Case B 58 3.1.3 Case C 58 3.2 Other case studies where other factors than market distortion were decisive for the location of the investment 60 3.2.1 Case D 60 3.2.2 Case E 62 3.2.3 Case F 63

4 Evidence from the case studies: Market distortion and location factors 66 4.1 Instruments used to attract foreign investment 66 4.2 Evidence of market distorting practices 67 4.3 Other factors influencing KETs investment location decisions 68 4.4 Opinions on what Europe could do differently 69

5 Regulatory and framework conditions: options for counteracting market distortion 71 5.1 Introduction 71 5.2 Counteracting market distortions in the context of international (public) law 71 5.2.1 International (public) law 71 5.2.2 Mechanisms for counteracting market distortion 72 5.3 Counteracting via the World Trade system 74 5.3.1 GATT - Context and scope 74 5.3.2 Relevance for KETs 77 5.4 The matching clause as counteracting mechanism 78 5.4.1 Context 78 5.4.2 Relevance for KETs 80 5.5 Summary 84

6 Conclusions 87

Annex I List of literature 93 Cross-cutting (general) literature 93

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Korea 94 United States 94 Japan 96 Singapore 97 China 97 Taiwan 98 Regulatory and framework conditions 99

Annex 2 Lists of EU KETs companies with manufacturing and/or R&D facilities in the third countries101 US 101 China 103 Japan 105 Taiwan 106 South Korea 106 Singapore 107

Annex 3: Overview of EU State Aid rules 108

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List of abbreviations

Where abbreviations concern institutions or concepts that are specific to one country, and this is not clear from the abbreviated term, the country is indicated in brackets.

ATV Advanced Technology Vehicle ARRA American Recovery and Reinvestment Act CPV Concentrated Photovoltaics DOE Department of Energy (US) EDB Economic Development Board (Singapore) FDI Foreign Direct Investment FIZ Foreign Investment Zone FY Financial Year GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GMO Genetically Modified Organism HDI Human Development Index HNTE High and New Technology Enterprise (China) IB Industrial Biotechnology IC Integrated Circuit ICCP Industrial Complex Cluster Program (Korea) IPA Investment Promotion Agency IPR Intellectual Property Rights JETRO Japan External Trade Organization KRW South Korean Won (currency) METI Ministry of Economy, Trade and Industry (Japan) MIDA Malaysian Investment Development Authority MNE Multi-National Enterprise MOST Ministry of Science and Technology (China) NIS National Innovation Systems NNI National Nanotechnology Initiative (US) NT New Taiwan Dollar (currency) PTA Preferential Trade Agreement RF Radio Frequency RISC Research Incentive Scheme for Companies (Singapore) RMB Chinese Renminbi (currency) S&T Science and Technology SBA Small Business Administration SBIR Small Business Innovation Research Program (US) SCM WTO Agreement on Subsidies and Countervailing Measures SEI Strategic Emerging Industry SGD Singapore Dollar (currency) SME Small/Medium-sized Enterprise STIP Science and Technology Industrial Park STTR Small Business Technology Transfer Program TECS Technology Enterprise Commercialisation Scheme TIP Technology Innovation Program (Singapore)

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TRIM Trade-Related Investment Measure USDA US Department of Agriculture WTO World Trade Organization

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1 Introduction

The background for this study is that Key Enabling Technologies (KETs) have been identified as crucial to the future competitiveness of Europe’s economy and for Europe’s ability to face the great social challenges ahead. At the same time, Europe’s competitive position in this area is being challenged by intense global competition and, in many competitor countries, incentives are available to attract investment in KETs R&D and manufacturing which Europe is not always able to match. This may lead to market distortion which in the framework of this study means “the intentional creation of competitive advantages which aim at protecting targeted domestic enterprises/sectors or attracting foreign investors and allowing them to produce and crowd out companies from abroad” (Request for services, p. 2).

Consequently, there is a need to identify whether and how such market distortion takes place, and what action can be taken to redress this distortion. The study should identify the most important distorting issues and shed light on the important factors influencing the decision on where to invest.

1.1 Objectives of the study

The main purpose of this study is “to firstly examine whether the existing European policy and regulatory framework is able to tackle eventual market distortions so as to make the EU attractive to KET-related investment and secondly any measures which, if applied, could effectively redress the balance”1.

More specifically, the objectives of the study are the following:

 “to identify and analyse the specific policy measures that distort the KETs market and have led to KETs’ manufacturing outside the EU”. The aim is to demonstrate that (or whether) there is, in fact, distortion of the international market taking place due to legal and other policy measures implemented by 3rd countries, and identify the most important distorting issues. Information should be provided on the specific, targeted policy measures which exist for product development and competitive manufacturing of KETs in the six most competitive countries and regions, i.e. USA, China, Singapore, Taiwan, Korea and Japan.  “to choose and study illustrative cases of EU based companies which have invested in KETs R&D manufacturing in specific third countries by pinpointing the targeted policies that distort markets in KETs”. This objective is at the core of the study and the aim is to procure as much information as possible from EU companies that have established R&D and/or manufacturing outside Europe, gaining in-depth insight into what made these companies invest in 3rd countries;  “to examine existing EU legislation and instruments and their relevance/efficiency to counter market distortion in KETs”; in addition, other relevant frameworks, in particular that of the WTO, will be examined.  to develop conclusions on how different legislative and other institutional frameworks, including the WTO and the EU State aid control system, can be better applied with the aim of restoring EU competitiveness in KETs.

1 The quotations concerning objectives of the study are from the Commission’s Request for Services, dated 30 July 2012.

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1.2 Structure of this report

The remainder of this introductory chapter focuses on two key concepts used in the study (KETs and market distortion) and discusses key elements of a theoretical framework for public interventions aimed at promoting R&D and attracting foreign investments in technology areas such as KETs. The chapter concludes with a short description of the methods used for data collection.

Chapter 2 provides a detailed review of the specific policy measures put in place by the selected third countries to create a favourable environment for KETs investment.

In chapter 3, case studies of EU companies’ recent investments in KETs manufacturing and R&D in third countries are presented, with the main objective to identify examples of market distortion in KETs investment. This is followed by a cross-cutting analysis of the case evidence in chapter 4.

Chapter 5 contains an analysis of the relevant regulatory and framework conditions that provide possibilities for counteracting market distortion, focusing in particular on the WTO system and aspects of the EU state aid system.

Finally, chapter 6 contains the conclusions of the study.

1.3 Key concepts used in this study

Key enabling technologies Key enabling technologies, or KETs, are technologies which are of strategic importance to the future competitiveness and prosperity of the EU and its member states. In its 2009 Communication ‘Preparing for our future: Developing a common strategy for key enabling technologies’ (COM (2009)512), the European Commission identified Key Enabling Technologies (KETs) for their potential impact in strengthening Europe's industrial and innovation capacity.

Six KETs have been selected as the most strategically relevant for Europe:  Nanotechnology  Micro- and nano-electronics, including semiconductors  Photonics  Advanced materials  Biotechnology  Advanced manufacturing systems, identified as a cross-cutting KET.

Market distortion The concept of market distortion is rather broad but in this report used in the specific sense of ‘the intentional creation of competitive advantages which aim at protecting targeted domestic enterprises/sectors or attracting foreign investors and allowing them to produce and crowd out companies from abroad’. For there to be market distortion related to KETs investments in third (non-EU) countries, the EU companies’ main reason for choosing to invest in these third countries rather than in the EU, must be the specific incentives provided to the investment by the third country, not company strategy or other purely market-related factors (such as proximity to customers).

Companies are defined as EU companies when their headquarters is located in an EU member state.

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1.4 Theoretical approaches for the promotion of R&D&I

Before proceeding with the review of specific policy instruments implemented in a number of countries to promote research and investment in KETs, this section briefly reviews some of the relevant theoretical approaches for public intervention in the field.

The following is based on a review of scientific literature within the area of R&D&I (research & development & innovation) promotion. The objective of the review is to identify the types of policy measures that can be applied for the different stages of the deployment of KETs and could contribute to improvement of a country’s competitiveness in this area. There are two approaches that follow different philosophies and reasons for public intervention in R&D&I as is outlined by e.g. the EIB2. These two approaches are:

 The neoclassical, and  The structuralist approach.

While government interventions in the area of KETs with regard to the neoclassical approach are mostly concerned with problems of externalities and economies of scale (leading to market failures), the structuralist approach focuses on sector- and/or country-specific features which are conducive to the development of new technologies and thus justify an active role of the government. According to the structuralist approach the most relevant fields of government intervention concerning the area of KETs are:

 the evolutionary approach, which outlines the importance of national innovation systems and their technological trajectories  new trade theory and the support of strategic sectors, and  the importance of sectoral production systems and the effectiveness of cluster policies.

The neoclassical and the structuralist approach are not mutually exclusive and may complement each other in various aspects. This is because the structuralist approach does not deny neoclassical arguments but expands the view on other potential fields of policy measures. Important aspects of these approaches are the proximity to the market and the selectivity that incorporates the threat of market distortion.

Neoclassical approach The neoclassical approach for KETs mainly involves two aspects; one is externalities, the other is economies of scale. Regarding externalities, one usually speaks of technological externalities, which can be derived e.g. from spill-over or network effects as they emanate from the introduction of new technologies (by individual companies). Since these externalities are not rewarded by the market (e.g. because of free-riding of other companies if the technology is not protected) there will be a less-than-optimal level of R&D activity by individual firms. Policy measures to address the problem of externalities are mainly founded on the internalization of externalities by granting intellectual property rights (IPR) to the innovating firm3. Another approach is reducing or limiting transaction costs that evolve along with externalities due to specific investments. In particular, this may become relevant for KETs as the investment in R&D of a specific new technology that entails

2 EIB (2006): “An industrial policy for Europe?”, EIB Papers 11, No 1/2006 3 See for instance Coase (1960): The Problem of Social Cost, in: Journal of Law and Economics Vol. 3, 1-44; Aghion and Howitt (1992): A Model of Growth through Creative Destruction", Econometrica, 60; Aghion and Howitt (1998): Endogenous growth theory, MIT Press, Cambridge, UK; Khan and Sokoloff (1998): Patent Institutions, Industrial Organization and Early Technological Change: Britain and the United States, 1790 –1850. In: Technological Revolutions in Europe, edited by Bergand and Bruland, Cheltenham, 292– 313. UK: Edward Elgar.

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interoperability with other inputs and suppliers along the value chain (network effects) usually involves high costs and low profits as long as no successful implementation is accomplished. Better integration along the value chain and policies supporting the integration activity of firms can thus make a contribution to fostering economic growth in the industry in the long run.

The second aspect is economies of scale. In particular, innovations in KETs are characterized by scale effects. In the inception phase of a new technology fixed costs tend to be high while, given a successful implementation of the new technology in the market, unit costs decrease with an increasing number of units over time. This generates economies of scale which can lead to market power and the emergence of monopolies and oligopolies. According to the academic literature, given that industries are characterized by high fixed costs (and, thus, by strategic advantages from economies of scale) the first mover in a market obtains crucial advantages that impede market access for other firms4. Hence, appropriate policies can tackle these problems by granting state aid to second-mover firms as well as subsidizing the development and dissemination of new technologies.

One important aspect of the neoclassical approach is that it favours horizontal instead of vertical policies. As the neoclassical approach allows for government intervention to eliminate existing market failures, horizontal industrial policies advocate intervention generally aimed at creating a favourable environment in which competitive industries and new technologies can emerge. Vertical industrial policies, in contrast, advocate sectoral or specific government intervention because of the highly strategic nature of industries as well as the effectiveness of targeted actions for specific industries. Because of limited government knowledge about the prospects of an industry’s long- term success and regarding the uncertainty whether governments are able to provide better results than the market, horizontal policies are dominant in the neoclassical approach.

Structuralist approach As the neoclassical approach takes a rather limited focus and justifies intervention only if market failures impair fair competition, the structuralist approach is broader based and provides more avenues for shaping the economic development through policy measures for stimulating technology and innovation. Three main fields can be identified.

The first field concerns the National Innovation Systems (NIS) and their technological trajectories. As this field strongly refers to country-specific features that affect a nation’s capacity to develop and adapt innovations, its main focus is on countries’ institutions and their historical development. Dynamic aspects of this approach rest on Schumpeterian arguments according to which innovation and technological change are considered to be the main drivers of growth and according to which the economy is constantly evolving. Thereby the real determining factor of competition is dynamism in the production of knowledge that is ultimately transformed into new products. Hence, the evolution of the economy takes places along a technological trajectory, which is limited by each country’s institutional constraints5,6. Given the evolutionary development of an economy, NIS reflects the capacity of an economy to develop technological trajectories based on the economy’s institutions. Hence, appropriate industrial policies require a sound understanding of NIS, where governments should learn from other countries’ successful innovation policies.

4 Spencer, B. J. (1986): “What Should Trade Policy Target?”, in Krugman (ed.), Strategic Trade Policy and the New International Economics, MIT Press, Cambridge, USA 5 Dosi, G. (1988): “Sources, Procedures, And Microeconomic Effects Of Innovation”, Journal of Economic Literature, 26, pp. 1120–1171 6 Nelson, R., Baumol, W., and Wolf, E. (1994) (eds.): Convergence of Productivity: Cross-national studies and historical evidence, Oxford University Press, Oxford, UK

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In the second area the main interest is on defining and supporting strategic sectors. According to this approach, world trade is characterized by imperfect competition giving rise to economies of scale, market power and reduced benefits from free trade. Hence, the dictum of free trade to exhibit the best form of international trade is questionable. Especially sectors which are subject to rapid technological change and scale effects, as in the case of KETs, are characterized by imperfect competition, whereas comparative advantage is no longer the main driver of international trade in sector outputs7. It is the initially large fixed cost in these sectors and the considerably dropping unit cost after a successful product release that generates entry barriers for other firms. Hence, free- trade benefits are restricted or even eliminated. Given this scenario, strategic trade policies set by the government may appear useful in supporting industries that are promising to sustain a country’s long-term competitiveness. Nevertheless, in most cases such policies come close to protectionism.

Regarding the third area of sectoral production systems and industrial clusters the academic literature assumes that clusters usually build around a set of specific factors. Those factors could be access to a good tertiary education system, financing and venture capital, and/or other firms, which provide sufficiently large up- and down-stream linkages along the value-chain. The importance of a set of critical factors that positively influence the entry of new firms in the market is underlined by Nelson8, who compares the semiconductor industry of the United States with that of Europe and Japan. According to the idea of industry clusters, each cluster exhibits its own industrial logic and provides the most relevant level of analysis for industrial policy. Regarding appropriate policy measures Nelson suggests a synthesis between vertical and horizontal industrial policies. In particular, instead of focusing only on horizontal measure to get the original conditions right, Nelson proposes horizontal policies that are tailored to a specific industrial sub-system. An effective industrial policy has a concrete sectoral orientation that promotes specific infrastructure for each sector, but not individual companies.

Public measures by type Since the WTO plays a minor role in regulating state aid (more details on this in chapter 5), most of the regulatory state aid frameworks outside the EU are on national level. To provide a first overview of existing national programs to support R&D&I with respect to their applicability to KETs, the two most frequently used types of policy measures identified in the following literature review are presented in this section. Those two are grants and fiscal incentives. A more detailed presentation of each of the programs by country follows in chapter 2. Additional sources for identifying general policy measures in the USA, China, Japan and Korea are taken from the literature mentioned in the Commission’s Request for Services for this study.

As the study will show, one of the most frequently used policy types is funding R&D projects by grants. Examples of such funding programs are the National High-Tech R&D Programme (Program 863) in China, the Technology Enterprise Commercialization Scheme and the Technology Innovation Program in Singapore, Multinational innovative R&D centres in Taiwan, and the Innovation Center Establishment Assistance Program and the Subsidy Program for Domestic Site Location in Japan. Besides the Recovery Act (ARRA) and state level grants in the USA, the USA provides a specific regulatory system for small enterprises called The Small Business Innovation Research Program (SBIR), which was initiated by the Small Business Administration (SBA)9.

7 Zysman, J., Tyson, L. A., and Dosi, G. (1990): “Technology, trade policy and Schumpeterian efficiencies”, in de la Mothe, J. d. L. and Ducharme, L. M. (eds.), Science, technology and free trade, Columbia University Press, New York, USA 8 Nelson, R. (1999): “The Sources of Industrial Leadership: A Perspective on Industrial Policy”, De Economist, 147 (1), pp. 1–18 9 For more information, see http://www.sba.gov/content/small-business-innovation-research-program-sbir-0 and http://www.sbir.gov/

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The US federal level grant program SBIR is separated by three different stages: firstly, it provides grants for technical feasibility studies during the inception phase of innovation projects (Phase I). Secondly, Phase II is aimed at funding (grants) to continue R&D efforts initiated in Phase I. In both Phases I and II the commercialization potential of the innovation project is an important criterion for funding. Thirdly, Phase III is focused on commercialization only whereas SBIR does not fund this phase. In Phase III it is primarily the federal agencies which are involved in non-SBIR funded R&D as well as in production contracts for products and services intended for use by the US Government.

Another KET-relevant US program is the Small Business Technology Transfer Program (STTR), which is mainly engaged in funding to support public/private sector partnerships. Here the most important objective is to bring together small businesses and non-profit research institution partners. Especially as non-profit research labs are instrumental in high-tech innovations, but mostly lack the entrepreneurial skills, bringing together both entities is crucial to successfully transfer high-tech innovations developed in labs to the market place. Again, commercialization of innovations is a major focus point of this funding program, although Phase III (commercialization) is not funded by the STTR Program (the same as for SBIR, cf. above)10.

Regarding fiscal incentives in Asian countries, especially China, Taiwan and Korea are in favour of promoting industrial clusters. Corresponding programs are e.g. Science and technology industrial parks in China, Science parks in Taiwan, or the Industrial Complex Cluster Program (ICCP) in Korea. Besides specific science park projects in China as mentioned in the country sections, one of China’s largest innovation support programs is the Torch Program. It focuses on high-tech industries and high-tech product industrialization and aims at establishing high-tech industrial development zones around China. Moreover, its objective is to organize and carry out projects for developing high-tech products in domestic and foreign markets. Its main focus is on KET-relevant fields such as new materials, biotechnology, electronic information, integrative mechanical-electrical technology, and advanced and energy-saving technology. The program offers tax reductions after companies in the development zone are confirmed as a new- or high-tech enterprise.

Other types of policy instruments are loans and loan guarantees, expansion of university-based training, and the provision of goods, land, or services. Examples of such measures will be provided in the following chapters on country-specific measures and in connection with the case studies.

1.5 Methodology

The data and information on which this study is based consists of both primary and secondary data. Primary data has been collected via interviews, mainly with EU KETs companies, supplemented with additional interviews with various other sources such as relevant industry associations (mainly with the purpose of identifying possible case companies) and academic experts (explorative interviews in connection with the analysis of regulatory and framework conditions).

Secondary data has been collected through a vast array of written sources - academic literature; reports and studies; press releases and news articles; and websites of companies, third country authorities and investment promotion agencies, industry associations, industry/trade journals etc. Specific references have been included throughout the report, and a comprehensive list of literature is provided in Annex 1.

10 For more on STTR, see http://www.sba.gov/content/small-business-technology-transfer-program-sttr-0

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Possible case studies of individual KETs investments in third countries by EU-based companies were identified through a number of different sources:  a comprehensive internet search of company websites, press releases, news articles, websites of investment promotion agencies,  contacts to relevant industry associations,  references to specific investment cases stemming from the review of third country policy measures to attract FDI,  the study team’s network and contacts.

The cases are based on one or more interviews with the case companies plus additional desk research of company websites (including annual reports and press releases), as well as news articles on individual investment cases and sources pertaining to the measures implemented by the recipient countries.

Information on the decision process and the size and nature of the incentives provided by the host country are usually highly sensitive company information and in some cases subject to non- disclosure clauses between the company and the country providing the incentives. Some companies were therefore not inclined to participate in the study.

For the companies that agreed to participate, all interviews were undertaken on the condition that company-specific information would not be disclosed by the study team to third parties without the explicit prior approval of the person(s) interviewed. The case studies in this report have therefore been heavily anonymised. All case studies have been validated by the interviewees and approved for inclusion in this report

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2 Specific policy measures put in place by selected third countries

2.1 Introduction

This chapter reviews the relevant policy measures in place in each of the selected third countries to promote the development of KETs/high-tech industries and, specifically, to attract foreign direct investment (FDI) in these areas.

It should be noted that the “KETs” term covering the six specific technology areas (cf. section 1.3) is an EU concept which is not in broad use outside the EU. In many cases, the policy measures or instruments used by third countries are aimed simply at high-tech industries in general or, alternatively, at individual (high-tech) industries or groupings of technologies considered strategic by the country in question, not all of which are necessarily KETs in the EU sense – for instance, ICT (information technology), which is not one of the EU key enabling technologies, is often included.

The following sections each deal with a specific third country, while the chapter ends with a cross- cutting view of the identified measures. A few examples of investment incentives granted in some of these countries are included11. These are all based on publicly available sources and are not the case studies, which will be presented in chapter 3. Lists of EU KETs companies with manufacturing and (in some cases) R&D in these countries are provided in Annex 2 to this report.

2.2 United States

The United States has an innovation system which excels in keeping a market orientation on the research carried out12. American competitiveness is further strengthened by excellent collaboration between universities and the business sector13. Within KETs, the US commands a strong position in most areas. Within nanotechnology, the US position is strengthened by a specific National Nanotechnology Initiative (NNI). The cumulative investment in this area since the fiscal year 2001 (including the 2012 request) totals almost USD 18 billion14. The United States’ position in nanotechnology is however threatened by increased competition from countries such as Japan, Russia and Korea. Another strong KETs position is found within biotechnology. The United States is the largest market for biotechnology products and home to 70% of the world R&D in biotechnology15. The US is also a global leader in microelectronics. In 2010, the U.S. semiconductor industry had a global market share of 48%16 and, according to KPMG’s 2009

11 Although there is plenty of general information on EU company investments in these countries – often publicized by the companies themselves – details of the incentives provided are rarely public, which limits the availability of such examples. The only country where such information is often available is the US. 12 Peter Bjørn Larsen, Els van der Velde, Eveline Durinck, Henrik Noes Piester, Leif Jacobsen and Hanne Shapiro (2011): Cross-sectoral Analysis of the Impact of International Industrial Policy on Key Enabling Technologies 13 World Economic Forum (2012): The Global Competitiveness Report 2012-2013 14 National Nanotechnology Initiative (2012): NNI Budget. http://www.nano.gov/about-nni/what/funding 15 Battelle Technology Partnership Practice (2010): BIO State Bioscience Initiatives 2010 16 Select USA: The Semiconductor Industry in the United States, http://selectusa.commerce.gov/industry- snapshots/semiconductor-industry-united-states

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semiconductor industry survey, 68% of the leading semiconductor companies have their headquarters in the United States17.

2.2.1 Overall policies in the KETs area In February 2011 the US government launched a Strategy for American Innovation. This strategy states that “the standard lesson from economics, and history, is that an innovation-friendly environment requires public support on specific dimensions”18. Several critical areas are identified as especially important for public investments in the 21st century. These areas are:

 Energy  Bio- and nanotechnology  Space capabilities  Health care technology  Education technology

The US wants to develop clean energy technology (and thus reduce the dependence on oil) through a focus on renewable energy, advanced batteries, alternative fuel, and advanced vehicle industries. Bio- and nanotechnology are regarded as potential drivers for economic growth, just as technologies for advanced manufacturing. Space capabilities are promoted in hope of a spill-over effect which enables innovation in other sectors, for instance agriculture, communications, air travel, and highway safety. Health care technology is regarded as important in order to increase the quality of care and reduce costs and malpractice. The US government also sees a potential in health ICT in order to integrate the health market and thereby attract scalable private sector innovation. Finally the US facilitates the development of advanced educational technology innovation with the aim of improving learning outcome.

Some of these technologies have their own initiatives, like the National Nanotechnology Initiative (NNI), and the others are incorporated in different national programmes or in the agency research programmes19. An example of these cross-cutting programmes is the focus on biotechnology by both the US Department of Agriculture and the Department of Energy (see below). The funding of biotech is coordinated by the Bioenergy Technologies Office.

2.2.2 Specific measures The following specific policy measures targeting foreign investment in the KETs area have been identified for the United States. These policy measures are not specifically targeted at foreign direct investments. However, they try to enhance general investments in certain fields, and the measures are all available for foreign business with a location in the US.

The following measures at US federal level are described below:  Advanced Technology Vehicle Manufacturing Incentives Program  The Section 1703 and 1705 Loan Programs  Biomass Program  Biorefinery Assistance Program  The Advanced Research Projects Agency – Energy  Make it in America.

17 KPMG 2009: The Road to Recovery in the Global Semiconductor Industry. A Survey of Industry Executives – Fourth Quarter 2009 18 The White House (2011): A Strategy for American Innovation. Securing Our Economic Growth and Prosperity. http://www.whitehouse.gov/sites/default/files/uploads/InnovationStrategy.pdf (s. 10) 19 Peter Bjørn Larsen, Els van der Velde, Eveline Durinck, Henrik Noes Piester, Leif Jacobsen and Hanne Shapiro (2011): Cross-sectoral Analysis of the Impact of International Industrial Policy on Key Enabling Technologies

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In addition, a number of state level initiatives are described.

In the United States key enabling technologies are supported at both federal level and state level. Therefore the list above is not fully exhaustive as there are numerous different programs at the state level.

The United States government investments in KETs were enhanced by the American Recovery and Reinvestment Act (ARRA) of 2009 with the purpose of creating new jobs, spurring economic activity and investing in long-term growth. There is no expiration date written into this Act as many of the projects are expected to contribute to the economic growth for many years.

The Recovery Act distributes funds in three ways: Tax benefits, Entitlements, and Contracts, Grants, and Loans. The estimated funds allocated total USD 840 billion. The Recovery funds are implemented through specific programs in different government agencies20. This will be elaborated with some illustrative examples in the following sections. The text box below provides an example of a European company benefiting from a grant under the ARRA.

Box 2.1 Recovery Act grant from the DoE and state incentives for Saft Group (France) for a Lithium-ion battery production plant in Florida, US Saft is a world leader in the design and manufacture of advanced technology batteries for industrial and defence applications. The Group is implementing its strategy for high technology lithium-ion batteries in the renewable energy storage, transportation and telecommunication networks markets.

Saft opened a new plant in Jacksonville, Florida, in September 2011. The plant is referred to by Saft as the world's most advanced automated lithium-ion battery site. The factory is a USD 200-million, 235,000-square- foot facility that will produce lithium-ion batteries for use mainly in the military and aerospace industries. The batteries produced at the Jacksonville factory will be sold throughout the world, not just America.

Saft was awarded a USD 95.5 million federal grant from the US Department of Energy under the American Recovery and Reinvestment Act and a further USD 20.2 million incentive (not specified further) from the State of Florida and the city of Jacksonville to build the plant. The investment is expected to create nearly 280 permanent jobs at the factory, and the city of Jacksonville expects an additional 800 indirect jobs to be created within its community.

This project is part of the American Recovery Act’s USD 2 billion investments in battery and electric drive component manufacturing, supporting 20 battery and 10 component manufacturing factories. At full scale, these investments will support factories with the capacity to supply more than 500,000 electric drive vehicles, helping to build a domestic electric-drive vehicle industry. The US produced less than 2% of the world’s batteries in 2008 but aimed to have the capacity to produce 20% of the world’s advanced vehicle batteries by the end of 2012.

Sources: “Saft launches industrial production at Jacksonville lithium-ion battery plant”, Press Release, 16 Sept. 2011, http://www.saftbatteries.com/SAFT/UploadedFiles/PressOffice/CP_42-11_en-2.pdf

“Saft kick starts lithium-ion battery production at Florida facility”, 16 Sept. 2011,

20 The U.S. Government (2009): The Recovery Act http://www.recovery.gov/About/Pages/The_Act.aspx

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http://green.autoblog.com/2011/09/16/saft-kick-starts-lithium-ion-battery-production-at-florida-facil/

“Saft America Advanced Batteries Plant Celebrates Grand Opening in Jacksonville”, 16 Sept. 2011, http://energy.gov/articles/saft-america-advanced-batteries-plant-celebrates-grand-opening-jacksonville

“Battery Factory Bringing Jobs to Jacksonville”, 30 April 2010, http://energy.gov/articles/battery-factory-bringing- jobs-jacksonville

2.2.3 Advanced Technology Vehicle Manufacturing Incentives Program The American government uses loans and loan guarantees as a measure in several funds under the Recovery Act. Some KETs have benefitted from the Advanced Technology Vehicle Manufactu- ring Incentives Program (ATVMI) where ATV and ATV component manufacturers can get direct loans for projects that “reequip, expand, and establish manufacturing facilities in the United States to produce light-duty vehicles”. For companies producing components this gives the possibility for direct loans up to 30%.21

According to the High Level Expert Group on Key Enabling Technologies, this policy along with the ARRA has proven successful in attracting European KET industry and know-how, especially in promoting pilot lines capability for batteries22. However, no specific information on EU companies involved in the loans has been found (although, as shown in the text box above, Saft received a large grant for its new Lithium-ion battery production plant). The table below provides an overview of loans provided, according to the Department of Energy, Loan Programs Office. Among these loans, Ford is using a USD 5.9 billion loan to upgrade factories and introduce new technology23, and took advantage of this loan program by moving a hybrid battery facility from Mexico to Michigan24. Another case is the advanced battery producer A123 that produced electric batteries using nanophosphate. They got a loan guarantee at a value of USD249 million25 from the Department of Energy, but later filed for bankruptcy.

21 U.S. Department of Energy (2012): Advanced Technology Vehicle (ATV) Manufacturing Incentives http://www.afdc.energy.gov/laws/law/US/411 22 High Level Expert Group on Key Enabling Technologies (2011): Final Report 23 DOE Loan Programs Office (2013): ATVM, https://lpo.energy.gov/?page_id=43 24 Planetizen (2011): Latest Government Shutdown Threat: Disaster Relief vs. Clean Car Manufacturing Subsidy http://www.planetizen.com/node/51545 25 International Business Times (2012): A123 Once Again Thrusts Taxpayer Funded Failed Green Tech Into Spotlight http://www.ibtimes.com/a123-once-again-thrusts-taxpayer-funded-failed-green-tech-spotlight-847447

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Table 2.1 Loans provided by the US DoE under the ATVM program

Jobs (created/ Date of Number of Program Loan Amount saved) agreement Projects Status

ATVM

Fisker Automotive $529 million 2,000 Apr 2010 2 Closed

Ford Motor Company $5.907 billion 33,000 Sep 2009 13 Closed

Nissan North America, Inc. $1.448 billion 1,300 Jan 2010 2 Closed

Tesla Motors $465 million 1,500 Jan 2010 2 Closed

The Vehicle Production Group LLC $50 million 900 Mar 2011 1 Closed

Source: US Department of Energy, Loan Programs Office, https://lpo.energy.gov/?page_id=45

2.2.4 The Section 1703 and 1705 Loan Guarantee Programs The Department of Energy’s Loans Program Office (LPO) has provided loan guarantees to clean technologies through The Section 1703 Loan Program and The Section 1705 Loan Program under the ARRA. The Loan Guarantee Program aims at promoting clean energy technologies that address air pollutants or the emission of greenhouse gasses. LPO accepts the following technologies:

 Biomass,  Hydrogen,  Solar,  Wind and hydropower,  Nuclear,  Advanced fossil energy coal,  Carbon sequestration practices/technologies,  Electricity delivery and energy reliability,  Alternative fuel vehicles,  Industrial energy efficiency projects; and  Pollution control equipment.

The project must be located in the US. Foreign ownership or sponsorship is accepted as long as the project itself takes place on American territory. The technology used in the project must be either new or a significant improvement of an existing technology. Applicants must use innovative new technologies in order to be eligible for a loan, as commercial technologies are ineligible. A technology is considered commercial if it has more than three implementations that have been active for minimum 5 years. The Section 1705 Loan Program has provided loans for renewable energy systems but expired in September 2011.26 A list of the projects awarded loan guarantees under section 1705 is provided below. All in all the Loan Programs Office has issued loan guarantees for

26 US Department of Energy’s Loan Programs Office (2013): Eligibility. https://lpo.energy.gov/?page_id=31

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more than USD 21 billion to clean energy projects, including several for the Spanish company Abengoa (see also text box 2.2 further below).27

Table 2.2 Loan guarantees provided by the US DoE under the section 1705 Loan Guarantee Program

Loan Jobs Date of Guarantee (Permanent/ agreemen Company Technology Amount Construction) t Locations

1366 Technologies, Inc. Solar $150 million 70/50 Sept 2011 Lexington, MA Manufacturing

Abengoa Bioenergy Biomass of Biofuel $132.4 65/300 Aug 2011 Hugoton, KS

Kansas LLC million

Abengoa Solar, Inc. (Mojave Solar $1.2 billion 70/830 Sept 2011 San Bernardino County,

Solar) Generation CA

Abengoa Solar, Inc. (Solana) Solar $1.446 billion 60/1,700 Dec 2010 Gila Bend, AZ Generation

Abound Solar Solar $400 million N/A/400 Dec 2010 Longmont, CO and Manufacturing Tipton, IN

Beacon Power Corporation Energy Storage $43 million 14/20 Aug 2010 Stephentown, NY

Caithness Shepherds Flat Wind partial 35/400 Oct 2010 Gilliam and Morrow Generation guarantee of Counties, OR $1.3 billion

Cogentrix of Alamosa, LLC. Solar $90.6 million 10/75 Sept 2011 Alamosa, CO Generation

Exelon (Antelope Valley Solar Solar $646 million 20/350 Sept 2011 Lancaster, CA

Ranch) Generation

Granite Reliable Wind partial 6/198 Sept 2011 Coos, NH Generation guarantee of $168.9 million

Kahuku Wind Power, LLC. Wind $117 million 10/200 July 2010 Kahuku Oahu, HI Generation

LS Power Associates Transmission $343 million 15/400 Feb 2011 Ely to Las Vegas, NV

Mesquite Solar 1, LLC (Sempra Solar $337 million 7/300 Sept 2011 Maricopa County, AZ

Mesquite) Generation

Nevada Geothermal Power Geothermal partial 14/200 Sept 2010 Humbolt County, NV

Company, Inc. (Blue Mountain) guarantee of $98.5 million

NextEra Energy Resources, LLC Solar partial 15/550 Sept 2011 Riverside County, CA

(Desert Sunlight) Generation guarantee of $1.46 billion

NextEra Energy Resources, LLC Solar partial 47/800 Aug 2011 Riverside County, CA

(Genesis Solar) Generation guarantee of $852 million

27 Nanopatents and Innovation (2011): DOE Offers USD2.1 Billion Conditional Loan Guarantee to Support California Solar Thermal Power Plant,http://nanopatentsandinnovations.blogspot.dk/2011/04/doe-offers-21-billion-conditional-loan.html

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Loan Jobs Date of Guarantee (Permanent/ agreemen Company Technology Amount Construction) t Locations

NRG Energy, Inc. Solar $1.6 billion 86/1,000 Apr 2011 Baker, CA

(BrightSource) Generation

NRG Solar (California Valley Solar $1.237 billion 15/350 Sept 2011 San Luis Obispo, CA

Solar Ranch) Generation

NRG Solar, LLC (Agua Caliente) Solar $967 million 10/400 Aug 2011 Yuma County, AZ Generation

Ormat Nevada, Inc. Geothermal partial 64/332 Sept 2011 Jersey Valley, guarantee of McGinness Hills, and $350 million Tuscarora, NV

Prologis (Project Amp) Solar partial 42/Over Sept 2011 28 States Generation guarantee of 1,000 $1.4 billion

Record Hill Wind Wind $102 million 8/200 Aug 2011 Roxbury, ME Generation

SolarReserve, LLC (Crescent Solar $737 million 45/600 Sept 2011 Nye County, NV

Dunes) Generation

SoloPower Solar $197 million 450/270 Aug 2011 Portland, OR Manufacturing

Solyndra Inc. Solar $535 million N/A/3,000 Sep 2009 Fremont, CA Manufacturing

US Geothermal, Inc. Geothermal $97 million 10/150 Feb 2011 Malheur County, OR

Source: US Department of Energy, Loan Programs Office, https://lpo.energy.gov/?page_id=45

2.2.5 Biomass Program The Department of Energy (DOE) has set up a Biomass Program to enhance American energy independence by creating a domestic bioenergy industry28. The Biomass Program coordinates its efforts with several other agencies that fund other parts of the supply chain from biomass to bioenergy. Key components of this supply chain are R&D of a feedstock supply system and biomass conversion technologies, industrial-scale demonstration and validation of integrated biorefineries as well as cross-cutting sustainability, analysis, and strategic communications activities. 29 The integrated biorefineries are funded by the DOE with means from the Recovery Act through the section 1705 loan program (cf. the previous section; USDA’s funding of biorefineries is covered in a separate paragraph below). DOE funds Biorefinery projects by companies that are technologically and economically ready for a scale-up of producing biofuels and bioproducts. Applicants must meet requirements for the feedstock and the primary product of their production. The feedstock used must be a High Impact Feedstock, which is defined as “a feedstock that is domestically available and has the agronomically and ecologically sustainable ultimate availability potential of at least 100 million dry metric tonnes of biomass per year” 30. The primary product must be a biofuel that is liquid at standard temperature and pressure31.

28 US Department of Energy’s Bioenergy Technologies Office (2013): About the Bioenergy Technologies Office: Growing America's Energy Future by Replacing the Whole Barrel of Oil, http://www1.eere.energy.gov/biomass/about.html 29 Department of Energy (2012): Biomass. Multi-Year Program Plan. 30 Department of Energy (2009): Financial Assistance Funding Opportunity Announcement 31 Ibid

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Since 2008 the different public agencies under the Biomass Program have provided grants and loan guarantees to biofuel companies for a total of USD 1.77 billion32. One of the beneficiaries was the Spanish company Abengoa, cf. the text box below.

Box 2.2 Loan guarantee from US DoE to Abengoa (Spain), for a biorefinery in Kansas, US In 2011 a USD 132.4 million loan guarantee was granted by the US Department of Energy to the Abengoa Bioenergy Biomass of Kansas, LLC, part of the Spanish company Abengoa, to support the development of a commercial-scale cellulosic ethanol plant. The project is expected to convert approximately 300,000 tons of agricultural crop residues, including corn stover (stalks and leaves), into approximately 23 million gallons of ethanol per year using an innovative enzymatic hydrolysis process. The project is expected to create 250 peak construction jobs and an average of 65 jobs sustained per year during the operation of the facility.

The loan guarantee was granted by the US Department of Energy under the Section 1705 loan guarantee program (part of the American Recovery and Reinvestment Act of 2009). The Section 1705 Loan Program authorizes loan guarantees for US-based projects that commenced construction no later than September 30, 2011 and involve certain renewable energy systems, electric power transmission systems, and leading edge biofuels. Under this programme, Abengoa was also granted loan guarantees for two large-scale solar plants of USD 1.2 billion and USD 1.5 billion, respectively.

Sources: Energy Department Finalizes $132 Million Loan Guarantee to Support the Abengoa Bioenergy Project, September 29, 2011, http://energy.gov/articles/energy-department-finalizes-132-million-loan-guarantee-support- abengoa-bioenergy-project

Project sheet: ABENGOA COMMERCIAL PROJECT, Dec. 2012, US Dept.of Energy, http://www1.eere.energy.gov/biomass/pdfs/ibr_commercial_abengoa.pdf

Loan Programs Office website, https://lpo.energy.gov/?page_id=45#projatvmset

2.2.6 Biorefinery Assistance Program The Biorefinery Assistance Program is a U.S. Department of Agriculture loan program targeting renewable energy provided by biofuel. To get a loan guarantee the projects must meet the following requirements33:

 Must be for the development and construction or the retrofitting of a commercial-scale biorefinery using an eligible technology  Must use an eligible feedstock for the production of advanced biofuels and biobased products  The majority of the production must be advanced biofuels

The rules of the loan guarantee are as follows: The proposed operation must have realistic repayment ability, maximum Agency (Federal government) participation in an eligible project is 80%, the borrower will need to provide the remaining 20% from other non-Federal sources, there is no minimum loan amount and the maximum loan amount is USD 250 million. If these requirements are met, along with the project requirements, the companies can get a loan guarantee according to the amount of the loan: 90% maximum loan guarantee on loans of up to USD 125 million, 80% maximum loan guarantee on loans of up to USD 150 million, 70% maximum loan guarantee on loans of USD 150-200 million, 60% maximum loan guarantee on loans of up to USD 250 million.

32 Environmental Entrepreneurs (2012): Advanced Biofuel Market Report 2012 33 Department of Agriculture (2012): USDA - Biorefinery Assistance Program http://energy.gov/savings/usda-biorefinery-assistance-program

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This funding possibility was used by the European biotechnology company INEOS (formerly British, now with HQ in Switzerland) who were granted a loan guarantee of USD 75 million to their new production facility in Florida. The “New Plant Energy LLC” is a biorefinery to a value of USD 130 million34, and was also funded by a grant of USD 50 million from the DOE35.

2.2.7 The Advanced Research Projects Agency - Energy The Department of Energy (DOE) invests substantial amounts in R&D, and some of their programs focus on KETs. The Advanced Research Projects Agency – Energy (ARPA–E), under the DOE, have granted projects for research into high technology energy storage based on funding from the Recovery Act. This measure focuses on “transformational energy research that industry by itself cannot or will not support due to its high risk” with an objective to “create a new tool to bridge the gap between basic energy research and development/industrial innovation”36. Funding through ARPA-E is typically carried out as a Cooperative Agreement unless the prime recipient is either: (1) a Federally Funded Research and Development Center or a US Government-Owned Government- Operated laboratory or (2) qualified for a Technological Investment Agreement. Like grants, Cooperative Agreements provide public financial support to accomplish a public purpose authorized by federal statute, but they differ in terms of a more comprehensive government involvement under Cooperate Agreements. For instance, the Government and the Prime Recipient share responsibility for the management, control, direction, and performance of projects37. The ARPA-E has had four major founding rounds, the latest from September 2011. By this fourth round, the ARPA-E has supported 180 projects for a total value of USD 521.7 million38.

2.2.8 Make it in America The Make it in America challenge is a fairly new program from 2013 provided by The US Depart- ment of Labor's Employment and Training Administration (ETA), the US Department of Com- merce's Economic Development Administration (EDA) and the National Institute of Standards and Technology Manufacturing Extension Partnership (NIST-MEP). The program allocates USD 40 million in grant funds to promote in-sourcing and thereby bring jobs back to American ground. One of the ways to attract industries is to get “foreign businesses to bring new production into the United States” 39. Applicants must encourage job creation by one of the following measures:

 Encouraging re-shoring of productive activity by US firms.  Fostering increased Foreign Direct Investments.  Encouraging US companies to keep or expand their businesses in the US.  Training local workers to meet the needs of those businesses.

USD 13 million of the overall USD 40 million is targeted at distressed regions to help them get foreign owned or domestic firms to expand their activities in the US. The size of individual grants will differ for non-construction and construction-related projects. Non-construction projects can get grants ranging from USD 100,000 to USD 500,000 over a three-year period, and construction- related projects can get approximately USD 2,000,000 over a five-year period. Applicants must use

34 Waste Business Journal (2012): INEOS Bio Facility in Florida Begins Producing Power http://www.wastebusinessjournal.com/news/wbj20121031L.htm 35 INEOS (2009): INEOS Bio JV Selected for $50 Million U.S. Department of Energy Grant for Commercial BioEnergy Facility, http://www.ineos.com/new_item.php?id_press=257 36 The Advanced Research Projects Agency-Energy (2012): About, http://arpa-e.energy.gov/About/About.aspx 37 The Advanced Research Projects Agency-Energy (2012): Funding Agreements (http://arpa- e.energy.gov/FundingAgreements/Overview/Award.aspx) 38 Department of Energy (2011): Department of Energy Awards $156 Million for Groundbreaking Energy Research Projects. http://energy.gov/articles/department-energy-awards-156-million-groundbreaking-energy-research-projects 39 The Department of Labor (2013): Announcement of Federal Funding Opportunity. Make it in America challenge.

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grant funds within the project-period applied for, and EDA attaches importance to timely implementation of the investments. These requirements are meant to accelerate the economic impact of the funded projects40.

2.2.9 State level initiatives Several initiatives at the state level focus on promoting innovation by grant subsidy. At state level, grants are often given as a negotiated grant, where the amount and conditions of the funding are determined by negotiations between the investing companies and the state government41. This results in a variety of different funding possibilities for high technology companies, which would be too broad and varied to cover exhaustively in this report. Instead three illustrative cases of state funding for high technology are presented below.

A state funding system worth mentioning is Missouri’s innovation policy as defined in the Missouri Science and Innovation Reinvestment Act (MOSIRA). The purpose of this program is to attract jobs and investment to the state by providing the necessary funds. Two initiatives in this program are the regional organization BioStl that funds the bio-tech industry42 and the Kansas Bioscience Authority. MOSIRAs financing setup is interesting because it is based on a percentage of revenue growth from science and innovation companies. This system is quite controversial and was judged uncon- stitutional by a Cole County judge in February 201243. Now MOSIRA awaits a final verdict from the Missouri Supreme Court.

Companies can receive funding from both the federal level and the state level. SAFT, a French manufacturer of high-tech industrial batteries, placed their latest production facility in Jacksonville, Florida. This advanced facility for manufacturing of lithium-ion batteries received a USD 95.5 million grant from the US DoE while getting funding from the state of Florida as well (cf. text box 2.1, above). Florida has a High Impact Performance Incentive Grant (HIPI) used to “attract and grow major high impact facilities in Florida” 44. HIPI is a negotiated grant that requires that the project operates within a high-impact sector such as clean energy, financial services, transport equipment manufacturing, or life sciences. The definitions of what is regarded a high impact sector changes, and currently it is businesses working within in silicon technology or transport equipment manufacturing. Another requirement is that there must be 100 new full-time jobs over a three year period, but for R&D facilities the required number of jobs is only 75. The cumulative investment in the state must be at least USD 100 million over a three-year period - for R&D facilities the required investment is only USD 75 million. Grants range according to the size of the investment and number of jobs created. High impact businesses that create 100 jobs and invest USD 100 million are eligible for a grant of USD 1-2 million. The grants can increase significantly if more jobs are created and investments are higher. Grants are even higher for R&D facilities, where the minimum requirements of 75 jobs and USD 150 million investments makes companies eligible for a grant of USD 2-3 million45.

40 Ibid 41 Business Facilities: State Incentives Guide. http://businessfacilities.com/special-report/2011-incentives-guide/ 42 Area Development (2012): Biotech Startups Rely on Different Types of Funding http://www.areadevelopment.com/Biotech/January2012/biotech-startups-early-funding-sources-684210.shtml 43 Kansas City Business Journal (2012): MOSIRA goes before Missouri Supreme Court http://www.bizjournals.com/kansascity/blog/morning_call/2012/09/mosira-goes-before-missouri-supreme.html 44 Enterprise Florida (2012): Incentives. (http://www.eflorida.com/ContentSubpage.aspx?id=472#Targeted_Industry) 45 Ibid

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The Made in Alabama funding program tries to attract companies from around the world.46 This is done through a variety of business incentives and custom tax packages. First and foremost Ala- bama offers tax abatements to new projects and major additions to existing projects. The potential abatement period varies by the investment amount:

 The maximum abatement period is 10 years for projects that invest at least USD 200 million within 10 years from the commencement of the project.  The maximum abatement period is 20 years for projects that invest over USD 200 million but less than USD 400M within 10 years from the commencement of the project.  The maximum abatement period is 30 years for projects that invest over USD 200 million within 10 years from the commencement of the project and exceed USD 400 million within 20 years from the commencement of the project.47

The project must be granted by the local granting authorities and there are certain capital investment requirements. There are no minimum capital investment required for new projects except for warehousing activity projects and projects owned by utilities producing electricity. Projects by alternative energy providers must have minimum capital cost USD 100 million, and projects based on hydropower production of electricity must minimum costs of USD 5 million. Projects to expand existing facilities in Alabama must not exceed 30% of the original cost for the industrial facility and must not exceed USD 2 million. The Made in Alabama program also funds new facilities through Industrial Revenue Bonds that may be used as financing of up to 100% of a project. Through the Industrial Revenue Bonds Alabama formally buys the facilities and leases it back to the company. When the bonds are completely paid the user company acquires full ownership of the facilities again48. Industrial Revenue Bonds must be used for the following purposes:

 Acquisition of land, buildings, site preparation and improvements.  Construction of buildings  Acquisition and installation of furnishings, fixtures and equipment  Capitalizable soft costs (e.g., architectural and engineering, interest incurred during construction, cost associated with bond issuance, etc.)

A further example of a state grant to a European company is provided in the text box below.

Box 2.3 State grants for Wacker (DE), for an integrated polysilicon production facility in Tennessee, US Wacker Chemie AG is a globally operating chemical company with headquarters in Germany. It has more than 16,000 employees and more than 20 production sites across Europe, the Americas, and Asia. Its product range includes silicone rubbers, polymer products, chemical materials, polysilicon and wafers for semiconductor industry. Wacker is the world’s second-largest supplier of polycrystalline silicon with a market share of some 20%.

In April 2011, Wacker began construction work for the company’s integrated polysilicon production site, which will have an annual capacity of 18,000 metric tons. The new facility in Bradley County, Tennessee, is scheduled for start of production in mid-2015. The plant will serve the growing demand for hyperpure polycrystalline silicon which is the main raw material for the production of solar crystalline wafers, cells and modules used in the manufacture of solar panels and photovoltaic devices. It will be Wacker’s first plant of its kind outside of Europe.

46 Alabama House Republicans (2011): Legislature Passes the "Made in Alabama" Job Incentives Act http://alhousegop.com/2011/06/02/legislature-passes-the-made-in-alabama-job-incentives-act/ 47 State of Alabama Department of Revenue (2012): Summary of Alabama Tax and Taxes Incentives 48 State of Alabama Department of Revenue (2012): Financing Programmes

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The total investment for this production site is estimated at about USD 2 billion, and the new site is expected to create some 650 new jobs.

The project has received grants and infrastructure support from the state of Tennesseeworth more than USD 100 million, distributed as follows: - USD 64.2 million state grant awarded in 2010 for infrastructure (preparing the Wacker site and roads) - USD 34.6 million in 2011 to be issued from the state budget for further infrastructure work - USD 3.1 million Tennessee Fast Track grant for employee training

In addition, the company will benefit from Tennessee's commitment to cover the cost of any future carbon tax for green companies that make major investments in the state. The credit was enacted to help eliminate uncertainty among investors. The project is also reported to have received US federal renewable-energy subsidies (most likely under the ARRA) but no details have been found.

By way of comparison, in 2010, the European Commission authorised EUR 97.5 million regional investment aid by the German authorities for a EUR 800 million expansion of its production facility in Nünchritz, East Germany, to add a solar grade polysilicon plant next to its silicon/silane plant.

Sources :

Wacker website, http://www.wacker.com/cms/en/wacker_group/wacker_facts/sites/charleston/charleston.jsp, http://www.wacker.com/cms/en/nafta/about_nafta/tennessee/tennessee.jsp, http://www.wacker.com/cms/en/nafta/about_nafta/tennessee/tennessee_faq/tennessee-faq.jsp

Bradley legislator favors $34 million grant for Wacker Chemical, Timesfreepress.com, March 16, 2011, http://www.timesfreepress.com/news/2011/mar/16/bradley-legislator-favors-34-million-grant-wacker-/

Accountable USA – Tennessee, http://www.goodjobsfirst.org/states/tennessee

Tenn. offer to offset carbon tax credited in deals, knoxvillebiz.com, February 28, 2009, http://www.knoxnews.com/news/2009/feb/28/tenn-offer-offset-carbon-tax-credited-deals/

State aid: Commission clears regional German investment aid for Wacker Chemie, Commission Press Release IP/10/1130, 15 September 2010, http://europa.eu/rapid/press-release_IP-10-1130_en.htm

2.2.10 General innovation support The US also provides general innovation support relevant to, but not specifically aimed at, KETs or FDI. One of these innovation policies is to accelerate business innovation with a simplified and permanent R&E tax credit. President Obama has called for the Research and Experimentation Tax Credit to be simplified and made permanent, creating predictable, substantial incentives for U.S. businesses to innovate. The proposed FY 2011 Budget devotes about USD 100 billion over 10 years to leverage additional research and development investments49.

Another measure promoting innovation is lending public research facilities to business research. For instance the National Nanotechnology Initiative has a purpose to maximize the payoff of the federal investment in nanotechnology. Therefore government infrastructure such as research

49 The White House (2011): A Strategy for American Innovation. Securing Our Economic Growth and Prosperity. http://www.whitehouse.gov/sites/default/files/uploads/InnovationStrategy.pdf

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facilities are available for researchers and this interaction between industry, academic and government researchers can be important to make the technology commercially applicable50.

2.3 China

China has realized an enormous economic growth as the evolution of the GDP of China over the last 20 years shows (Figure 2.1). Key to this success is the economic reforms that started at the end of the 1970s together with the increasing openness of the country. China began to attract foreign direct investment (FDI) with dedicated policies, and by the early 1990s and onwards it was the largest recipient of FDI among developing countries51. Joining the World Trade Organization (WTO) in 2001 allowed it to reap even more gains from globalization. Apart from the dedicated policies aimed at attracting FDI, China has been particularly attractive to foreign investors thanks to its low labour costs and its fast growing internal market. China increasingly focuses on genuine innovation and moving up the value chain. It has the ambition to become a knowledge intensive economy52.

Figure 2.1 The Gross Domestic Product of China for the period 1990-2010. Source: World Bank

2.3.1 Overall policies in the KETs area The status of the Chinese innovation system is evident in the national innovation policy, which springs from the comprehensive five-year plans within which the future strategic direction of the Chinese society and economy has been developed. The Chinese industrial and innovation policy is very goal-oriented and aims at achieving long-term objectives within strategically important sectors chosen by the government. Several KETs are embedded in the 12th Five-Year Plan, for example, biotechnology, advanced materials and advanced manufacturing technology are highlighted as important for strengthening China's industrial base. China’s 12th Five-Year Plan for national economic and social development from 2011 to 2015 has shifted its focus towards long-term prosperity and sustainability. A goal explicitly mentioned is to concentrate on seven priority

50 National Nanotechnology Initiative (2012): Tech Transfer & Commercialization. http://www.nano.gov/techtransfer 51 Fung, K.C., Iizaka, H. and Tong, S. (2002). Foreign Direct Investment in China: Policy, Trend and Impact. http://www.hiebs.hku.hk/working_paper_updates/pdf/wp1049.pdf 52 The Investment Environments of Major Asian Countries, Korea Trade-Investment Promotion Agency

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industries and moving up the value chain in biotechnology, new materials, new IT and high-end manufacturing as well as new energy and energy conservation, environmental protection and clean energy vehicles53,54. The 12th Five-Year Plan also focuses on three measures to improve the development of relevant industries which relate to fiscal and financial policies, technical innovation and the market environment55.

Box 2.4 The seven Chinese strategic emerging industries

Source: State Council56

The State Council has approved a plan outlining the development of the seven strategic emerging industries (SEIs) as the primary driver of China’s next phase of economic growth. China targets 8% of GDP by 2015 for the strategic emerging industries; up 1 percentage point a year in 2011-15 and tripling to RMB 6 trillion (EUR 740 billion). This implies a 32% compound annual growth rate (CAGR) in the next four years or about three times as fast as nominal GDP in each respective year, which seems highly ambitious.

53 KPMG (2011). China’s 12th Five Year Plan: Overview http://www.kpmg.com/cn/en/IssuesAndInsights/ArticlesPublications/Documents/China-12th-Five-Year-Plan-Overview- 201104.pdf 54 CBI (2011). China's Twelfth Five Year Plan (2011-2015) - the Full English Version http://cbi.typepad.com/china_direct/2011/05/chinas-twelfth-five-new-plan-the-full-english-version.html 55 China Briefing (2012). China Releases 12th Five-Year Plan for National Strategic Emerging Industries http://www.china- briefing.com/news/2012/07/25/china-releases-12th-five-year-plan-for-national-strategic-emerging-industries.html 56 HSBC (2012). China Strategy Flashnote https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=6xYu1f3mmi&n=332108.PDF

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Source: Sun, Xie & Evans, China Strategy57

2.3.2 Specific measures The following specific policy schemes targeting foreign investment in the KETs area have been identified for China. Thereof the first two schemes are focused on high-tech electronics and software. The third scheme is dedicated to attracting FDI to industrial parks with preferential framework conditions for high-tech companies’ R&D and production. Special attention has been paid to KETs. The fourth scheme comprises numerous technologies that are in the focus of public policies. In addition, two policy measures that stimulate high tech companies in general are also included:

 Policies on Encouraging Development of the Software Industry and Integrated Circuit Industry  Special Fund for Research and Development of the Integrated Circuits Industry  Science and technology industrial parks  National High Technology R&D Programme (863 Programme)  Corporate income tax law  R&D tax credit

2.3.3 Policies on Encouraging Development of the Software Industry and Integrated Circuit Industry China has supported its software and semiconductor industries, which are considered strategic emerging industries (the latter lies at the heart of the KET micro- and nanoelectronics), with various incentives since the mid-1980s. The most important policy measure in this regard has been the State Council notice, Guo Fa [2000] No. 18 (Circular No. 18), Several Policies on Encouraging the Development of the Software and Integrated Circuits Industry (dated June 24, 2000). This measure provides a strong investment incentive for integrated circuit (IC) producers. It entails various tax benefits58:

 IC companies with an investment of over RMB 8 billion or that manufacture ICs with a width of less than 0.25 µm are eligible to enjoy a preferential tax regime: A full income tax exemption for the first 5 years followed by a 50% reduction for the next five years, if the duration of operation is no less than 15 years (also called a ‘5+5 Tax Holiday’).  Similarly, a "two-free and three-half" preferential treatment (‘2+3 Tax Holiday’) is granted to newly established IC companies or companies that manufacture ICs of 0.8 µm or less in width.

57 https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=6xYu1f3mmi&n=332108.PDF 58 DLA PIPER (2011). China offers new incentives to further boost software and semiconductor industries. http://www.dlapiper.com/china-new-incentives-to-further-boost-software-and-semiconductor-industries/

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 Imported IC technologies and whole sets of production equipment as well as separately imported special equipment and apparatus to produce ICs are exempt from customs duties and import VAT  IC enterprises enjoy a shortened two-year depreciation period for purchased software, and a shortened three-year depreciation period for production equipment.

In 2011 a new notice was released (Guo Fa [2011] No. 4, Notice on Relevant Polices for Further Encouraging Development of Software Industry and Integrated Circuit Industry (Circular No. 4)). This notice retains the tax holidays system while it adds some new dimensions: e.g. tax exemptions are granted to companies that provide services in the IC industry, and companies upstream and downstream of the manufacturing firms in the IC value chain now also qualify for tax incentives in order to establish a strong cluster of IC companies.

This policy measure is generally considered to be one of the drivers behind the success of the semiconductor industry in China. The fiscal incentives, which are among the strongest in the world for this sector, have attracted quite some foreign direct investment.

2.3.4 Special Fund for Research and Development of the Integrated Circuits Industry The Chinese government established the Development Fund for the Electronics and Information Industry in 1986, with the intention to aid the software and integrated circuits (IC) industry as well as the development and industrialization of core information technologies and products in the fields of computers, telecommunications, networks, digital audio and visual, and electronic components.

In order to give priority to support the IC industry, the central government set up the Special Fund for Research and Development of the Integrated Circuits Industry (IC Fund) in 2005. The fund allocates direct grants to firms, which can amount up to 50% of the R&D expenditures of a research project. The agencies in charge of the IC fund (the Ministry of Finance, the Ministry of Information Industry (MII) and the State Development and Reform Commission (SDRC)) evaluate the applications from the individual companies. In 2005, the IC Fund provided a total of RMB 150 million (EUR 18.5 million) to 27 companies for 29 projects59. This program illustrates the specific interest of the Chinese government in the microelectronics sector.

2.3.5 Science and technology industrial parks Since the late 1980s, the Chinese government has been promoting the formation and development of national science and technology industrial parks (STIPs). The main goals are to promote the development of innovation clusters and advance upgrades in high technologies. For a firm to gain entry into the STIPs, it is required to be qualified as a high-tech firm. In China, there are certain criteria for qualifying as a high-tech firm, the most important ones being60:

1. A high-tech firm is required to develop or use technology in the new and high-tech products or services listed in the Catalogue for High and New Technology Products published by the Ministry of Science and Technology. This list supports over 200 products and services in areas targeted in the long term objectives of the government such as electronics and

59 Stewart & Stewart (2007). China’s Industrial Subsidies Study: High Technology. Trade Lawyers Advisory Group, report volume 1. More recent data not available. http://www.uscc.gov/researchpapers/2008/TLAG%20Study%20- 20China%27s%20Industrial%20Subsidies%20High%20Technology.pdf 60 Sonobe, T. and Zhang, H. (2010). An Inquiry into the Development of Science and Technology Parks in China. Economics Discussion Papers, No 2010-26, Kiel Institute for the World Economy. http://www.economics- ejournal.org/economics/discussionpapers/2010-26. Newer data are not available. It is not known whether any of the 27 companies are foreign-owned.

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information technology, advanced materials, advanced manufacturing technologies and biotechnology. 2. R&D expenditures for the last three accounting years should reach a certain percentage of the enterprise's total revenue. This threshold is 6% for firms with revenue < RMB 50 million (EUR 6.2 million), 4% for firms with revenue between RMB 50 million and RMB 200 million (EUR 24.7), and 3% for firms with revenue > RMB 200 million61. 3. Of the high-tech firm’s employees, 30% or more must have at least a college degree, and at least 10% must be engaged in R&D. 4. The enterprise must own the intellectual property right of core technology in connection with the main products (services) of the enterprise. 5. A high-tech firm must be certified every year by a provincial-level government agency in charge of science and technology issues.

On-park firms are exempted from corporate income tax for the first two years and enjoy a favourable tax rate of 15% from the third year on, whereas the normal corporate income tax rate is 25%. Their revenues generated by the use of newly transferred technology are only taxable beyond the first RMB 300,000 (about EUR 37,000). Import licenses are not demanded by the customs office when they import materials and parts from abroad if the materials and parts are used to produce exports.

Under the Income Tax Law, extra incentives are given specifically to foreign invested enterprises: an extension of an income tax rate reduced by half for an additional three years after the expiration of tax exemption and reduction. However, the measures benefitting foreign invested firms have been specifically eliminated in the new legislation of 2008 (cf. section 2.3.7).

Today, there are 54 STIPs in China, the biggest one (Beijing Zhongguancun Park) counting 18,096 firms in 2006 (newer figures not available). The national STIPs have grown at a tremendous rate, more than 40% per year on average. They form an important part of China’s transformation to an innovative economy and contain both domestic and foreign top innovating firms. For example, the Zhangjiang Hi-Tech Park, located in Shanghai, hosts companies such as GlaxoSmithKline, Roche, Infineon and DSM.

In the area of nanotechnology, the Suzhou Industrial Park has been designated by China's Ministry of Science and Technology as a National Nanotech Innovation Cluster since 200762. This industrial park plays a key role in the development of nanotechnology in China. For example, it is committed to investing about USD 950 million for building the ‘Nanopolis Suzhou’ by 2015, the largest nanotechnology innovation and commercialization hub in China. In addition, it has launched specific nanotechnology policies and incentives, and will further commit about USD 160 million every year to support nanotechnology innovation and commercialization, including house subsidies, tax refund, free access to the open R&D platforms and 2% of product revenue bonus reward within the first 3 years, talent and shareholder incentives, as well as support for promoting international collaboration and public-private partnerships.

2.3.6 National High Technology R&D Programme (863 Programme) The National High-Tech R&D Programme, or 863 Programme, sponsors research in key high technology fields, considered as important for China's national development63. The programme was

61 JonesDay (2008), China High- and New-Technology Enterprises, http://www.jonesday.com/china-high--and-new-technology- enterprises-05-02-2008/ 62 Accelerating Nanotechnology Innovation and Commercialization through Public-Private Partnership --Highlight of CHInano2011, Nanotech-now.com, December 13, 2011, http://www.nanotech-now.com/columns/?article=603 63 http://erawatch.jrc.ec.europa.eu/erawatch/opencms/information/country_pages/cn/supportmeasure/support_mig_0009

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approved by Deng Xiaoping in 1986 as a response to a letter of 4 scientists who asked for the development of high technology in China. The programme is supervised by the National Steering Group of S&T and Education, and is managed by the Ministry of Science and Technology. One important component of this programme is applied research, which aims to stimulate R&D in the private sector. Within this component, a project can only be eligible for financial support if a company is involved. All projects undergo peer review prior to funding.

Currently the programme is supporting eight priority research fields (Information Technology, Biotechnology and Medical Technology, New Materials, Advanced Manufacturing Technology, Advanced Energy Technology, Environment Technology, Marine Technology, Advanced Agriculture Technology, Advanced Transportation Technology, Earth Observation and Navigation Technology), in line with the long term objectives of the central government. Hence the supported technologies overlap with the KETs micro– and nanoelectronics, advanced materials, industrial biotechnology and advanced manufacturing systems. In 2010, the budget for the 863 programme amounted to EUR 500 million.

2.3.7 Corporate income tax law China employs its corporate income tax law as a major tool to conduct its industrial policies. It is used to support high tech companies in order to facilitate the transition to a highly innovative economy. Companies qualifying as high/new-technology enterprises (HNTEs) are eligible for a reduced income tax rate of 15% instead of the ordinary corporate tax rate of 25%64. There are certain criteria for qualifying as high-tech companies (see section 2.3.5). Based on statistics released by local authorities in 2009, around 10% to 25% of those HNTEs were Foreign Invested Enterprises (FIEs) (on a total of about 11 000 companies), while the rest were domestic enterprises65.

The corporate income tax law that currently applies came into force on January 1, 2008. It replaced the previous income tax law which was generally considered to be even more generous, also to non-high tech companies. The previous income tax law also contained a number of incentives specifically for foreign invested firms while the current version provides a level playing field for domestic companies. Among the incentives for foreign invested firms under the previous law were strong fiscal exemptions and reductions (for a detailed overview, see footnote66). For example, while both Foreign Invested Enterprises and Domestic Enterprises were subject to a statutory tax rate of 33%, foreign enterprises enjoyed so many preferences and tax holidays that their effective tax rate generally amounted to only 15%. In addition, there was a zero withholding tax on dividends paid to foreign parents67. In this way, the previous corporate income tax law, with its strong incentives to foreign investors, has greatly helped in attracting foreign businesses (and in particular high tech businesses) to China. The current corporate income tax law can still be categorized as attractive to investors in general, but the high incentives specifically for foreign investors have been eliminated.

64 PWC (2010): Global reach: China‘s Impact on the Semiconductor Industry 2010 Update 65 PWC (2010): Global reach: China‘s Impact on the Semiconductor Industry 2010 Update 66 Stewart & Stewart (2007). China’s Industrial Subsidies Study: High Technology. Trade Lawyers Advisory Group, report volume 1. http://www.uscc.gov/researchpapers/2008/TLAG%20Study%20- 20China%27s%20Industrial%20Subsidies%20High%20Technology.pdf 67 DLA Piper (2011). The New Chinese Enterprise Income Tax Law: Planning Opportunities and Traps for the Unwary, http://www.dlapiper.com/planning_opportunities_chinese_income_tax_law/

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2.3.8 R&D tax credit The new income tax law of 2008 entails a preferential tax treatment for R&D activities in addition to the support to HNTEs. This preferential treatment allows companies incurring research and development expenses in the production of new technologies, products, or techniques to enjoy a 50% “superdeduction” over and above the actual expense deduction when the expenditure is not capitalized68. When the expense is capitalized as an intangible asset, 150% of actual costs may be amortized.

In addition to the national programmes, local and provincial governments in China can also provide support to FDI, but no overview has been found. The example of EMCORE, provided in the text box below, illustrates that such incentives can be very substantial.

Box 2.5 Local government support to EMCORE (US), Suncore Joint Venture, concentrated photovoltaics (CPV) production in Huainan, China In 2010, EMCORE Corporation, a leading US provider of compound semiconductor-based components, subsystems and systems for the fiber optics and solar power markets, entered into an investment and cooperation agreement with Chinese partner San'an Optoelectronics Company to operate their joint venture, Suncore Photovoltaics Co. in Huainan, China for manufacturing of CPV receivers, modules and systems for terrestrial solar power applications. The joint venture agreement provides for Suncore to be owned 40% by EMCORE and 60% by San'an.

Suncore is established in the Economic and Technology Development Zone of Huainan City. It began operations in February 2012 and is expected to establish a total of 1,000 megawatts (MW) of manufacturing capacity in Huainan over the next few years, with 200 MW of capacity ready in early 2012, another 300 MW by the end of 2013, and the remaining 500 MW by the end of 2015. At that capacity, the total capital expenditure and working capital investment is estimated to be RMB 8 billion (EUR 1 billion). In addition, to support start-up and on-going operations of Suncore, Huainan will provide a land grant of approx. 263 acres, extended tax holidays, and other financial incentives. Moreover, Huainan agreed to provide RMB 500 million (EUR 63 million) to Suncore at the start of the construction of the Suncore manufacturing plant, for capital equipment purchases. Furthermore, for the first 1,000 MW, Huainan will provide a RMB 1.4 (EUR 0.13) cash rebate to Suncore for every watt of CPV systems manufactured in Huainan and sold in China, amounting to a potential total of RMB 1.4 billion (EUR 130 million).

Sources : EMCORE Enters Into Agreement to Establish Its Suncore Joint Venture in Huainan, China, EMCORE press release December 7, 2010, http://investor.emcore.com/releasedetail.cfm?ReleaseID=627825

China: Gigawatt plans for Suncore’s new CPV facility, PV Magazine 12 March 2012, http://www.pv- magazine.com/news/details/beitrag/china--gigawatt-plans-for-suncores-new-cpv- facility_100006064/#ixzz2R6BUfzch

68 Ernst & Young (2011). 2011 Asia-Pacific R&D incentives. http://www.ey.com/Publication/vwLUAssets/2011APAC_RnD/$FILE/2011-Asia-Pacific-R&D-incentives.pdf

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2.4 Singapore

Singapore’s overall economic situation is to some extent different compared to those of other countries. Singapore is a city state with high-wage and highly qualified personnel that exploits opportunities from a division of labour with low-wage close-by Malaysia.

Despite some drastic slumps, Singapore’s economic performance has exhibited a strong growth performance since 2000 of an average annual 6%. World Bank figures even indicate a tremendous post-crisis growth rate in 2010 of more than 14%69. Within manufacturing, the country maintains a stable share of value-added in this sector. Measured as percentage of GDP, value-added in manufacturing has hovered around an average of 25% since the end of the 1980s. During the recent recession it dropped to a 20% low but current figures indicate a gradual recovery according to the World Bank. World Bank figures on Singapore’s R&D personnel show a strong upward trend in both R&D researchers and technicians (per million people) since the mid–1990s. While the number of R&D technicians steadily increased from 315 per million people in 1996 to 530 in 2007, R&D researchers grew from 2500 per million people to more than 6000 during the same time period. R&D expenditures (in % of GDP) also steadily increased since 1996, but still being under 3%. Nevertheless, the strong upward trends in R&D activities serve as an indicator for Singapore’s efforts to create a KETs-friendly research environment.

2.4.1 Overall policies in the KETs area Policies in the KETs area are more fragmented in the case of Singapore and less embedded in an overall growth strategy compared to e.g. Japan. Nevertheless, most of the business-related programs are initiated by Singapore’s government and are separated into government assistance through loans, grants, tax incentives, equity financing, and non-financial assistance. Specific public schemes for manufacturing are available for IT and telecommunication services, electronics, and precision engineering. There are also broader-based programs that tackle a range of KET-relevant fields. However, there is no official document that identifies exact volumes of overall or specific growth-orientated government policies.

Specific measures of government incentives to facilitate KET-relevant investment in Singapore and which are supported by Singapore’s government are explained in the following. The most relevant key measures identified are tax incentives and grants. However, it should be noted that these measures do not focus on the attraction of FDI exclusively. Some measures are mainly directed at developing domestic industries by setting the stage for a business-friendly environment, while other measures aim at FDI attraction and the development of domestic industries alike.

2.4.2 Specific measures The following specific policy measures targeting foreign investment in the KETs area have been identified for Singapore:

 Pioneer Incentive  Research Incentive Scheme For Companies  Technology Enterprise Commercialisation Scheme  Technology Innovation Program

The Pioneer Incentive scheme is dedicated to technologies of crucial importance for the Singapore economy, strengthening strategic industries. The Research Incentive Scheme for Companies is

69 All figures can be obtained under http://data.worldbank.org/country/singapore.

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dedicated to supporting companies’ innovation efforts. The Technology Enterprise Commercialisation Scheme supports technology firms to surpass the threshold to become larger companies with access to client markets, whereas the Technology Innovation Program’s objectives lie in the dissemination of available technologies and their application in Singaporean firms. Each measure will be described in more detail in the following sections.

2.4.3 The Pioneer Incentive (fiscal measure) The Pioneer Incentive is an initiative operating under the supervision of the Singapore Economic Development Board (EDB). It is based on the Pioneer Industries (Relief from Income Tax) Ordinance, which was introduced in 1959 and designed to promote the establishment of new companies supplying the home market or export markets.70

The Pioneer Incentive provides tax incentives for companies that are registered and based in Singapore. The incentives include a full corporate tax exemption on qualifying profits up to 15 years. It is awarded to projects that are of strategic importance and result in the creation of desirable industries in Singapore. The incentive may be awarded to both manufacturing and services companies and aims at encouraging the growth of high-tech/high value-added manufacturing and services industries in Singapore as well as existing and new companies’ acquisition of new technologies/skills/knowledge that raise overall industry standards (e.g. training workers in high-tech skills, importing innovative processes/equipment to raise production capabilities, etc.).71 Since the program does not explicitly mention specific technologies, it provides more of a general incentive for new technology companies that are relevant for KETs too.

According to the Ministry for Trade and Industry, 97 companies have been awarded support from the Pioneer Incentive in the last five years before 2012. Usually it is larger companies that apply for the Pioneer Incentive, whereas 11 out of the 97 are SMEs. 5 out of them are local SMEs. The total commitments from the 97 Pioneer incentive companies amount to SGD 8.8 billion (EUR 5.4 billion) in fixed assets investments, SGD 4.8 billion (EUR 2.9 billion) in annual total business spending and the creation of over 10,000 skilled jobs.72

2.4.4 Research Incentive Scheme for Companies (RISC) (grant) The Research Incentive Scheme for Companies encourages and assists businesses to set up R&D centres in Singapore and to develop in-house R&D capabilities in strategic areas of technology and to increase the business’ industrial competitiveness.73 Strategic areas of technology are not specified in detail. It can be assumed that incentive schemes aiming at strengthening R&D capabilities in “strategic areas” are also relevant in various fields of KETs.

The grants provided under RISC support Singapore-registered businesses with a percentage of the qualifying costs of a project. The current level of funding is related to labour costs (50%), equipment, materials/consumables and software costs (30%), professional services (30%), IPR (30%). The grant is paid on a reimbursement basis.

70 Tan (1999), “Official Efforts To Attract FDI: Case Of Singapore’s EDB”, National University of Singapore Publications. 71Enterprise One (2012): Pioneer Incentive (PC-M or PC-S), http://www.enterpriseone.gov.sg/Government%20Assistance/Tax%20Incentives/Product%20Development%20and%20Inn ovation/gp_edb_PC-M_PC-S.aspx 72 Ministry of Trade and Industry Singapore (2012), “Minister Lim Hng Kiang's reply to Parliament Question on Pioneer Incentive”, 29 Feb 2012 http://www.mti.gov.sg/NewsRoom/Pages/Minister-Lim-Hng-Kiang's-reply-to-Parliament-Question-on-Pioneer-Incentive.aspx 73 Enterprise One (2012): Research Incentive Scheme For Companies (RISC) http://www.enterpriseone.gov.sg/Government%20Assistance/Grants/Product%20Development%20and%20Innovation/gp_ edb_risc.aspx

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2.4.5 Technology Enterprise Commercialisation Scheme (TECS) The Technology Enterprise Commercialisation Scheme provides support and resources to companies that want to convert their technology ideas into a promising business. The scheme is dedicated to helping technology businesses in Singapore to grow past their embryonic phase, secure third party funding and achieve growing revenues. Areas of technology that involve IPR with high commercialization potential under current market conditions will constantly be defined and reviewed by a review panel.74

TECS is a competitive grant in which proposals are ranked based on the evaluation of a team of reviewers, and the best proposals are funded. For applicants who wish to develop proprietary ideas at the conceptualisation stage (“Proof-Of-Concept Project”), the support is set up to 100% of qualifying costs for each project and up to a maximum of SGD 250,000 (EUR 160,000). For applicants who are keen to carry out further research and development on a technology project (“Proof-Of-Value Project” with the aim to validate the commercial merit of an established concept, including the development of a working prototype), the support is up to 85% of qualifying costs for each project and up to a maximum of SGD 500,000 (EUR 322,000). The scheme applies to technology-oriented start-ups and SMEs who are physically present or are registered in Singapore for 0–5 years and employ at least one in-house technology engineer or scientist. Furthermore it needs to meet the following criteria: 30–100% of company’s shareholding is local and it employs 0– 200 employees or the annual sales turnover is not more than SGD 100 million (EUR 64.5 million).

To get a TECS grant the project must fall under one of the specific areas75: (1) Electronics, Photonics & Device Technologies (2) Chemicals, Advanced Materials & Micro / Nanotechnology (3) Information & Communication Technology (Excluding Interactive Digital Media) (4) Biomedical Sciences (Excluding Drug Discovery) (5) Water Technology

2.4.6 Technology Innovation Program (TIP) The Technology Innovation Program provides grants to encourage local enterprises to use technology by funding technology innovation projects that help SMEs to develop and to improve new products, processes and business models. Thereby the technology innovation project should increase revenues and value-added.76 Closely linked to TIP are programmes to strengthen technology innovation capabilities of businesses. Businesses under TIP get the opportunity to cooperate with polytechnic and research institutes to establish Centres of Innovation. These one- stop centres offer technology consultancy and advice to help SMEs identify practical, downstream technology platforms that can be quickly adopted. They can also help SMEs develop technology projects.77

The program applies to SMEs registered or incorporated in Singapore and which are characterized according to the following criteria: 30–100% of company’s shareholding is local and it employs 0– 200 employees or the annual sales turnover is not more than SGD 100 million (EUR 64.5 million). The company must show a commitment to technology innovation as part of its overall business

74 Enterprise One (2012): Technology Enterprise Commercialisation Scheme (TECS) http://www.enterpriseone.gov.sg/Government%20Assistance/Grants/Technology/gp_spring_tecs.aspx 75 SPRING Singapore (2012): Technology Enterprise Commercialisation Scheme (TECS) http://www.spring.gov.sg/entrepreneurship/fs/fs/tecs/pages/technology-enterprise-commercialisation-scheme.aspx 76 Enterprise Development Centres (2012): Technology Innovation Programme (TIP) - Projects http://www.enterpriseone.gov.sg/Government%20Assistance/Grants/Product%20Development%20and%20Innovation/gp_sprin g_tip-proj.aspx 77 SPRING Singapore (2012): Technology Innovation Programme (TIP) http://www.spring.gov.sg/EnterpriseIndustry/TIP/Pages/technology-innovation-programme.aspx

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strategy and the project must be carried out in Singapore. For those companies the support is up to 70% of the qualifying costs depending on the “level” of the project, whereas the level can be enterprise, consortium or industry. In case of the enterprise level the amount of support is up to 70% support for the SME. For the consortium level it is up to 50% support for all participants and for the industry level it is up to 70% support of all participants.

2.5 Taiwan

Taiwan is a well-known economic success story. While in the beginning of the 1960s, its income per capita was still at the level of the poorest developing countries, it has risen quickly to attain the levels of advanced Western countries. Nowadays Taiwan scores very well in the Human Development Index (HDI) ranking 22nd in 201178. Taiwan is one of the so-called ‘Asian Tigers’ (together with Singapore, Hong Kong and South Korea), countries that have realized tremendous growth and industrialization between the early 1960s and 1990s. One of the drivers behind this country’s success is the strong export performance (see the figure below).

Taiwan has a competitive advantage in a number of sectors, the most important one being ICT. Its major export products are electronics, followed by basic metals, plastics & rubber and optical instruments79. Exports generate about 70% of Taiwan's GDP growth80.

Figure 2.2 Trade balance of Taiwan for the period 1981-2011

2.5.1 Overall policies in the KETs area Taiwan has transformed itself from agro exporter (rice, sugar, bananas) to top ICT manufacturer. The Ministry of Economic Affairs is the one-stop ministry for industrial policy. The key document that guides industrial policy is the industrial statute, a law approved by parliament81. From 1960 till 1990, there was the Statute for Encouragement of Investment followed by the Statute for Upgrading Industries from 1991 till 2010. In 2010, Taiwan's Legislative Yuan82 adopted the Statute for

78 Human Development Index (HDI) Report 2011. http://hdr.undp.org/en/reports/global/hdr2011/ 79 Taiwan Balance of Trade, Tradingeconomics.com, http://www.tradingeconomics.com/taiwan/balance-of-trade 80 The world factbook, CIA.com, https://www.cia.gov/library/publications/the-world-factbook/geos/tw.html 81 Ohno, K. (2011). Taiwan: Policy drives for innovation. Highlights from GRIPS Development Forum Policy Miss Ion. http://www.grips.ac.jp/vietnam/KOarchives/doc/ES51_ET_taiwan201100517.pdf 82 The legislative Yuan has a role similar to a parliament in Western countries.

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Industrial Innovation. Under the new law, the government is able to encourage innovation and employment by offering tax breaks, funds, and other incentives to businesses83.

Highlights of the law are84:  a 15% tax credit for research and development expenses for companies in Taiwan during the ten-year period from January 1, 2010 through December 31, 2019, with the restriction that the offset amount may not exceed 30% of the business income tax paid in the given year;  subsidies for small- and medium-sized enterprises that make an extra effort to create job opportunities (subsidy levels will be determined by the Council for Labor Affairs);  a special provision, aimed at preventing larger business groups from engaging in real estate speculation in industrial parks or development zones, requiring the investors to allocate at least 60% of the land area in such zones for the purpose at hand (rather than for other purposes such as construction of residential or commercial buildings), to reserve at least 20% of the area for public facilities, and to limit residential space to no more than 10%;  granting of permission to municipalities and local governments to draw up their own industrial development policies, establish industrial parks, and seek subsidies and incentives from the central government (certain sectors, e.g., medical services, creative industries, and environmental technology, may apply to set up their own industrial parks); and  a provision stipulating that the Executive Yuan (Cabinet) is to establish national development funds for the financing of investment in major projects or businesses geared towards increasing industrial output or improving industrial structures. In September 2012, the National Development Fund of the Executive Yuan agreed to offer NT$10 billion (EUR 254 million) in loans to Taiwan's photovoltaic equipment suppliers for their plan to install solar-power plants overseas. The fund estimated the loan can help five to ten local equipment manufacturers develop overseas markets, mostly Europe, America and Japan. Maximum loan for each application case is NT$1 billion (EUR 25.4 million) and maximum cumulative loan for any individual applicant is NT$2 billion (EUR 50.8 million). Maximum cumulative loan applied by companies under the same group is NT$3 billion (EUR 76.2 million).The loan interest ceiling is a six-month LIBOR (London Interbank Offered Rate) interest plus 3%, while the maximum loan maturity term is 10 years85.

The industrial policy tools that are currently being used are industrial project, industrial estates (science parks, export processing zones, industrial parks), and a low and uniform corporate income tax of 17%. Taiwan offers a single window service to provide foreign companies not only with consulting services about the subsidy but also assistance with recruiting, R&D centre location evaluation, tax rules, etc. in order to eliminate the investment barriers.

The electronics sector has been the most important recipient of government innovation support, which has contributed to the global leading position that Taiwan enjoys nowadays in this sector. Taiwan has a solid industrial infrastructure and a strong vertical integration in ICT and electronics sectors. Due to the importance of the optoelectronics industry, the KET photonics has received a lot of attention over the past years. Furthermore, advanced manufacturing technologies are becoming increasingly important.

83 Zeldin, W. (2010). Taiwan: Law on Industrial Innovation Adopted in Place of Expired Statute for Upgrading Industries. http://www.loc.gov/lawweb/servlet/lloc_news?disp3_l205401939_text 84 Zeldin, W. (2010). Taiwan: Law on Industrial Innovation Adopted in Place of Expired Statute for Upgrading Industries. http://www.loc.gov/lawweb/servlet/lloc_news?disp3_l205401939_text 85Global Export Media, CENS.com, http://news.cens.com/cens/html/en/news/news_inner_41546.html

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Taiwan has been recognized worldwide for its industrial clusters — a model for economic development where interconnected businesses agglomerate for leveraged productivity and competitiveness. According to the Global Competitiveness Report 2010-2011 of the World Economic Forum (WEF), Taiwan is ranked 3rd out of 139 economies around the world in terms of the “state of cluster development.” Taiwan currently has more than 70 industrial clusters in operation. Being one of the key elements of the Taiwanese cluster policy, the science parks have no doubt contributed to this success. The figure below provides an overview of some well- developed industry clusters in Taiwan. Next to ICT and electronics, also other industries are supported in various industrial parks and zones.

Figure 2.3: Well-developed industry clusters in Taiwan86

Taiwan offers several incentives for foreign investment which stimulates the development of particular industries such as the concession of industrial land, financial assistance, and industry assistance87. Next to the corporate tax incentives of 17%, other tax incentives include import tariff exemptions, income tax exemptions on foreign royalty payments and on private participation in major infrastructure projects. Taiwan also offers several subsidies and low-interest loans for R&D and industrial technology development. In addition, incentives such as common tax and free trade zones are offered in particular zones, science parks and/or R&D Centers. A single-window InvesTaiwan Service Center was created to match investors with business opportunities, address overseas businesses’ operational and investment concerns, and provide customized service. As of December 2011, this task force handled 232 investment cases with capital totalling NT$310.92 billion (EUR 8 billion), generating about 41,800 jobs88.

2.5.2 Specific measures The following specific policy measures targeting foreign investment in the KETs area have been identified for Taiwan:

 Multinational innovative R&D centres

86 MOEA Department of Investment Services, compiled by ITRI IEK (2010) 87 MOEA, Investment Climate in Taiwan, http://investtaiwan.org/doc/1-20130319_e.pdf 88 Office of Information Services, Executive Yuan, http://www.ey.gov.tw/en/cp.aspx?n=A132EDB16DD62808

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 Science parks  Si-Soft programme

These measures will be described in the following sections.

2.5.3 Multinational innovative R&D centres This measure, established in 2002, aims to create synergies and complementarities between local and multinational companies from abroad. The aim is to get multinational corporations collaborating with local Taiwanese firms so that Taiwan can establish itself as a regional R&D centre within the Asia Pacific region. This in turn will help to support multinational production activities, thereby enhancing the role which Taiwan plays in global R&D, giving the R&D activity of Taiwanese industry greater depth and encouraging Taiwanese companies to focus on cutting-edge research. Taiwan aims at becoming a main technology partner for worldwide companies in order to develop its own industry89.

The measure offers different kinds of support90:

 Subsidy for Operating Capital  Salaries of Local R&D personnel  Remunerations of overseas R&D personnel  Travel expenses  Rent  Expenses for collaborations with local business, academic, and research communities  Expenses for collaborations with foreign companies  Overseas training expenses  Equipment use fees  Equipment maintenance fees

Since its initiation in 2002, the Program has received highly positive responses from multinational companies. Currently, there are 38 multinational enterprises with 54 R&D centres that are established in Taiwan and take part in the program. The average size of the projects is around NT 600 million (EUR 16 million) and the average public funding of the projects is around NT 110 million (EUR 3 million). The introduction of key technology by these R&D centres is expected to contribute to the further development of the Taiwanese industry.

2.5.4 Science Parks Science parks have the goal of attracting high-tech industries and professionals, encouraging technological innovation, promoting industrial upgrading and balancing regional development. They are key to the industrial policy of Taiwan which aims at creating strong clusters91. The first law on the establishment and administration of science parks dates back to 1979. In 2008, about 50% of the revenue of companies located in science parks was related to activity in integrated circuits and about 40% was related to optoelectronics, implying that micro- and nanoelectronics and photonics represent the lion’s share of activity in these parks. Albeit still marginal, there is also growing activity in the KETs advanced manufacturing technologies and industrial biotechnology92.

89 Multinational Innovative R&D center in Taiwan, http://investtaiwan.nat.gov.tw/matter/show_eng.jsp?ID=433 90 Van De Velde, E., Rammer, C., Padilla, P., Schliessler, P., Slivko, O., Gehrke, B., Bilsen, V., Lukach, R. (2012). Exchange of good policy practices promoting the industrial uptake and deployment of Key Enabling Technologies. http://ec.europa.eu/enterprise/sectors/ict/files/kets/ex_of_practice_ket_final_report_en.pdf 91 The clustering is thought to leverage productivity of companies involved due to the close proximity of suppliers and customers, the creation of a pool of skilled labour, positive spill-over effects, etc. 92 Science Parks, Ministry of Foreign Affairs, http://www.taiwan.gov.tw/ct.asp?xItem=27510&ctNode=1906&mp=1001

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Access to science parks is granted only to high tech companies that have high ratios of R&D investment. The National Science Council is responsible for establishing a Park Supervisory Committee, which decides on the most important matters (including investment applications), and for establishing a park administration, which is responsible for the operational management of the park. Companies located in the parks enjoy several tax benefits93:

 For export of products or services by a park enterprise, the business tax rate is zero and commodity tax is exempted  The import duties, commodity tax, and business tax are exempted for self-use machines and equipment imported from abroad by park enterprises  The import duties, commodity tax, and business tax are exempted for raw materials, supplies, fuels, goods-in-process, samples, and finished goods for trading purposes imported from abroad by park enterprises.

Hsinchu Science Park was the first science park that was established in 1980. It is very successful as it is Taiwan’s central production site for the ICT industry. As of 2010, Hsinchu Science Park had 449 tenant firms with combined sales of USD 41 billion/year. Most firms are local while 44 firms are foreign (e.g. Logitech)94. Hsinchu Science Park is full but about 60 firms are waiting to enter the park. Therefore, firms with small R&D shares (<2.28% of sales) are asked to leave.

Figure 2.4 Industry evolution in the Hsinchu Science Park95

The figure above shows that the focus on PCs in the 1980s has shifted to IC foundries in the 1990s. From 2000 onwards, the emphasis is on innovation and therefore Taiwan has installed Research Centers, attracted global Headquarters and new policies in its science parks & clusters. The main focus is still on IC, as also reflected in the policy measures.

93 Act for establishment and administration of science parks. http://web1.nsc.gov.tw/public/Data/831216145871.pdf 94 Ohno, K. (2011). Taiwan: Policy drives for innovation. Highlights from GRIPS Development Forum Policy Miss Ion. http://www.grips.ac.jp/vietnam/KOarchives/doc/ES51_ET_taiwan201100517.pdf 95 Hsia, M. (2010). Innovation for a better tomorrow. www.bic.jo/docs/2010.03-LeadersMeeting-MayHsia.ppt

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2.5.5 The Si-Soft project The National Si-Soft Project’s goal is to evolve Taiwan’s semiconductor industry from its current contract manufacturing base to a focus on innovative integrated circuit (IC) design96. The Si-Soft Project was launched in 2002 with the intention to promote Taiwanese human resources in the field of microelectronics, to open a semiconductor “design park” comparable to the island’s science- based industrial parks, and to invest roughly USD 250 million in R&D funds in optoelectronics, embedded processor design, and wireless technology. The project’s goal is to promote the creation of intellectual property by Taiwanese IC design houses, particularly System-on-Chip (SOC) technologies.

Si-Soft has at least two important elements97:  Expansion of university-based training. Taiwan has set targets to increase its university faculty staff in the area of Very Large Scale Integration (VLSI). The country will also create new undergraduate and graduate level university courses in semiconductor design and “will cultivate thousands of design engineers every year.” Some key aspects of this program include: (1) Compulsory system-on-a-chip design for all students in electronics and electrical engineering, allowing “even bachelor graduates [to] be able to engage in IC design;” (2) making semiconductor-related courses mandatory for all engineering students in Taiwan; and (3) the development of expertise in intellectual property rights and marketing.  IC Design Park. The Si-Soft project launched a new system-on-a-chip IC design park to be networked with Hsinchu and Tainan Science-Based Industrial Parks and Nankang Software Park. The Nankang Integrated Chip Design Science Park opened in July 2003, with sites for IC design firms, an incubation centre for start-ups, an open lab, and a service and management section. The main purpose of the new park was to “incubate” start-up design houses with up to 35 employees. The Executive Yuan worked with the National Chiao Tung University to develop the design park, and “the Executive Yuan will support these IC design houses looking for business opportunities.”

The first phase (2003-2005) saw substantial progress in the R&D of IC design, most clearly reflected in the number of papers local researchers presented at the International Solid State Circuits Conference—a leap from none in 2002 to 18 in 2009. Industrial R&D projects also resulted in the design of central processing units, digital-signal processors, and radio frequency (RF)/analog/mixed-signal modules, which were then integrated to produce chips.

In the second phase (2006-2010) and with a total budget of around USD 380 million, the program is targeting the following sub-areas for future development:  RF and mixed-signal circuit design;  embedded software; and  integration technology to combine system-in-package, micro-electromechanical systems and sensors on a single chip.

96 LTX Selected for Taiwan's National Si-Soft Project, LTX.com, http://www.ltx.com/testweb.nsf/published/062105release?OpenDocument 97 Dewey & LeBoeuf (2009). Maintaining America’s competitive edge: government policies affecting semiconductor industry R&D and manufacturing activity. A White Paper Prepared for the Semiconductor Industry Association. http://www.sia- online.org/clientuploads/directory/DocumentSIA/Research%20and%20Technology/Competitiveness_White_Paper.pdf

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2.6 Korea

Over the last 50 years Korea has changed dramatically in terms of wealth and technology development. In the 1960s and partly the 1970s Korea focused on expanding industries based on cheap labour capacity. This was followed by an investment driven stage focused on attracting FDI and expanding the technology intensive industries. Since the 1990s Korea has focused on their innovative capability through a dedicated and continuous effort towards high technology98. Looking at the development in GDP, Korea has realized a substantial growth in these past 20 years (cf . the figure below). A key factor in this growth is a national R&D approach using a great variety of policy instruments, ranging from direct instruments like tax credits, tax exemptions, grants and subsidies to indirect instruments such as establishment of business clusters, incubators and networks to promote innovation in private companies99.

However, there have been some setbacks, especially during the global economic crisis during 2008-2009. The economic slump made Korea focus its policy even more on high technology and green growth in its National Strategy from 2009. This effort has affected Korea’s global competitiveness positively. According to the 2012 World Competitive Index, Korea is ranked 19th out of 144 countries, primarily because of high quality education and a significant technological readiness which enables a remarkable capacity for innovation100.

Figure 2.5 The gross domestic product of Korea for the period 1990-2011. Source: World Bank

2.6.1 Overall policies in the KETs area Korea’s latest ‘National Five-year Plan’ and the ‘National Strategy’ from 2009 identify a number of technologies as drivers for green growth. These technologies consist of green technology, what is labelled “state of the art fusion industries”101, and high value-added industries102.

98 Peter Bjørn Larsen, Els van der Velde, Eveline Durinck, Henrik Noes Piester, Leif Jacobsen and Hanne Shapiro (2011): Cross-sectoral Analysis of the Impact of International Industrial Policy on Key Enabling Technologies, European Commission, DG Enterprise 99 Youngjoo Ko (2011): ERAWatch Country Reports 2010: Korea 100 World Economic Forum (2012): The Global Competitiveness Report 2012-2013 101 The concept is not defined but the following industries are listed in this group: IT fusion industry, Robot applications, New material and nano-fusion, Biomedicines, and High value-added food industry (OECD 2011, see next footnote). This group thus overlaps considerably with the EU definition of KETs. 102 OECD (2011): The Implementation of the Korean Green Growth Strategy in Urban Areas

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A key element in Korea’s overall policies is an emphasis on nanotechnology, and the government has invested heavily in the Korea Nanotechnology Initiative. This initiative consists of two phases: The first phase from 2001-2005 focused on the R&D of nanotechnology while the second phase from 2006-2015 focuses primarily on industrialization of the research in nanotechnology103.

Figure 2.2 Milestones of the Korea Nanotechnology Initiative

Source: Ministry of Education, Science and Technology 2010104

Korea combines investments in higher education in science and key technology areas with initiatives that support commercialisation of research results105. According to the ‘Science and Technology Basic Plan: 577 Initiative’ produced in August 2008, the Korean government set up the national R&D investment objectives of devoting 5% of GDP to R&D by 2012 106. By 2010 3.7% of GDP was devoted to R&D107. The commercialisation of research results is supported by initiatives to attract foreign investors in high technology areas. Korea uses a wide range of measures to attract FDI, especially Foreign Investment Zones (FIZ). The purpose of the Foreign Investment Zones is to promote foreign direct investments, transfer of high technology and promotion of employment. High technology companies get favourable conditions in FIZ: They are offered rental cost exemption, tax reduction (or exemption) and financial support.

2.6.2 Specific measures The following specific policy measures targeting foreign investment in the KETs area have been identified for Korea:

 Foreign Investment Promotion Act (grants)

103 Ministry of Education, Science and Technology (2010): Nanotechnology for Dynamic Korea, http://www.kontrs.or.kr/data/pdf/Nanotechnology%20for%20Dynamic%20Korea.pdf 104 Ibid. 105 Peter Bjørn Larsen, Els van der Velde, Eveline Durinck, Henrik Noes Piester, Leif Jacobsen and Hanne Shapiro (2011): Cross-sectoral Analysis of the Impact of International Industrial Policy on Key Enabling Technologies, Study for the European Commission, DG Enterprise 106 Youngjoo Ko (2011): ERAWatch Country Reports 2010: Korea 107 Thomson Reuters (2013): Building Bricks. Exploring the global research and innovation impact of Brazil, Russia, India, China and South Korea.

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 Special Taxation Restriction Act (fiscal incentives)  Foreign Investment Zones – location support

2.6.3 Foreign Investment Promotion Act (grants) Korea supports companies if certain requirements are met. First and foremost that the companies either bring in highly advanced technology or invest USD 10 million in industrial support services. Thus the businesses must either produce high technology or they must support this production by product testing for instance. Furthermore the FDI ratio must be over 30% of the total investment. This cash support system is intended to promote foreign investments and must only be used for specific purposes. Amounts and detailed conditions of cash support are determined through negotiations between the government and the investor. Cash grants must be over 5% of the FDI while the upper limit will be decided by a closed (non-public) formula that considers the share of investment used for stipulated purposes.

In the detailed conditions of cash support it is required that subsidies are used for costs related to production or research facilities. More specifically cash grants may only be used for the following purposes: Employment, education and training, land purchase or lease, construction, basic facilities installation or purchase of capital goods and research equipment. The central government and the local government share the funding by a given ratio: In Seoul Metropolitan Area the central government accounts for 40% of the support, and in other areas the central government accounts for 75%.108

2.6.4 Special Taxation Restriction Act (fiscal incentives) Under the Special Taxation Restriction Act foreign investments that meet a set of qualifications are entitled to tax exemption or reduction. The purpose of this tax break system is to facilitate the transfer of cutting-edge technologies by favouring foreign investment in these technology areas.

Industrial support services and high-tech businesses in FIZs get 7-year breaks from national tax such as corporate tax and income tax109. In the first five years these companies get a 100% tax exemption; the following two years a tax reduction of 50%. There are no investment requirements to achieve these tax breaks for highly advanced technology companies, while investment requirements for other companies are as follows: Manufacturing (USD 30 million), Tourism (USD 20 million), Logistics (USD 10 million), R&D (USD 2 million). High-tech companies may be allowed similar tax breaks from local taxes such as acquisition tax, registration tax and property tax. Under ordinance the exemption or reduction from local tax can be extended up to 15 years, and the tax reduction rate can be increased110.

Korea also supports transfers of foreign cutting-edge technology by providing tax support for foreign engineers working for foreign high technology companies in Korea. The income tax for these engineers can be reduced by 50% if their companies are entitled to tax exemptions.

2.6.5 Foreign Investment Zones – location support Foreign investments with an FDI ratio of 30% can receive location support by the government, typically through the Foreign Investment Zones. There are two types of these zones: complex type FIZ and individual type FIZ.

108 KOTRA (2010): The Investment Environments of Major Asian Countries, and web-page of Invest in Korea, http://www.investkorea.org/InvestKoreaWar/work/ik/eng/bo/bo_01.jsp?code=102041803 109 Other Foreign Investment Zone companies only get a 5-year tax break 110 KOTRA (2010): The Investment Environments of Major Asian Countries

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The complex type FIZs are industrial areas that are designated for lease or sale to foreign companies. If required, land is purchased by the government before it is leased to companies. The purchase costs are shared between the central government and the local government by a given ratio: In Seoul Metropolitan Area the central government accounts for 40% of the support while the local government accounts for 60%. In other areas the central government accounts for 75%. Businesses requiring highly advanced technology can get a 100% break on rental costs if their investment exceeds USD 1 million. In contrast manufacturing businesses using less advanced technology must invest over USD 5 million and their reduction in rental costs vary from 50 to 75%.111

Larger companies making large-scale investments can have areas designated to their own facilities (individual type FIZ). The companies purchase the land, and the land purchase costs are partly funded by the same ratio between the central government and the local government as in complex type FIZ.

In 1994 Korea designated their first Foreign Investment Zone in Ceonan, Chungnum. As of December 2009 there were 17 complex type FIZs with an occupancy rate of 73.8%. The total invested location support in the complex type FIZ amounted to USD 1,296 million (EUR 1.0 billion). There are 36 individual type FIZs with an overall invested amount of KRW 11,764.2 billion (EUR 8.49 billion). The individual type FIZ contains a variety of company types including hotel businesses like Stanford, carbon producers like Power Carbon, and electronics producers like J.S.T.112.

2.6.6 General innovation support Korea pursues a wide range of policies that focus on innovation support in general, not targeting KETs or FDIs as such. They have a matching fund system aimed at high risk investments which are usually collaborative projects with private companies with innovative R&D ability. Such projects are evaluated twice every year and if successful they have to pay back 20-40% of the project funds as a royalty. More than 50% of R&D projects under the Ministry of Education, Science and Technology and 70% of projects under the Ministry of Knowledge and Economy have been undertaken under this scheme.

Another overall policy measure used by Korea is public procurement. In 2006 the Korean government introduced a policy of public procurement for innovation-oriented SMEs and has increased procurement of innovative goods and services based on new technology with various instruments such as obligatory procurement of some proportion by local governments and national companies. Products with technology certification such as NEP (New Excellent Product), NET (New Excellent Technology), GS (Good Software) and EPC (Excellent Performance Certification) are given priority by public organisations. Another instrument used by the government is the pre- commitment of procurement for SMEs involved in national research projects. Even though public procurement seems effective, accounting for more than £1.3 billion (approx. EUR 1.6 billion) in 2009, there are some barriers to procuring innovative products this way. The national Board of Audit and Inspection prefers a competitive bids system rather than these private contracts113.

111 KOTRA (2010): The Investment Environments of Major Asian Countries 112 InvestKorea (2012): Site Location Support http://www.investkorea.org/InvestKoreaWar/work/ik/eng/bo/bo_01.jsp?code=102041804 113 Youngjoo Ko (2011): ERAWatch Contry Reports 2010: Korea, p. 19. http://erawatch.jrc.ec.europa.eu/erawatch/export/sites/default/galleries/generic_files/file_0122.pdf

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2.7 Japan

Although Japan has seen some recovery in its gross domestic product (GDP) growth after the financial crisis, its current overall evolution is still rather weak compared to the 1990s. Before the financial crisis Japan experienced an average annual growth rate of around 1.5% during the period from 2000 to 2007 according to World Bank figures114. Since 2008, Japan has even experienced negative growth in some years: in 2011, for example, GDP fell by 0.7%. Regarding Japan’s competitiveness with respect to manufacturing and KETs, the country has come under pressure during the last decades. In particular, Japan’s manufacturing suffered strongly from the overvalued Yen. Its manufacturing value-added share of GDP dropped from 27% in 1981 to 20% in 2012. In this sector, the country has experienced a steady decline over the last three decades. The situation is different for Japan’s R&D endowment measured by R&D personnel. While the number of researchers in R&D (per million people) has exhibited a strong upward trend since 1995, the number of R&D technicians (per million people) decreased during 2000 to 2003. In more recent years, however, the number of R&D technicians has been recovering, signalling that Japan is still continuing its R&D efforts. Similar to R&D personnel, R&D expenditures (% of GDP) steadily increased during the period from 1996 to 2008 being above 3% on average. Hence, Japan continued to set the stage for a positive KET environment to increase basic and applied research as well as experimental development.

2.7.1 Overall policies in the KETs area Under the aegis of the Ministry of Economy, Trade and Industry (METI), Japan has launched initiatives toward the creation of new industries and new markets, where facilitation and development of advanced technology industries is a key element. These initiatives mainly target the revitalization of the Japanese economy.

Since R&D in both public and private sectors has become smaller in scale and shorter in term, government initiatives aim at the construction of cooperative mechanisms between related ministries towards commercialization of innovative technologies and promotion of their adoption as international standards.

In terms of KETs the initiatives support R&D on parts, materials and technologies that will strengthen advanced technology industries and trigger next-generation technologies. Particular government focus is on promoting new energy industry clusters. Japan is highly competitive in wind power generation, storage batteries and fuel cells, and R&D project funds in this area amount to 110 billion yen (EUR 0.8 billion) during the fiscal year of 2011.115 Also, the development of “future- pioneering technologies” is seen as an important driver of Japan’s future competitiveness. Examples of such technologies are quantum dot-type solar cells, lithium air batteries, and next- generation electronics. The 2012 budget for future-pioneering research projects is set at about 35 billion yen (EUR 270 million).116

To achieve an internationally competitive tax system and to specifically attract foreign investments, Japan has made efforts to enhance incentives to strategically attract foreign enterprises by passing the “Asian Hub Promotion Bill” incorporating a reduction of corporate tax and quicker immigration procedures, granting business location subsidies, and providing selective support through special

114 All figures can be obtained under http://data.worldbank.org/country/japan. 115 METI Budget & Tax Policies (2011): Challenges and Actions in Economic/Industrial Policies 116 METI Budget & Tax Policies (2011): Challenges and Actions in Economic/Industrial Policies

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zones. Total funding for hub business location programs in 2012was 570 million yen (EUR 4.4 million).117

Specific government incentives to facilitate investment in Japan are explained in the following. Such measures are supported by the Japan External Trade Organization (JETRO), which is a government-related organization promoting trade and investment between Japan and 3rd countries. The most relevant key measures identified that apply to subsidizing KETs are investment incentives.

2.7.2 Specific measures The following specific policy measures targeting foreign investment applicable in the KETs area have been identified for Japan:

 Bill on Special Measures on Encouraging R&D Activities of Specified Multinational Corporations  Subsidy Program for Projects Promoting Asian Site Location in Japan  The Innovation Center Establishment Assistance Program  Subsidy Program for Domestic Site Location

The main subsidy program in Japan is the Bill on Special Measures for the Promotion of Research and Development by Certified Multinational Companies, which is directly linked to the Asian Hub Promotion Bill, and the Subsidy Program for Projects Promoting Asian Site Location whose objective is the establishment of R&D facilities or regional headquarters in Japan by global companies with a specific focus on high-tech or cutting-edge industries. The Subsidy Program for Domestic Site Location has a similar objective but focuses more on manufacturing of parts and materials contingent on maintaining pre-earthquake levels of domestic employment. KETs are specifically addressed in this program. Particularly suited for KET development is the Innovation Center Establishment Assistance Program, which assists the development and maintenance of equipment to ensure feasibility and evaluation of advanced technologies. Each measure will be described in more detail in the following sections.

2.7.3 Bill on Special Measures for the Promotion of Research and Development by Certified Multinational Companies As stated by the Japanese Ministry of Economy, Trade and Industry, there is a serious threat of global companies leaving Japan as emerging Asian countries achieve economic growth. This implies that the relative size of the Japanese market becomes smaller, in particular, as the support offered by these countries to attract foreign companies intensifies.118 To impede this development the Japanese government aims at attracting global companies’ R&D centres and Asian headquarters to Japan by providing them with business-friendly incentives such as reduced corporate tax burdens or lower patent fees.

Under this bill a preferential corporate tax of 20% corporate income deduction for 5 years is granted as well as a preferential income tax, which has the same tax treatment for stock options from the foreign parent company as given to those from Japanese companies. For SMEs patent fees and examination request fees for patent applications for certified R&D operations are reduced by half. To spur investment activities, faster investment procedures are implemented to shorten the inactive period from the current 30 days to 2 weeks after application under the Foreign Exchange Act.119

117 METI Budget & Tax Policies (2011): Challenges and Actions in Economic/Industrial Policies 118 Bill on Special Measures for the Promotion of Research and Development by Certified Multinational Companies (2011) 119 Bill on Special Measures for the Promotion of Research and Development by Certified Multinational Companies (2011)

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2.7.4 Subsidy Program for Projects Promoting Asian Site Location in Japan The Program for Projects Promoting Asian Site Location in Japan is supervised by JETRO, which aims to promote mutual trade and investment between Japan and the world. The program is mainly a cost subsidy and was implemented in August 2012.120 It is intended to sustain and strengthen high-value-added business sites and to achieve sustainable growth of the Japanese economy. It supports the establishment of new high-value-added sites in Japan by global companies operating internationally, such as regional headquarters or R&D sites.121 R&D sites refer to facilities needed to carry out R&D (e.g. industrialization through applied development or trials and product testing from advanced industrial technology). Selected investment projects under this program in 2011 in KET-relevant industrial fields were: optical communication equipment (company: NeoPhotonics Japan, Godo Kaisha, headquarters: USA), materials for electronics components (company: Nihon Cabot Microelectronics K.K., headquarters: USA), technology development related to automobiles (company: Volvo Technology AB, headquarters: Sweden).122

Eligible companies need to have a significant impact on the Japanese economy and to establish high-value-added business functions that match the strength of the economy. Further requirements are that companies must have corporate status in Japan and must belong to a corporate body consisting of group companies that are operating an actual business in two or more countries. Moreover, the project is only funded if ripple effects in the relevant region can be expected, through collaboration with Japanese companies, universities or public research institutions. Also, to obtain funding further reviews are required on whether there are any possibilities of establishing the planned site outside of Japan.123 Subsidy rates are up to 1/2 of costs (such as survey, design, facility, or equipment costs or facility rental charges) for SMEs, up to 1/3 for non-SMEs, and up to 2/3 for those establishing a site in the disaster afflicted zones (referring to the Great East Japan Earthquake and tsunami). The upper limit for subsidy rates per investment project in 2011 was set to 500 million yen (EUR 3.9 million).124

2.7.5 The Innovation Center Establishment Assistance Program The Innovation Center Establishment Assistance Program is a partial cost funding program for improvements of advanced technology demonstration and evaluation facilities.125 It is launched by the Ministry of Economy, Trade and Industry (METI) and aims at the promotion of R&D investment by accelerating the practical applications of new technologies. This will be achieved through providing subsidies for the improvement and development of corporate facilities designed for the demonstration and/or evaluation of new technology.

Under this program subsidies will be provided for a portion of the purchasing expenses (including expenses minimally required for designing of the facility and its construction) required to improve facilities necessary for the demonstration and evaluation of new technology conducted by corporate enterprises through research and development. Also, subsidies will be provided for a portion of the labor and material expenses required for the development of facilities necessary for the

120 Investing in Japan (2012): Subsidy Program for Projects Promoting Asian Site Location in Japan, Aug. 28, 2012, http://www.jetro.go.jp/en/invest/newsroom/announcements/2012/20120727754.html 121 Investing in Japan (2012) Subsidy Program for Projects Promoting Asian Site Location in Japan – Application Guidelines, August 2012 122 Investing in Japan (2011):List of projects selected under the FY 2011 Subsidy Program for Projects Promoting Asian Site Location in Japan 123 Investing in Japan (2012): Subsidy Program for Projects Promoting Asian Site Location in Japan – Application Guidelines 124 Investing in Japan (2012): Subsidy Program for Projects Promoting Asian Site Location in Japan, Aug. 28, 2012, http://www.jetro.go.jp/en/invest/newsroom/announcements/2012/20120727754.html 125 Investing in Japan (2012): The Innovation Center Establishment Assistance Program, Sep. 14, 2012, http://www.jetro.go.jp/en/invest/newsroom/announcements/2012/20120914648.html

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demonstration and evaluation of new technology conducted by corporate enterprises through research and development.126 Governmental support provides a subsidy rate of costs of 1/3 for large companies, 1/2 for SMEs, and 2/3 for industry-academia government collaborations.127

2.7.6 Subsidy Program for Domestic Site Location The Subsidy Program for Domestic Site Location is a partial cost funding program aiming to promote new investment, maintain and create jobs in Japan, and improve the site location environment for companies in Japan by encouraging companies to launch their production bases domestically. The focus of the scheme lies in the reconstruction after the Great Earthquake 2011 and primarily addresses domestic companies. However, the scheme has been promoted by the Japan External Trade Organisation (JETRO) and can be applied for by foreign companies too. A new public offering of this funding program was initiated in April 2012.128

Due to the fear of nation-wide economic damage induced by the earthquake, location subsidies, which were originally meant to support affected areas, are now expanded on a nation-wide level. To obtain subsidies, the applicant company must either belong to specific categories qualified under the scheme, which include production of parts and materials that constitute the core part of the supply chain and cannot be substituted, or to high value-added growth sectors.

In the first case the applicant company must maintain a level of domestic employment in one of the specific categories qualified under the subsidy, equal to the pre-earthquake standard, for 4 years. In the second case, subsidies will be also granted if the company represents a high-value-added growth sector that is expected to create employment. For the latter, the company must manufacture products or parts related to KET-relevant fields that are expected to have growth potential according to the outlines of the “New Growth Strategy” and “Cool Earth – Innovative Energy Technology Program”. While Japan’s “New Growth Strategy” includes green innovations (as e.g. storage batteries, next-generation vehicles and lighting), the “Cool Earth – Innovative Energy Technology Program” prioritized 21 innovative energy technologies, which are mainly grouped into129: (1) power generation/transmission (innovative photovoltaic power generation), (2) transportation (fuel cell vehicles, plug-in hybrid vehicles, electric vehicles), (3) industry (innovative iron and steel making processes), (4) commercial/residential (next-generation high-efficiency lighting, stationary fuel cells, etc.), (5) cross-cutting technologies (high-performance power storage, power electronics).

The program had a budget of 295 billion yen (EUR 2.3 billion) in 2011 and focuses on private enterprises. The subsidy rate is specified as up to 1/2 of costs for SMEs, up to 1/3 for other non- SME corporations that fall under the applicant company requirements, and up to 2/3 for SMEs in a group.130

126 Investing in Japan (2012): The Innovation Center Establishment Assistance Program, Sep. 14, 2012, http://www.jetro.go.jp/en/invest/newsroom/announcements/2012/20120914648.html 127 Innovation Center Establishment Assistance Program (2011) 128 Investing in Japan (2012): METI's Subsidy Program for Domestic Site Location (Second Public Offering), Apr. 27, 2012, http://www.jetro.go.jp/en/invest/newsroom/announcements/2012/20120427255.html 129 Investing in Japan (2012): Subsidy Program for Domestic Site Location (Second Public Offering) (Provisional translation) 130 Investing in Japan (2012): Subsidy Program for Domestic Site Location (Second Public Offering) (Provisional translation)

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2.8 Cross-cutting view of measures

The table below provides an overview of the identified types of official, published policy measures provided to companies investing in KETs R&D and manufacturing in the six countries. It should be noted that these policy measures are not necessarily the only means through which subsidies, loans and other benefits are bestowed on foreign investors, as ad-hoc negotiated benefits which are not necessarily part of official policy measures are also used (cf. below and the case studies discussed in the following chapters).

Table 2.3 Overview of relevant published measures identified in the six countries

Type of USA China Singapore Taiwan Korea Japan measure Grants  Federal  Special fund  Research  Multinati  Foreign  Subsidy level: for research Incentive onal Investment Program for Recovery Act and Scheme For innovative Promotion Projects (ARRA) development of Companies R&D Act Promoting Asian  ARPA-E the integrated  Technology centres Site Location  Make it in circuits industry Enterprise  Innovation America  National Commercializa Center  State level High-Tech R&D tion Scheme Establishment grants Programme  Technology Assistance (863 Innovation Program programme) Program  Subsidy Program for Domestic Site Location Loans  Recovery and loan Act (ARRA), guarante incl. Section es 1703 and 1705 Loan Guarantee Programs  Advanced Technology Vehicle Manufacturing Incentives Program  Biorefinery Assistance Program  Biomass program Fiscal  State level  Policies on  Pioneer  Science  Special  Bill on incentive (e.g. encouraging Incentive parks Taxation Special s (tax Alabama) development of Restriction Measures for breaks) the software Act the Promotion of industry and Research and integrated Development by circuit industry Certified  Science and Multinational technology Companies industrial parks  Corporate income tax law  R&D tax credit Provision  Science and  Foreign of goods, technology Investment land, or industrial parks Zones (FIZ) services Expansio  Si-Soft n of project universit y-based training

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The investigation into concrete policy measures introduced by the third countries unveiled a broad range of quite different schemes dedicated to promoting technological progress, strengthening competitiveness and creating workplaces. Generally speaking, all countries perceive technological progress as a means to strengthening their economic development and thus the welfare of their people. Moreover, high-tech areas, in particular KETs, are perceived as of key importance to reach this objective. There is a global competition in these technological areas not only between companies but also between societies which struggle to create the best framework conditions and to attract the leading companies and brains.

As discussed in the section on theoretical literature in this field (section 1.3) there are policies based on the neoclassical approach that are dedicated to balancing market failures. The empirical investigation disclosed that few policies implemented in this area can be classified as neoclassical. Emerging economies’ initiatives to catch up with the developed economies’ technological lead with cluster policies dedicated to creating growth poles can be interpreted as the late runners’ efforts to balance market failures. However, these activities, often accumulated in industrial zones, are not only aimed at attracting foreign companies by providing preferential framework conditions for R&D as well as production and the evolution of a strong domestic industrial basis. These initiatives are likewise aimed at gaining shares in the global market, in particular export of high-tech goods to developed market economies.

Most of the policies identified can be classified as structuralistic. They pursue a clear vertical approach, usually targeting hi-tech industries, but differ in their scope. Some policies, in particular in Asian countries, target hi-tech industries in general and do not single out specific industries. Other policies target specified industries or technology areas (specific KETs). Predominantly they tackle numerous technologies and in most cases can be applied to KETs.

The incentives provided by the policies comprise all theoretically available tools. They include grants - for training (up-skilling the labour force), R&D expenses, acquisition of equipment etc.; loans and loan guarantees; fiscal measures such as tax breaks and exemption from duties; preferential conditions for the acquisition or lease of land, etc. However, the major risk of market distortion seems not to come from the single policy measure but from the accumulation of several policies. Of special importance might be industrial zones and technology parks, because these are equipped with multiple preferences and in most cases dedicated to serving foreign markets. In the selected examples provided in this chapter of companies receiving investment incentives, there were several instances of “package effects”, i.e. the combination of multiple instruments (including funding at different levels of government) which together may add up to incentives of a very substantial size. We shall see more examples of the package effect in the next chapter, where we take a more in-depth look at selected investment cases.

Another important consideration is the degree to which specific policies are targeted at attracting foreign direct investment, which varies a lot. Although instruments that benefit both domestic and foreign investment are seen in all countries, the main difference lies between the US and Asian countries.

In the US, the focus is on strengthening the domestic industry. This is seen very clearly in the different instruments under the American Recovery and Reinvestment Act (ARRA). The ARRA was put in place in 2009 to help the economy recover after the financial crisis while also promoting other policy objectives, for instance a shift towards a less oil-dependent economy through the heavy focus on renewable and alternative energies, which is particularly KETs-relevant. Very substantial incentives are provided under the various KETs-relevant ARRA schemes in the form of loans, loan guarantees, tax benefits, and grants. The main beneficiaries are domestic industries (the schemes

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have actually been controversial in the US since the incentives are seen by some stakeholders as distorting the domestic market and a number of loans have been defaulted by beneficiaries filing for bankruptcy). However, foreign companies established in the US are also eligible under the different schemes and a number of EU companies have benefited. It is also important to note that there is heavy competition at the state level to attract investment and, again, some of the effects of the incentives provided at state level are associated with encouraging investors to invest in one US state rather than another, i.e. creating domestic market distortions.

The identified policy measures in Asian countries, in particular the emerging economies, are much more focused on attracting FDI as a means to develop the economies, although domestic companies can benefit from a number of these measures as well. A key vehicle for many of these countries is the various forms of industrial zones and technology parks and, as mentioned above, the provision of “location packages” combining several instruments. These instruments may be targeted (i.e. benefiting particular industries) but are often aimed more at hi-tech industries broadly defined or even FDI in general irrespective of the level of technology. Fiscal measures with significant tax breaks and exemption from duties are very common in Asia and a number of these are described in this chapter. In addition, as the cases in the next chapter will show, grants and loans are often provided which are not published as a specific policy instrument (and thus not necessarily included in the review of policy measures in this chapter) but seem to be based on individual, ad-hoc negotations between the host country and the potential investors. These grants, alone or in combination with other measures, represent a significant risk of market distortion which is difficult to pin down because the details of Asian incentive packages are almost never made public.

With regard to the innovation chain from basic research to the marketing of high-tech products all levels are addressed by the schemes implemented by governments. Quite obvious is the case of Singapore where the different schemes address the whole chain from basic research on technologies of strategic importance for the economy, followed by an R&D scheme to push companies’ innovation activities and a scheme to enable companies to place their high tech products in the market. The final stage is addressed by a scheme dedicated to inciting companies to applying process innovations. However, there are some differences in prioritizing public schemes. The emerging economies’ policies show more emphasis on international co-operation and the attraction of know-how. In this respect tax breaks for foreign experts working in Korea can be mentioned. Likewise cluster policies and industrial zones are perceived as being of major importance to closing the technology gap. The developed economies’ policies are more directed towards maintaining the pace in technological progress with efforts to stimulate basic and applied research.

The competitive pressure from emerging economies has increased and they have become eager to climb further up the innovation chain. Here the Taiwanese Si-Soft initiative is worth mentioning. It is dedicated to going beyond the production of high-tech commodities and creating domestic capabilities and capacities for the design of very-large-scale integrated circuits. This is understood as an assault on the leading edge know-how of developed economies, in particular an assault on the predominance of US firms.

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3 Case studies of KETs investments in third countries

A key objective of this study was to identify illustrative cases of EU-based companies which have invested in the deployment of KETs in specific third countries by pinpointing the targeted policies that distort markets in KETs. This chapter thus contains case studies of EU companies’ investments in KETs R&D and manufacturing facilities in third (non-EU) countries, and where substantial subsidies and/or other types of investment incentives have been provided. The cases thus depict concrete examples of the use of targeted measures by the recipient countries to attract FDI within hi-tech in general or specific KETs areas in particular.

The companies represented in these cases are all major multinational companies with headquarters in the EU, and operating on a global scale. The presentation of the case studies below is divided in two sections: The first section presents the case studies where clear indications of market distortion have been detected. The second section presents other case studies where companies have benefited from various types of subsidies and other investment incentives but where clear market distortion (in the sense that the incentives were the main reason for the selection of the particular location) cannot be identified. However, these case studies have been included because they also provide interesting insights into the factors which influence the investment decisions and, in many cases, insights into how the current EU state aid system is perceived by such multinational companies.

The case studies are based on one or more interviews with the concerned companies supplemented by desk research. While details for some of the investments are publicly available, most interviews contained sensitive company information which in some cases is subject to non- disclosure clauses between the company and the country providing the incentives. The cases have therefore been anonymised to the extent necessary so that individual companies cannot be identified.

It should be noted that the information contained in the case studies expresses the views of the interviewed companies, based on their experiences. The term ‘state aid’ is used in the broad sense to include all forms of aid provided in under the EU state aid rules (e.g. whether regional, or de minimis, R&D&I aid, etc.). It should also be noted that the case companies are all large companies (i.e. not SMEs) and that in some of the cases the targeted measures which result in market distortion have attracted FDI to third countries within manufacturing, whereas the R&D activities of the company have been maintained in the EU.

3.1 Market distortion cases

This section presents the investment cases where market distortion is evident, i.e. where the incentives granted by the host country were the decisive factor in the decision to invest in this particular location.

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3.1.1 Case A

The investment and the incentives The case concerns an EU-based company which established a facility for production of semiconductors in an Asian country within the past decade. The company already had production facilities in several locations across the EU and in third countries.

The investment took place in two phases, with the second (expansion) phase currently on-going. The facility currently employs about 1,500 staff.

The incentive package provided by the Asian country included:  Grants (for training, R&D and energy, amounts specified in advance and for a limited time period)  Soft loans (0% interest)  Fiscal incentives: - Investment Tax Allowance of 100% deduction on capital expenditure for 10 years - Withholding tax exemption on tech fees, royalties and interest for 10 years - Full exemption on import duty (raw materials, computers, machinery)  Rent-free land for the factory, parking etc.

The total investment made to date amounts to approx. EUR 900 million and the combined value of all grants, tax and other benefits for the two phases is estimated at about EUR 200 million, plus the free land, resulting in an overall ‘location package’ worth more than 22% of the investment.

Decisive factors for the choice of location The production process at the Asian plant is partly automated which means that although labour costs are still a factor to be counted with, they constitute a smaller part of operational costs than in more traditional, labour-intensive manufacturing. On top of that, according to the company, the lower labour costs in the Asian country (compared to the EU) are largely off-set by lower efficiency of the local labour force. For these reasons, lower labour costs in this country were not a decisive factor in the selection of the location for the new plant.

A precondition for the investment was the presence of a stable power source to prevent potentially costly production stops. This is often an issue in developing countries and is a potential deal- breaker. However, the local government had a new power plant installed specifically for the area (also serving other important manufacturing plants), thus providing a cheap and stable energy supply.

The attractive location package with a combination of grants, tax benefits, a soft loan, and free land, was the main reason for locating the facility in this country. The accompanying provision of cheap and stable energy through the establishment of a new energy utility in the area was an additional indispensable factor.

The investment context in the EU vs third countries for semiconductor manufacturing The semiconductor industry can be characterised as having a real global market since transport costs compared to products costs are quite low, and in most sectors there are no tariffs because of the WTO Information Technology Agreement (ITA). The industry is being courted as a key investor for BRIC and developing countries, which offer substantial subsidies that create market distortion. According to the investing EU company, incentives worth up to 20-25% of an investment in a production line in the semiconductor industry is common.

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In the present case, Europe could have been a possible location for the investment. Europe is an attractive location because of its political stability, its highly skilled labour force and its good infrastructure which means that a full matching of the offers of Asian low-cost countries might not be necessary to get high-tech production located in Europe. However, the company’s perception is that, under the current EU state aid rules, locating the production facility in Europe could potentially have triggered state aid amounting to up to about 10% of the investment131. Comparing the option to receive more than 20% support in Asia, a location in Europe was quickly dismissed and the company did not even enter into discussions with the relevant national/regional authorities in their EU home country.

The case company pointed to the low state aid intensity in the EU as one of the key reasons for the absence of large investments in the semiconductor industry in Europe over the last decade. In addition, the long procedure for reaching an aid agreement with the national authorities and subsequently vetting state aid cases at EU level, which, based on the company’s experience, can take 1-3 years, adds delays and uncertainty about the outcome. The aid intensity was up to 20-30% before the current state aid rules were implemented and the semiconductor industry invested in Europe. The case company believes that if the state aid levels were to be raised again to 20%, and the procedures for approving state aid were simplified, the semiconductor industry might again see Europe as an attractive market for investing in manufacturing facilities.

Another key factor when investing in Asia is efficient investment agencies functioning as ‘one-stop shops’ which reduce or eliminate the need to deal with other authorities. This is a widespread phenomenon in a number of Asian states. Within the EU, the one-stop-shop investment service is much less developed. The whole negotiation procedure in Asian countries with efficient one-stop- shops can be dealt with in a period from a few weeks up to six months of negotiation. In Europe, initial negotiations with regional authorities can be completed within a similar timespan but after that the long EU notification and vetting procedure steps in. Thus, the limitations and the administrative burdens related to obtaining any ‘location packages’ in Europe are considered a significant barrier.

Conclusions – case A This case provides a clear example of market distortion in the world market for investment in the semiconductor industry, where location packages offered by third countries – particularly in Asia – easily outmatch the kind of support that can be achieved for major investments in Europe. The indication is that the ‘going rate’ for location packages (usually a combination of cash grants, tax benefits, free land and other services) offered by third countries is 20% or more of the investment, whereas the maximum state aid that can be provided in Europe is less than half of that.

In this case, locating the investment in Europe was possible for technical reasons but was in practice not considered because the company does not see the EU as currently offering a competitive investment climate for the semiconductor industry. Since labour costs are a minor concern due to the automation of new semiconductor fabs, and the European labour force generally offers a high level of skills and high productivity, labour costs are not considered a significant barrier for investing in production facilities in Europe. The main barriers, as perceived by the company, are the EU state aid rules which in their view make it difficult to obtain attractive location packages: the

131 As the potential investment would mainly concern regional investment aid, the allowable state aid amount very much depends on the chosen region within the EU. In some regions, aid intensity could potentially be higher, cf. the overview of state aid rules in Annex 3 to this report. The statement relates to the company’s perception of the potential aid intensity in the European regions which could be considered for location of the investment and should not be considered as a general conclusion.

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relatively low aid level, the administrative burdens and long case handling times associated with the EU state aid regime.

3.1.2 Case B

The investment and the incentives The second case is quite similar to Case A as it also concerns an EU-based multinational company with activities in the semiconductor industry and production facilities in several locations, both within the EU and third countries. The subject of this case is also an investment within the past decade in a production facility (semiconductor fab) but in another Asian country.

The total cost of the investment was several hundred million Euros and the incentives received from the Asian host country consisted of a combination of  Subsidies (grants) for R&D and training  Tax incentives  Free lease of the land with an option for expansion

Decisive factors for the choice of location The location of the semiconductor fab was not given in advance, and the company was open to locating the facility where it could get the best conditions. Both Europe, the US and Asia were considered as possible locations and the company employed an investment consultancy to investigate which kinds of incentives were available in different locations. At that time, the best location package was provided by the Asian country.

Other factors that influenced the final investment decision in a positive way were the availability of an efficient “ecosystem” of suppliers and other supporting functions for the fab, as well as the efficiency and speed of the decision-making process concerning the provision of the location package on the part of the host country. The company experienced the negotiation process as very fast and decisive; it was completed in less than three months through the local investment promotion agency.

Conclusions – case B This case provides another clear example of the type market distortion within the area of KETs investments that this study is concerned with. The choice of investment location was primarily influenced by the availability of an attractive location package combining direct subsidies (grants), tax exemptions and free land. In addition, the speed of the negotiations concerning the location package was a significant positive factor along with the existence of a well-developed industrial infrastructure. Similarly to the first case, this one underlines the issues that the companies associate with the current set-up of the European state aid system which is seen as limiting both the scale of the investment incentives that can be offered and the possibilities to reach a quick decision. The EU system could not match the conditions that are offered by, particularly, Asian nations eager to bolster their economic development through the attraction of hi-tech production from abroad.

3.1.3 Case C

The investment and the incentives The case concerns an EU-based company which established an enzyme manufacturing facility in the US. The facility produces enzymes used to make advanced biofuels and represents an investment of upwards of EUR 150 million. The factory currently employs around 100 people.

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The support that the European company received was in the form of a tax credit, i.e. a sum deducted from the total amount of tax which the taxpayer owes to the government. The tax credit is part of the American Recovery and Reinvestment Act. The Act includes a possibility for awarding tax credits to companies for investments in manufacturing facilities for clean energy technologies. In return for the tax credit, the US expects to foster investment and job creation in clean energy manufacturing.

The tax credit was given to the European company on the basis of an application in 2010 and amounted to app. EUR 22 million.

Decisive factors for the choice of location In general, the decisive factors for the European company were a set of what it calls “basic factors” which need to be present for a company to invest in the country or region in question. It is not realistic that the company would place a manufacturing facility in a country where these factors were not present. In this specific case, the basic factors that needed to be present were:  Good infrastructure  Good skills level of the workforce  Energy prices  Closeness to the market (to some extent – enzymes can be shipped to a biofuel production facility elsewhere in the world. Obviously there is a limit to the transport costs but sometimes, if a location for enzyme production is attractive, a more remote area can be chosen)

However, these basic factors are increasingly present in more and more countries and regions, including Europe. This means that other factors determine the final investment decision, factors which the interviewee termed the “winning factors”. One of these factors is government incentives, which according to the European company are critical to attracting foreign direct investments. The tax credit in this case played a decisive role in the decision to locate its manufacturing facility in the US.

The investment context in the EU vs. third countries for industrial biotechnology There are regional differences in the drivers behind the development of the industrial biotechnology sector. In the US, the concern about energy independence has led to strong support measures for the bioenergy industry. In Europe, the developments in industrial biotechnology are rather driven by environmental concerns and the desire to maintain a strong position of its chemical industry.

The table below presents some of the strengths and weaknesses for the EU and the US, respectively.

Table 3.1 Comparison of Industrial Biotechnology (IB) strengths and weaknesses for the EU and the US (selected parameters) EU US Strengths IB drivers: Chemical industry, ecology, IB drivers: Energy and chemical industry, added value products start-ups, venture capital

Competence in R&D: Strong in biotech and Competence in R&D: Strong in biotech and chemistry (academia), industry competence, chemistry (academia), industry competence, start-up competence highest regional R&D density Public acceptance: GMOs well accepted Public acceptance: no specific strengths Availability of bio-renewable carbon sources: Availability of bio-renewable carbon sources: corn and soy, ligno-cellulosic ethanol sugar beet, potato starch, cereal starch Weaknesses IB drivers: no relevant technology provider in IB drivers: bioenergy dominates too much bioenergy

Competence in R&D: Not enough start-ups Competence in R&D: No specific

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weaknesses Public acceptance: GMOs not accepted Public acceptance: no specific weaknesses Availability of biorenewable carbon sources: limited due to lack of land Availability of bio-renewable carbon sources: limited due to lack of water Source: OECD 2010132

Other locations in Brazil, China, and Europe, were considered as well. As the above table shows, Europe is in many aspects an attractive location compared to the US. The table suggests that the lack of acceptance of GMO and perhaps the lack of start-ups could be a problem, but these were not highlighted in the interview.

Instead, it was stressed that Europe (as well as the US) has all the basic factors that were decisive for the company’s choice of location. Therefore, the tax credit and the subsequent negotiations with the US state in question became decisive for the investment location. Europe seems to be lagging behind on what the interviewee called the winning factors, and has perhaps put too much trust in performing well on the basic factors. But both types of factors need to be present.

Conclusions – case C The case demonstrates a market distortion in the world market for investments in the industrial biotechnology sector. There are some basic factors (market pull, supply, infrastructure, skills) that are indispensable for the choice of investment location, and that need to be present for a company to invest in a country or a region. However, these basic factors are present in an increasing number of countries and regions, including Europe. This means that other factors, in this interview termed the “winning factors”, determine where the company places its investment. In this regard, public incentives are a very important winning factor. The company in question could obtain a tax credit in the US, something that was not offered in Europe133.

The interviewee found that the basic factors were to a large extent present in Europe, which was also supported by the OECD analysis from 2010 highlighting the strengths and weaknesses of Europe and the US, respectively. However, when it comes to the winning factors, the interviewee found that Europe did not have as much to offer as countries and regions like China, Brazil and the US. Europe is acting reactively whereas the other countries are proactively offering financial incentives such as tax credits.

3.2 Other case studies where other factors than market distortion were decisive for the location of the investment

3.2.1 Case D

The investment and the incentives This case concerns multiple investments of an EU-based semiconductor company in Asia. It has organized its production such that front-end manufacturing takes place mainly in Europe while back-end manufacturing happens mostly in Asia, close to a number of important customers. The company was not willing to provide specific details on the incentives received and thus this case provides a more general discussion on location factors and state aid policy in Europe and in Asia.

132 OECD (2010): OECD Workshop on ”Outlook on industrial biotechnology”, discussion paper – session trends in technology and application 133 There is nothing as such against offering tax credits in EU state aid rules, but the company was not offered any such subsidies in any of the European locations considered.

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Decisive factors for the choice of location From a business perspective, investing in Asia is interesting. The first main reason is the low labour cost which helps to keep production costs low (the investments concern back-end production which is more labour-intensive than front-end production). The second main reason is the proximity to major customers. Asia is by far the most important region for the company in terms of sales. It has opted to execute most back end production in Asia, since this allows final products to be shipped easily to nearby customers.

However, the company has decided to keep most frond end production in Europe. A new technology that is developed will first be implemented in Europe, while for strategic reasons only more standard technology is used in Asia. As such the company has developed a clear strategy for both regions: technology development and front end production takes place in Europe, while back end production happens in Asia. Regarding the role of government incentives for investment, the company assesses the conditions in Asia as excellent. Although the availability of government incentives are always taken into account in investment decisions, they have however not been the main drivers behind the set-up of manufacturing in Asia.

The investment context in the EU vs. third countries The company has a strong production base in Europe and aims to maintain it in the long term. The activities in Europe are R&D intensive, and in general new technologies are always first implemented in Europe. Therefore the presence of good technical universities in EU countries is important for the company to satisfy its R&D needs. Also the R&D support of national governments is highly welcomed as this is essential to stay on track in this highly competitive and R&D intensive industry. In this respect, a proper IP protection in Europe is important. The company also appreciates the presence of good suppliers and research partners. Apart from R&D related issues, the company also finds that both national and local governments are supportive in the implementation of new investment plans.

While many good elements are present in Europe, the company finds that most non-EU countries such as the US, Japan, China and Taiwan are more active in supporting their domestic semiconductor industry. In a highly competitive market with strong R&D and capital demands the government support in non-EU countries is causing substantial competitive disadvantage to EU companies. Many examples of substantial government support of non-EU countries to their domestic semiconductor industry exist, although the exact amount of funding is rarely disclosed.

In this respect, there are several initiatives that Europe could undertake to level the playing field for European companies. For example, the company suggests raising the allowed percentage of government support to the starting (initial commercial) phase of pilot plants from 15% to 25% of the capital expenditure (CAPEX), as it perceives that in major non-EU countries similar support percentages can be obtained. The main reasoning that the EU applies when funding corporate activities is that R&D should get most support as this is the most risky part. This however ignores the fact that investments in pilot plants are very capital intensive (a typical investment can be about EUR 350 million) and therefore even with a smaller product technology failure probability, this investment represents a major financial risk for companies. It is also suggested broadening the type of investment expenses eligible for support to include equipment costs (again, for the starting phase of pilot plants, not just for the R&D phase), as these constitute an important fraction of the investment cost. In addition, support not only for pilot plants but also for mass production facilities would be welcomed, as in the latter case the capital requirements are even more overwhelming (several billion EUR for a new facility).

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With regard to the speed at which investment dossiers are treated by the EU authorities, the EU should significantly speed up the time to approval, to avoid losing projects to third countries that could have received state aid and stayed in Europe. In the EU, the notification process is considered by the company as being too administratively burdensome and time-consuming. In the company’s view, part of this problem is that in the EU, too many organizations are involved, which slows down the procedure.

Conclusions – case D For this company, the investments in Asia are primarily driven by low labour costs and the proximity to its major customers. The company has installed most of its back-end production in Asia, as this allows for easy shipping of the end products to the customers. Most front-end production is done in Europe, where generally also new technology is implemented first. This pattern of regional localization of production is part of a global corporate strategy, which until now has not been decisively influenced by government incentives. For that reason, concrete examples of market distortions for KETs investments cannot be pinpointed for the investments made by this company.

However, the competitive pressure is increasing. From its practical experience, the company finds that there is not a level playing field for EU companies, as governments from major non-EU countries are much more active in supporting their domestic industry. Therefore the company calls for an altered EU attitude towards government support. For example, one improvement would be to increase the percentage support at the starting phase of the pilot plants from 15% to 25%. A second improvement would be to expand the types of capital expenditures eligible for government support with equipment costs. A third improvement would be to reduce the time needed to handle investment dossiers. All these elements would, in this company’s opinion, be a major step forward in maintaining the competitiveness of the EU semiconductor industry.

3.2.2 Case E

The investment and the incentives The case concerns the establishment of a manufacturing facility in the US to produce photovoltaic products aimed at solar power plants for large-scale utilities, an investment amounting to approx. USD 150 million. The EU company received a USD 25 million SUNPATH award (grant) from the US DoE. SUNPATH, which stands for Scaling Up Nascent PV At Home, seeks to increase America’s manufacturing competitiveness in the global solar market.

Decisive factors for the choice of location The main factors that were decisive for the investment decision were listed by the company as follows:

Reason 1: Public incentives available to the company’s customers create a market for its products. The main customer group for the products produced at the new facility are energy utilities investing in large-scale solar farms. There is an incentive system in the US state where the investment is located, to push for increased use of solar energy. This includes an obligation on utilities to base 35% of their production on renewable energy by 2020. In addition, utilities get a 30% tax credit for electricity generated as renewable energy, which means that they can sell such energy at a competitive market price (since solar energy is more expensive to produce than conventional energy). This creates a demand for large-scale solar farms by energy utilities.

Reason 2: Incentives provided to the investing company – both targeted and general. The main incentive was the USD 25 million grant targeted at keeping manufacturing in the US. The company

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also mentions that other, general incentives are available which also helps increase the attractiveness of producing in the US. These include a.o. incentives for export out of the US, and a local content clause which can be applied in public procurement.

Reason 3: The presence of a local/national value chain ecosystem. The company stressed that the fact that the whole value chain, in particular suppliers and other supporting companies for the type of production undertaken by the company is present in the US.

The company emphasizes that none of the three reasons outlined above were the main reason on its own. The decision to invest was made based on the whole package, where the financial incentive was a factor on an equal level with the other factors. A contract with utilities to develop a solar farm was already in place so the company was considering establishing a plant in the US to be close to their customers. As put by the company, the investment decision is always based on business considerations but the quality of the total incentive package in the US was such that it was easy to make that decision.

This is not a clear-cut case of market distortion, but it has some interesting aspects: The company itself considers that there is market distortion because the US government (at state and federal level) provides a set of conditions which are a lot more favourable than in the EU since the government ensures that there is both a market (indirect incentives) and direct incentives (grants) for the investing company.

Conclusion – case E This case does not provide a clear case of deliberate market distortion, as the investment decision was made on the basis of a combination of factors which were both market-related and incentive- related. It could be said that the market is effectively distorted by this combination of factors but except for the award (grant) from the DoE these are not targeted incentives. For instance, the incentives provided to the company’s customers (utilities) are primarily designed as part of a renewable energy promotion policy. While they indirectly create a market for the company’s products they are not as such aimed at attracting FDI.

3.2.3 Case F

The investment and the incentives The case concerns an EU-based company that has established a multi-purpose facility (customer service, R&D) in an Asian country. The host country offered a USD 10 million support grant upon investment by the EU company which amounted to about 10% of the investment, but was not the decisive factor for the choice of location. The facility currently employs about 350 people, and the initial capital investment amounted to about EUR 100 million.

Decisive factors for the choice of location The main driver for the EU company to invest in Asia is to be close to its customers, as an important share of its customers is located there. The location in Asia allows it to better organize its activities there. The decision where to invest in Asia was taken carefully after taking into consideration many factors. Initially, a long list of candidate countries was created which included most of the prominent Asian economies. Soon afterwards, this list was reduced to two countries where important customers are located. A comparison was then made between these two countries on a number of criteria including the presence of skilled labor (technical skills & knowledge of English), political stability, economic performance, war risk, intellectual property protection and the quality of the logistic system. It was found that both countries scored well on all criteria, but in the end the host country was selected based upon supply chain arguments. This relates to the number

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and type of suppliers available, as well as the good flight frequency to important destination countries, as most equipment transport happens by plane.

In the process of selecting a country to invest in, the EU company had the impression that all Asian countries of interest were happy to welcome it. This translated into good financial conditions for investment that were rather comparable across countries (e.g. offering of tax holidays). Some countries even offered a counterbid when finding out that they were not selected as destination country. Upon the final decision to invest the recipient, the company received a grant of about USD 10 million to support the R&D activities. Yet, from the company’s point of view, these government incentives are certainly appreciated, but by no means the main driver behind the selection of the location for the investment.

The investment context in the EU vs third countries Generally speaking the EU company could get better fiscal conditions outside Europe (e.g. in Asia), however it aims to keep its headquarters in the EU for several reasons. There is a strong tie between the company (and its personnel) and the country, in addition to the presence of a strong network of suppliers. The company relies heavily on expertise of its suppliers and collaborates extensively with them. It also collaborates intensively with partners for the development of new technology, and in this respect the presence of renowned research institutes in Europe is important.

The attractiveness of Asia is based on its market growth potential and low wage cost in general, including low cost skilled labour. The quality of the skilled labour is perceived as very good, while the same is true for Europe, but here the number of students graduating in technical areas (such as physics) is too low, although a slight improvement has been noted in this respect over the last years. It could be interesting to combine added value in design, a strength of Europe, with the manufacturing excellence of Asia. This could create unique partnerships between companies located in both continents.

At the policy level, the good collaboration with the national government in the home country is appreciated by the EU company. Concerning the European level, however, there are some concerns about the industrial policy currently in place, as it does not succeed in preventing important parts of the industry moving away to other regions outside Europe. Europe is typically rather reluctant to grant state aid while in other countries this is less the case. The host country, for example, conducts a more active industrial policy. Furthermore, the authorities’ decision-making process in investment cases is faster in the host country compared to Europe. On average, according to the company, the whole process of investment decision, location package and the start of construction can take place in 8 to 9 months in Asia, while this process easily takes two years in Europe, all (national and, where applicable, European) procedures taken into account.

Unlike the other interviewed companies, this company has gone through concrete deliberations concerning the possible application of the so-called ‘matching clause’ contained in the European state aid framework, when at a time of major revenue drops due to the start of the financial crisis, one of its major Asia-based competitors received a substantial government subsidy. This could potentially make the EU company eligible for state aid to match the subsidies given to the Asian competitor. The matching clause and the experiences of this company will be discussed in more detail in chapter 5.

Conclusions – case F The investment of the EU company is driven by the importance of customers located in Asia. The choice where to locate within Asia was based on a number of criteria, including the presence of a good supply chain, important customers, and good skill quality. The company received various

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financially attractive offers from various Asian countries to invest in their country, but although these offers were highly appreciated, they were never a key driver in the decision process. Despite this, a number of interesting findings with respect to international market distortion emerge from this case.

First, it is clear that in Asia, governments generally conduct a more active industrial policy. They are less reluctant to support domestic companies, while they also actively recruit foreign companies with various fiscal incentives. Second, although the investment case under consideration here was not driven by incentives received from third countries, this does not imply that there is no link with policy making. The presence of small, medium-sized and large customer companies in Asia is partly the result of a supportive industrial policy that made the customer industry flourish. Third, the company keeps it headquarters in the EU because it is embedded in a strong local network of suppliers and R&D partners. Hence, the proximity of firms (clustering effect) is important. In this respect, it is in Europe’s interest to maintain a viable industrial base, as the delocalization or exit of a given firm can harm the position of other firms in the same region. Fourth, the EU state aid framework has a provision that could potentially be used to counter international market distortions through the matching clause instrument, but this instrument has not been effective. The procedure is too long and requires too much effort and resources.

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4 Evidence from the case studies: Market distortion and location factors

This chapter analyses the evidence across the investment cases introduced in the previous chapter. We begin with a short summary of the incentives at play, drawing on the instruments used in the case studies but also referring back to the overview of instruments in place in each of the six countries (chapter 2). Then the presence of market distortion in some of the cases are discussed, followed by some indications provided by the interviewed companies on what they would like to see different in Europe in order to attract the deployment of KETs within the EU and not in third countries.

4.1 Instruments used to attract foreign investment

The instruments used to attract investment by EU companies which have been documented in the case studies include a broad variety of the targeted policy instruments that governments can employ to attract hi-tech (specifically KETs) investments.

 Grants (subsidies): Grants are given for establishment of R&D activities, for training of local staff, and for subsidising energy costs. The grants seen in Asian investment cases are not industry-specific but aimed more generally at attracting foreign direct hi-tech investments and are subject to negotiations with the host country authorities. In the US, an example was identified of a grant specifically promoting investment in a priority area (renewable energy, under the American Recovery and Reinvestment Act).  Fiscal incentives (tax and import duty incentives in the form of rebates or full exemptions, usually within a specific period of time) were provided in a number of cases, both in Asia and in the US. The picture is similar as for grants, in that the types of tax breaks awarded are generally available for FDI, and are typically even more generous for investments in hi-tech sectors. Again, a more targeted tax instrument was seen in the US, directed at promoting investment in renewable energy manufacturing.  Soft loans were mentioned only once in the selected cases, as part of a negotiated location package combining several instruments.  Free land (rent-free lease) was also seen in at least two Asian cases, again as part of a comprehensive location package. Provision of free land is typically seen in connection with location in dedicated areas such as industrial parks/science parks.  In addition, one case provided evidence of other types of incentives (export incentives, government incentives to customer industries creating a market for the company’s products) which are part of the equation when it comes to investment decisions but cannot be considered targeted instruments in connection with the attraction of KETs FDI as these are general conditions available to all companies operating within the geographical area or sector covered by the incentive.

It is important to consider that the incentives are often not granted in isolation but are part of a comprehensive location package offered by national/regional governments. The combined monetary value of such packages can run into dozens or even hundreds of millions of Euros.

Another important “instrument” is the investment promotion agencies (IPAs) which seem to be particularly important and effective in a number of Asian countries. Whereas IPAs around the world

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are, as a rule, charged with general investment promotion (branding/marketing, building relations with potential investors, etc.), several Asian IPAs are mentioned by EU investors as particularly effective throughout the negotiation process, securing a fast decision-making process and reducing the administrative burdens laid upon the investing companies to an absolute minimum. Besides their role in the actual negotiation process, some of the services commended by the interviewed companies include managing dealings with local authorities in areas such as customs, local partner search, and extensive facility services.

4.2 Evidence of market distorting practices

An important objective of this study was to identify concrete examples of market distorting practices by third countries in the area of KETs investments. For there to be market distortion, the EU companies’ main reason for choosing to invest in these third countries rather than in the EU must be the specific incentives provided to the investment by the third country, not company strategy or other purely market-related factors (such as proximity to customers).

Several such examples have been identified. The two most obvious examples of market distortion are both found in the semiconductor industry which, based on anecdotal evidence from the case studies and indications from other sources (industry associations, other companies), seems to be particularly prone to this type of behaviour from potential host countries. This phenomenon is closely linked to key characteristics of the industry. It is relatively “footloose” and not necessarily dependent on being located close to major customers since transport costs in relation to product costs are quite low, and in most sectors there are no import tariffs because of the WTO Information Technology Agreement (ITA). As a prime example of a high-profile high-tech industry (and probably inspired by the success story of Taiwan), the semiconductor industry is being courted as a key investor by developing economies, which offer substantial incentive packages to leading companies, thus creating market distortion. According to one of the case companies, incentive packages worth up to 20-25% of an investment in a front-end production line are common in the semiconductor industry, particularly in Asian host countries, but not in Europe.

The two semiconductor cases with indications of market distortion are quite similar in many respects. They are both located in Asian countries which in themselves are not major markets for the companies’ end-products, but in the same region as major markets (in particular China). Both companies were offered significant location packages with a combined monetary value in the three- digit million Euros. The packages in both cases comprised direct subsidies, significant tax exemptions, and free land. One of the companies also benefited from a large soft loan at 0% interest. In both cases, the packages were subject to confidential negotiations with the national/regional governments, facilitated by local IPAs. Both companies also stress the fast decision-making process as an important factor, with final agreements on the location packages being reached in a few months.

The third example is found in the biotech industry, concerning an investment made in the US. The incentive in this case consisted of a two-digit million dollar tax break which was granted by the US federal government after application to the programme administration and was decisive for the location of the investment in a situation which can be termed “all other things being equal” – the investment could also have been located in Europe or other regions and the fiscal incentive became decisive because all of the basic factors (good infrastructure, good skills level of the workforce and, to a smaller extent, closeness to the market) were in place in both Europe and the US.

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4.3 Other factors influencing KETs investment location decisions

Although the incentives offered by third countries are implemented to attract FDI, basic factors also need to be in place before the location can be considered for investment. A recent OECD report, based on a number of theoretical and empirical studies, found that:

It is generally believed that location-based incentives play some role especially in the final stages of the decision-making process, particularly when different countries are ‘bidding’ for the same investment. What typically happens is that MNEs first draw up a short list of preferred sites on the basis of economic fundamentals, while at a later stage they consider and/or actually seek government support in the shortlisted locations […] It is clear that when confronted with two or more relatively similar location alternatives, government incentives can tilt the investment decision (OECD 2011, p. 74)134.

This was evident also in the biotech case. Another of the case studies also provided a clear example of such a ‘tilt’ of the investment decision. In this case, there was evidence of market distortion, but not in the sense that investments were drawn from Europe to a third country. Here, a strategic decision had been made to locate the investment in Asia, because this is where the company’s main customers are located. A long list of possible locations was narrowed down to two different Asian countries that both lived up to the company’s location criteria. The final choice between the two countries was decided by the location packages (facilities, services, and incentives such as tax breaks) offered by the local investment agencies and the local authorities. The abovementioned OECD report provides further perspectives on this situation:

Several theoretical contributions have explored and modelled the negotiation process between the host government and the MNE deciding about the location of its future investments, and have demonstrated how different policy incentives impact outcomes […]. Investment incentives offered by other countries in the same geographic region are correlated with lower FDI inflows in one country […]. Even if one specific location is the best place to locate, it might lose the new investment to a more aggressive country if its government does not offer any support […]. (OECD 2011, p. 75)

In the case studies that did not show direct market distortion in the investment process, the companies pointed to other factors as being decisive for their investment decisions. First and foremost are the market-related factors, particularly location close to important customers (which allows for reduced transport costs, avoidance of import tariffs, better possibilities for providing services related to the products, etc.). Other host country factors mentioned by the case companies include the availability of skilled labour (technical skills and in some cases knowledge of English), political stability, economic performance, protection of intellectual property rights, infrastructure (including connections to other important destinations) and the quality of the logistic system. Another important factor indicated by several companies is the availability of an efficient “ecosystem” of suppliers and other supporting functions for the manufacturing site – clusters or sectoral agglomerations. All of these are widely recognised as the ‘classic’ factors that are considered by companies when deciding on the location of an investment, and their relative importance is obviously closely related to the sector and type of activity.

Another ‘classic’ factor, which has been the driving force in much off-shoring of production from industrialised countries to developing/emerging economies, is the cost of labour. As for the other location factors mentioned above, the importance of (low) labour costs varies with the type of

134 OECD, Attractiveness for Innovation: Location factors for international investment, 2011

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activity undertaken in the investment location. In many state-of-the-art KETs production activities, labour costs are not a key factor because production relies more on automation and skilled or highly educated labour. For instance, in the highly automated front-end semiconductor production, labour costs are of less importance than in more labour-intensive back-end semiconductor production. In addition, as stated by one of the interviewed companies, lower labour costs in some countries may to some extent be off-set by lower productivity of the labour force. Rising wages in several of the traditional off-shore production locations, particularly China, also reduces the weight of labour costs in the KETs investment ‘equation’.

For pure R&D facilities the decisive factors differ somewhat from the cases where the investment concerns production facilities. One of the interviewed companies, establishing an R&D center in Asia, listed the following criteria as those used for comparing possible locations on a global scale:

 The ability to attract international employees  Proximity to an attractive science environment  Proximity to market and production  Easy access to partners.

Finally, most of the case companies point to the need for speed and certainty in the process of securing (negotiating) incentives. Decision-making processes of 3-9 months from first discussions to implementation are indicated as typical in third countries.

4.4 Opinions on what Europe could do differently

When asked what Europe could do to improve the conditions for investment in KETs R&D and manufacturing, the companies invariably pointed to two aspects of the EU state aid system: the limitations on the maximum support which can be provided throughout the value chain (although varying between EU regions) and the time-consuming process for clearing state aid at EU level. Another aspect mentioned by some companies is the presence of necessary elements of the value chain, notably suppliers and supporting functions. The suggestions made by various interviewed companies are shown in the text box below.

Box 4.1 Suggestions for improving the conditions for KETs investments in Europe by the interviewed companies

State aid intensity The European state aid rules are mentioned by most of the interviewed companies as an important barrier for investing in Europe, in particular the limitations to aid intensity which cannot compete with the incentives offered by third countries.

One company pointed to the low aid intensity allowed for in the EU for large investments, and only in less developed regions, as one of the reasons for the absence of large investments specifically in the semiconductor industry in Europe in the last 15-20 years135. As put by the interviewed company, if the aid intensity were to be raised and the procedure for approving state aid simplified, the semiconductor industry might again see Europe as an attractive market for investment in semiconductor production. Another company suggested raising the allowed percentage of

135 The aid intensity for large investments which do not concern R&D&I but are given as Regional Aid are regulated by the “Guidelines on National Regional Aid for 2007-2013” (2006/C 54/08). The ceilings (or allowed aid intensity as percentage of the total investment) vary according to the type of region and the type of investment. Cf. Annex 3 for more details.

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government support for the start-up phase of pilot plants from 15% to 25% of the capital expenditure (CAPEX). Making investment in pilot plants more attractive could potentially pave the way for future investments in full-scale production facilities in the EU.

An alternative option for increasing the possibilities for granting large amounts of aid to an individual company could be sought in an instrument allowing the ‘matching’ of state aid offered by third countries, as suggested by the KETs High-Level Expert Group appointed by the European Commission136. This option will be discussed in more detail in the following chapter.

The procedure for review of state aid cases at EU level The limitations and the administrative burdens related to obtaining any ‘location packages’ in Europe are considered by several interviewed companies as a significant barrier, and even if a deal is made with a regional or national authority, the procedure for reviewing the deal at EU level is time-consuming and administratively heavy. This can delay the investment decision for years without any certainty of the outcome137.

Although making investments of the size that is dealt with in this study – often to the tune of hundreds of millions of Euro – is a long-term, strategic decision, the interviewed companies find the lengthy case handling associated with the EU state aid regime prohibitive. This is particular the case when compared to the time required to reach an agreement on investment incentives in third countries, which is usually only a few months. Part of the problem seems to be that in the EU, too many organizations are involved.

Reducing the hassle related to investing in a foreign country The efficient Asian investment agencies functioning as ‘one-stop shops’ offering a full location package (including reducing or eliminating the need for the investing company to deal with other authorities) is seen by the interviewed companies as a significant factor when investing in Asia. Within the EU, the one-stop-shop investment service is much less developed, which is of course related to the requirement for an extra review at EU level which comes after an agreement has been reached at regional or national level.

136 KETs High-Level Expert Group on Key Enabling Technologies: Final Report, European Commission 2011 137 The companies refer to the procedure following the promise of aid by the concerned member state, which may be above thresholds provided in the state aid rules, and which thus needs to be approved by the Commission. While the Commission decision is pending, there is uncertainty about the outcome.

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5 Regulatory and framework conditions: options for counteracting market distortion

5.1 Introduction

The previous chapters elaborated on the different measures which result in international market distortion in the area of KETs. This chapter assesses the existing relevant legislation, mechanisms and instruments to counteract these market distortions in general and more specifically in KETs. First, the counteracting of market distortions is put in the context of international law: what are the regular instruments to deal with these kinds of market problems. Then, we focus in more detail on the WTO as the main counteracting mechanism and its relevance for KETs. After that, the focus is laid on the functioning of the European ‘matching clause’, which was designed to counteract market distortions. The chapter concludes with an assessment of the different instruments and their relevance and expected efficiency for counteracting market distortion in KETs as well as some recommendations to improve this.

5.2 Counteracting market distortions in the context of international (public) law

5.2.1 International (public) law Counteracting market distortions cannot be done in an isolated and one-sided way, as it involves and influences the relationship between countries/states and/or groups of countries/states. This inter-country relationship is determined by international (public) law, which can be described as the set of ‘legal responsibilities of states in their conduct with each other, and their treatment of individuals within State boundaries’.138 More in general, law binds the members of a (in this case global) community together in their adherence to recognised values and standards.139 In the past this set of legal responsibilities was mainly limited to ‘classic’ legal topics like diplomacy, international waters, war and the acquisition of territories. The current international law became much more complex and covers a wide variety of additional legal topics, like human rights, outer space, environmental protection and sustainable development, the use of force, refugees, migration and also international trade.140

This international law is characterised by a number of elements, which also influence and limit the possibilities to counteract certain market distortions. These main elements are:141  Multiple sources - International law gains its legitimacy from a number of different commonly accepted international sources of law, like international treaties, international common law, general accepted principles of law, judicial decisions and doctrine (academic publications, peer to peer articles, etc.). Contrary to national law, and to some extent also European law, these sources cannot be traced back to one ‘national source’;  Sovereign states - As a result, international public law is based on the basic principle that one country (or group of countries) is not authorised to dispose rules which are legally binding for other countries. This implies that every individual country acts legally independent and

138 United Nations, see: http://www.un.org/en/globalissues/internationallaw/ (retrieved February 2013). 139 Shaw, M.N., et al, ‘International law’, Cambridge University Press, fifth edition, 2003. 140 Werner W.G., Wessel, R.A., ‘Internationaal en Europees Recht’ (‘International and European law’) , Europa Law Publishing (NL), 2004, p. 3-5. 141 Werner and Wessel (2004), p. 3-20.

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sovereign both internally (within their own territory) and externally (towards other states) and that states are only bound to rules which they have agreed on by their own free will. These rules are laid down in treaties with an explicit will expression, or in the international common law in which states have demonstrated that they accept certain rules as binding;  Restrictions – the concept of sovereign states also implies that restrictions of their authority and/or competence are only possible under certain very strict conditions;  Decentralised structure – while in modern national states the government power is centralised, international law is characterised by a decentralised or horizontal structure: (i) there is no central legislator, (ii) there is no general system for obliged jurisdiction, and (iii) there is no central executive or enforcing power.

Despite this de iure sovereignty of states, states stand de facto in a close relationship with each other. Institutionalised examples of this international cooperation are international organisations like the European Union, the United Nations, the Council of Europe and the World Trade Organisation, which are all based on treaties between sovereign states. As a result, the discretionary power of these organisations has a very strong trade off with the ‘power’ that individual states were willing to concede, which often limits the scope of the treaty as well as the ability to enforce it. On the other hand, these international organisations and treaties often also have their own dynamics, resulting in a changed and strengthened position over time (see e.g. the European Union, the United Nations).142

5.2.2 Mechanisms for counteracting market distortion The described characteristics of international law also have implications for the options that are available to the European Union143 and its Member States to counter certain market distortions (as in the area of KETs). The most obvious implication is that the European jurisdiction (laws, regulation, enforcement, etc.) is not applicable to non-European sovereign states. This implies that ‘European legislation’ (originating either from the EU institutions or from the Member States) can only deal with and/or solve market distortions within the European jurisdiction. Examples of related mechanisms are the antitrust and competition rules, state aid rules (including the matching clause) and trade remedies, which are however only applicable within the internal market. Outside the EU jurisdiction, one is mainly dependent on existing international sources of law (treaties, international common law, general accepted principles of law, etc.) between sovereign countries. Given these limitations, the main international legal mechanisms for counteracting market distortion can be found in the GATT/World Trade system, which will be discussed below.

It is important to stress here that the international cooperation on competition issues (antitrust, mergers, abuse of dominant position, and to a certain extent also state aid) is very limited. The Agreement on the WTO contains some elements related to competition policy (subsidies, antidumping, non-tariff entry barriers), but the main discretionary power still lies at national (or European) level. In 2004 it was decided that the ‘interaction between trade and competition’ was not to be part of the future negotiations in the Doha Round.144

142 Werner and Wessel (2004), p. 3-20. 143 The European Union is itself an international organization, as it is erected via a treaty between different sovereign states. Nevertheless, the European Union differs from other international organisations by having institutionalized certain centralised supranational institutions (like the European Commission, the European Parliament and the European Court), which have their own discretionary powers. In this respect, the EU is more like a ‘federation’ than an ‘international organisation’. 144 WTO, ‘Interaction between Trade and Competition Policy’, see: http://www.wto.org/english/tratop_e/comp_e/comp_e.htm (retrieved February 2013).

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Besides multilateral agreements like the WTO/GATT, the preferential (or bilateral) trade agreements (PTA) might also be of relevance in relation to market distortions in the area of KETs. Bilateral trade agreements are negotiated directly between two states and as a result can have a different scope in comparison to multilateral agreements like the WTO/GATT. In fact these preferential trade agreements may contain ‘WTO plus’ elements (commitments building on those already agreed at the multilateral level, e.g. a further reduction in tariffs) or ‘WTO extra’ elements (commitments dealing with issues going beyond the current WTO mandate altogether, e.g. on labour standards).145 The European Union has negotiated a number of ‘preferential trade agreements’ with European (non-EU) countries, Mediterranean countries, Korea, Mexico, etc. South Korea is the only selected third country (within the scope of this study) that the EU has signed a trade agreement with146, whilst negotiations with other main ‘competitors’ just began (Japan, in March 2013147) or will begin in the near future (US, June 2013148).

Horn et al (2009) observe that there is a clear tendency for the EU to include ‘competition elements’ in the preferential trade agreements they make. These are ‘WTO extra’ elements as the WTO does not cover competition law (see below). These competition elements are more or less in line with the EU acquis, as Horn et al (2009) state that “most preferential trade agreements prohibit all agreements between undertakings ‘which have as their object or effect the prevention, restriction or distortion of competition’ as well as ‘the abuse by one or more undertakings of a dominant position’ on the territory of the parties, insofar as they affect trade between the parties. The agreements also mandate that the competition authorities of the parties cooperate to ensure that this prohibition is enforced. According to Horn et al (2009) many agreements149 also prohibit ‘any public aid which distorts, or threatens to distort, competition by favouring certain undertakings or the production of certain goods’. These prohibitions mirror precisely the disciplines contained in the EC treaty, which apply to intra-EC trade”.150 Nevertheless, Horn et al. also observe that the level of legal enforceability varies across signed agreements.

In the negotiations about the preferential trade agreements, the EU normally wants to discuss the issue of subsidies (or state aid). In most cases the negotiations about this topic are difficult, given the European position regarding support to the European agricultural sector. Nevertheless, the PTA with Korea151 does contain a section on subsidies, which conforms with the SCM Agreement (see below). In article 11.9 for example the parties “agree to use their best endeavours to remedy or remove through the application of their competition laws or otherwise, distortions of competition caused by subsidies in so far as they affect international trade, and to prevent the occurrence of such situations.” Two types of subsidies are prohibited (article 11.11), which are (i) unlimited subsidies/guarantees152 and (ii) restructuring aid in the absence of a restructuring plan.153 In the agreement there are also separate arrangements on dispute settlement (via a

145 Horn, H, Mavroidis, P.C. and Sapir, A., ‘Beyond the WTO? An anatomy of EU and US preferential trade agreements’, study for the Bruegel blueprint series, 2009. 146 For details, see for instance ‘The EU-Korea Free Trade Agreement in practice’, European Commission, DG TRADE, 2011 http://trade.ec.europa.eu/doclib/docs/2011/october/tradoc_148303.pdf 147 European Commission, press release ‘A Free Trade Agreement between the EU and Japan’, 25 March 2013, see: http://trade.ec.europa.eu/doclib/press/index.cfm?id=881. Text of the agreement: 2011/265/EU, Council Decision of 16 September 2010 on the signing, on behalf of the European Union, and provisional application of the Free Trade Agreement between the European Union and its Member States, of the one part, and the Republic of Korea, of the other part, http://eur-lex.europa.eu/JOHtml.do?uri=OJ:L:2011:127:SOM:EN:HTML. 148 European Commission, press release ‘European Union and United States to launch negotiations for a Transatlantic Trade and Investment Partnership’, 13 February 2013, see: http://europa.eu/rapid/press-release_MEMO-13-95_en.htm 149 From the text it is not very clear which specific trade agreements they mean. 150 Horn et al (2009), p. 54-55. 151 For text of the agreement, cf. footnote 147. 152 In the wording of the FTA with Korea: "subsidies granted under any legal arrangement whereby a government or any public body is responsible to cover debts or liabilities of certain enterprises without any limitation, in law or in fact, as to the amount of those debts and liabilities or the duration of such responsibility". 153 In the wording of the FTA with Korea: "subsidies (such as loans and guarantees, cash grants, capital injections, provision of assets below market prices, tax exemption) to insolvent or ailing enterprises, without a credible restructuring plan based on

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dedicated trade committee) and sanctions. The two types of subsidies mentioned above are seen as the most distortive and therefore part of the PTA. However, these two prohibited types of subsidies have a limited scope and do not seem very relevant for market distortions in the area of KETs. The more general commitment (article 11.9) to remedy or remove market distortions is less concrete, but may be of relevance in terms of KETs investments.

5.3 Counteracting via the World Trade system

The Agreement on the World Trade Organisation (WTO, 1994) functions as an umbrella agreement for more than 60 underlying agreements on a variety of topics, which have been negotiated since the 1980s (or even before). The WTO system contains three main ‘blocks’ of Agreements, which are (i) the agreements on trade in goods, including the general agreement on tariffs and trade (GATT, 1994) and associated agreements, (ii) the general agreement on trade in services (GATS), and (iii) the Agreement on trade-related aspects of intellectual property rights (TRIPS).154 Within the scope of this study, the GATT is the most relevant agreement.

5.3.1 GATT - Context and scope The main objective of the GATT is to ‘create a liberal and open trading system under which business enterprises from member countries can trade with one another under conditions of fair competition’. The GATT is further characterised by four main principles: (i) the domestic industry may be protected from foreign competition, but in principle only through tariffs, (ii) states are urged to reduce and/or eliminate protection (tariffs, non-tariff barriers), (iii) tariffs should be applied to imported and exported goods without discrimination between states (‘most favoured nation’ treatment), and (iv) it is not allowed to discriminate between imported goods and domestically produced products in terms of taxes and regulations (‘national treatment’ rule).155 Besides the ‘rules of general application’ within the GATT, which determine the dutiable value, product standards, regulations, licenses, etc., there are some other agreements. In relation to the market distortions in KETs, the agreement on subsidies and countervailing measures (SCM Agreement) and the agreement on the trade-related investment measures (TRIMs) are assessed below.156

Agreement on subsidies and countervailing measures (SCM Agreement) The main relevant elements from the GATT (article XVI on notification of subsidies and article VI on antidumping and countervailing measures) have been laid down in more detail in the underlying ‘Agreement on subsidies and countervailing measures’ (SCM Agreement, 1995). The SCM Agreement consists of two main ‘tracks’. The first track covers article VI of the GATT and ‘refers to the imposition by a WTO Member of countervailing duties on imports from a WTO Member granting a (harmful) subsidy’. The second track covers article XVI of the GATT and refers to the rules that a WTO Member must respect or else find itself in violation of the SCM Agreement and the subject of a complaint.157

Definition - The definition of a subsidy is built on three complementary elements (article 1 SCM).

realistic assumptions with a view to ensuring the return of the insolvent or ailing enterprise within a reasonable time to long-term viability and without the enterprise significantly contributing itself to the costs of restructuring)". 154 WTO (International Trade Centre and the Commonwealth Secretariat), ‘Business Guide to the World Trading System’, 1999.p. 4. 155 WTO (1999), p. 6-7. 156 Other agreements, like for example on government procurement practices and anti-dumping are assessed to be less relevant in relation to market distortions for KETs. 157 Ehlermann, C-D, Goyette, M., ‘The interface between EU State Aid Control and the WTO Disciplines on Subsidies’, European State Aid Law Quarterly, 2006 (4), p. 696.

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 First, there should be a financial contribution by a government or any public body within the territory of a Member. The SCM Agreement determines four types of financial contributions158, which cover for example direct grants and loans, loan guarantees, tax credits, etc. This list of financial contribution types is exhaustive, but at the same time the wording is quite broad.159  Additionally, the measure should have a beneficiary element, meaning anything which is not consistent with normal commercial practise.160  Finally, the subsidy must also be ‘specific’, i.e. the benefit should be given to a particular company or group of companies (article 2.1). This element is not part of the exact definition (article), but strongly related.

Compared to the EU state aid rules, the WTO definition of ‘subsidy’ is broader than the European definition of ‘state aid’, as the WTO definition also covers ‘various government-mandated measures that do not impose a cost on the granting government’ (this cost element is the main criteria in the EU state aid rules). 161 Regarding the beneficiary element, Ehlermann and Goyette conclude that the European and WTO disciplines on this element are quite similar, while also the concept of selectivity (specificity) under the WTO and the EU state aid framework are similar but differ in some respects (EU law is a little broader in certain cases, e.g. aid limited to SMEs is considered selective under EU rules and not under WTO rules).162 Further, the EU state aid framework requires that the measure should affect trade between Member States, which is not considered in the WTO framework. Finally, the Commission also has the possibility to authorise certain aid compatible with the market, which is not possible under the WTO. This results in a situation (or risk) that, despite the generally stricter European rules, specific state aid is allowed under the EU state aid framework, but does not comply with the WTO rules.163

Scope - Although the SCM Agreement determines that subsidies have to relate to ‘exports’ or ‘imports’, the scope of the SCM Agreement is in principle a little broader and covers subsidies which influence international trade. In principle there are two types of subsidies: prohibited subsidies and actionable subsidies. Specific subsidies which are prohibited are export subsidies and subsidies which promote the use of domestic over imported goods (‘red subsidies’). Other subsidies are in principle allowed, as long as they do not create ‘adverse effects’ (e.g. injury to the domestic industry164). Whether subsidies are prohibited depends on the granting conditions.165 The second category of subsidies consists of the actionable subsidies (‘amber subsidies’),166 which are

158The four types are (i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees); (ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits); (iii) a government provides goods or services other than general infrastructure, or purchases goods; (iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments; (AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES, Article 1, text can be found at: http://www.wto.org/english/docs_e/legal_e/24-scm.pdf) 159 Ehlermann and Goyette (2006), p. 698-699. 160 WTO (1999), p. 128. 161 Ehlermann and Goyette (2006), p. 700-704. Ehlermann and Goyette indicate that in the EU-view “subsidies are limited to cases where a charge on the public account is incurred. (….) Under the WTO-definition also the government instruction to a private body (for instance a private bank) to grant a financial contribution will satisfy as a subsidy”. 162 Ehlermann and Goyette (2006), p. 698-699. 163 Ehlermann and Goyette (2006), p. 714. 164 Other adverse effects are: (i) nullification or impairment of benefits accruing directly or indirectly to other Members and (ii) serious prejudice to the interests of another Member. 165 Ehlermann and Goyette (2006), p. 706. 166 Serious prejudice shall be deemed to exist, for example, in the case: (i) the total ad valorem subsidization of a product exceeding 5%, or (ii) subsidies to cover operating losses sustained by an industry. Serious prejudice may arise in any case where (i) the effect of the subsidy is to displace or impede the imports/exports of a like product of another Member, (ii) the effect of the subsidy is a significant price undercutting by the subsidized product as compared with the price of a like product of another Member in the same market or significant price suppression, price depression or lost sales in the same market, or (iii) the effect of the subsidy is an increase in the world market share of the subsidizing. See article 6 SCM.

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mainly judged by the ‘adverse effects’ to the interests of other Members.167 Until 1999 there were also non-actionable subsidies (‘green subsidies’).168

Counteracting – Against prohibited or actionable subsidies one can take countervailing measures (unilateral first track) or make the subsidy subject to dispute settlement (multilateral second track).169 The countervailing measures (or: countervailing duties) are imposed on the products of another Member State. The SCM Agreement determines a number of procedural steps before a countervailing duty can be enforced (e.g. investigation to determine the existence, degree and effect of any alleged subsidy, bilateral consultations, duration of the measures, etc.). The measure can also be challenged via the WTO Dispute Settlement Body (DSB).

Matching subsidies Ehlermann and Goyette point to a specific situation under the SCM Agreement in which Members can use a ‘matching technique’ (see next section on the EU matching clause): “Matching subsidies are not specifically addressed in the SCM Agreement. (…) Matching is a technique, which is exceptionally allowed under the OECD Agreement on Guidelines for Officially Supported Export Credits. (…) Matching aid is thus not given any special treatment under the SCM Agreement: in order to be WTO compatible, a matching subsidy needs to be SCM Agreement-consistent on its own right. A matching subsidy may therefore be prohibited or actionable under Track II or countervailable under Track I if the relevant conditions are fulfilled.”170 They also point to one specific case in which ‘retaliatory subsidies’ were used. These are subsidies used as a temporary defence against other members in order to force them to remove a subsidy. “The mechanism was part of the dual strategy: (i) filing a WTO complaint and (ii) granting retaliatory subsidies, adopted by the EU to address the injury caused to EU shipbuilders by the Korean subsidies. (…) The Panel held that the mechanism was inconsistent with the EU’s obligations under the SCM Agreement. The Panel concluded that the EU was not permitted to resort to this type of unilateral pressure, but should have limited itself to its WTO procedure against Korea”.171

Trade-related investment measures (TRIM) The agreement on Trade-related investment measures (TRIM) covers the situation in which certain investment measures limit and distort trade: “governments often impose conditions on foreign investors to encourage investment in accordance with certain national priorities”.172 The scope of the TRIMs is however rather limited due to the problematic negotiations (developing countries versus developed countries). Again, the focus is on goods and the TRIM mainly determines that the principles of national treatment should be followed (level playing-field for foreign companies to invest), and the prohibition of quantitative restrictions. Illegal TRIM-examples are (i) local equity requirements, (ii) remittance restrictions, (iii) technology transfer requirements, (iv) manufacturing requirements, etc. Although the agreement required mandatory notification of all non-conforming TRIMs and their elimination within two years (from 1995) for developed countries, within five years for developing countries and within seven years for least-developed countries,173 the work is not finished and the Committee on Trade-Related Investment Measures is still active. Disputes can be solved via the WTO Dispute Settlement Body. It is important to note that, as explained, the scope of the TRIM is mainly focused on the principles of national treatment and prohibition of quantitative restrictions. The specific market distortions in the area of KETs (as assessed in this study) do not

167 Ehlermann and Goyette (2006), p. 710. 168 Non-actionable subsidies (under certain conditions) are for example: (i) non-specific subsidies, (ii) assistance for research activities conducted by firms or by higher education or research establishments, (iii) assistance to disadvantaged regions and (iv) assistance to promote adaptation of existing facilities33 to new environmental requirements. See article 8 SCM. 169 Ehlermann and Goyette (2006), p. 705. 170 Ehlermann and Goyette (2006), p. 712. 171 Ehlermann and Goyette (2006), p. 712. 172 WTO (1999), p. 161. 173 WTO website, summary of the legal acts (TRIM).

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exactly fit in this scope, as they mainly focus on financial incentives for (external) investors and not on the protection of the domestic industry.

5.3.2 Relevance for KETs Given the existence of this WTO system, the next question is how relevant these instruments are in relation to market distortions in general and more specifically in the area of KETs. Some observations can be made.

Effectiveness – Ehlerman and Goyette observe that (since 1995) unilateral countervailing measures are the main instrument used to counteract subsidies. The main reasons for this (compared to the dispute settlement) include the fast procedure, the perceived higher chance of success and the higher level of (direct) protection by remedies.174 They further indicate that countervailing measures are mainly used to protect the home market, while the WTO dispute settlement is more used for restoring the level playing field on a global scale. The EU uses the WTO system on a regular basis, but at the same time the EU is one of the primary targets of countervailing duties and dispute settlement, especially in relation to agriculture.175

Solving trade issues via the WTO is relatively effective. Hoekman and Kostecki (2001) indicate for example that in the period 1948-1994, when the dispute settlement was still based on inter-state consensus, 170 out of the total 280 complaints (61%) were settled before a formal decision was taken. There were 110 rulings by panels, and out of the 88 violations the majority of the rulings were adopted, while ‘many’ non-adopted rulings led to a ‘satisfactory outcome’. Hoekman and Kosteck observe that states did not use blocking tactics extensively and explain this success by the ‘self-interest’ of states and the fact that it is a ‘repeated game’: losing parties know that at some point in the future they might bring a case for dispute settlement.176 In 1994/1995 the dispute settlement system was strengthened with a binding panel decision (consensus not needed anymore). In general this new system also works quite well, although there are some ‘significant flaws’ such as the enforcement of rulings.177 Nevertheless, it should be noted that dispute settlement is still vulnerable to ‘politics’. Although the scope for politicization of the process has been reduced since 1994/1995, controversial cases still lead to (political) tension between WTO members.178 Horn et al. (2011) looked at the dispute settlement procedure over a longer period (1995-2010) and observed that on average 26 disputes are initiated per year (with a declining trend over the years). On average, the US and the EU win as complainant approximately 64% of the cases, and as respondent in 44% of the cases.179

Scope – The scope of the WTO agreements may also limit the possibilities to redress market distortion in the area of KETs. The GATT (SCM Agreement, TRIMs) focuses on trade in goods and more specifically on limitations of exports and imports. It is uncertain whether (all) experienced market distortions in the area of KETs investments will fall under the scope and definitions of especially the SCM Agreement. Subsidy related market distortions must relate to the import and exports of goods and must have ‘adverse effects’ and prejudice the interests of another Member. Especially for less obvious trade distorting subsidies (e.g. related to R&D and innovation) the uncertainty whether it is a violation of the GATT increases. Subsidy cases seem particularly difficult

174 Ehlermann and Goyette (2006), p. 712. 175 Ehlermann and Goyette (2006), p. 713. 176 Hoekman, B.M., Kostecki, M.M., ‘The political economy of the world trade system’, Oxford, 2001, p. 74 -75. 177 Hoekman and Kostecki (2001), p. 78-79. Smaller countries are for example not always able to enforce a ruling via retaliation against big players like the US or the EU. 178 Hoekman and Kostecki (2001), p. 96-97. 179 Horn, H., Johannesson, L., Mavroidis, P.C., ‘The WTO Dispute Settlement System 1995‒2010: Some Descriptive Statistics’, IFN Working Paper No. 891, November 2011, p. 28.

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to solve. This point can be illustrated by the enduring disputes between the US and the EU about large civil aircrafts (Boeing and Airbus) which, amongst others, focused on the question whether the granting of R&D subsidies and ‘launch aid’ were violations of the SCM agreement and caused adverse effects (as claimed by both sides).180 Ehlerman and Goyette point to the fact that, while R&D subsidies in the past (until 1999) fell under the non-actionable subsidy category, they can now in principle be challenged. At the same time, they indicate that R&D aid will very rarely constitute export subsidies, as well as that (small amounts of) R&D assistance that are remote from the product development state are unlikely to produce the adverse trade effects necessary for either a successful challenge in WTO dispute settlement procedures or for the imposition of countervailing duties.181 Also the TRIM is of less relevance for specific market distortions in the area of KETs, as the scope of the TRIM is mainly focused on the principles of national treatment and prohibition of quantitative restrictions and not on market distorting investment incentives given in order to attract investments.

5.4 The matching clause as counteracting mechanism

Another mechanism to counteract subsidies and market distortion outside the EU jurisdiction is the so-called ‘matching aid’. The idea behind this type of aid is that EU Member States have the possibility to grant state aid (‘match’) to EU undertakings if a non-EU competitor received (or is going to receive) state support in order to keep a (global) level playing field.

5.4.1 Context In the European case law there are only a few examples on how one should deal with cases in which ‘matching aid’ is involved. Examples are the German Steinike & Weinlig case (1977) and the Dutch shipyard case (2004). In both cases the conclusion was that it was against the general principles of the European Treaty to provide state aid in order to ‘match’ other (illegal) aid from other Member States. For non-EU countries there is a less strict approach and matching aid can in certain circumstances be allowed.

In the German Steinike & Weinlig case (1977)182 the European court responded to a question from a German Verwaltungsgericht.183 In the answer, the Court indicated that “any breach by a Member State of an obligation under the treaty (in connexion with the prohibition laid down in article 92 [now 17 FTEU]), cannot be justified by the fact that other Member States are also failing to fulfill this obligation. The effects of more than one distortion of competition on trade between Member States do not cancel one another out but accumulate and the damaging consequences to the common market are increased”.

This view is confirmed by the Commission in the Dutch shipyard case (2004)184 in which the Dutch government wanted to support a number of Dutch shipyards to match aid allegedly offered by Spain to certain private Spanish shipyards which competed with the Dutch shipyards for a number of specific contracts. The Commission stated that: “The principle that a Member State should not act on its own to counter the effects of unlawful aid from another Member State has been clearly established by the Court.

180 See for a short summary of the case: ‘Simon Lester, ‘The Airbus—Boeing Subsidy Dispute: With Both Parties in Violation, Is There an End in Sight?’, May 2012, published on the American Society of International Law. 181 Ehlermann and Goyette (2006), p. 716. 182 Case 78/76; judgment of the Court of 22 March 1977. - Steinike & Weinlig v Federal Republic of Germany. - reference for a preliminary ruling: Verwaltungsgericht Frankfurt am Main – Germany (see section 24). 183 The question was: Is competition distorted and trade between Member States affected if the market research and advertising carried on by the state agency in its own country and abroad is also carried on by similar institutions of other community countries? 184 European Commission, case 2005/122/EC of 30 June 2004 on the State aid which the Netherlands is planning to implement in favour of four shipyards to support six shipbuilding contracts, OJ 2005 L 39, paragraph 17.

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Specifically, the Court has held that it is not possible to justify an aid on the ground that other Member States have granted illegal aid (see the Steinike & Weinlig case). The Commission observes that the notified aid aims at matching alleged illegal aid from another EC Member State. This is therefore contrary to the general principles of the EC Treaty. The notified aid is incompatible with the EC Treaty and should therefore not be authorised”. Nevertheless, there is a less strict approach for non-EU countries, as the Commission noted that the matching aid could only be allowed for aid initially granted by a third country.185

The ‘matching clause’ in the RDI Framework In the European state aid framework there is one clear example of ‘matching aid’ which is laid down since 1996 in the Community Framework for State aid for research and development (since 2007: Community Framework for State aid for research and development and innovation; R&D&I Framework).

The approach towards state aid for research and development has been in place at European level since 1986, when a first R&D Framework was adopted.186 In 1996, a new R&D Framework187 was published and this document indicates that higher aid intensities may be authorized if non-EU competitors received (or: are going to receive) state support for ‘fundamental research’ and ‘industrial research’. The essence of the matching clause can be summarised as follows: “It refers to the situation that an aid applicant can prove or demonstrate that a competitor has received a higher aid intensity than permissible under R&D State aid rules for a comparable project in a third country. In that situation, the clause allows under certain conditions to ‘match’ this intensity, thereby exceeding the normal ceilings for intensities”.188

The matching clause in more detail (1996 R&D Framework) The 1996 R&D Framework determines in article 5.13 that “gross intensities of 75 % for industrial research and 50 % for precompetitive development activities (maximum intensities authorized by the WTO's Agreement on Subsidies and Countervailing Measures for non-actionable subsidies) may be authorized if similar projects or programmes of competitors located outside the European Union have received (in the last three years), or are going to receive, aid of an equivalent intensity for the two types of research” (i.e. ‘fundamental research’ and ‘industrial research’).

In addition to this main principle, the R&D Framework makes a few more procedural considerations (article 15.13): If at all possible, the Member State concerned will provide the Commission with sufficient information to enable it to assess the situation, in particular regarding the need to offset the competitive advantage enjoyed by a third-country competitor. If the Commission has evidence (official publication, notification to the WTO, OECD data, budgetary documents, etc.) that aid granted or proposed by a third country attains a rate that justifies higher aid intensity, it will give its opinion on the notification requesting such alignment within 30 working days for an individual case and within two months for a scheme. If there is only circumstantial evidence, the Commission, having collected all appropriate information from the Member States, will give its opinion on the advisability of alignment within two months.

In the review of the R&D Framework, the Commission already considered that in the period 1996- 2006 the matching clause had never been used. Still, the Commission decided to maintain the clause ‘in substance’, although the procedural elements were removed and were covered by

185 See section 21 in the case; see also Ehlermann and Goyette (2006), p. 714. 186 European Commission, Community Framework for State Aids for Research and Development, O.J. C 83/2 (1986). See also: Ehlermann, C.D., ‘State Aids Under European Community Competition Law’, Fordham International Law Journal, Volume 18, 1994, p. 418-419. 187 European Commission, Community framework for state aid for research and development, 96/C 45/06. 188 European Commission, ‘Memorandum on the Community Framework on State aid for research and development and innovation (R&D&I)’, staff paper - preliminary draft, 4 May 2006, p. 25.

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Regulation 659/1999 (detailed rules for the application of article 108 TFEU).189 In the 2007 R&D&I Framework, the wording is a little different compared to the 1996 R&D Framework:

The matching clause in more detail (2007 R&D&I Framework) The Community framework for state aid for R&D (2006/C 323/01) describes the matching clause for R&D&I under Art: 5.1.7. as follows: “In order to address actual or potential direct or indirect distortions of international trade, higher intensities than generally permissible under this section may be authorized if — directly or indirectly — competitors located outside the Community have received (in the last three years) or are going to receive, aid of an equivalent intensity for similar projects, programmes, research, development or technology. However, where distortions of international trade are likely to occur after more than three years, given the particular nature of the sector in question, the reference period may be extended accordingly. If at all possible, the Member State concerned will provide the Commission with sufficient information to enable it to assess the situation, in particular regarding the need to take account of the competitive advantage enjoyed by a third-country competitor. If the Commission does not have evidence concerning the granted or proposed aid, it may also base its decision on circumstantial evidence.”

By the end of 2012, the matching clause had still not been used or applied. Nevertheless, the Commission appears to still find it potentially useful, as they indicated in an issues paper in December 2012190 (as part of the 2013 review of the R&D&I framework) that it could seem suitable to maintain the current provisions in order to address actual or potential distortions of international trade.

5.4.2 Relevance for KETs In line with the previous section on the WTO, one of the main questions is whether a matching clause is a suitable and efficient instrument in relation to market distortions in general and more specifically in the area of KETs investments as dealt with in this study. The High-level group of experts on KETs specifically recommended the generalised introduction of a matching clause in the EU state aid framework to counter significantly higher state aids by third countries resulting in an unfair distortion of international competition.191 Related to this recommendation, a number of observations can be made.

Effectiveness Given the lack of cases in which the matching clause is used, it is very difficult to assess its (potential) effectiveness. On the one hand, one may argue that the level of support allowed under the ‘normal’ R&D&I aid rules might be sufficient, while on the other hand undertakings may be discouraged to submit a request due to the non-confidential nature of the State aid procedures, the fear of distorted relations or even ‘retaliation’, reluctance at national level to start a trade dispute with another country, etc. From the cases in this specific study it became clear that not all the companies are aware of the existence of the matching clause. Only one of the interviewed companies had experience with the matching clause, in the sense that they had considered invoking it. However, the company indicated that invoking the matching clause is considered to be a too lengthy procedure, which made it unattractive and costly.

189 European Commission, ‘Memorandum on the Community Framework on State aid for research and development and innovation (R&D&I)’, staff paper - preliminary draft, 4 May 2006, p. 25. 190 European Commission, ‘Revision of the state aid rules for research and development and innovation – Issues paper’, December 2012, p. 3. The remark was made subject to proper verification of WTO compliance. 191 High-level group of experts on Key Enabling Technologies, final report, European Commission, June 2011, p. 5, 35-36.

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Case: using the matching clause (anonymised) In this case the European company X learnt in early 2009 (at the time of major revenue drops due to the start of the financial crisis) that one of its major competitors (Y) from the Far East received financial support (tens of millions of euros) from its government for the development of a new technology. The home government of company X agreed to expand existing R&D subsidy programs (which not only company X would benefit from) so that high-tech companies would be able to maintain their R&D investments at a certain level. However, after the procedure following notification of state support, the European Commission objected to this support.. Company X considered invoking the matching clause but abandoned the procedure in 2011, and a formal decision on this issue was never taken. Invoking the matching clause was estimated (by company X) to be a too lengthy procedure. In the company’s view, invoking the matching clause after the Commission had objected to ‘regular’ state support would lead to a long legal procedure with associated high legal fees. The company was also discouraged by the idea of having the case made public and to create a negative atmosphere around it. Also, the existence of market distortion is difficult to prove in practice: typically information on government support to competitors is not public.

The whole procedure lasted about two years (aid was requested in 2009, notification to the Commission took place in the beginning of 2010 and the case was finally abandoned in 2011). The government subsidy requested in 2009 was intended to help the company maintain investments in R&D at times of major revenue drops. To reach its full effect, it is important that government support arrives swiftly, rather than years later. According to company X, the procedures would have to be much shorter to be attractive to companies. In this respect the duplication of information asked from the companies by the Commission, a phenomenon that company X had to undergo several times in this case, should be eliminated. In addition, it was questioned by company X whether the intervention of DG Competition was justified, given the fact that the case did not involve competition between two EU companies, but government support from a non- EU country to a major non-EU competitor of an EU company, company X. The competitor received the government support much faster and the procedure went smoothly, allowing the competitor to benefit from the support at the time when it needed it the most.

This is more or less recognised by the Commission (DG Competition) in the recent paper on issues in relation to a revision of the state aid rules for R&D&I192, which observes (based on a public consultation by the Commission) that in general the standard of proof allegedly required is considered too difficult to meet, mainly due to the confidential nature of the information requested (non-disclosure clauses in third-countries' aid agreements). However, the paper does not directly agree with this view, stating that “the current wording of the matching clause does not impose any specific conditions or practical limitations”, while at the same time, “any move towards relaxation of the current standard of proof could thus result in the approval of otherwise incompatible aid (e.g. not limited to the minimum necessary), and possibly induce long-term negative effects, in particular by leading to subsidy races at the global level and windfall profits for mobile investors”193. This point was also underlined by the Economic Advisory Group on Competition Policy, which indicated that “the clause is an encouragement to the would-be recipients of money for undeserving projects to scour the annals of worst practice in the rest of the world in order to import such practice into Europe”194, Additionally, the Commission concludes in the above-mentioned issues paper that “Member States have in general confirmed in the public consultation that the currently maximum aid intensities are appropriate, and moreover indicated that aid granted for R&D projects in most cases remain significantly below the allowed maxima”195. This paper finally points to the insight (e.g. from

192 European Commission (2012), p. 21-22. 193 European Commission (2012), p. 21-22. 194 Economic Advisory Group on Competition Policy, ‘Commentary on the European Commission’s Draft Community Framework for State Aid for Research, Development and Innovation, July 2006. 195 European Commission (2012), p. 21-22.

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the OECD in 2006) that state subsidies are not a determining factor for location decisions.196 On this latter point, however, the OECD published in 2011 another study in which they indicate that investment incentives may have an influence, but may also trigger rent-seeking behaviour197 of investors:

OECD - Location factors for international investment In the 2011 study on location factors for international investment, the OECD indicates that: “As a result of the increasing policy competition, countries are sometimes willing to offer direct incentive packages (e.g. subsidies and taxes including R&D tax credits) to individual investors. There is some evidence suggesting that incentives may divert investments from one country to another within a geographic region. Nevertheless, countries should be very cautious in granting incentives to investors since spillovers from MNEs do not occur automatically and may trigger rentseeking behaviour of investors”. Additionally, the OECD states: “Attractiveness for international investments is a policy priority in most countries: developed countries hope that these new investments compensate for their decreasing comparative advantage in more labour intensive activities, while emerging countries consider these activities as an important leverage for their economic development. The implementation of countries’ active attractiveness policies for a rather limited supply of investments projects has resulted in increasing policy competition between countries. Policy makers should remain vigilant for the negative effects of such policy competition (e.g. bidding wars) and refrain from market-distorting behaviour.”198

Likewise, the academic literature provides no conclusive answer on the effectiveness of the matching clause, as this specific element of the R&D&I Framework has hardly been treated. In a study about the impact of the R&D&I Framework on the European Union competitiveness, Technopolis (2008) stated that the views of interviewees199 on the matching clause vary. On the one hand it was argued by interviewees that the (unused) clause should be either removed or replaced with a more effective method of ensuring some level of equality between State aid practices within and outside Europe, while on the other hand it was argued that, due to the deterrent effect, the effectiveness of the provision was not dependent on its actual use. The Technopolis report recommends that the implementation conditions for the matching clause should be clarified so that it could actually be used.200 The OECD points to the risk of a tit-for-tat subsidy race under the matching clause, and indicates that the SCM Agreement would be a better instrument to deal with market distorting behaviour.201

Risk of WTO violation Despite the lack of evidence on the effectiveness of the matching clause, some authors point to the risk that use of the matching clause will mean a violation of the WTO rules (and especially the SCM Agreement). Ehlermann and Goyette point to the fact that, as R&D subsidies are no longer non- actionable under the SCM Agreement, the use of the EU R&D matching clause can be a risk, although this risk is assessed as being small.202 This is also related to the Korean shipyard case (see above), in which the Panel concluded that by using the ‘temporary defense mechanism’, the

196 The Commission refers to: OECD, "Government R&D funding and company behaviour – measuring behavioural additionality", 2006. 197 The concept of “rent seeking behaviour” refers to a situation where a company, organization or individual uses their resources to obtain an economic gain from others (e.g. through public subsidies etc.) without reciprocating any benefits back to society through wealth creation. 198 OECD, ‘Attractiveness for Innovation - Location factors for international investment’, 2011, p. 10-11. 199 In this study 90 interviews were carried out with public decision-makers and firms, both within the EU and in competitor regions. 200 Technopolis, ‘Impact of the Community Framework for State Aid for Research and Development and Innovation on European Union Competitiveness’, study for the European Commission, 2008, p. 9 and 25. 201 OECD, OECD Economic Surveys: European Union 2007, Number 11. 202 Ehlermann and Goyette (2006), p. 716.

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EU did not respect its obligation to use exclusively the WTO dispute settlement system (under Article 23.1 of the Dispute Settlement Understanding), imposing a general obligation on WTO Members not to act unilaterally.203 This risk is also recognized by the Commission, as they considered that the use of the matching clause may be a violation of the WTO law and incompatible with the EU's obligations under the SCM Agreement.204

Applicability of the matching clause as an instrument to counteract the market distortion in KETs investments The current matching clause discussed above concerns a situation where a subsidy is given to a third-country competitor of an EU company by third-country authorities, thus (potentially) damaging the competitive position of the EU company. The matching clause then provides the possibility for an EU member state to grant a matching subsidy to the EU company with the aim of levelling the playing field. However, the clause does not cover a situation where an EU company is offered a subsidy by a third country in order to induce the EU company to invest in the third country. By extension, it also does not cover a situation where an EU member state wishes to match the offered third-country subsidy in order to keep the investment within the EU. Obtaining the necessary information and documentation about competitors receiving support may be very difficult, particularly taking into account that the award of aid in third countries is frequently awarded through individual negotiations and not as part of published government support schemes, and this type of aid is often subject to non-disclosure agreements (cf. section 2.8). Furthermore, the matching clause applies only to R&D&I support, i.e. not to large investments in full-scale production facilities. In other words, the current matching clause is not applicable to the type of market distortion investigated in this study.

Using matching aid as an instrument to counteract such market distortion would then require a new form of matching clause specifically addressing this situation. Such an instrument would have to open up for the possibility to give larger subsidies to investments in full-scale production facilities (i.e. not limited to R&D) than allowed for in the current EU state aid rules, in cases where the EU company could document that a subsidy offer from a third country was on the table.

Assessing the legal implications of such an exemption is beyond the scope of this study. However, it is safe to say that there is a risk that applying matching aid in this way could be in violation of the WTO rules (cf. above).

Another key issue is that matching aid is a reactive instrument which can only be applied in retaliation and as such may be of little use in practice. One of the interviewed companies provided additional perspective on the possible use of matching aid as an instrument for keeping investments in Europe rather than losing them to third countries: such use of matching aid would have to take place during or after negotiations with the third country, as a type of counter-offer from an EU Member State. However, the interviewee argued, once the negotiation process has started and a subsidy amount has been agreed upon, companies are likely to be reluctant to discuss investment incentives in the EU and start the negotiations over again. As pointed out earlier, time is often of the essence when making large investment decisions. Furthermore, companies are likely to be concerned with their position and reputation vis-à-vis the third country in question if the offer is rejected following the completion of negotiations (in particular when, as is often the case, a tailor-

203 See also: Rydelski, M.S., ‘State Aid or Not State Aid? – That is the Question’, in: International Trade Law & Regulations – Vol. 7, Issue 4, August 2001. 204 European Commission, ‘Revision of the state aid rules for research and development and innovation – Issues paper’, December 2012, p. 21-22.

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made location package has been put together by the third country). This is also linked to the fact that negotiations and offers are almost always subject to confidentiality.

5.5 Summary

This chapter assessed the existing relevant legislation, mechanisms and instruments to counteract market distortions created by incentives aimed at protecting targeted domestic enterprises/sectors and/or attracting foreign investors.

International law limits the possibilities to counteract certain market distortions Counteracting market distortions cannot be done in an isolated and one-sided way, as it involves and influences the relationship between countries/states and/or groups of countries/states. This inter-country relationship is governed by international public law. The main characteristics of international law (sovereign states, decentralised power, negotiated sources of law, etc.) imply that the European jurisdiction is not applicable (or enforceable) to non-European sovereign states. Given these limitations, the main non-EU legal mechanisms for counteracting market distortion (and especially subsidies) can be found in the multilateral agreements on the World Trade System (WTO) and more specifically the general agreement on tariffs and trade (GATT). On typical competition issues (cartels, mergers, etc.) the international cooperation is very limited.

The SCM Agreement is the main counteracting mechanism, but has limitations in scope Within the GATT, the agreement on subsidies and countervailing measures (SCM Agreement) and the agreement on the trade-related investment measures (TRIM) are the most relevant. The main characteristics of the WTO subsidy framework and EU state aid framework are comparable, but also contain important differences. This results in a situation (or risk) that, despite the generally stricter European rules, specific types of state aid may be allowed under the EU state aid framework, but do not comply with the WTO rules. Despite this difference, the SCM Agreement is the main international instrument for counteracting market distortions, which is done via unilateral countervailing measures or multilateral dispute settlement.

In general the system is assessed as quite effective, although it may be influenced by international (trade) politics. Since 1995, unilateral countervailing measures are the main instrument used to counteract on subsidies, as this (compared to the dispute settlement) includes a fast(er) procedure, a perceived higher chance of success and a higher level of (direct) protection by remedies.

The scope of the SCM Agreement and TRIM limits to some extent the possibilities to redress market distortion in the area of KETs investments. The focus is on trade in goods and more specifically on limitations of exports and imports. It is uncertain whether the experienced market distortions in the area of KETs will fall under the scope and definitions of especially the SCM Agreement. Subsidy related market distortions must relate to the import and exports of goods and must have ‘adverse effects’ and prejudice the interests of another WTO Member. Especially for less obvious trade distorting subsidies (e.g. related to R&D and innovation) the uncertainty whether it is a violation of the GATT increases. The scope of the TRIM is mainly focused on the principles of national treatment and prohibition of quantitative restrictions, which is less relevant for the type of market distortions assessed in this study.

Summing up, the existing international instruments,(i.e. SCM and TRIM), do not appear to be effective instruments for counteracting market distortion in the area of KETs investment (as identified for this study).

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Preferential trade agreements are useful, but limited to specific countries Besides the multilateral agreements like the WTO/GATT, also the preferential (or bilateral) trade agreements (PTA) negotiated between the EU and certain third countries are relevant in relation to market distortions, as some of these preferential trade agreements go beyond the WTO system and contain for example specific details on further tariff reductions (‘WTO plus’). Within the scope of this study, South Korea is the only selected third country with a PTA with the EU. The EU-Korea PTA contains the prohibition of two specific types of subsidies, but these are of little or no relevance for the type of market distortions assessed in this study. The more general commitment in this PTA to remedy or remove market distortions is less concrete, but can be of relevance in terms to KETs investments. However, since this general commitment does not specify the types of market distortions that would be covered, it would need further detailing (i.e. further negotiations) to be effective.

In conclusion, PTAs could potentially be a relevant instrument to combat market distortion for KETs investments, but are currently limited to one of the studied countries, and would need to be quite specific on the types of market distorting instruments that would be prohibited under such PTAs in order to be effective.

Matching clause – never applied until now, uncertainty about its WTO conformity and not appropriate for counteracting market distortion in KETs in its current form Another mechanism that has been proposed as being of potential relevance to counteract on subsidies and market distortion outside the EU jurisdiction is the so-called ‘matching aid’, which gives EU Member States the possibility to grant (match) state aid to EU undertakings if a non-EU competitor received (or is going to receive) state support in order to maintain a (global) level playing field. European case law has clarified that it is against the general principles of the European Treaty to provide state aid in order to match (illegal) aid from other Member States. For non-EU countries matching aid can in certain circumstances be allowed. In the European state aid framework there is one clear example of matching aid which is laid down since 1996 in the R&D/R&D&I Framework. Until now, this matching clause has however not been used or applied.

Given the lack of cases in which the matching clause is used, it is very difficult to assess its (potential) effectiveness. From the cases in this specific study, only one of the interviewed companies had considered invoking the matching clause. However, the company indicated that they assessed that invoking the matching clause would be a too lengthy procedure, which makes it unattractive and costly. Academic literature or other publications (e.g. from the Commission) provide no conclusive answer on the effectiveness of the matching clause. The OECD warned in 2007 and 2011 of the risk of ‘tit-for-tat subsidy races’ and/or ‘rent-seeking behaviour of investors’. In addition to that, some authors point to the risk that use of the matching clause will mean a violation of the WTO rules (and especially the SCM Agreement).

It is important to note that the current set-up of the matching clause covers the situation in which a non-EU competitor received (or is going to receive) state support for R&D&I (requiring that the EU company invoking the clause could gain access to the required information/documentation). Thus, in its current form, the matching clause cannot be used to ‘stimulate’ an enterprise to invest in full- scale production facilities in the EU instead of a third country. Matching aid in the latter situation would require a new form of matching clause, an exemption to the current state aid rules, also addressing a situation where a subsidy offer has been made to the EU company by a third country, and applicable not only to R&D but to full-scale production as well.

There are, however, a number of issues in relation to the application of such a ‘new form’ of matching clause. Although an assessment of the legal implications of such an exemption is beyond

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the scope of this study, there is a risk that applying matching aid in this way could be in violation of the WTO rules (similar to the current matching clause). Any new matching clause would have to be carefully drafted to be in conformity with WTO rules while respecting the EU competition rules and avoiding the creation of bidding wars between member states eager to attract the investment. A ‘new matching clause’ which could only be used when negotiations with a third country have resulted in a concrete offer would however provide little or no incentive for the company to restart lengthy negotiation procedures with national and EU authorities concerning a counter-offer. In addition, there are reputational risks for the company involved if anonymity could not be guaranteed.

Thus, the current form of matching clause does not appear to be the appropriate solution to the issues of market distortion within the area of KETs.

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6 Conclusions

Europe’s competitive position in the area of KETs is being challenged by intense global competition. Many competitor countries, including both developing/emerging and mature industrial economies, provide incentives for investors in KETs manufacturing which EU Member States are not always able to match. This study has reviewed the policy instruments used by third countries to provide such incentives to EU companies, and has studied selected investment cases and indications of market distortion. Finally, the study assessed the existing relevant legislation, mechanisms and instruments to counteract on these market distortions aimed at protecting targeted domestic enterprises/sectors or attracting foreign investors.

Specific targeted policy measures in third countries for attracting KETs investments This study looked at six third (non-EU) countries – the US and five Asian countries - in order to investigate what kinds of policy instruments are used to attract KETs R&D and production investments by EU-based companies. All of the investigated countries have implemented a number of measures through which incentives for FDI can be provided. The types of measures applied include:

 Grants (direct subsidies) – given for establishment of R&D activities, for training of local staff, for subsidising energy costs, etc. Particularly in Asia, grants may be subject to negotiations with the host country authorities. In the US, an example was identified of a grant specifically promoting investment in a priority area (renewable energy).  Loans and loan guarantees – in the US, this constitutes a significant instrument under the American Recovery and Reinvestment Act. In Asia, a soft loan was seen in one of the cases, as part of a negotiated location package combining several instruments.  Fiscal incentives (tax breaks, customs duty exemptions, etc.) were provided in a number of cases, both in Asia and in the US. Tax breaks are generally available for FDI, and are typically even more generous for investments in hi-tech sectors.  Provision of goods, land and services (in particular free lease of land) was in evidence in several Asian cases, as part of a comprehensive location package. Provision of free land is typically seen in connection with location in industrial parks/science parks.  Expansion of university-based training – an extremely focused effort at providing highly skilled labour within a very specific area, supported by other initiatives to support the same industry was seen in Taiwan, for the IC (integrated circuit) industry.

In some cases, the instruments are directly targeted at attracting FDI, particularly high-tech, and sometimes within selected industries. This applies particularly in a number of Asian countries. In other cases, however, the measures aim to promote investment and innovation in general and may also apply to domestic industries (as in the US, where the identified instruments are primarily targeted at developing the domestic industry).

The specific investment cases which have been examined in more detail show the use of the whole spectrum of policies. Particularly, it was noticeable that often, the host country does not rely on a single instrument but rather offers a combination of different incentives (a “location package”) to potential investors. Such a package may consist of both targeted and more general instruments, and may contain negotiated incentives which are not published.

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Evidence of market distortion in KETs investment markets For there to be market distortion in KETs investments, the EU companies’ main reason for choosing to invest in third countries rather than in the EU must be the specific incentives provided to the investment by the third country, not company strategy or other purely market-related factors (such as proximity to customers).

Several EU-based KETs companies that have invested in third countries were interviewed for this study, and among these, three concrete examples of market distortion in KETs investments were identified.

Two examples were found in the semiconductor industry, where third countries – particularly emerging economies - offer substantial incentive packages to leading EU companies, thus creating market distortion. Such incentive packages can be worth up to 20-25% of an investment. Both cases concerned Asian countries, and the location packages contained a combination of grants, tax/duty exemptions, and free land, along with other incentives. The size and the specific elements of these location packages were decided through negotiations with the host countries, and the incentives were not published.

The third example that can be labelled market distortion concerned an investment in the biotech industry in the US where the company was awarded a substantial tax break. The tax rebate was granted on the basis of a formal application to a specific tax incentive programme under the American Recovery and Reinvestment act and the grant was subsequently published.

In all of these cases, a location in Europe was possible since the basic location factors (framework conditions) were in place, but the investment incentives were decisive for the selection of KETs investment locations outside the EU.

Location factors The investment incentives in and of themselves are not sufficient for attracting FDI. Major investments in production and R&D facilities are long-term decisions, and a number of basic requirements (location factors) need to be present before a company will consider a particular location for investment. If such basic factors are found in several possible investment locations, incentives may however be the decisive element for the choice of location.

In many instances, such location factors will also carry more weight than investment incentives, and some of the interviewed companies reported that even though they had received incentives, these were not decisive for the choice of location. Obviously, market-related factors (size of the market, location close to important customers etc.) are of crucial importance to any investment, and other important factors typically include the availability of skilled labour, political stability and economic performance of the host country, protection of intellectual property rights, infrastructure (incl. connections to other important destinations) and the quality of the logistic system. The importance of (low) labour costs varies with the type of activity undertaken in the investment location (the more labour-intensive the activity, the more important wage costs become). Another important factor is the availability of an efficient “ecosystem” of suppliers and other supporting functions for the activity.

Finally, many of the case companies point to the need for speed and certainty in the process of securing (negotiating) incentives. Decision-making processes of 3-9 months from first discussions to implementation are indicated as typical in third countries.

In this connection, it is not only the absence of the additional EU approval process for state aid that speeds up the process. The existence of effective investment agencies, especially in Asian

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countries, is also mentioned by several of the interviewed companies as a facilitating factor when making the decision on where to invest.

With respect to what Europe could do to improve the conditions for investment in KETs R&D and manufacturing, the companies invariably pointed to two aspects of the EU state aid system that they would like to see improved: the limitations on how much support can be provided and the time- consuming process for approving state aid at EU level205.

Legal mechanisms for counteracting market distortion The main non-EU legal mechanisms for counteracting market distortion (and especially subsidies) lie in the multilateral agreements on the World Trade System (WTO), where the agreement on subsidies and countervailing measures (SCM Agreement) and the agreement on the trade-related investment measures (TRIM) are the most relevant. The main characteristics of the WTO subsidy framework and EU state aid framework are comparable, but also contain important differences. This results in a risk that, despite the generally stricter European rules, specific state aid could be allowed under the EU state aid framework, but would not comply with the WTO rules. Despite this difference, the SCM Agreement is the main international instrument for counteracting market distortions, which is done via unilateral countervailing measures or multilateral dispute settlement. However, the scope of the SCM Agreement and TRIM limits to a large extent the possibilities to redress market distortion in the area of KETs investments. Especially for less obvious trade distorting subsidies (e.g. related to R&D and innovation) the uncertainty whether it is a violation of the GATT increases.

Global competition in high-tech locations will continue to increase. Initiatives are needed for multinational agreements to become more concrete with respect to the definition of what constitutes market distortion in the area of FDI and the design of more appropriate measures to counteract such distortion.

Besides the multilateral agreements, EUs preferential (or bilateral) trade agreements (PTAs) with other countries are relevant in relation to market distortions. Within the scope of this study Korea is the only selected third country with a PTA with the EU. The PTA prohibits two specific types of subsidies, but these are not relevant for the type of market distortions assessed in this study. The more general commitment in PTA to remedy or remove market distortions, although less concrete, might yet be of relevance in terms of KETs investments.

Future negotiations on bilateral agreements could also be subject to inclusion of more effective instruments for counteracting market distortion (for instance in the form of notifications or a code of conduct for allowed and prohibited policies). However, reaching agreement on useful measures is most likely going to be difficult given the nature of the problem, which includes the fact that governments may be reluctant to increase companies’ bargaining power in individual subsidy cases by informing other countries’ governments of the nature of incentives offered for investment.

Matching clause Another mechanism to counteract market-distorting subsidies outside the EU jurisdiction is the so- called ‘matching aid’, which gives EU Member States the possibility to grant (‘match’) state aid for R&D&I to EU undertakings if a non-EU competitor received (or is going to receive) state support.

205 It should be noted that for a company, the ”clock starts ticking” when the subject of state aid is first addressed with the competent authority in the Member State concerned, and the process lasts up to the time when the final decision is made at EU level.

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The matching clause has been part of the EU R&D/R&D&I Framework since 1996, but has never been applied.

However, the matching clause is not applicable in its current form to the problem of market distortion in the area of KETs investments as treated in this study, since it cannot be used to ‘stimulate’ an enterprise to invest in full-scale production facilities in the EU instead of in a third country.

With one exception, the companies interviewed in this study were not familiar with the existing matching clause, and when presented with the concept of matching aid (as an instrument to keep investments in the EU) their assessment was mostly negative. One of the companies had considered invoking the existing matching clause but gave it up because the procedure was considered too lengthy and costly. Furthermore, if the desired effect is to keep companies from investing in third countries and locate the investment in the EU instead, a matching clause in its current form is not likely to be effective. It is a reactive (retaliatory) instrument which will be difficult to apply once negotiations between a potential investor and the host (third) country have been concluded and an offer is on the table. There are also reputational risks for the company involved in relation to the third country that has made the offer, if anonymity cannot be guaranteed. In addition to that, the use of matching aid must be in conformity with WTO rules.

There is no conclusive assessment on the effectiveness of a matching clause but, as outlined above, there are a number of other significant and difficult issues to be resolved. In its current form, it is clear that the matching clause is not an appropriate solution to the issues of market distortion within the area of KETs.

The box below summarises the key conclusions of this study:

 Third countries have adopted specific policies to attract direct foreign investments; these policies have in some cases shown themselves to be decisive for attracting investments from EU companies, thus constituting cases of clear market distortion;

 Third-country investment incentive packages, or ‘location packages’ (combination of various incentives) can in some cases be worth up to 20-25% of an investment. These location packages usually contain a combination of grants, tax/duty exemptions and free land along with other incentives;

 In order to increase their attractiveness to foreign investors, third countries often grant investment incentives whose exact nature and size are subject to bilateral negotiations with the foreign (European) company concerned. Such negotiations may result in additional advantageous terms, which are usually not made public by the parties;

 Competing countries have the ability to make decisions and offers much quicker than in Europe. This is mainly due to the lack of an extra approval procedure above the national level (such as is found in the EU); in addition, effective investment agencies reduce administrative procedures with national authorities;

 WTO rules (more specifically, the SCM Agreement) is the most relevant international means to counteract market distortion through unilateral countervailing measures, but these are often only marginally applicable to the types of market distortion seen in this study. Preferential trade agreements may go beyond the WTO system. EU has already signed a PTA with Korea and is negotiating with Japan and the US;

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 The matching clause is an instrument provided in the RDI framework which has never been applied. In its current form it cannot be considered appropriate for addressing the market distortion in KETs investments.

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Annex I List of literature

The list of literature is divided into sections as follows:  Cross-cutting (general) literature  Korea  United States  Japan  Singapore  China  Taiwan  Regulatory and framework conditions

Some sources may thus appear more than once if they have been consulted for more than one part of the study.

Cross-cutting (general) literature

Dosi, G. (1988): “Sources, Procedures, And Microeconomic Effects Of Innovation”, Journal of Economic Literature, 26, pp. 1120–1171

Dewey & LeBoeuf (2009): Maintaining America’s Competitive Edge: Government Policies Affecting Semiconductor Industry R&D and Manufacturing Activity, prepared for the Semiconductor Industry Association, accessed at www.choosetocompete.org on 30 October 2012.

EIB (2006): “An industrial policy for Europe?”, EIB Papers 11, No 1/2006

Nelson, R. (1999): “The Sources of Industrial Leadership: A Perspective on Industrial Policy”, De Economist, 147 (1), pp. 1–18

Nelson, R., Baumol, W., and Wolf, E. (1994) (eds.): Convergence of Productivity: Cross-national studies and historical evidence, Oxford University Press, Oxford, UK

OECD (2011): “Attractiveness for Innovation - Location factors for international investment”.

Spencer, B. J. (1986): “What Should Trade Policy Target?”, in Krugman (ed.), Strategic Trade Policy and the New International Economics, MIT Press, Cambridge, USA

Technopolis (2008): Impact of the community framework for state Aid for R&D&I on EU Competitiveness

Thomas, K. P. (2007): Investment incentives: Growing use, uncertain benefits, uneven controls, accessed at www.globalsubsidies.org/files/assets/GSI_Investment_Incentives.pdf on 30 October 2012.

Zysman, J., Tyson, L. A., and Dosi, G. (1990): “Technology, trade policy and Schumpeterian efficiencies”, in de la Mothe, J. d. L. and Ducharme, L. M. (eds.), Science, technology and free trade, Columbia University Press, New York, USA

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Korea

InvestKorea (2012): Cash Grant http://www.investkorea.org/InvestKoreaWar/work/ik/eng/bo/bo_01.jsp?code=102041803

InvestKorea (2012): Site Location Support http://www.investkorea.org/InvestKoreaWar/work/ik/eng/bo/bo_01.jsp?code=102041804

KOTRA – Korean Trade-Investment Promotion Agency (2010): The Investment Environments of Major Asian Contries http://www.scribd.com/doc/27330092/The-Investment-Environments-of-Major-Asian-Countries

Ministry of Education, Science and Technology (2010): Nanotechnology for Dynamic Korea http://www.kontrs.or.kr/data/pdf/Nanotechnology%20for%20Dynamic%20Korea.pdf

OECD (2011): The Implementation of the Korean Green Growth Strategy in Urban Areas http://www.oecd.org/gov/regionaldevelopment/49330153.pdf

Peter Bjørn Larsen, Els van der Velde, Eveline Durinck, Henrik Noes Piester, Leif Jacobsen and Hanne Shapiro (2011): Cross-sectoral Analysis of the Impact of International Industrial Policy on Key Enabling Technologies

World Economic Forum (2012): The Global Competitiveness Report 2012-2013 http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2012-13.pdf

Youngjoo Ko (2011): ERAWatch Contry Reports 2010: Korea http://erawatch.jrc.ec.europa.eu/erawatch/export/sites/default/galleries/generic_files/file_0122.pdf

United States

Advanced Research Projects Agency – Energy (2012): About http://arpa-e.energy.gov/About/About.aspx

Advanced Research Projects Agency – Energy (2012): Funding Agreements http://arpa-e.energy.gov/FundingAgreements/Overview/Award.aspx

Battelle Technology Partnership Practice (2010): BIO State Bioscience Initiatives 2010 http://www3.bio.org/local/battelle2010/Battelle_Report_2010.pdf

Business Facilities (2012): State Incentives Guide http://businessfacilities.com/special-report/2011-incentives-guide/

Energy.gov (2012): Battery Factory Bringing Jobs to Jacksonville http://energy.gov/articles/battery-factory-bringing-jobs-jacksonville

Energy.gov (2012): USDA - Biorefinery Assistance Program http://energy.gov/savings/usda-biorefinery-assistance-program

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Enterprise Florida (2012): Incentives http://www.eflorida.com/ContentSubpage.aspx?id=472#Targeted_Industry

High Level Expert Group on Key Enabling Technologies (2011): Final Report http://ec.europa.eu/enterprise/sectors/ict/files/kets/hlg_report_final_en.pdf

INEOS (2009): Press Releases. INEOS Bio JV Selected for $50 Million U.S. Department of Energy Grant for Commercial BioEnergy Facility http://www.ineos.com/new_item.php?id_press=257

International Business Types (2012): A123 Once Again Thrusts Taxpayer Funded Failed Green Tech Into Spotlight http://www.ibtimes.com/a123-once-again-thrusts-taxpayer-funded-failed-green-tech-spotlight- 847447

John K. Borchardt (2012): Biotech Startups Rely on Different Types of Funding http://www.areadevelopment.com/Biotech/January2012/biotech-startups-early-funding-sources- 684210.shtml

Kansas City Business Journal (2012): MOSIRA goes before Missouri Supreme Court http://www.bizjournals.com/kansascity/blog/morning_call/2012/09/mosira-goes-before-missouri- supreme.html

National Nanotechnology Initiative (2012): NNI Budget http://www.nano.gov/about-nni/what/funding

National Nanotechnology Initiative (2012): Tech Transfer & Commercialization http://www.nano.gov/about-nni/what/funding

Planetizen (2011): Latest Government Shutdown Threat: Disaster Relief vs. Clean Car Manufacturing Subsidy http://www.planetizen.com/node/51545

Recovery.gov (2012): The Recovery Act http://www.recovery.gov/About/Pages/The_Act.aspx

The White House (2011): A Strategy for American Innovation. Securing Our Economic Growth and Prosperity http://www.whitehouse.gov/sites/default/files/uploads/InnovationStrategy.pdf

U.S. Department of Energy (2011): Vehicle Battery R&D: Current Scope and Future Directions http://www.orau.gov/battery2011/presentations/01howell.pdf

U.S. Department of Energy – Office of Public Affairs (2011): Department of Energy Awards $156 Million for Groundbreaking Energy Research Projects http://arpa−e.energy.gov/Portals/0/Documents/Media/DOE%20Awards%20$156%20Million%20for %20Groundbreaking%20Energy%20Research%20Projects_September_29_2011.pdf

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U.S. Department of Energy (2012): Advanced Technology Vehicle (ATV) Manufacturing Incentives http://www.afdc.energy.gov/laws/law/US/411

U.S. Department of Energy – Loan Programs Office (2012): ATVM https://lpo.energy.gov/?page_id=43

Waste Business Journal (2012): INEOS Bio Facility in Florida Begins Producing Power http://www.wastebusinessjournal.com/news/wbj20121031L.htm

World Economic Forum (2012): The Global Competitiveness Report 2012-2013 http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2012-13.pdf

Japan

METI Budget & Tax Policies (2011): Challenges and Actions in Economic/Industrial Policies http://www.meti.go.jp/english/aboutmeti/policy/fy2012/fy2012policies.pdf

Investing in Japan (2012): Subsidy Program for Projects Promoting Asian Site Location in Japan [Japanese Fiscal Year 2012] http://www.jetro.go.jp/en/invest/newsroom/announcements/2012/20120727754.html

Investing in Japan (2012): Subsidy Program for Projects Promoting Asian Site Location in Japan – Application Guidelines [Japanese Fiscal Year 2012] http://www.jetro.go.jp/en/invest/newsroom/pdf/2012/20120828guide_en.pdf

Investing in Japan (2012):List of projects selected under the FY 2011 Subsidy Program for Projects Promoting Asian Site Location in Japan http://www.jetro.go.jp/en/invest/newsroom/pdf/2012/20120829_list2011.pdf

Investing in Japan (2012): The Innovation Center Establishment Assistance Program http://www.jetro.go.jp/en/invest/newsroom/announcements/2012/20120914648.html

METI Announcements (2011): Announcement of successful applicants for the Innovation Center Establishment Assistance Program http://www.meti.go.jp/english/press/2011/0701_01.html

Investing in Japan (2012): Incentive Programs http://www.jetro.go.jp/en/invest/incentive_programs/

Investing in Japan (2012): METI's Subsidy Program for Domestic Site Location(Second Public Offering) http://www.jetro.go.jp/en/invest/newsroom/announcements/2012/20120427255.html

Investing in Japan (2012): Subsidy Program for Domestic Site Location 8Second Public Offering） (Provisional translation) http://www.jetro.go.jp/en/invest/newsroom/pdf/2012/20120427255b.pdf

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Singapore

National University of Singapore, Publications (1999): Official Efforts To Attract FDI: Case Of Singapore’s EDB http://www.fas.nus.edu.sg/ecs/pub/wp/previous/AHTAN2.pdf

Enterprise Development Centres (2012): Pioneer Incentive (PC-M or PC-S) http://www.enterpriseone.gov.sg/Government%20Assistance/Tax%20Incentives/Product%20Devel opment%20and%20Innovation/gp_edb_PC-M_PC-S.aspx

Singapore News (2012) http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1185995/1/.html

Enterprise Development Centres (2012): Research Incentive Scheme For Companies (RISC) http://www.enterpriseone.gov.sg/Government%20Assistance/Grants/Product%20Development%20 and%20Innovation/gp_edb_risc.aspx

Enterprise Development Centres (2012): Technology Enterprise Commercialisation Scheme (TECS) http://www.enterpriseone.gov.sg/Government%20Assistance/Grants/Technology/gp_spring_tecs.as px

SPRING Singapore (2012): Technology Enterprise Commercialisation Scheme (TECS) http://www.spring.gov.sg/entrepreneurship/fs/fs/tecs/pages/technology-enterprise- commercialisation-scheme.aspx

Enterprise Development Centres (2012): Technology Innovation Programme (TIP) - Projects http://www.enterpriseone.gov.sg/Government%20Assistance/Grants/Product%20Development%20 and%20Innovation/gp_spring_tip-proj.aspx

Deliotte (2011): Applying for tax incentives in Singapore 1http://www.deloitte.com/assets/Dcom- Singapore/Local%20Assets/Documents/Tax/2011/Applying%20for%20tax%20incentives%20in%20 Singapore.pdf

China

CBI (2011). China's Twelfth Five Year Plan (2011-2015) - the Full English Version http://cbi.typepad.com/china_direct/2011/05/chinas-twelfth-five-new-plan-the-full-english- version.html

China Briefing (2012). China Releases 12th Five-Year Plan for National Strategic Emerging Industries http://www.china-briefing.com/news/2012/07/25/china-releases-12th-five-year-plan-for- national-strategic-emerging-industries.html

DLA PIPER (2011). China offers new incentives to further boost software and semiconductor industries. http://www.dlapiper.com/china-new-incentives-to-further-boost-software-and- semiconductor-industries/

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ERAWATCH (2012). National High Technology R&D Programme (863 Programme) http://erawatch.jrc.ec.europa.eu/erawatch/opencms/information/country_pages/cn/supportmeasure/ support_mig_0009

Ernst & Young (2011). 2011 Asia-Pacific R&D incentives. http://www.ey.com/Publication/vwLUAssets/2011APAC_RnD/$FILE/2011-Asia-Pacific-R&D- incentives.pdf

Fung, K.C., Iizaka, H. and Tong, S. (2002). Foreign Direct Investment in China: Policy, Trend and Impact. http://www.hiebs.hku.hk/working_paper_updates/pdf/wp1049.pdf

Haiyang Zhang and Tetsushi Sonobe (2011). Development of Science and Technology Parks in China, 1988–2008. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 5, 2011-6 http://www.economics-ejournal.org/economics/journalarticles/2011-6

Herbert Smith (2012). China’s 12th Five-Year Plan for investment. http://www.herbertsmithfreehills.com/-/media/HS/SIBEHK130812371025.pdf

HSBC (2012). China Strategy Flashnote https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=6xYu1f3mmi&n=332108.PDF

KPMG (2011). China’s 12th Five Year Plan: Overview http://www.kpmg.com/cn/en/IssuesAndInsights/ArticlesPublications/Documents/China-12th-Five- Year-Plan-Overview-201104.pdf

KOTRA – Korean Trade-Investment Promotion Agency (2010): The Investment Environments of Major Asian Contries http://www.scribd.com/doc/27330092/The-Investment-Environments-of-Major-Asian-Countries

Nanotechnology Now (2011). Accelerating Nanotechnology Innovation and Commercialization through Public-Private Partnership -- Highlight of CHInano2011 http://www.nanotech-now.com/columns/?article=603

PWC (2010): Global reach: China‘s Impact on the Semiconductor Industry 2010 Update. http://www.pwc.ru/en/communications/assets/China-Semicon-2010-nov2010.pdf

Stewart & Stewart (2007). China’s Industrial Subsidies Study: High Technology. Trade Lawyers Advisory Group, report volume 1. http://www.uscc.gov/researchpapers/2008/TLAG%20Study%20- 20China%27s%20Industrial%20Subsidies%20High%20Technology.pdf

Taiwan

CIA (2012). The World Factbook. East & Southeast Asia: Taiwan https://www.cia.gov/library/publications/the-world-factbook/geos/tw.html

Department of Industrial Technology Taiwan (2012). Multinational Innovative R&D center in Taiwan. http://doit.moea.gov.tw/doiteng/contents/g_nws/show.aspx?sn=64

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Dewey & LeBoeuf (2009). Maintaining America’s competitive edge: government policies affecting semiconductor industry R&D and manufacturing activity. A White Paper Prepared by

Dewey & LeBoeuf for the Semiconductor Industry Association. http://www.sia- online.org/clientuploads/directory/DocumentSIA/Research%20and%20Technology/Competitivenes s_White_Paper.pdf

Els Van De Velde, Christian Rammer, Pierre Padilla, Paula Schliessler, Olga Slivko, Birgit Gehrke, Valentijn Bilsen and Ruslan Lukach (2012). Exchange of good policy practices promoting the industrial uptake and deployment of Key Enabling Technologies. http://ec.europa.eu/enterprise/sectors/ict/files/kets/ex_of_practice_ket_final_report_en.pdf

GRIPS (2011). Taiwan: Policy Drive for Innovation. Highlights from GRIPS Development Forum Policy Mission. http://www.grips.ac.jp/vietnam/KOarchives/doc/ES51_ET_taiwan201100517.pdf

Library of Congres (2010). Taiwan: Law on Industrial Innovation Adopted in Place of Expired Statute for Upgrading Industries http://www.loc.gov/lawweb/servlet/lloc_news?disp3_l205401939_text7.pdf

LTX (2005). LTX Selected for Taiwan's National Si-Soft Project. http://www.ltx.com/testweb.nsf/published/062105release?OpenDocument

May Hsia (2010). Innovation for a better tomorrow. Presentation at the ASPA Leaders Meeting Jordan www.bic.jo/docs/2010.03-LeadersMeeting-MayHsia.ppt

Ministry of Foreign Affairs Taiwan (2010). Science Parks. http://www.taiwan.gov.tw/ct.asp?xItem=27510&ctNode=1906&mp=1001

National Science Council Taiwan (2012). ACT FOR ESTABLISHMENT AND ADMINISTRATION OF SCIENCE PARKS http://web1.nsc.gov.tw/public/Data/831216145871.pdf

Trading Economics (2012). Taiwan Balance of Trade. http://www.tradingeconomics.com/taiwan/balance-of-trade

Regulatory and framework conditions

Ehlermann and Goyette (2006); Ehlermann, C-D, Goyette, M., ‘The interface between EU State Aid Control and the WTO Disciplines on Subsidies’, European State Aid Law Quarterly, 2006 (4), p. 696

Ehlermann (1994); Ehlermann, C.D., ‘State Aids Under European Community Competition Law’, Fordham International Law Journal, Volume 18, 1994.

Economic Advisory Group on Competition Policy (2006); Economic Advisory Group on Competition Policy, ‘Commentary on the European Commission’s Draft Community Framework for State Aid for Research, Development and Innovation, July 2006.

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European Commission (2006); European Commission, ‘Memorandum on the Community Framework on State aid for research and development and innovation (R&D&I)’, staff paper - preliminary draft, 4 May 2006, p. 25.

European Commission (2012); European Commission, ‘Revision of the state aid rules for research and development and innovation – Issues paper’, December 2012.

Hoekman and Kostecki (2001); Hoekman, B.M., Kostecki, M.M., ‘The political economy of the world trade system’, Oxford, 2001.

Horn et al (2009); Horn, H, Mavroidis, P.C. and Sapir, A., ‘Beyond the WTO? An anatomy of EU and US preferential trade agreements’, study for the Bruegel blueprint series, 2009.

Horn et al (2011); Horn, H., Johannesson, L., Mavroidis, P.C., ‘The WTO Dispute Settlement System 1995‒2010: Some Descriptive Statistics’, IFN Working Paper No. 891, November 2011.

KETs High-level group(2011); High-level group of experts on Key Enabling Technologies, final report, June 2011.

OECD (2006); "Government R&D funding and company behaviour – measuring behavioural additionality", 2006.

OECD (2007); ‘OECD Economic Surveys: European Union 2007’, Number 11.

OECD (2011); ‘Attractiveness for Innovation - Location factors for international investment’, 2011.

Rydelski (2001); Rydelski, M.S., ‘State Aid or Not State Aid? – That is the Question’, in: International Trade Law & Regulations – Vol. 7, Issue 4, August 2001

Shaw (2003); Shaw, M.N., et al, ‘International law’, Cambridge University Press, fifth edition, 2003.

Technopolis (2008); Technopolis, ‘Impact of the Community Framework for State Aid for Research and Development and Innovation on European Union Competitiveness’, study for the European Commission, 2008.

Werner and Wessel (2004); Werner W.G., Wessel, R.A., ‘Internationaal en Europees Recht’ (translation: ‘International and European law’) , Europa Law Publishing (NL), 2004.

WTO (1999); International Trade Centre and the Commonwealth Secretariat, ‘Business Guide to the World Trading System’, 1999.

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Annex 2 Lists of EU KETs companies with manufacturing and/or R&D facilities in the third countries

This annex contains lists of EU KETs companies with production and/or R&D facilities located in the third countries investigated in this report. The lists are based on an investigation of company websites to determine where the companies had production and/or R&D facilities in third countries, and to the extent possible to verify that the facility is KETs-relevant.

It should be noted that the lists are not necessarily exhaustive. It should also be noted that information on when the unit in question was established is often not available. Some facilities have existed for decades, while others are recent.

Company name KET EU HQ Location Abengoa Industrial biotech ES Agfa Advanced materials, photonics BE Air Liquide Nanotechnology FR Akzo Nobel Advanced materials NL Arkema Industrial biotech FR Arkema Nanotechnology FR ASML (AMT) Photonics NL Attocube systems AG Nanotechnology DE Baikowski Chimie Advanced materials, nanotechnology FR Barco Photonics BE BASF Industrial biotech, photonics DE Bayer Technical Services Industrial biotech DE Bosch Nanotechnology DE BYK-Chemie Gmbh Nanotechnology DE Carl Zeiss AG Photonics DE Chemetall GMBH Nanotechnology DE Comau Advanced manufacturing IT Croda Industrial biotech UK DRAKA Photonics NL DSM Industrial biotech NL EADS Advanced manufacturing, photonics NL Ekspla Experimental Lasers Photonics LT Essilor Photonics FR Evonik Industrial biotech DE Frigoglass SAIC Nanotechnology EL FRT GmbH Nanotechnology DE Fuchs Industrial biotech DE Galactic Industrial biotech BE

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Company name KET EU HQ Location Gamesa Nanotechnology ES Gooch & Housego Photonics UK Green Biologics Industrial biotech UK HC Starck Advanced materials DE Henkel Industrial biotech DE Heraeus Advanced materials, photonics DE Infineon Micro- and nanoelectronics DE Ingenza Industrial biotech UK Intrinsiq Materials Ltd Nanotechnology UK IQE Photonics UK Jenoptik Laser, Optik, Systeme GmbH Photonics DE Johnson Matthey Advanced materials UK Lanxess Industrial biotech DE Lenzing Industrial biotech AT Leybold Optics Photonics DE Lucite Industrial biotech UK Lyondellbasell Advanced materials, nanotech NL M&G Industrial biotech IT MEMSCAP Nanotechnology FR Novozymes Industrial biotech DK Oxford Lasers Ltd. Nanotechnology UK Perstorp Industrial biotech SE Plansee Advanced materials AT Purac Industrial biotech NL Puratos Industrial biotech BE Rhodia (Part of Solvay) Industrial biotech FR Photonics, adv. Materials, adv. Robert Bosch Manufacturing DE Rofin Photonics DE Roquette-Freres Industrial biotech FR Sachem Europe B.V. Nanotechnology NL Saint Gobain Photonics FR Sandoz Industrial biotech DE Sick AG Photonics DE Siltronic Micro- and nanoelectronics DE Sofradir Photonics FR Soitec Micro- and nanoelectronics FR Solvay Photonics, nanotechnology BE SPTS Technologies Nanotechnology UK Storz Photonics DE Saati S.p.A. Nanotechnology IT Tate&Lyle Industrial biotech UK Thales Nanotechnology FR Trumpf Photonics DE

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Company name KET EU HQ Location Umicore Advanced materials, nanotech, photonics BE VALEO Nanotechnology FR Wacker Industrial biotech, advanced materials DE X-FAB Dresden GmbH Nanotechnology DE Zumtobel Photonics AT

China

Company name KET EU HQ Location Abengoa Industrial biotech ES Agfa Photonics BE Arkema Industrial biotech FR AtoS Nanotechnology FR Automotive Lighting Photonics DE/IT BASF Industrial biotech, photonics DE Bayer Technical Services Industrial biotech DE Berliner Glas Photonics DE Bosch Nanotechnology DE BYK-Chemie Gmbh Nanotechnology DE Carl Zeiss AG Photonics DE DRAKA Photonics NL DSM Industrial biotech NL EADS Photonics NL ENI Nanotechnology IT Ericsson Photonics SE Essilor Photonics FR Evonik Industrial biotech DE Exel Composites Advanced materials FI Festo Advanced manufacturing DE Fidia Advanced manufacturing IT Frigoglass SAIC Nanotechnology EL FRT GmbH Nanotechnology DE Fuchs Industrial biotech DE Galactic Industrial biotech BE Gamesa Nanotechnology ES HC Starck Advanced materials DE Henkel Advanced materials DE Heraeus Materials Technology Advanced materials DE Heraeus Noblelight Photonics DE Infineon Micro- and nanoelectronics DE Johnson Matthey Advanced materials UK Lanxess Industrial biotech DE Leica Microsystems Photonics DE

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Company name KET EU HQ Location Lenzing Industrial biotech AT Leybold Optics Photonics DE L'Oréal Nanotechnology FR Lucite Industrial biotech UK Lyondellbasell Advanced materials, nanotech NL Merck (performance Materials Division) Advanced materials Merck Group Nanotechnology DE Nanolane Nanotechnology FR Nokia Photonics FI Novozymes Industrial biotech DK NXP Photonics NL Osram Advanced materials, photonics DE Perstorp Industrial biotech SE Puratos (Belgium) Industrial biotech BE Rhodia (Part of Solvay) Industrial biotech FR Photonics, adv. Materials, adv. Robert Bosch Manufacturing DE Roquette-Freres Industrial biotech FR Sachem Europe B.V. Nanotechnology NL Saint Gobain Photonics FR Sick AG Photonics DE Solvay Photonics, nanotechnology BE STMicroelectronics Micro- and nanoelectronics CH/NL Saati S.p.A. Nanotechnology IT Thyssen Krupp Advanced materials DE Trumpf Photonics DE Umicore Advanced materials, photonics BE VALEO Nanotechnology FR Wacker Industrial biotech, advanced materials DE Zumtobel Photonics AT

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Japan

Company name KET EU HQ Location Air Liquide Nanotechnology FR Arkema Industrial biotech, nanotechnology FR Baikowski Chimie Advanced materials FR BASF Industrial biotech, photonics DE Bosch Nanotechnology DE BYK-Chemie Gmbh Nanotechnology DE Croda Industrial biotech UK DSM Industrial biotech NL Essilor Photonics FR Esteco Nanotechnology IT Evonik Industrial biotech DE Fuchs Industrial biotech DE HC Starck Advanced materials DE Henkel Advanced materials DE Lanxess Industrial biotech DE L'Oréal Nanotechnology FR Lucite Industrial biotech UK Merck Group Nanotechnology DE Philips Photonics, advanced materials NL Puratos (Belgium) Industrial biotech BE Rhodia (Part of Solvay) Industrial biotech FR Photonics, adv. Materials, adv. Robert Bosch Manufacturing DE Rofin Photonics DE Saint Gobain Photonics FR Solvay Photonics, nanotechnology BE Thales Nanotechnology FR Trumpf Photonics DE Umicore Advanced materials BE UMICORE Nanotechnology BE Wacker Industrial biotech, advanced materials DE Zoz Group Nanotechnology DE

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Taiwan

Company name KET EU HQ Location Air Liquide Nanotechnology FR Heraeus Materials Technology Advanced materials DE Umicore Advanced materials BE Arkema Industrial biotech FR Bosch Nanotechnology DE Chemetall GMBH Nanotechnology DE Henkel Industrial biotech DE Lucite Industrial biotech UK Merck (performance Materials Division) Advanced materials NXP Photonics NL Photonics, adv. Materials, adv. Robert Bosch Manufacturing DE Saint Gobain Photonics FR Umicore Photonics BE Merck Group Nanotechnology DE Advanced materials, advanced ASML manufacturing NL L'Oréal Nanotechnology FR

South Korea

Company name KET EU HQ Location Air Liquide Nanotechnology FR Arkema Nanotechnology, industrial biotech FR BASF Photonics DE Bosch Nanotechnology DE BYK-Chemie Gmbh Nanotechnology DE Croda Industrial biotech UK DSM Industrial biotech NL Evonik Industrial biotech DE Fuchs Industrial biotech DE Henkel Industrial biotech DE Johnson Matthey Advanced materials UK Lyondellbasell Advanced materials, nanotech NL Merck (performance Materials Division) Advanced materials Nokia Photonics FI Plansee Advanced materials AT Puratos (Belgium) Industrial biotech BE Rhodia (Part of Solvay) Industrial biotech FR

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Company name KET EU HQ Location Photonics, adv. Materials, adv. Robert Bosch Manufacturing DE Roquette-Freres Industrial biotech FR Saint Gobain Photonics FR Umicore Advanced materials, photonics BE VALEO Nanotechnology FR Wacker Industrial biotech, advanced materials DE

Singapore

Company name KET EU HQ Location Air Liquide Nanotechnology FR Arkema Industrial biotech FR Bosch Nanotechnology DE BYK-Chemie Gmbh Nanotechnology DE Chemetall GMBH Nanotechnology DE Croda Industrial biotech UK DSM Industrial biotech NL Heraeus Materials Technology Advanced materials DE Infineon Micro- and nanoelectronics DE IQE Photonics UK Lanxess Industrial biotech DE Leica Microsystems Photonics DE Lucite Industrial biotech UK Perstorp Industrial biotech SE Rofin Photonics DE Saint Gobain Photonics FR Sick AG Photonics DE Siltronic Micro- and nanoelectronics Soitec Micro- and nanoelectronics FR STMicroelectronics Micro- and nanoelectronics CH/NL Tate&Lyle Industrial biotech UK Trumpf Photonics DE Wacker Industrial biotech, advanced materials DE Xenics Photonics BE

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Annex 3: Overview of EU State Aid rules

The overview provided below is based on Annex 1 of the report National State aid in support of Innovation and SMEs: Strengths and weaknesses of the EU State aid control system, April 2013, by Idea Consult, Ecorys, and Danish Technological Institute for the European Commission, DG Enterprise.

1. State aid for Research and Development and Innovation (R&D&I Framework)

Rationale and background of the guideline The current Community Framework for State aid for Research and Development and Innovation (R&D&I Framework) entered into force on the first of January 2007. This new R&D&I Framework was the result of a review of the old R&D Framework which dates back to 1996 (and which was prolonged several times). Important drivers for this new R&D&I Framework were the relaunched Lisbon Strategy of 2005 (Baroso (2005)) which stressed the need for increased and improved investments in Research and Development and also the State aid Action Plan (SAAP) of 2005. Key elements of the SAAP were, as mentioned above, (i) the better targeted aid and (ii) the refined economic approach and improved scrutiny. These elements are also implemented in the new R&D&I Framework.

There are a number of key elements which shape the scope and effectiveness of the R&D&I Framework:  Type of measures; The R&D&I Framework contains eight specific measures for R&D&I which all have their own definitions, conditions and aid intensities. These specific measures are summarized below. Compared to the previous R&D framework the definition of ‘research’ has been modernised and expanded, while also ‘innovation’ is now included under the scope of the Framework206,207;  Balancing test and listed market failures; In line with the more ‘refined economic approach’ (SAAP), a balancing test was introduced which focuses on (i) the objective of common interest, (ii) the existing market failures, and (iii) distortions of competition and effect on trade.208 The Framework stresses explicitly that State aid in order to solve market failures is only one of the solutions. The R&D&I framework identified four specific market failures which hamper R&D&I, which are: (i) positive externalities (knowledge spillovers), (ii) public goods (knowledge spillovers), (iii) imperfect and asymmetric information, and (iv) coordination and network failures;  Closeness to the market; an important underlying consideration in the R&D&I framework is (and was in the past) that aid given to R&D&I activities which are close to the market, has a higher chance to result in distortion of competition and crowding out effects;

206 Kleiner, T. (2007), ‘The new Framework for Research, Development and Innovation, 2007-2013’, in: European State aid Law Quarterly, 2007, p. 231-233. 207 These eight measures are based on article 107.3 sub c of the TFEU (facilitating the development of certain economic activities or of certain economic areas). The R&D&I Framework however also gives room for aid under article 107.3 sub b of the TFEU which covers the promotion of aid to important projects of common European interest. The latter however is not often used in practice. 208 R&D&I Framework, section 1.3. The distortions of competition cover for example the existence (or strengthening) of distorting incentives and market power.

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 Scope of application; the R&D&I framework follows the standard EU definitions which apply to small and medium sized enterprises (SMEs) and large enterprises (non-SMEs).209 In principle the R&D&I Framework is applicable to all industries, unless sector specific rules provide otherwise;  Cumulation; In case of cumulation of aid, the most favourable ceiling is applicable. This limitation does not apply to aid granted in accordance with the Community guidelines on State aid to promote risk capital investments in SMEs (see below). Aid for R&D&I shall also not be cumulated with de minimis support.

Compared to the old R&D-framework (1996 to 2006), the current R&D-framework is expanded with support to certain activities which relate to ‘innovation’210. Kleiner211 indicates that in 2005 this was a ‘breakthrough’, as the 1996 R&D-framework explicitly stated that the framework did not cover ‘State aid for innovation’, which was in line with the “traditional view that activities close to the market which are a normal requirement in order to stay in business should not generally be entitled to State aid”. In the period 1996 to 2006 this view changed gradually, as the Commission “actually approved a series of State aid cases having innovation as an objective” (Kleiner, p. 233). The five specific new ‘innovation’ elements are (i) the aid for young innovative enterprises, (ii) aid for process and organisational innovation in services, (iii) aid for innovation advisory services and innovation support services, (iv) aid for the loan of highly qualified personnel and (v) aid for innovation clusters (Kleiner, p. 236-238).

Summary of the aid measures In the next table the main four specific measures are summarised.

Type of measures Summary Aid for R&D projects Rationale: market failures related to positive externalities (knowledge spillovers), (section 5.1) including public goods; Scope: aid for projects covering fundamental and industrial research and experimental development (as defined in section 2.2 of the R&D&I Framework); Eligible costs: personnel costs for researchers, costs for building and land, cost for external sources (e.g. patents), additional overhead and other operating expenses; Aid intensity: 100% (fundamental research), 50% (industrial research) or 25% (experimental development) of the eligible costs. For industrial research and experimental development there exists (under certain conditions) a bonus system for collaboration, resulting in higher aid intensity. The different aid intensities relate to the sizes of the market failures and the closeness to the market. There are also SME bonuses. Aid for technical Rationale: market failures related to imperfect and asymmetric information; feasibility studies Scope: aid for technical feasibility studies preparatory to industrial research or (section 5.2) experimental development activities; Eligible costs: the costs of the study; Aid intensity: for SMEs this is 75 % for studies preparatory to industrial research activities and 50 % for studies preparatory to experimental development activities. For large undertakings these percentages are respectively 65% and 40%. Aid for young Rationale: market failures related to imperfect and asymmetric information;

209 European Commission, Commission recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises, 2003/361/EC. 210 Innovation is described as follows: “Innovation is related to a process connecting knowledge and technology with the exploitation of market opportunities for new or improved products, services and business processes compared to those already available on the common market, and encompassing a certain degree of risk” (section 1.2 R&D&I Framework). 211 Cf. footnote 206 for reference.

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Type of measures Summary innovative Scope: aid for small enterprises that exist less than six years and have proven to be enterprises (section ‘innovative’; the latter criterion is based on the development of innovative products, 5.4) services or processes and R&D expenses of at least 15 % of its operating expenses; Eligible costs: not defined specifically; Aid intensity: the maximum amount is € 1 million (€ 1.25 or 1.5 million in certain regional areas), while there also exist limitations to cumulation with other R&D&I and risk capital aid. Aid for innovation Rationale: market failures related to coordination problems (hampering the clusters (section development of clusters or limiting interaction and knowledge flows) 5.8) Scope: aid for innovation clusters by (i) investment aid for setting up, expansion and animation of innovation clusters, and (ii) operating aid for cluster animation (enhanced collaboration, networking and learning); Eligible costs: investment costs may cover costs for facilities for training and research centers, open-access research infrastructures (laboratory, testing facility) and broadband network infrastructures. Operating aid may cover the personnel and administrative costs related to cluster animation activities. Aid intensity: for investment aid the maximum aid intensity is 15% (or higher in certain regional areas), with a bonus for small (+20 percentage point) or medium sized enterprises (+10 percentage point). For operating aid the aid is limited to five years, with a decreasing aid intensity (e.g. from 100% to 0% in linear fashion).

The other type of measures are: aid for industrial property right costs for SMEs (section 5.3), aid for process and organisational innovation in services (section 5.5), aid for innovation advisory services and for innovation support services (section 5.6), and aid for the loan of highly qualified personnel (section 5.7).

The General Block Exemption Regulation (GBER) covers to a certain extent the same type of aid categories as laid down in the R&D&I Framework. The GBER follows the definitions and principles of the R&D&I Framework and the GBER thresholds (exemption for notification) are in line with the thresholds for a more detailed assessment in the R&D&I Framework. The main relevant elements of the GBER (section 7, aid for R&D&I) are summarized in the table below.

Type of measures Summary Aid for R&D&I Rationale: in line with the different market failures mentioned in the R&D&I (GBER, section 7) Framework. Scope: the GBER covers six of the eight measures in the R&D&I Framework212. Threshold: the GBER is not applicable if the aid equals or exceeds: - R&D project aid and feasibility studies: € 20 million for predominantly fundamental research, € 10 million for predominantly industrial research and € 7.5 million for all other projects (special requirements for EUREKA projects); - Aid for industrial property right costs for SMEs: € 5 million. Eligible costs and aid intensity: - In line with the same measure in the R&D&I Framework: aid for R&D projects, aid for technical feasibility studies, aid for industrial property rights, aid to young innovative enterprises, aid for innovation services; - R&D aid in the agricultural and fisheries sectors: this concerns aid for R&D to specific products (100% of costs in line with aid for R&D projects).

212 Not covered are: aid for process and organisational innovation in services and aid for innovation clusters.

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2. National regional aid

Rationale and background of the guideline As stated in article 107.3.a of the TFEU, certain regional aid may be considered compatible with the internal market: (i) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment (sub a; hereafter: category A regions) and (ii) aid to facilitate the development of certain economic activities or of certain economic areas (sub c; hereafter: category C regions). In other words: when national regional aid can be used to promote the economic development of certain disadvantaged areas within the European Union, State aid can be considered to be compatible with the common market. In fact, the idea is that by addressing the handicaps of the disadvantaged regions, national regional aid promotes the economic, social and territorial cohesion (market failures) of Member States and the European Union as a whole213.

The Commission published in 2006 the ‘Guidelines on national regional aid for 2007-2013’, in which it presents the criteria applied by the Commission when examining the compatibility of national regional aid with the common market. The Commission stresses that regional aid can only play an effective role if it is used sparingly and proportionately, and if it is concentrated on the most disadvantaged regions of the European Union. The permissible aid ceilings should reflect the relative seriousness of the problems affecting the development of the regions concerned and the advantages of the aid in terms of the development of a less-favored region must outweigh the resulting distortions of competition.

The guidelines state that as a general rule, regional aid should be granted under a multisectoral aid scheme which forms an integral part of a regional development strategy with clearly defined objectives. In other words, the aid must be part of a bigger investment plan for the whole region that includes several sectors. However, it is possible to grant aid to one specific individual company or one specific sector. Then it is the responsibility of the Member State to demonstrate that the project contributes towards a coherent regional development strategy and that, given the nature and size of the project, it will not result in unacceptable distortions of competition (guidelines, section 10).

There are number of key elements which shape the scope and effectiveness of the guidelines:  Regional aid map; under the regional aid guidelines, the Commission determined per country and per region the allowed aid intensity (aid ceilings, measured by gross grant equivalents or GGE). This is related to the category A and C regions and additional (economic) indicators;  Type of aid measure; the guidelines cover three types of aid, which are (i) regional investment aid, (ii) operating aid and (iii) aid for newly created small enterprises. These types of aid are discussed in more detail in the table below;  Scope of application; the Guidelines cover in principle national regional aid in all industrial sectors. Exceptions are the fisheries sector, the coal and the steel industry, the synthetic fibers industry and the primary production of agricultural products. Special rules apply to the transport and shipbuilding sectors. Regional aid is not allowed to firms in difficulty. The guidelines follow the standard EU definitions which apply to small and medium sized enterprises.

Summary of the aid measures In the next table the main specific measures are summarized.

213 European Commission (2009), ‘Handbook on community State aid rules for SMEs - Including temporary State aid measures to support access to finance in the current financial and economic crisis’, February 2009.

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Type of measure Summary Regional investment Rationale; market failures related to (the lack of) regional development; aid (section 4) Scope; Regional investment aid is aid awarded for an initial investment project relating to (i) the setting-up of a new establishment; (ii) the extension of an existing establishment; (iii) diversification of the output of an establishment into new, additional products; and (iv) a fundamental change in the overall production process of an existing establishment; Form of aid; according to the guidelines the form of the aid is variable and it may e.g. take the form of grants, low-interest loans or interest rebates, state guarantees, the purchase of a share-holding or an alternative provision of capital on favorable terms, exemptions or reductions in taxes, social security or other compulsory charges, or the supply of land, goods or services at favorable prices; Eligible costs; the costs can enclose investments in material (to land, buildings and plant/machinery) and immaterial assets (transfer of technology through the acquisition of patent rights, licenses, know-how or unpatented technical knowledge) or to (estimated) wage costs for jobs directly created by the investment project. For SMEs some additional costs (e.g. costs of preparatory studies and consultancy costs) may be taken into account; Aid intensities; aid intensities vary for category A regions (30-70% of the Gross Grant Equivalent (GGE)) and C regions (10-20% GGE). In case the aid is awarded to SMEs the aid ceilings may be increased by 20% GGE for aid granted to small enterprises and by 10% GGE for aid granted to medium-sized enterprises. For large projects (> € 50 million), the aid intensity is reduced; Cumulation; In case of accumulation, the most favorable ceiling is applicable. Operating aid Rationale; Operating aid is aimed at the reduction of a firm's current expenses and is (section 5) only allowed under exceptional circumstances and strict conditions. Operating aid may be granted in category A regions and sparsely populated regions. This type of aid should always be temporary and reduced over time.214 [Not for ultraperipheral regions (RUPs) and sparsely populated regions] Scope; operating aid may only be granted in respect of a predefined set of eligible expenditures or costs (e.g. replacement investments, transport costs or labor cost) and limited to a certain proportion of those costs. Aid for newly Rationale; related to (the lack of) regional development and the existence of imperfect created small and asymmetric information; enterprises (section Scope; this aid supports small enterprises in their early development stages (first five 6) years). Aid should be graduated to the specific region, (for an initial period at least) strictly limited to small enterprises, limited in amount and degressive. Aid may be granted up to a maximum of € 2 million for small enterprises in category A regions and € 1 million in category C regions; Eligible costs; legal, advisory, consulting and administrative costs directly related to the creation of the small enterprise, as well as a number of operating costs actually incurred within the first 5 years of the creation of the undertaking. Aid intensity; for category A regions the aid intensity is maximum 35% in the first three years and 25% in the two years thereafter. Under certain conditions this aid can be increased with 5%. For category C regions these percentages are respectively 25% and 15%. Annual amounts of aid awarded for newly created small enterprises must not exceed 33 % of the abovementioned total amounts of aid per enterprise.

214 Case T-459/93,, Siemens Sa vs Commission ; [1995] ECR II-1675. par. 76.

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The GBER covers to a certain extent the same type of aid categories as laid down in the regional aid guidelines. The relevant GBER aid category (regional aid, section 1) covers two specific measures: (i) regional investment and employment aid and (ii) aid for newly created small enterprises. The latter measure is also covered in the national regional aid guidelines. The main relevant elements of the GBER are summarized in the next table.

Type of measures Summary Regional aid Rationale: related to (the lack of) regional development and the existence of imperfect (section 1, GBER) and asymmetric information; Scope: the GBER covers two types of aid: (i) regional investment and employment aid, and (ii) aid for newly created small enterprises. Specific rules apply for large projects. - Investment and employment aid: covers ad hoc aid which is only used to supplement aid granted on the basis of regional investment and employment aid schemes; - aid for newly created small enterprises: supports small enterprises in their early development stages (first five years). In line with the national regional aid guidelines, aid may be granted up to a maximum of € 2 million for small enterprises in category A regions and € 1 million in category C regions; Eligible costs and aid intensity: Investment and employment aid: the aid intensity is up to the maximum for that region, but can be increased by 20% for small enterprises and 10% for medium sized enterprises. Costs cover tangible or intangible investment costs, or acquisition costs in case of takeovers; Aid for newly created small enterprises: costs and aid intensity are in line with the national regional aid guidelines (legal, advisory, consulting and administrative costs directly related to the creation of the small enterprise, as well as a number of operating costs actually incurred within the first 5 years of the creation of the undertaking).

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