Kets Market Distortion PDF Report July 2013 en

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 ECSIP-MU@ecorys.com
2 Study on the international market distortion in the area of KETs

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
2.3.3 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
2.4.3 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
2.5.3 Multinational innovative R&D centres 41
2.5.4 Science Parks 41
2.5.5 The Si-Soft project 43
Study on the international market distortion in the area of KETs

2.6 Korea 44
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
2.7.3 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

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

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)

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

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
1
balance” .
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
rd
implemented by 3 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
rd
outside Europe, gaining in-depth insight into what made these companies invest in 3 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.

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.

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.
2
the EIB . 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
3
intellectual property rights (IPR) to the innovating firm . 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.
11

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
4
access for other firms . 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
5,6
country’s institutional constraints . 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

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
7
sector outputs . 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
8
underlined by Nelson , 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
9
Research Program (SBIR), which was initiated by the Small Business Administration (SBA) .
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/
13

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
10
not funded by the STTR Program (the same as for SBIR, cf. above) .
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

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
15

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
11
these countries are included . 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
12
research carried out . American competitiveness is further strengthened by excellent collaboration
13
between universities and the business sector . 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
14
(including the 2012 request) totals almost USD 18 billion . 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
15
biotechnology . The US is also a global leader in microelectronics. In 2010, the U.S.
16
semiconductor industry had a global market share of 48% 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

semiconductor industry survey, 68% of the leading semiconductor companies have their
17
headquarters in the United States .
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
18
environment requires public support on specific dimensions” . Several critical areas are identified
st
as especially important for public investments in the 21 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
19
programmes . 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
Cross-sectoral Analysis of the Impact of International Industrial Policy on Key Enabling Technologies
17

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
20
implemented through specific programs in different government agencies . 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

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
21
direct loans up to 30%.
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
22
promoting pilot lines capability for batteries . 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
23
loans, Ford is using a USD 5.9 billion loan to upgrade factories and introduce new technology ,
and took advantage of this loan program by moving a hybrid battery facility from Mexico to
24
Michigan . Another case is the advanced battery producer A123 that produced electric batteries
25
using nanophosphate. They got a loan guarantee at a value of USD249 million 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
19

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 ei-
ther 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 acti-
ve for minimum 5 years. The Section 1705 Loan Program has provided loans for renewable energy
26
systems but expired in September 2011. 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

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

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 in-
28
dependence by creating a domestic bioenergy industry . The Biomass Program coordinates its
efforts with several other agencies that fund other parts of the supply chain from biomass to bio-
energy. 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
29
well as cross-cutting sustainability, analysis, and strategic communications activities. The integra-
ted 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
30
million dry metric tonnes of biomass per year” . The primary product must be a biofuel that is liquid
31
at standard temperature and pressure .
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

Since 2008 the different public agencies under the Biomass Program have provided grants and
32
loan guarantees to biofuel companies for a total of USD 1.77 billion . 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 re-
newable energy provided by biofuel. To get a loan guarantee the projects must meet the following
33
requirements :
 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
23

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
34 35
million , and was also funded by a grant of USD 50 million from the DOE .
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
36
gap between basic energy research and development/industrial innovation” . 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
37
for the management, control, direction, and performance of projects . The ARPA-E has had four
major founding rounds, the latest from September 2011. By this fourth round, the ARPA-E has
38
supported 180 projects for a total value of USD 521.7 million .
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
39
States” . 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.

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
40
impact of the funded projects .
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
41
determined by negotiations between the investing companies and the state government . 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
42
regional organization BioStl that funds the bio-tech industry 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-
43
stitutional by a Cole County judge in February 2012 . 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
44
grow major high impact facilities in Florida” . 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
45
USD 2-3 million .
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
25

46
The Made in Alabama funding program tries to attract companies from around the world. 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
47
from the commencement of the project.
The project must be granted by the local granting authorities and there are certain capital invest-
ment 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
48
again . 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

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
49
years to leverage additional research and development investments .
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
27

facilities are available for researchers and this interaction between industry, academic and
50
government researchers can be important to make the technology commercially applicable .
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
51
the largest recipient of FDI among developing countries . 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
52
economy .
Figure 2.1 The Gross Domestic Product of China for the period 1990-2010. Source: World Bank

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
th
chosen by the government. Several KETs are embedded in the 12 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

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
53,54
energy vehicles . 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
55
and the market environment .
Box 2.4 The seven Chinese strategic emerging industries
56
Source: State Council
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
29

57
Source: Sun, Xie & Evans, China Strategy

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
58
benefits :
 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
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/

 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
59
million (EUR 18.5 million) to 27 companies for 29 projects . 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
60
criteria for qualifying as a high-tech firm, the most important ones being :
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.
31

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
61
million (EUR 24.7), and 3% for firms with revenue > RMB 200 million .
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
62
of Science and Technology as a National Nanotech Innovation Cluster since 2007 . 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
63
technology fields, considered as important for China's national development . 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

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
64
reduced income tax rate of 15% instead of the ordinary corporate tax rate of 25% . 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
65
enterprises .
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
66
strong fiscal exemptions and reductions (for a detailed overview, see footnote ). 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
67
paid to foreign parents . 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.
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/
33

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
68
capitalized . 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

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
69
post-crisis growth rate in 2010 of more than 14% . 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.

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.

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.
35

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
70
companies supplying the home market or export markets.
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
71
capabilities, etc.). 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
72
the creation of over 10,000 skilled jobs.
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
73
to increase the business’ industrial competitiveness. 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.
71
Enterprise 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

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
74
reviewed by a review panel.
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).
75
To get a TECS grant the project must fall under one of the specific areas :
(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
76
increase revenues and value-added. 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
77
projects.
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
37

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
nd 78
Development Index (HDI) ranking 22 in 2011 . 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
79 80
instruments . Exports generate about 70% of Taiwan's GDP growth .
Figure 2.2 Trade balance of Taiwan for the period 1981-2011

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
81
that guides industrial policy is the industrial statute, a law approved by parliament . From 1960 till
1990, there was the Statute for Encouragement of Investment followed by the Statute for Upgrading
82
Industries from 1991 till 2010. In 2010, Taiwan's Legislative Yuan 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.

Industrial Innovation. Under the new law, the government is able to encourage innovation and
83
employment by offering tax breaks, funds, and other incentives to businesses .
84
Highlights of the law are :
 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
85
maturity term is 10 years .
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
85
Global Export Media, CENS.com, http://news.cens.com/cens/html/en/news/news_inner_41546.html
39

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
87
assistance . 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
88
billion (EUR 8 billion), generating about 41,800 jobs .

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

 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
89
its own industry .
90
The measure offers different kinds of support :
 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
91
are key to the industrial policy of Taiwan which aims at creating strong clusters . 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
92
activity in the KETs advanced manufacturing technologies and industrial biotechnology .
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
41

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
93
park. Companies located in the parks enjoy several tax benefits :
 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
94
foreign (e.g. Logitech) . 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

2.5.5 The Si-Soft project
The National Si-Soft Project’s goal is to evolve Taiwan’s semiconductor industry from its current
96
contract manufacturing base to a focus on innovative integrated circuit (IC) design . 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.
97
Si-Soft has at least two important elements :
 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
43

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
98
innovative capability through a dedicated and continuous effort towards high technology . 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
99
promote innovation in private companies .
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
th
competitiveness positively. According to the 2012 World Competitive Index, Korea is ranked 19
out of 144 countries, primarily because of high quality education and a significant technological
100
readiness which enables a remarkable capacity for innovation .
Figure 2.5 The gross domestic product of Korea for the period 1990-2011. Source: World Bank

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
101 102
labelled “state of the art fusion industries” , and high value-added industries .
98
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
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

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
103
from 2006-2015 focuses primarily on industrialization of the research in nanotechnology .
Figure 2.2 Milestones of the Korea Nanotechnology Initiative
104
Source: Ministry of Education, Science and Technology 2010
Korea combines investments in higher education in science and key technology areas with
105
initiatives that support commercialisation of research results . According to the ‘Science and
Technology Basic Plan: 577 Initiative’ produced in August 2008, the Korean government set up the
106
national R&D investment objectives of devoting 5% of GDP to R&D by 2012 . By 2010 3.7% of
107
GDP was devoted to R&D . 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 em-
ployment. High technology companies get favourable conditions in FIZ: They are offered rental cost
exemption, tax reduction (or exemption) and financial support.

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
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.
45

 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
108
for 75%.
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
109
such as corporate tax and income tax . 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
110
reduction rate can be increased .
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 engi-
neers 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

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
111
75%.
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
112
like Stanford, carbon producers like Power Carbon, and electronics producers like J.S.T. .
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
113
Audit and Inspection prefers a competitive bids system rather than these private contracts .
111
KOTRA (2010): The Investment Environments of Major Asian Countries
112
InvestKorea (2012): Site Location Support
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
47

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
114
from 2000 to 2007 according to World Bank figures . 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.

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
115
110 billion yen (EUR 0.8 billion) during the fiscal year of 2011. 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
116
billion yen (EUR 270 million).
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

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

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
118
offered by these countries to attract foreign companies intensifies. 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
119
period from the current 30 days to 2 weeks after application under the Foreign Exchange Act.
117
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)
49

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
120
a cost subsidy and was implemented in August 2012. 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
121
internationally, such as regional headquarters or R&D sites. 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
122
(company: Volvo Technology AB, headquarters: Sweden).
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
123
planned site outside of Japan. 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
124
to 500 million yen (EUR 3.9 million).
2.7.5 The Innovation Center Establishment Assistance Program

The Innovation Center Establishment Assistance Program is a partial cost funding program for
125
improvements of advanced technology demonstration and evaluation facilities. 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,
125
Investing in Japan (2012): The Innovation Center Establishment Assistance Program, Sep. 14, 2012,

demonstration and evaluation of new technology conducted by corporate enterprises through
126
research and development. Governmental support provides a subsidy rate of costs of 1/3 for
127
large companies, 1/2 for SMEs, and 2/3 for industry-academia government collaborations.
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
128
new public offering of this funding program was initiated in April 2012.
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
129
into :
(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
130
group.
126
Investing in Japan (2012): The Innovation Center Establishment Assistance Program, Sep. 14, 2012,
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,
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)
51

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

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
53

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.

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.
55

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.

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
131
have triggered state aid amounting to up to about 10% of the investment . 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.
57

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 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

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 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.

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.

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
59

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
133
the US, something that was not offered in Europe .
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

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.

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).
61

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 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.

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

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 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.

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
63

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

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.
65

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

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.
67

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 above-
mentioned 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

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
135
the semiconductor industry in Europe in the last 15-20 years . 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.
69

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
136
Commission . 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
137
without any certainty of the outcome .
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.

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
138
individuals within State boundaries’. More in general, law binds the members of a (in this case
139
global) community together in their adherence to recognised values and standards. 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
140
and also international trade.
This international law is characterised by a number of elements, which also influence and limit the
141
possibilities to counteract certain market distortions. These main elements are:
 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.
71

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
142
Nations).
5.2.2 Mechanisms for counteracting market distortion

The described characteristics of international law also have implications for the options that are
143
available to the European Union 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, anti-
dumping, 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
144
not to be part of the future negotiations in the Doha Round.
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).

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
145
labour standards). 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
146
signed a trade agreement with , whilst negotiations with other main ‘competitors’ just began
147 148
(Japan, in March 2013 ) or will begin in the near future (US, June 2013 ).
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 Korea 151 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
73

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),
154
and (iii) the Agreement on trade-related aspects of intellectual property rights (TRIPS). 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
155
produced products in terms of taxes and regulations (‘national treatment’ rule). 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
156
agreement on the trade-related investment measures (TRIMs) are assessed below.
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
157
a complaint.
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.

 First, there should be a financial contribution by a government or any public body within the
158
territory of a Member. The SCM Agreement determines four types of financial contributions ,
which cover for example direct grants and loans, loan guarantees, tax credits, etc. This list of
159
financial contribution types is exhaustive, but at the same time the wording is quite broad.
 Additionally, the measure should have a beneficiary element, meaning anything which is not
160
consistent with normal commercial practise.
 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
161
EU state aid rules). 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
162
under EU rules and not under WTO rules). 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
163
framework, but does not comply with the WTO rules.
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
164 165
domestic industry ). Whether subsidies are prohibited depends on the granting conditions. The
166
second category of subsidies consists of the actionable subsidies (‘amber subsidies’), which are
158
The 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
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.
75

167
mainly judged by the ‘adverse effects’ to the interests of other Members. Until 1999 there were
168
also non-actionable subsidies (‘green subsidies’).
Counteracting – Against prohibited or actionable subsidies one can take countervailing measures
(unilateral first track) or make the subsidy subject to dispute settlement (multilateral second
169
track). 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
172
investors to encourage investment in accordance with certain national priorities”. 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
173
for developing countries and within seven years for least-developed countries, 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
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
170
171
172
WTO (1999), p. 161.
173
WTO website, summary of the legal acts (TRIM).

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
174
success and the higher level of (direct) protection by remedies. 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
175
countervailing duties and dispute settlement, especially in relation to agriculture.
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
176
point in the future they might bring a case for dispute settlement. 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
177
flaws’ such as the enforcement of rulings. 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
178
members. 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
179
cases, and as respondent in 44% of the cases.
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
175
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.
77

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
180
adverse effects (as claimed by both sides). 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
181
duties. 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
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.

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
186 187
since 1986, when a first R&D Framework was adopted. In 1996, a new R&D Framework 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
188
exceeding the normal ceilings for intensities”.
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.
79

189
Regulation 659/1999 (detailed rules for the application of article 108 TFEU). 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
190
December 2012 (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
191
unfair distortion of international competition. 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.

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
192
in relation to a revision of the state aid rules for R&D&I , 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
193
by leading to subsidy races at the global level and windfall profits for mobile investors” . 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
194
Europe” , 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
195
remain significantly below the allowed maxima” . This paper finally points to the insight (e.g. from
192
European Commission (2012), p. 21-22.
193
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
81

196
the OECD in 2006) that state subsidies are not a determining factor for location decisions. On
this latter point, however, the OECD published in 2011 another study in which they indicate that
197
investment incentives may have an influence, but may also trigger rent-seeking behaviour 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,
199
Technopolis (2008) stated that the views of interviewees 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
200
be clarified so that it could actually be used. 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
201
instrument to deal with market distorting behaviour.
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,
202
although this risk is assessed as being small. 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

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
203
Members not to act unilaterally. 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
204
with the EU's obligations under the SCM Agreement.
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.
83

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).

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
85

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.

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.
87

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

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-
205
consuming process for approving state aid at EU level .
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.
89

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;

 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.
91

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
93

Korea
InvestKorea (2012): Cash Grant

InvestKorea (2012): Site Location Support

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

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

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

National Nanotechnology Initiative (2012): Tech Transfer & Commercialization

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
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
95

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

http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2012-13.pdf
Japan
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]
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

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)
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

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/
97

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

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.
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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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semiconductor industry R&D and manufacturing activity. A White Paper Prepared by
Dewey & LeBoeuf for the Semiconductor Industry Association.

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s_White_Paper.pdf
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Valentijn Bilsen and Ruslan Lukach (2012). Exchange of good policy practices promoting the
industrial uptake and deployment of Key Enabling Technologies.
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99

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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.
US
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
101

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

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

Abengoa Industrial biotech ES
Agfa Photonics BE
AtoS Nanotechnology FR
Automotive Lighting Photonics DE/IT
Bayer Technical Services Industrial biotech DE
Berliner Glas Photonics DE
Carl Zeiss AG Photonics DE
DRAKA Photonics NL
EADS Photonics NL
ENI Nanotechnology IT
Ericsson Photonics SE
Exel Composites Advanced materials FI
Festo Advanced manufacturing DE
Fidia Advanced manufacturing IT
Frigoglass SAIC Nanotechnology EL
FRT GmbH Nanotechnology DE
Galactic Industrial biotech BE
Gamesa Nanotechnology ES
Henkel Advanced materials DE
Heraeus Materials
Technology Advanced materials DE
Heraeus Noblelight Photonics DE
Leica Microsystems Photonics DE
103

Lenzing Industrial biotech AT
Leybold Optics Photonics DE
L'Oréal Nanotechnology FR
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
Puratos (Belgium) Industrial biotech BE
Sachem Europe B.V. Nanotechnology NL
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
Zumtobel Photonics AT

Japan

Arkema Industrial biotech, nanotechnology FR
Baikowski Chimie Advanced materials FR
Esteco Nanotechnology IT
Henkel Advanced materials DE
Philips Photonics, advanced materials NL
Rofin Photonics DE
Thales Nanotechnology FR
Trumpf Photonics DE
Umicore Advanced materials BE
UMICORE Nanotechnology BE
Zoz Group Nanotechnology DE
105

Taiwan

Heraeus Materials
Umicore Advanced materials BE
Merck (performance
NXP Photonics NL
Umicore Photonics BE
Advanced materials, advanced
ASML manufacturing NL
South Korea

Arkema Nanotechnology, industrial biotech FR
BASF Photonics DE
Merck (performance
Nokia Photonics FI
Plansee Advanced materials AT

Umicore Advanced materials, photonics BE
Singapore

Heraeus Materials
IQE Photonics UK
Leica Microsystems Photonics DE
Rofin 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
Xenics Photonics BE
107

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
206,207
Framework ;
 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,
208
(ii) the existing market failures, and (iii) distortions of competition and effect on trade. 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.

 Scope of application; the R&D&I framework follows the standard EU definitions which apply to
209
small and medium sized enterprises (SMEs) and large enterprises (non-SMEs). 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
210 211
support to certain activities which relate to ‘innovation’ . Kleiner 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.
109

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.

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.

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
213
Union as a whole .
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.
111

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.

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.

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).
113

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 ECSIP-MU@ecorys.com
W www.ecorys.com

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Study on the international market

distortion in the area of KETs:

Client: DG Enterprise and Industry

Copenhagen, 13 May 2013

Within the Framework Contract for Industrial Competitiveness and Market

Client: DG Enterprise and Industry

Compiled by the following partners of the ECSIP consortium:

 Danish Technological Institute (DTI)

P.O. Box 4175

T. +31 (0)10 453 88 00

2 Study on the international market distortion in the area of KETs

2 Specific policy measures put in place by selected third countries 16

Study on the international market distortion in the area of KETs

3 Case studies of KETs investments in third countries 55

5 Regulatory and framework conditions: options for counteracting market distortion 71

Annex I List of literature 93

4 Study on the international market distortion in the area of KETs

Annex 3: Overview of EU State Aid rules 108

Study on the international market distortion in the area of KETs

ATV Advanced Technology Vehicle

Study on the international market distortion in the area of KETs

8 Study on the international market distortion in the area of KETs

1.1 Objectives of the study

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

Study on the international market distortion in the area of KETs

Finally, chapter 6 contains the conclusions of the study.

1.3 Key concepts used in this study

Key enabling technologies

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

10 Study on the international market distortion in the area of KETs

 The neoclassical, and

Study on the international market distortion in the area of KETs

12 Study on the international market distortion in the area of KETs

Public measures by type

Study on the international market distortion in the area of KETs

14 Study on the international market distortion in the area of KETs

Study on the international market distortion in the area of KETs

2.2 United States

16 Study on the international market distortion in the area of KETs

2.2.1 Overall policies in the KETs area

2.2.2 Specific measures

The following measures at US federal level are described below:

Study on the international market distortion in the area of KETs

18 Study on the international market distortion in the area of KETs

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

2.2.3 Advanced Technology Vehicle Manufacturing Incentives Program

Study on the international market distortion in the area of KETs

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

Tesla Motors $465 million 1,500 Jan 2010 2 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

20 Study on the international market distortion in the area of KETs

Loan Jobs Date of

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

Granite Reliable Wind partial 6/198 Sept 2011 Coos, NH

Study on the international market distortion in the area of KETs

Prologis (Project Amp) Solar partial 42/Over Sept 2011 28 States

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

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

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

2.2.5 Biomass Program

22 Study on the international market distortion in the area of KETs

Project sheet: ABENGOA COMMERCIAL PROJECT, Dec. 2012, US Dept.of Energy,