Letter

In recent years, the COVID-19 pandemic, climate change, digitalisation and the emergence of global systemic rivals, supplemented by the war in Ukraine, have together led to the resurgence of industrial policy in the EU. Similarly to other major world economic blocks, the EU is currently re- evaluating its position in global value chains, taking stock of its strategic dependencies and trying to remedy them, either through enhanced trade cooperation or local production. This transition, as any other, poses diverse opportunities and threats for different EU regions, industries and demographic groups. For regions thus far focusing on the energy-intensive, lower added-value part of the production chain, the transition may be particularly challenging. On the other Picture 1: Regional Innovation Score hand, if these regions are provided with the right incentives for research, development and business services and unencumbered access to the single market, the twin transition is an opportunity for these regions to 1 integrate into emerging European value chains of strategic products at a higher level of added value1. The Presidency thus proposes to concentrate the competitiveness ministers’ debate on increasing the added value of industry in regions that are comparatively weaker in innovation performance. To define these regions, we use the Regional Innovation Scoreboard 20212 (RIS), which measures, inter-alia, the following industry-related indicators: broadband penetration of enterprises, R&D expenditure of the public sector and the business sector, SMEs introducing product innovations, patent applications, employment in knowledge-intensive activities, medium and high-tech products and knowledge-intensive exports, and environmental sustainability. Based on these criteria, the RIS classifies EU regions into four categories: innovation leaders, strong innovators, moderate innovators and emerging innovators (in this paper, the latter two are referred to as ‘lagging innovation regions’). The RIS indicates that, in line with literature on regional development3, innovation performance overlaps with the academic concept of centre-periphery. According to the literature, industries operating in ‘centres’ benefit from good infrastructure and geographical connections, and access to other industries, public services, skilled workforce and decision-making bodies. Contrarily, industries in ‘peripheries’ lack these advantages, making it more challenging for them to adapt and innovate. Furthermore, relatedness literature shows that regions tend to diversify into activities related to their current specialisation. For this reason, regional knowledge trajectories can be shaped by co-evolutionary network dynamics. Therefore, a deeper understanding of the regional knowledge proximity may allow for more targeted investments in the specialisation pathway of lagging regions4, as technological relatedness represents a key driver of innovation5. This would feed into and benefit from the work being done on European industrial ecosystems. On the RIS, the centre-periphery disparities (notably differences between rural and urban areas across the EU) are significant, with ‘pockets of excellence’ concentrated around national capitals. Furthermore, the scoreboard shows that above-average innovators 1 Grieveson et al. (2021): A new growth model in EU-CEE, http://library.fes.de/pdf-files/id-moe/17843.pdf 2 European Commission (2021): European and Regional Innovation Scoreboards https://ec.europa.eu/info/research-and-innovation/statistics/performance-indicators/regional-innovation- scoreboard_en. 3 ESPON (2019): Inner peripheries in Europe; Eder (2019): Innovation in the Periphery: A Critical Survey and Research Agenda. 4 KOGLER, Dieter F., ESSLETZBICHLER, Jürgen, and RIGBY, David L. The evolution of specialization in the EU15 knowledge space. Journal of Economic Geography, 2017, vol. 17, no 2, p. 345-373. 5 BOSCHMA, Ron, BALLAND, Pierre-Alexandre, et KOGLER, Dieter Franz. Relatedness and technological change in cities: the rise and fall of technological knowledge in US metropolitan areas from 1981 to 2010. Industrial and corporate change, 2015, vol. 24, no 1, p. 223-250. 2 (innovation leaders and strong innovators) are geographically concentrated in the northwest of the continent. The Presidency proposes to focus on measures that can help lagging innovation regions increase the added value of their performance, thus enhancing their overall prosperity and attractiveness for businesses and citizens, to the benefit of the EU as a whole. To this end, the discussion will be structured as follows: a plenary debate will be supplemented by three parallel thematic workshops with delegations distributed evenly between the workshops. The conclusions of the workshops will be presented during lunch. Plenary topic: Increasing the added value of EU industry across regions of the single market The concept of added value was coined by Stan Shih, the founder of the Acer company. Shih noticed that added value – or the gross margin earned – grows differently at different stages of the production process. Higher added value is generated from marketing, logistics and business services, but also from basic and applied research and development, design and commercialisation. This is why innovation and the RIS are highly relevant for the discussion on added value in the single market6. Picture 2: The Smile Curve7 The challenge for some European lagging innovation regions is their specialisation in the manufacturing part of European and global value chains. This part has lower added value compared to other parts and is simultaneously more material- and energy-intensive. These regions also show a relatively weaker specialisation in technologically advanced products and have a lower share of patents and R&D as a consequence of their focus on manufacturing. In some of these regions, economic development has been highly 6 Deloitte (2019): Made in the World: Analýza českého zahraničního obchodu a pozice v globálních hodnotových řetězcích. 7 Shih (1992): The Smile curve of GVCs. 3 dependent on investment by foreign companies that have kept their headquarters and innovation centres outside of these regions, to the detriment of the innovation potential of local subsidiaries8. Other lagging innovation regions in the EU suffer from lower integration into European industrial value chains, while being more dependent on services9. These include real estate and tourism, whose revenues were severely hit by the COVID-19 pandemic10. The ongoing economic transformation, notably the push towards open strategic autonomy in strategic products, is an opportunity for these regions and industries to improve their position in European and global value chains, thus improving their overall prosperity. The EU innovation and industry policy should be mobilised to help businesses in these regions increase their innovation and value-added potential. For instance, we need to ensure the widest participation of businesses, including the smaller ones and those originating from lagging innovation regions, in IPCEIs. At the same time, the EU’s most advanced economic achievement, the single market, brings enormous potential, particularly when companies learn how to benefit from it to the highest possible degree and do not face unjustified barriers, including in times of crises; the upcoming Single Market Emergency Instrument (SMEI) should help to remove such barriers. Questions: How can we integrate industries from regions with a lower innovation rate into the new European and global value chains, which are emerging in the context of the economic transformation (e.g. hydrogen, cloud, micro-electronics, batteries)? What measures can be taken at national and EU level? How can the single market be best utilised to increase the added value of EU industry across regions? 8 Pellény (2020): The Role of CEE in GVC: Evidence from Occupation Level Employment Data; Grieveson et al. (2021): A new growth model in EU-CEE, http://library.fes.de/pdf-files/id-moe/17843.pdf; Deloitte (2019): Made in the World: Analýza českého zahraničního obchodu a pozice v globálních hodnotových řetězcích. 9 Dauderstadt (2021): Cohesive Growth in Europe: A Tale of Two Peripheries. 10 European Commission (2022): Transition Pathway for Tourism. 4 Workshop 1: The potential of the single market for companies across regions Thirty years after its inception, the single market is a success story of EU integration. However, barriers in the market still persist, notably in the services sector. These barriers include, for example, burdensome administrative procedures, a lack of predictability and information from local authorities and complex procedures in the posting of workers11. Recent crises, notably the COVID-19 pandemic and the Russian invasion of Ukraine, have further endangered the smooth operation of the EU’s value chains. These disturbances pose an obstacle to the integration of companies in peripheral regions into European value chains, reinforcing their remoteness12. Across the entire EU, they also hinder the development of servitisation, a phenomenon that integrates manufacturing with businesses services or research and development, increasing the added value of the final product13. Last but not least, different regulatory and tax regimes and the restricted mobility of workers create bureaucratic obstacles to the development and installation of low-emission technologies across the EU (e.g. chargers for electromobility)14. This applies especially to SMEs and prevents them from scaling up and driving economic growth through innovation. Deficiencies in the single market are not the only problem faced by companies in lagging innovation regions when attempting to increase their added value. While these regions are often eligible for European Structural and Investment Funds, local companies, in particular SMEs, have below-average success in obtaining centrally-managed EU funds, such as Horizon Europe15. Moreover, many of these regions fail to attract company investments into innovation centres and business services, even if the companies operate in these regions as providers of manufacturing jobs16. Questions: How can we improve the single market in services in order to increase the added value of companies and help them scale up, particularly in lagging innovation regions? What barriers need to be removed so that the single market can fully enable the uptake of twin transition technologies by companies, in particular SMEs? How can we ensure that companies from lower innovation regions have the necessary resources to finance innovation and increase their industry’s added value? What measures can be taken at national and EU level? 11 Ministerstvo průmyslu a obchodu (2020): CZ Non Paper: Findings of the survey on barriers inhibiting trade on the Single Market for Czech businesses and policy implications. 12 Ministerstvo průmyslu a obchodu (2021): Strategie podpory malých a středních podniků v České republice 13 Copenhagen Economics (2018): Making EU Trade Services Work for All. 14 Ministére de l’economie, des finances et de la relance; Dutch Ministry of Economic Affairs and Climate Policy (2020): Barriers to trade in the electric vehicles sector. 15 CZELO (2020): Good Practice Examples of H2020 Projects in Visegrad countries. 16 Úřad vlády České republiky (2016): Analýza odlivu zisků: Důsledky pro českou ekonomiku a návrhy opatření. 5 Workshop 2: Companies in lagging innovation regions and the twin transition Companies in lagging innovation regions face specific problems in decarbonisation. These include, notably, the dependence on energy- and material-intensive industries and (specifically in central and eastern Europe) also on the automotive industry, which is undergoing a massive transformation. Other obstacles to decarbonisation in these regions include a low share of renewable energy in local energy mixes (due at least in part to geographical position) and the low capability of the public sector to invest in green innovations. These regional differences in decarbonisation can potentially collide with the EU’s attempts to achieve regional cohesion17. This could be addressed by considering the business case for the green transition in these regions, and how the EU can demonstrate and foster commercial incentives for this transition. The digital transformation appears to be a trend that could help lagging innovation regions to ‘catch-up’ with the rest of the EU. This is because in cutting-edge digital technologies (including AI), the position of European economic ‘centres’ is not yet that pronounced compared to other sectors of the economy. In other words, AI centres and peripheries are still being constructed. As digitalisation will permeate all sectors going forward, mastering and diffusing technical advances enabled by it (such as improved performance of electric vehicles and their connectivity, to give an illustrative example within the abovementioned automotive industry) represents an ongoing challenge. Developing these technologies could help lagging innovation regions create a niche, high added-value specialisation within the single market. The main obstacles to achieving this include the low investment capacity of some EU regions and the mismatch between workers’ skills and industry needs18. For both the digital and green transformation, an adaptation of the EU funding and state aid framework could be examined to help close the gap between different regions. EU industrial policy, in particular pan-European initiatives towards bridging the skills gap, also has an important contribution to make, as evidenced by the EIT Innoenergy’s EU Battery Academy. Building up industrial ecosystems in lagging innovation regions, for instance through the EU’s cluster policies, could also be of particular relevance to reflections in this field. Questions: What are the best measures to help companies from lagging innovation regions to close the gap in the context of the twin transition? How can the single market facilitate the uptake of twin transition technologies by companies? How can industrial ecosystems play a role? 17 Grieveson et al. (2021): A new growth model in EU-CEE, http://library.fes.de/pdf-files/id-moe/17843.pdf. 18 Grieveson et al. (2021): A new growth model in EU-CEE, http://library.fes.de/pdf-files/id-moe/17843.pdf. 6 Workshop 3: Resilience of the single market and the impacts of the Russian invasion of Ukraine The Russian invasion of Ukraine and the consequent EU sanctions have strongly affected trade ties between the EU and Ukraine, Russia and Belarus. Tackling our strategic dependencies on Russia, as discussed by leaders inter alia in Versailles, will be essential in the medium and long term to reinforce our resilience. Apart from Russian oil and gas, which the EU aims to phase out from its energy mix by 2030 in line with the REPowerEU package, the war also complicated imports of other raw materials, such as petroleum oils, coal, copper and iron ore. The war disproportionately affects regions with a high proportion of energy and raw material-intensive industries – including steel, chemicals, automotive and aerospace19. Furthermore, there are also severe implications on EU labour markets and professional mobility. In order to secure the single market’s resilience, it is crucial to ensure the sourcing of these strategic raw materials, either through local mining, recycling and innovation or through new trade partnerships. To increase the resilience of the single market in times of crisis, including the war in Ukraine, is also the goal of the SMEI which is under construction. Similarly, we must preserve the strategic European value chains that include Ukrainian companies and industry. The reconstruction of Ukraine will be a crucial task for the years to come. The EU will need to secure enough finances to rebuild critical infrastructure and resilient, green and competitive industry in the country. Mobilising private capital will be paramount to achieve this task. Simultaneously, it is crucial that EU companies continue operating in Ukraine, despite the war-related disruption to supplies. Questions: What measures are necessary to increase the single market’s resilience in the context of the war in Ukraine? How could the upcoming SMEI help in this regard? How can we best facilitate Ukraine’s economic recovery and its (re-)integration into European value chains? 19 Eurostat (2022): Russia-EU – international trade in goods statistics. 7 Saatja: informal_compet <[email protected]> Saadetud: 01.07.2022 14:39 Adressaat: informal_compet <[email protected]> Teema: Discussion Paper and Programme - Informal Competitiveness Ministers' Meeting, 19-20 July, Prague Dear Madam or Sir, the Czech Presidency of the Council of the EU has the pleasure to share with you the Programme and Discussion Paper for the Informal Meeting of Ministers Responsible for Competitiveness (Internal Market and Industry) on 19 and 20 July in Prague. Delegations that have not appointed a Delegation Accreditation Officer are kindly asked to appoint one as soon as possible. All delegations are kindly asked to proceed with the accreditation of their delegates. Faithfully yours, CZ PRES Competitiveness Team Time Programme Location 18:30 Bus departure to the venue Corinthia Hotel Gala Dinner with cultural 19:00 National Museum programme End of Gala Dinner, bus 22:00 National Museum departure to the hotel Time Programme Location Prague Congress Arrival of delegates, 9:00 Centre, entrance doorsteps no. 10 Plenary session: Increasing the added value of EU industry across regions of Prague Congress 9:30 the single market Centre, 2 n d floor, Forum Hall Interpretation 6/6 (CZ, EN, FR, DE, IT, ES) Seating arrangement: 2 rows (2+1)  Prague Congress 12:00 Coffee break Centre, 2 n d floor, Forum Hall Foyer Breakout sessions Prague Congress Centre, 2 n d floor 1) The potential of the single market for 1) Room 221 + companies across 222 regions Guest speaker: Martin Vohánka, CEO, Eurowag 2) Companies in lagging innovation regions and the twin 2) Room 223 + transition 224 Guest speaker: 12:20 Michal Kořan, founder, Global Arena Research Institute 3) Resilience of the 3) Room 2.3 single market and the impacts of the Russian invasion of Ukraine Guest speaker: Petr Krogman, president, Ukrainian-Czech Chamber of Commerce No interpretation Seating arrangement: 1 row Prague Congress 13:35 Family photo Centre, entrance no. 10  Working lunch for Heads of Prague Congress Delegation, presentation of Centre, 1 s t floor, conclusions of breakout Zoom Restaurant sessions 13:45 No interpretation Seating arrangement: 1 row 2nd Floor, Forum Hall Buffet lunch for Delegates Foyer Departure of delegates 15:30 Press conference of the Presidency Prague Congress and of the EC Centre, 4 t h floor NB: schedule is subject to change