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Statement by Prime Minister Prof. Dr. Georg Milbradt on the occasion of the Conference on Cohesion and the Lisbon Agenda held in Brussels on 3 March 2005

¾ Slide 1: Innovation and the Regions Cohesion and the Lisbon Agenda Cover page

Ladies and Gentlemen,

I am delighted, as the representative of a European region, to have the opportunity to discuss the topics of the Lisbon Agenda, cohesion and innovation with you today and offer my experience in this regard. I will give you an account of what has undertaken since 1991 to promote growth, employment and innovation in the region and, therefore, in and what contribution European cohesion policy has made in this context.

¾ Slide 2: Saxony – a central European region I would first like to give you an idea of where the Free State of Saxony is located geographically. As you can see, Saxony is a central region in the enlarged Europe. The biggest cities are , Leipzig and Chemnitz. Saxony is one of the five new federal states that emerged after the collapse of East . Saxony now has around 4.3 million inhabitants and borders on the neighbouring countries of Poland and the Czech Republic. Before World War II, Saxony was the strongest region in Germany in economic terms. After more than 40 years of planned economy, however, per capita economic performance amounted to only 30% of the level of the old federal states in 1990. Even though the region’s economic power has more then doubled since then, it still has a long way to catch up compared with the European average. For this reason, Saxony is, like all the federal states in eastern Germany, an Objective 1 region within the context of EU structural policy. ¾ The path towards the “knowledge-based economy” within the meaning of the Lisbon strategy was embarked upon in Saxony back in 1991 – with consistent orientation towards technologies of the future and corporate growth. ¾ Saxony presently spends 2.5% of its gross domestic product on research and development (R&E). The target value of 3% adopted under the Lisbon strategy is already exceeded today in the Dresden region with a figure of 3.47%. This is the reason for there being 1,100 companies in Saxony which are active in the field of research and development, together employing more than 10,000 industrial researchers. ¾ However, 95% of these companies are small and medium-sized enterprises. ¾ Three quarters of all companies engaging in research in Saxony therefore attempt to compensate for their size-related competitive disadvantages by organising joint research with higher education institutions, research centres and other companies.

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¾ Slide 3: Science and R&D infrastructure At a high financial cost, we have, over the past number of years, built up an efficient higher education and research landscape with universities, polytechnics and non- university research centres. Three of the four universities in Saxony focus strongly on natural and engineering sciences. The scientific location of Saxony is further strengthened by a large number of state- supported research institutions, including the Fraunhofer Societies and Leibnitz Institutes, for example. Most of these research centres are principally involved in future technologies such as microelectronics, materials research, biotechnology, as well as toolmaking and mechanical engineering. Around € 380 million from the European Fund for Regional Development (ERDF) will have been spent on establishing this industrially oriented research infrastructure by the end of the period 1995 – 2006 (including co-funding by Saxony). 21 technology consulting agencies in the Free State help companies to gain access to research results and a further 21 technology business incubators have so far provided assistance to a good 1,500 technology-oriented new businesses with more than 12,000 employees.

¾ Slide 4: High-tech competence in Saxony The economy of the former East Germany was organised in the form of large state- owned enterprises, which were not competitive in market economy conditions by virtue of their structure and obsolete technical equipment and which were closed down, broken up and partially privatised within a period of just a few years. An analysis of the economic structures at the time already showed that Saxony had particular sector-specific centres of competence with appropriately qualified personnel. In this context, I would like to refer especially to the microelectronics sector in Dresden, the automobile industry in Zwickau and mechanical engineering in Chemnitz. ¾ We developed a cluster and network policy in good time for the SME structure of the new Saxon economy which emerged after the collapse of the large state-owned enterprises. ¾ The comprehensive networking of all the important players in the region is important for the emergence of clusters. Networks produce composite, size and specialisation advantages, thus enhancing the competitiveness of the companies concerned. This enables them to introduce process innovations and offer product solutions, the development of which would be asking too much of an individual firm. There are now six such networks in Saxony. - Microelectronics and information technology (“Silicon Saxony”, which I will look at separately), - Automobile construction and automobile industry suppliers (AMZ 2005), - Mechanical engineering (VEMAS), - Medical technology, - Biotechnology and environmental technology, as well as - Aerospace technology.

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¾ Slide 5: Main fields of excellence in Saxony – a selection The basis for forming the network was the fact that we again have a critical mass of companies in the respective sectors in Saxony: There are around 200 companies with 20,000 employees active in the field of microelectronics in Saxony, most of which are part of the “Silicon Saxony” network in the Dresden area. Together with their supply companies, the automobile industry in Saxony comprises a total of around 450 companies employing a combined workforce of 60,000. The mechanical and plant engineering sector now also has approximately 430 companies employing a total of 34,000 people. Under the biotechnology offensive adopted five years ago, two technology business incubators were set up for SMEs and start-ups and given around € 200 million in support funding. Each of them now houses six university research groups and more than 30 companies. This guarantees that research, development and production are very closely intermeshed. Together with other core companies in the sector, there are now, with over 1,000 workers, already three times as many people employed as in the year 2000.

However, these successes must not hide the fact that we are only at the beginning of the road towards a self-supporting economic structure. Excessively high unemployment still prevails and the proportion of innovative sectors as part of the overall gross domestic product is, despite all the dynamism, still too low.

¾ Nonetheless, the positive experience gathered so far makes us all the more determined to assist the forming of further industrial and innovation clusters in a sustained manner and gear our support policy to sectors with a promising future. The areas of nanotechnology and new materials play an important role in this regard and are already having an impact on our automobile industry and mechanical engineering sector, for example.

¾ Slide 6: Electronics industry in Saxony until 1989 Starting point of “Silicon Saxony”, structures up to 1989 The development of the microelectronics sector in Saxony has provided considerable impetus for our cluster and network policy and I would now like to give an example of this. Dresden already had a certain tradition in the field of molecular electronics with the chair of Prof. Hartmann. Both semiconductors and computers were being produced in the Dresden area back in 1989. Added to this, there was also the Dresden Microelectronics Centre (ZMD), where the first one-megabit chip in the COMECON area was developed. It should, however, be noted with regard to the staffing levels given here that a large part of the workforce, as was the norm in the state-owned enterprises of COMECOM, performed support duties, e.g. as cooks, nurses or nursery- school teachers, rather than being directly involved in production or development. The equipment was utterly obsolete and the structure uncompetitive. What remained, though, were well-trained workers and a population with a very positive basic attitude towards technology. This potential was just waiting to be exploited. The human capital of the region thus became the decisive factor for the industrial location of Saxony.

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¾ Slide 7: Chip industry in Dresden 2005 In order to further develop Dresden as an industrial location for microelectronics, we made contacts with potential investors worldwide. We were able to convince two major semiconductor producers, and Advanced Micro-Devices (AMD) to invest in Saxony. Dresden is now one of the most modern microelectronics locations in the world. Over the past eleven years, Infineon and AMD have alone invested over € 9 billion in Dresden, with more then 9,000 employees working there on the completion of AMD’s FAB 36. Standard ICs (e.g. memory chips, microprocessors) and ASICs (Applied Specific ICs) are produced together with the Dresden Microelectronics Centre (ZMD), all components for innovative sectors like the automobile, mechanical engineering and electronics industries.

¾ Slide 8: “Silicon-Saxony” Description of the “Silicon-Saxony” network

Five years ago, microelectronic companies in the Dresden area set up an especially productive network together with suppliers, higher-education institutions, research centres and service companies close to the sector. They today constitute what is known as “Silicon Saxony”, representing, with the scientific institutes integrated into the network, what is now the leading semiconductor industrial location in Europe. The approximately 170 member companies employ a total of around 15,000 people and generate sales approaching € 2 billion. “Silicon Saxony” is an industrial cluster of European significance which, for its part, strives for inter-regional cooperation.

¾ Slide 9: R&D in nanoelectronics in Dresden The future in “Silicon Saxony”: R&E in nanoelectronics Parallel to the establishment of production operations, we have also taken steps to ensure the further development of research. As you all know, the structures of microelectronic circuits are getting smaller and smaller. As soon as they reach a size of less than 0.1 micrometers (= 100 nanometres), we are then concerned with “nanoelectronics”. In 2002, we were successful in getting Infineon, AMD and DuPont to establish a joint photomask centre in Dresden in order to be prepared for the challenges of the future. Put in simplified terms, this centre develops and produces the increasingly finer matrixes needed to manufacture the ever finer structures of microchips. In a further stage, AMD, Infineon and the Fraunhofer Society decided last year to set up a joint centre for nanoelectronics developments in Dresden for the purpose of conducting research on the next generation of semiconductor process technology.

¾ Slide 10: Job impact of AMD and Infineon investments (Dresden region) In 2002, the German Institute of Economic Research conducted a study on the direct and indirect impact of the major AMD and Infineon investments on employment. As you can see from this slide, a good 8,000 competitive and innovative jobs have been created since 1994 directly through the investments carried out by AMD and Infineon. Together with the jobs created indirectly in the areas of equipment and servicing as well as through the effects of income, the number is now in excess of 16,000.

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¾ Slide 11: Fiscal effects of public subsidies regarding AMD and Infineon investments The fiscal effects of subsidies were also calculated in the same study: At the beginning of 2003, the sum of all the support funding assigned up to that time was already exceeded by the total tax revenues collected and the reduction in expenditure under the social insurance scheme. And if the study’s forecast of a 5% net operating margin actually comes about, the sum realised from tax revenues, social insurance receipts and reduced social insurance expenditure will already amount to double the total amount of support funding in 2005. The support funding has been used up by the Federation and the Federal State. The European Commission (DG Competition) approved these initial investments in a record time of two months.

¾ Slide 12: Qualities and incentives attracting investments in Saxony (investors’ view) So what makes the Saxony region so interesting for investment in the view of the companies concerned? Besides the financial support for the investment, including research support, the main reasons were - The region’s “human capital”: a population open to technical developments and new technologies and with a large number of first-class, qualified workers. To quote Jerry Sanders, co- founder and former CEO of AMD: “It’s all about people. People come first, products and profits will follow.” - the excellent research and development infrastructure and, finally, - the close success-oriented partnership between politics, administration and industry.

We are all called upon to ensure a climate that is friendly to companies and conducive to research. Although fundamental conditions – such as the fiscal system – can often not be influenced from the regions, it is only the regions that can adopt the role of innovator. Only local decision-makers have the necessary close contact with the companies and researchers.

¾ Slide 13: Future state aid for major investment, a key element for the Lisbon process In conclusion, I would like to take a closer look here in Brussels at the subject of subsidies. This is something which we, as a region, can only influence to a limited extent, given that the area of state subsidies is regulated via European competition law. Consideration is presently being given to reducing subsidies for large investments. Although I support the principle of “less and better state aid”, I do think that Europe should continue to have the possibility in the future of granting those subsidies that are offered worldwide in alternative locations. Let me explain why: - Research and development is the basis for the innovation process and an integral part of high-quality, competitive production. - Investments in high-tech industrial production locations can amount to several billion euros. - There is global competition among production locations. Investors therefore make a global comparison of the incentives offered. 6

- If the incentives outside Europe are higher than in the EU, relocations of production have to be expected. However, if production does move away, this will also remove the basis for research and development in the medium term. This would jeopardise the innovation process in Europe. For this reason, it is necessary, I feel, to be able, in those areas in which Europe invests in research and development, to provide support for the ensuing investment in line with the global scale.

For me, it also goes without saying that an economic and research area as vast as Europe must cover all central domains of research and innovation. Revealing gaps, providing the momentum to close them and initiating European networks is and remains an essential task for Europe. Furthermore, I can well imagine that another of the EU’s tasks in the future will be to create a marketplace for regional skills and competencies, though with the regions retaining their inherent responsibility for presenting their skills and abilities in that marketplace in order to thus create the basic conditions for efficient European clusters and networks.

¾ Summary:

In conclusion, I would like to briefly respond to the question of what innovation strategy is needed to support growth and competitiveness and what the regions can contribute to this.

¾ Slide 14: Strategy for innovation Conclusions - Recognising and exploiting endogenous potential. The ability that exists in the region is the best breeding ground for innovation. - Developing an efficient research landscape and striving for a healthy sectoral mix of SMEs and large companies. - Networking of industry and science with the objective of forming clusters (networks, joint projects) - Creating a favourable economic climate (the costs of bureaucracy are increasingly becoming an industrial location factor) - Continuity, also in relation to support, so as not to have investment stop halfway in ruins.

Financial support via the EU Structural Funds has been and remains a considerable help in the structural change taking place over the past 15 years. We have used the funding, among other things, to build the infrastructure, for research and development, and for the training and qualification. We are very grateful for this. It would therefore be all the more regrettable if everything that has been achieved up to now were to be stopped halfway. This would then lead to setbacks and retrograde steps which are certainly undesirable in overall economic terms. I wish us all well in tackling the tasks facing us and eagerly await your comments. Thank you very much for your attention.