State aid for innovation clustersin the Republic of Serbia

Sinisa Varga and Dragan VujisicUniversity of Kragujevac, Kragujevac, Serbia, and

Marija ZdravkovicMoravcevic Vojnovic & Partners Law Firm, Belgrade

Abstract

Purpose – The purpose of this paper is to examine conditions for and initial results of granting stateaid for innovation clusters in the Republic of Serbia.

Design/methodology/approach – This paper is based on primary research data and secondarysources of scientific information. Due to interpretation of legal acts, a normative method was adopted.

Findings – There is a legal and institutional framework for granting state aid to innovation clustersin the Republic of Serbia. It is important because state aid distorts competition and may reduceeconomic growth if it is not controlled and moderate. Serbian state aid for innovation clusters is morethan moderate so less than 1 per cent of Serbian businesses are joined within innovation clusters.

Research limitations/implications – The legality and effects of granted state aid are notexplored. Requests for access to agreements signed with and reports submitted by beneficiariesremained unanswered.

Originality/value – Few studies examine the topics discussed in this paper; legal issues concerninggovernment intervention’s effect on the economy are often neglected. This paper explores legalregulations, procedures, and confinements of state aid for innovation clusters as a measure ofeconomic policy.

Keywords State aid, Business, Cluster, Innovation, Serbia

Paper type Research paper

IntroductionOver the last decade, the international economic environment underwent profound,rapid, and complex changes that affected methods of organising and managingindustry, production systems, distribution networks, and commercial practices at thenational and international levels (Methodological Guide: Restructuring, Upgrading andIndustrial Competitiveness, 2003). A revolution in information and communicationtechnologies and the emergence of a knowledge-based economy drove most of thechanges (Lawrence and Sun, 2010). Faster information flow, relatively inexpensivetransportation, accession to the World Trade Organization (WTO), and the signing of anumber of preferential arrangements and free-trade zone agreements are breakingdown geographic barriers to economic activity, exposing companies to internationalcompetition. Competition is no longer exclusively local; companies must be globallycompetitive even if they do business only within a national market ( Jovic, 2002).

Globalisation influences small and medium-sized enterprises (SMEs). Given theirnatural weaknesses, SMEs cannot survive intensified international competition if theireconomic existence depends on their limited resources only (Yang and Wang, 2008). Tosurvive in conditions of fierce competition, SMEs must develop innovative capabilities;though achieving them independently is extremely difficult (Han, 2009). Lacking

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International Journal of Public SectorManagementVol. 26 No. 2, 2013pp. 102-110q Emerald Group Publishing Limited0951-3558DOI 10.1108/09513551311317960

resources to create successful innovations by themselves, SMEs must cooperate andmake links to other SMEs or large companies, including transnational ones (TNCs).This process is known as clustering.

SMEs recognised as engines of economic growth (OECD, 2002) affect globalisationso affect national economies as a whole, implying government activity. Governmentsmay undertake many actions to create and maintain a favorable business climate forSMEs, all indirect in nature:

[. . .] there should be an understanding that economies must evolve and indirect supportshould not result in subsidies that fly in the face of economic reality (OECD, 2000, p. 13).

In Serbia, 99.8 per cent of all companies are SMEs, and 95 per cent SMEs aremicro-enterprises with fewer than ten employees. In the early 1990s the OUN SecurityCouncil established economic sanctions in Serbia in which the country’simport/export-dependent economy was broken. In 1993, prices increased by116,545,906,563,330 per cent; one of the highest hyperinflation rates in the worldever, gross domestic product (GDP) fell 27.7 per cent; previously falling 27 per cent in1992 relative to 1991 and 800,000 employees were laid off (Bajec and Joksimovic, 2002).Today’s GDP is 66 per cent of 1989’s figure; unemployment is 18.1 per cent (3 per centin EU) and Serbia ranks 79th of 104 countries for innovation (Republic of Serbia OfficialGazette, 2008). Given these conditions, the government is compelled to act directly tohelp SMEs and the entire economy survive globalisation and international competition.One of the means the government can use to create a productive and competitiveeconomy is state aid for innovation clusters. Exploring this government measure, thispaper contains three parts. The first explains the notions and methods of state aid. Thesecond demonstrates conception of (innovation) clusters. The third explores rules forgranting state aid and the initial results of granting such subsidies in Serbia.

The notions and methods of state aidState aid is any state activity aiming to alter the regular market behaviors of businessoperators (Feltkamp, 2003), distorting competition by granting privileges and favoringsome market participants while placing others in a subordinate or disadvantageousposition (Varga, 2005). Hindering efficient allocation of resources renders the economyless competitive. That is why state aid is, in principle, forbidden. However, there aresituations when state aid is compatible, and when it might be compatible with themarket.

State aid is compatible with the market if government uses it to achieve social goals.State aid might be compatible with the market if used to achieve economic goals. Suchstate aid is conditionally compatible; forbidden until conditions prescribed by relevantregulation are not fulfilled. Conditionally compatible state aid can be regional, sector,and horizontal. Regional aid improves economic development in regions where thestandard of living is extremely low or where the unemployment rate is very high.Sector state aid is granted for development of business activities or entire industrieswhere such aid does not affect trading conditions adversely to an extent contrary to thecommon interests of the economy. In Serbia sector state aid may be granted inindustrial sectors of mining, transport, and steel producing. Horizontal state aid isgranted for realisation of important projects of national or European interest orremedying considerable disorder of a country’s economy, and improving culture and

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preservation of cultural and natural inheritance where such aid does not affect tradingconditions adversely to an extent contrary to common interest. More precisely,horizontal state aid may be granted for:

. SMEs;

. rehabilitation and restructuring of the undertakings in difficulties;

. employment;

. environmental protection;

. research, development, and innovation;

. improvement of employee knowledge and skills (training);

. risk capital; and

. culture.

For the subject of this paper, the most important is horizontal state aid for research,development, and innovation, granted for:

. research and development projects;

. technical feasibility studies;

. industrial property rights costs for SMEs;

. young innovative undertakings;

. process and organisational innovation in services;

. innovation advisory services and innovation support services;

. loan of highly qualified personnel; and

. innovation clusters.

The 2009 State Aid Control Act and 2010 Decree on Rules for State Aid Grant regulatethe conditions and procedure for granting state aid in Serbia.

Cluster definition and classificationClusters are recognised as tools for economic development and upgrading ofinternational competitiveness of national industry. There are a lot of cluster definitions.For the purposes of this paper clusters are defined as:

[. . .] geographic concentrations of interconnected companies and institutions in a particularfield (Porter, 1998).

[. . .] a modern organizational form of partnership, cooperation, interaction and interrelation ineconomy (Nenova, 2007).

[. . .] an important instrument for promoting industrial development, innovation,competitiveness and economic growth (Cismas et al., 2010).

[. . .] spatial concentrations of business and related institutions with activity specializationand active cooperation linkages among cluster members (Szanyi et al., 2010).

[. . .] a group of related industries and other entities important from the competitive point ofview (Enache et al., 2009).

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[. . .] a geographical concentration of companies specialized in one sector, which are linkedwith specific suppliers and other enterprises in interrelated industries and which compete butalso cooperate with one another (Official Journal of European Union, 2008).

Analyzing these definitions, several traits are observable as main characteristics. Firstclusters represent a collection of business entities, linked by agreement only; most at thebeginning of networking or established as a new legal entity. In any case, clusters arevoluntary groupings (Nenova, 2007) consisting of parties that remain legally,economically, and organisationally independent, even in the latter case of clusterinstitutionalisation (Zarkovic, 1977). As a business network, they represent systematic,long-term relationships of a very dynamic nature (Stanojevic, 2008). As a “concentrationof resources indispensable for doing business” (Jovetic, 2008), they are based on constantinteraction of adjustment and achievement of common goals (Stankovic and Djukic,2010). Outstanding synergy effects facilitate attaining common goals within a cluster(Cismas et al., 2010); a host of links among cluster members makes the cluster producemore value than the sum of its parts (Porter, 1998), increasing competitiveness of SMEclusters to a large company’s level (Ilic, 2006,). Finally, clusters feature “simultaneouscooperation and competition” (Szanyi et al., 2010).

Clusters can be classified based on criteria such as geographic scope, breadth, depth,legal form, type of management, size, economic sectors and sub-sectors, life cycle stages,and others. In connection with the subject of this paper, the most important criterion isintensity of research and development (R&D) activities. According to R&D intensity, wedistinguish clusters of low and high levels of R&D (Strukelj and Dolinsek, 2010). Clustersof high-level R&D activities are known as innovation clusters, an “environment thatfavors the creation and development of high potential entrepreneurial ventures and ischaracterised by heightened mobility of resources, including people, capital andinformation” (Engel and del-Palacio, 2011). In the European Union, innovation clustersare defined as groupings of independent companies; innovative start-ups; small, medium,and large companies and research organisations; companies operating in a particularsector and region, designed to stimulate innovative activity by promoting intensiveinteractions, sharing facilities, and exchanging knowledge and expertise, andcontributing effectively to technology transfer, networking, and informationdissemination among entities in the cluster (Official Journal of European Union, 2006).An innovation cluster is a special kind of cluster; it is a collective, but not purely abusiness entity since some members are not companies. Innovative clusters are entitiescomposed of two member groups: businesses in the industry and supportive members.Sometimes supportive members are companies operating in marketing, auditing,insurance, etc. However, since “knowledge becomes the key factor for corporate, regionaland national competition” (Yang and Wang, 2008), at least one supportive member needsto be a non-profitable organisation, often in education or science. This suggestsinnovation clusters connect business and science to encourage economic development bycreating and applying new technologies; “combining industry, government andacademic research in a single location would produce impressive economies of scale andgreater commercialisation of research results” (Holroyd and Coates, 2007).

Serbian innovation clustersBusiness associations in Serbia have a long tradition, reaching from the middle ages(Jirecek, 2006) and continuing into modern times; lasting even through a communist

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government since 1954 when the Decree on Association of Business Organizations wasenforced (Veliki Pravni Prirucnik, 1977). That was followed in 1958 by the BusinessAssociation Act and a series of other acts including:

. 1960 – Association and Business Cooperation Act;

. 1962 – Unitary Chamber of Commerce Foundation Act;

. 1965 – Basic Act on Undertakings;

. 1976 – Associated Labour Act;

. 1988/1996 – Acts on Undertakings; and

. 2004 – Act on Business Companies.

The 2004 Act on Business Companies was the first legislation without norms onbusiness association. Today’s legal base for cluster establishment is the 2009Association Act. From 2004-2009, the 1982 Act on Social Organizations andAssociations of Citizens was the governing legislation, though some clusters set up asfunds (e.g., automobile cluster of Serbia) and limited liability companies (e.g., Feniks, acluster in the aeronautic industry).

According to the Serbian Business Registers Agency (SBRA) 108,339 companiesand 221,479 entrepreneurs are registered in Serbia (Serbian Business RegistersAgency, 2011). According to the Ministry of Economy and Regional Development, 737companies and entrepreneurs, and 111 educational, scientific, and other supportiveinstitutions are associated in 23 active innovation clusters. Thus, an unsubstantialnumber of registered businesses operate in innovation clusters; financial backing ofinnovation clusters started only recently, 2006-2011 through the Cluster DevelopmentSupport Programme.

With programme realisation are charged the Ministry of Economy and RegionalDevelopment and the National Agency for Regional Development. According to theprogramme, innovation clusters are defined as an association, not a company, businessincubator, or technological park. An innovation cluster is an association consisting ofat least twelve active industry-oriented businesses, from which at least 60 per cent areSMEs/entrepreneurs and at least three are supportive members; one supportivemember must be a scientific institution. State aid is granted for setting up, expanding,and animating innovation clusters, covering a portion of eligible costs for organisationof: programmes for skill improvement, special training, and workshops for learningnew technical rules that apply to EU markets and seminars and conferences thatstimulate knowledge exchanges, networking cluster participants, and clusterpromotion. In the case of newly established innovation clusters, those established onor after June 1, 2009, except for attracting new participants, state aid covers operatingcosts for: internal networking, development of a common vision and goals (strategicand operations), internal structure of cluster configuration, analysis of training needs,information exchanges, common market research, and purchase coordination andexternal networking, cluster and region marketing, helping with investments,collecting information about markets, searching for business partners, supporting theassociation to value-added chains and international networks.

Existing clusters may apply for state aid to cover costs related to:. common cluster services development (common market research, joint

immersion in markets, coordinated purchases, helping with investments,

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collecting information about market, searching for business partners, supportingassociation to value-added chains and international networks, and access tofinances);

. technical feasibility studies for common infrastructural projects and servicedevelopment within the cluster;

. preparation and/or realisation of common innovative projects, development ofnew ones, or improving existing products, processes, or services (at least threemembers must be involved);

. creation and testing prototypes and new product or packaging designs, andtesting of new production processes; and

. intellectual property protection and licensing.

Items eligible for cost reimbursement include personnel researchers, technicians, andother auxiliary staff, instruments and equipment, obtaining patents and technicalknowledge transferred at market prices in competitive conditions, consultancy used forR&D&I, overhead as a direct result of R&D&I, and non-durables as a direct result ofR&D&I. State aid must not be used for paying matured taxes, loans and otherclaimable debts, bank warranty issuance costs, insurance policies, interest, exchangerate differences, banking costs, customs duties, and forced collections.

State aid is paid exclusively to the legal entity operating the innovation cluster, notto cluster participants. Clusters must declare public notice on which notified projectsare evaluated. Criteria for project evaluation include:

. cluster profiles (number and character of cluster participants);

. results of business participants for the last three years (income, costs, andemployment);

. R&D results;

. financial and operation capacity (stable and sufficient financing, experience,technical skills, and existing of management capacities);

. relevance (the degree projects and programme purpose matches);

. methodology in creating projects and measurability of indicators of the projectresults, sustainability; and

. budget efficiency.

There is an additional criterion for existing clusters; each criterion carries a number ofpoints, totalling 100. To qualify for state aid, a project must collect at least 50 pointsand award points based on all criteria. If a project qualifies for state aid, the applicantand the National Agency for Regional Development sign an agreement.

The amount of the state aid per project may be RSD 200,000 to 800,000 (e2000-8000)for new clusters and RSD 1 to 10 million (e10,000-100,000) for existing clusters. Annualbudgets for these purposes are RSD 30 million (e300,000).

Aid intensity, gross aid expressed as a percentage of a project’s eligible costs, is 50per cent. The remaining part of a project’s cost must not be financed with resourcesoriginating from Serbia’s budget. Until 2011, state aid was granted as a refund; clustershad to bear all costs and submit invoices and other itemised documents as evidence ofexpenditures, and then obtain a right for refunding. Today, 30 per cent of state aid is

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payable 30 days after the agreement is signed. Any remainder falls under refund rules(Uputstvo za Sprovodjenje Programa o Rasporedu Sredstava Namenjenih za RazvojInovativnih Klastera u 2011, 2011).

In previous years, Serbia set up, expanded, and animated 30 innovation clusters byindustrial sectors. State aid for innovation clusters is granted to the tourist sector themost. Agriculture and food processing are next; then apparel and IT; wood processing,metal processing, and industrial waste recycling industry; and automotive, aeronautic,construction, chemical (plastic products), leather and footwear, and film productionsector, all with one innovation cluster (Figure 1).

The appearance of many food production clusters is expected due to an abundanceof arable land and a developing food processing industry. Although the fact that themajority of innovation clusters are tourist clusters is encouraging in terms of takingadvantage of tourist opportunities since many spas, medieval monasteries, culturalmanifestations, and natural beauty make tourist endeavours lucrative.

ConclusionUnder the condition of globalisation, the government must play an active role, enablingSMEs to survive fierce international competition. One tool is state aid for innovationclusters, a form of public-private partnership in which funds from public finances istransferred to private legal entities. The government does not receive remunerationcorresponding to the investment made, accomplishing the goal of economic policy withrespect to technological development of the national economy. Serbia regulates lawsstrictly, determining who may apply for state aid, which costs are covered and for whatpurposes, state aid intensity, criteria for project evaluation, and procedures for bothgrant and control of state aid. Additionally, innovation clusters are defined concisely,providing sufficient legal certainty.

Introduction of state aid for innovation clusters as an economic policy measure is asuitable contribution to building innovative capacities necessary to provide economicsurvival. Started in 2006, the Cluster Development Support Program supports 30innovation clusters of varying geographic scopes and industry sectors.

Figure 1.Innovative clusters byindustrial sector

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Notwithstanding of minor share in horizontal state aid amount, the initiative began tolive and became a phenomenon that due to experiences learned in meantime can be thesubject of further exploration. Subjects particularly interesting for future researchinclude project evaluation methodologies and effects of state aid given the increasingnumber of new cluster participants, changes to income, new jobs, exportation, andother growth indicators.

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Further reading

Republic of Serbia Official Gazette (2009), “State Aid Control Act No. 51 of 2009”.

Republic of Serbia Official Gazette (2010), “Decree on Rules for State Aid Grant No. 13 of 2010”.

Wang, L. (2009), “SME industrial cluster and regional development in the age of globalization”,Proceedings of 2008 Conference on Regional Economy and Sustainable Development,pp. 66-71, available at: www.seiofbluemountain.com/upload/product/200911/2008qyijhy01a.pdf

Corresponding authorSinisa Varga can be contacted at: svarga@jura.kg.ac.rs

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