Abstract
The growing demand for innovation in Europe is driven by issues of productivity and competitiveness. Many investors and entrepreneurs, however, avoid innovation's high risk and knowledge-intensive nature. The financial, economic and debt crises in the EU have not made it easier for innovative businesses, although they have boosted the demand for innovation because the European economy clearly needs productivity growth and long-term competitiveness. This study focuses on small innovative companies in Belgium, but the model could be a solution for Europe's competitiveness problems as well.
Introduction
The financial, economic and debt crises in Europe negatively affected business innovation and research and development (R&D). Market entry for innovative businesses in Europe was obstructed and risk capital dried up. Investment in innovation has suffered because of unstable market conditions and the current poor macroeconomic situation (OECD 2012). It makes sense that in times of uncertainty, fewer companies would boost R&D spending and invest in innovation, especially if they are small and medium-sized enterprises (SMEs).
The crises were a stress test for the small companies and many failed to pass. At the same time, demand for innovative SMEs increased because they were seen as a means to survival, productivity, growth and competitiveness.
Small companies innovate to maintain market share and achieve greater efficiency. Currently, 99.8 % of all firms in the EU are SMEs, accounting for 66.9 % of private sector employment (Ecorys 2012). Small innovative companies are part of this group, which is why they have enormous potential for economic growth and sustainability. In the long run, economic growth depends on the establishment and support of a business environment that fosters innovation. Countries which create and implement new technologies develop faster than countries that do not (Mobbs 2010). A knowledge-driven economy gives a central place to innovation (European Commission 2004). This is why innovative businesses have a key role to play in the long-term development of the EU.
This article is based on research covering 256 small innovative companies in Belgium. It was carried out in 2013 to examine their current state and activities.
Small innovative companies: what are they?
Innovations and R&D are not easy to understand and the best way to tell their story is to look at real examples. The companies under discussion are small, highly innovative enterprises with products and services that reshape and create markets. They realise significantly greater innovative sales–-more specifically, innovative products that create new markets–-than large innovative companies (Schneider and Veugelers 2010). Because of the high-risk nature of the enterprise, a significant number of these companies do not survive their first critical years (Bøllingtoft 2011). Many coexist in clusters at science and industrial parks, where a network of enterprises, organisations and academic institutions provide access to knowledge transfer, suppliers and expert capacity. Many of the small innovative companies in Belgium are spin-offs from universities–-a bridge between universities and businesses, providing jobs and added value to society. The spin-offs are regarded as academic entrepreneurship, where scientific knowledge is converted, through knowledge transfer, into pragmatic, results-oriented practice at innovative companies (Van Burg et al. 2008). This means that small innovative businesses are important for entrepreneurship generally.
How a small innovative company is born
Following the business path of small innovative companies is of particular importance in order to understand how such firms start up. Many begin life as spin-offs. KU Leuven Research and Development (LRD) is the knowledge and technology transfer office of the the Katholieke Universiteit Leuven (KU Leuven). LRD is a specialised organisation that sets up spin-offs and bridges science and industry. A project proposal based on a scientific discovery is submitted to LRD and reviewed. If the idea is approved, LRD provides assistance to the researchers in creating a business plan and identifying investors. In order to ensure knowledge transfer, LRD continues to have access to the start-up's data and information for educational and research purposes.
Once the company is created, it starts operating as part of a cluster, which provides networking and partnership opportunities. The cluster provides a kind of economic buffer zone for such companies because joint research projects can be undertaken that drive down the cost of R&D for any individual participant to an affordable level. In addition, innovative companies benefit from proximity to research institutions, which supports knowledge transfers. Such transfers generate higher returns on companies’ innovations (Whittington et al. 2009) because knowledge capital is the most valuable asset of an innovative firm. This is how a small company, engaging the creative ideas of researchers, might become a disruptive innovator, capable of reshaping markets. Successful cases attract more, often scarce, risk-tolerant investment, both public and private, and more entrepreneurs and innovators, too. In the end, all these ingredients create an almost self-sustaining cycle that provides jobs, economic growth and added value.
Small innovative companies, universities and research centres
Often institutions of higher education and innovative companies locate in the same area, and many of the business entities are established by academic institutions in the form of spin-offs. Those institutions also play an important role when it comes to establishing and developing clusters. In 2012, universities in Belgium represented 71 % of total public R&D spending (OECD 2012).
Knowledge transfer is critical to innovative companies. In order to boost knowledge transfer, in 2010 the Flemish government took action to establish the Transformation and Innovation Acceleration Fund, providing more than €167 million to support collaborative projects in industrial production. In addition, two knowledge centres and several centres of excellence were established in Flanders, in a move intended to expand R&D (OECD 2012). Wallonia also showcases policies to foster collaboration; its Technological Innovation Partnership in Wallonia was established in 2009. That was followed by the introduction of the Binding Corporate Rules’ strategic platforms (2010), which also focus on encouraging cooperation in R&D (OECD 2012).
There are several research centres throughout Belgium that retain and transfer knowledge to companies that do not have sufficient R&D resources. Thus, SMEs in specific sectors directly benefit through collaboration with these research centres (Invest in Belgium 2013).
Small innovative companies and clustering
Clusters employ roughly 38 % of all European employees, clear evidence of the importance of clusters to the European economy (European Commission 2007), and small innovative companies tend to exist in clusters. These are considered to be small-scale innovation systems. Clusters are better equipped for market success than a stand-alone firm. According to some authors (Maggioni 2004), clusters influence the performance of firms economically (in terms of average net benefits, marginal net benefits, average costs, marginal costs, average gross benefits and marginal gross benefits). Other researchers argue that technological performance may improve (Lecocq et al. 2008) or greater efficiency, productivity and employment may be achieved (Delgado et al. 2010). From an entrepreneurial point of view, clusters provide better opportunities for innovators by enabling access to a broad range of inputs. In addition, transfers of knowledge complement in-house R&D and technological spillovers. Clusters across the EU are mostly the products of business-to-business interactions and location factors such as the ability to be sited near universities or industry.
Belgium offers a good example of the successful clustering of small innovative companies. Three clusters present interesting cases because they contain a high number of small, innovative firms.
Louvain-la-Neuve Science Park is a cluster of small, innovative businesses. Established in 1971 as part of the Catholique University of Louvain (Université Catholique de Louvain, UCL), it specialises in life sciences, engineering, information and communication technology (ICT), chemicals and other fields. The cluster is a mixture of academic and scientific organisations, on the one hand, and innovative companies, on the other. Its success comes down to the fact that the cluster is home to almost 200 companies that have committed to investing as much as €440 million. In addition, approximately 5,200 employees work there, the majority of them scientists.
Haasrode Research Park hosts high-tech science and research companies, especially in the sectors of ICT, engineering, software, medicine, biotech, and renewable and green energy. KU Leuven and the IMEC Nano-Electronics Research Centre are the founders of the cluster. The presence of seven research centres and the LRD knowledge and technology transfer office have led to a strong spin-off portfolio that includes more than 80 firms.
Another interesting cluster is Zwijnaarde Science Park, a science and technology park attached to the University of Ghent that includes several institutes of the engineering and science faculty. The majority of the firms are biotech and ICT entities which are university spin-offs or have been launched by the Flanders Institute for Biotechnology. The Zwijnaarde Science Park hosts the Biotech Incubator, the Bio-Accelerator and the General Incubator IIC UGhent. This park's achievements include 40 companies that employ roughly 1,500 scientific workers.
These three clusters share common characteristics: public and private investment concentration, a highly skilled labour force, a sustained high employment level, productivity growth through lower R&D costs and joint projects. An important conclusion is that such clusters bridge science and the economy through small innovative companies. Their patents, products and services are used by a wide range of big and small enterprises in Belgium and around the world to improve productivity, efficiency and competitiveness. For this reason more government-driven incentives could significantly ease existing clustering through public–private partnerships and investment in tech parks.
How small innovative companies add value
It is interesting to observe how the companies located in these clusters exist and operate. This paper takes a look at three cases.
The first focuses on a small innovative firm in the Louvain-la-Neuve Science Park. The company was established in 2009 as a pharmaceutical spin-off of the UCL, and it was financially supported by mixed funding: private venture capital and a grant from the Walloon Brabant province. The case study reveals intensive networking practices, including partnerships and joint research with laboratories and the University of Hasselt. Such networking is very typical for the small, knowledge-based firm, for which intellectual property and knowledge are the greatest assets. The company started through the LRD. The organisation approved the company's project proposal, which was based on a scientific discovery. Subsequently a business plan was developed and investors provided. This model has proven itself to be vital because, in most cases, scientists and researchers are unable to start a firm on their own, and many innovative projects do not make it to the commercial stage.
The second case study is an innovative business located in the Haasrode Research Park. It was incorporated in 2000, and focuses on infrared imaging technologies. The firm is a fast developing entity that by 2012 had subsidiaries in Singapore and the US. The company is a spin-off of the IMEC Nano-Electronics Research Centre and is a member of Leuven Inc., an organisation that aims to establish a strong bond between knowledge-intensive organisations, high-technology enterprises and their social partners. Leuven Inc. has two goals: first, to ensure new communication channels and attract innovative organisations to the area of Leuven and, second, to team up with prominent partnering entities. This involves a process of building an ever-growing network of knowledge and technological capabilities. The young innovative firm has partnered with many other private and public organisations, such as Automatic Sea Vision, the Aerospace and Defence Industries Association and the Belgian Security and Defence Industry.
The third case represents a small innovative firm located in the Zwijnaarde Science Park. Its domain is biotechnology and pharmaceuticals. The firm was founded in 1999 as a spin-off of the University of Ghent, and actively networks. Its interactions include partnerships with several innovative companies, including other university spin-offs; links that have driven R&D costs down as a result of knowledge transfer; and shared patents. For instance, a technological platform designed by this firm has been used by other companies through partnerships. Government funding has supported the enterprise with a €0.9 million grant from the Flemish Institute for Promotion of Innovation by Science and Technology, designated for further developing the innovation platform. An intriguing finding is that the small innovative firm is patent-intensive; it has acquired eight patents for products and methods. Those patents provide a competitive edge and ensure partnerships and growth.
The three cases share common characteristics of dynamic enterprises: networking and value added to the economy through innovation. Another common feature is the solid bond between academia, research and the economy. From discovery to commercial production is the model for success for these firms. This model provides opportunities for game-changing innovations that would allow industries to innovate on a larger scale. The accumulation and acceptance of product, service and marketing innovations directly contribute to productivity growth, resource-efficient economies and competitiveness. Data analysis of 256 small innovative companies reveals relatively stable employment levels throughout the crises, indicating the potential of such firms to provide secure jobs in general. Two of the case studies concern firms that operate in the field of biotechnology and pharmaceuticals. These fields have been developed worldwide almost entirely through innovation, and the result is improved public health and longevity. Much of this innovation starts with technologies and methods produced by small companies and acquired by large corporations.
Conclusion
Small R&D-intensive companies could play a key role in a world economy increasingly dependent on its innovative drive because a strong relationship exists between R&D expenditure and economic growth. This study shows the potential of such firms to create high-quality jobs and growth in Belgium. This is not the case in many parts of Europe, a fact that should be addressed through higher public and private R&D investments focused on small firms and their clustering. Such investment will transform the European SME sector into a competitive and productive population of firms, significantly improving the market value and employment capacity of small, innovative businesses. The financial and economic crises revealed how vulnerable industries are, especially in the long run. In many countries the lack of policy support for SMEs throughout the crises led to lower start-up and survival rates. At the same time, the companies that were the subjects of this study showed resilience and maintained high employment levels. Small innovative companies emerged and developed even during the financial and economic crises. In this sense, there is a logical need to widen the share of innovative firms within the SME sector. The concurrent crises should be regarded as an opportunity for such a transition. It is important to note that small innovative companies could have a cumulative effect on the economy only if their number grows across the EU. A large number of small, highly dynamic and innovative firms has the capacity to close the gap between universities and the economy. This could contribute to economic convergence in the EU and to the long-term goal of economic growth and sustainability.
Footnotes