Select Committee on European Union Minutes of Evidence

Supplementary evidence from the Department of Trade and Industry

  This note follows oral evidence to Sub-Committee B (Energy, Industry and Transport) given on 19 May by Mr Nick Hallett, Mr Ray Lambert and Mr Andrew Rees—economists at the Department of Trade and Industry. It is in addition to a note already submitted on spend on research on business support activities and monitoring and evaluation issues and focuses on questions relating to the co-ordination of UK and EU policies and initiatives and UK policy on intrapreneurship.


  1.1  Mechanisms are in place to ensure that domestic and European policy initiatives, both for entrepreneurship and for the wider agenda, are dealt with in a co-ordinated manner across Whitehall.

  1.2  Within the Department of Trade and Industry, each group and agency has a European and International team which aims to ensure that UK policy towards the EU is informed by domestic policy in that area, and vice versa. Many individuals are also working directly with the European institutions on specific issues and initiatives.

  1.3  At the European level there is also increased policy co-ordination with the recent establishment of the Competitiveness Council. This is an issue on which the UK lobbied hard, and worked closely with EU Presidencies on to make a reality. This new formation deals with policy previously covered by the internal market, industry and research councils. It has a horizontal, micro-economic remit, to enhance growth and competitiveness, working with ECOFIN to ensure delivery of economic reform throughout the EU.

  1.4  There is also ongoing UK representation on numerous working groups of national experts which contribute to the development of Commission policy, as well as instruments. Additionally, following the review of DTI business support, all proposals for new products will need to clearly indicate how they complement the wider government and EU picture.

  1.5  The Committee asked how UK schemes, such as Regional Venture Capital Funds (RVCFs), the proposed early growth schemes etc matched up with schemes such as ETF Start up and Seed Capital Action Plan.

  1.6  Although the UK has one of the most dynamic and efficient financial markets in the world the Government has an important role to play in ensuring that UK markets work effectively and that any gaps or weaknesses are addressed. The Government's approach is based on targeted action to correct or compensate for market weaknesses by working through private sector intermediaries that operate using commercial criteria. This ensures that Government support complements rather than competes with existing private or public sector provision.

  1.7  The Government works closely with relevant EU authorities to make sure that interventions are compatible with EC state aid rules and that potential sources of EU funding are secured to support Government programmes. The UK has been successful in securing over £53.5 million from the European Investment Fund (EIF) to invest in Regional Venture Capital Funds (RVCFs), the largest single investment in any single Member State.

  1.8  The RVCFs had a difficult passage through the State Aids' clearance process, not least because they were a new concept, but were ultimately approved and, potentially more importantly from a policy perspective, led directly to the publication of the Commission's Communication on State Aids and Risk Capital (SARC). This established a framework for such funds throughout the EU. Similarly, the decision on the Community Investment Tax Relief has set out a framework for investor-intermediary-investee business relationships in the Community Development Finance sector.

  1.9  The ETF Start-Up Facility is managed, on a trust basis by the EIF and makes investments in venture capital funds established specifically to provide equity or other forms of risk capital to SMEs. The funds supported are smaller or newly established ones, in particular those operating at regional level, those focusing on specific industries or technologies and those that finance the exploitation of R&D results. Under the new Multi-Annual Programme for Enterprise and Entrepreneurship, the ETF Start-Up Facility has been adapted to support the establishment and financing of SMEs in their start-up phase by including support for specialised venture capital funds and business incubators. At year-end 2001, total disbursements to venture capital funds amounted to EUR 50 million, compared to EUR 32 million at year-end 2000. at 31 December 2001, the venture capital funds had invested a total EUR 184.6 million in 179 SMEs. This included EUR 15.4 million in 11 beneficiary SMEs in the UK.

  1.10  This compares with a total invested in 2001 by members of the British Venture Capital Association (BVCA) in UK high-technology companies of £1,658 million. Of this, £315 million went into 308 early stage companies. While the Government welcomes the increased availability of venture capital, particularly for technology starts the above figures suggest that the ETF Start-Up Facility is likely to have only a marginal impact in the UK. There may be additional scope for the UK to take advantage of EU guarantees for micro-credits and there have been discussions between the Small Business Service and the ETF regarding how this might be done in conjunction with existing national support for Community Development Finance Institutions (CDFIs).


  2.1  In the evidence originally submitted to the House of Lords Sub-Committee B, a paragraph on intrapreneurship was added as the Lords expressed their interest in this subject when stating the focus of the inquiry. Therefore, the information was included on this rationale and not due to it being a high priority for the Department of Trade and Industry.

  2.2  The following information seeks to address the Committee's request for further information on the Government's stance on intrapreneurship.

  2.3  Intrapreneurship is encouraged within larger companies by giving managers freedom within a defined financial framework, to run "their" business as they see fit. In particular, a company may establish a new R&D/business group with a "free rein" to develop and/or commercialise.

  A new product:

    —  A new market (in the geographical sense, or a novel application for an existing product);

    —  A new route to market (eg e-commerce, or selling groceries at petrol stations).

  2.4  In such circumstances funding will be provided by the parent company. Such initiatives to renew the business portfolio are part of any successful company's continuous push to innovate. They are likely to be commercially sensitive and not widely publicised.

  2.5  The concept of "intrapreneurship" is too vague, and the processes involved too general to allow public funds to be specifically earmarked for such a defined activity. Companies may however receive funding through R&D tax incentives, or various schemes encouraging pre-competitive research collaboration with academic institutions.

  2.6  Spin-outs leading to truly independent companies typically occur either as a result of academic research—for example the many biotech companies around Oxford and Cambridge—or because a venture capital provider is willing to finance a management buy-out from a larger parent which does not see the activity as fitting into its long term strategy. Such smaller independent units would be eligible for a range of "incubator" assistance schemes, and public funds may well have helped to finance early R&D and product development.

  2.7  The Government has also been actively taking steps—for example through the establishment of Regional Venture Capital funds in eight out of nine English regions (with steps being taken to establish a RVCF in the ninth) to make it easier for start-up companies to find sources of venture capital funding.

Department of Trade and Industry

June 2003

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