4. The institutional environment and governance of FDI-SME policies
This chapter provides an overview of the institutional environment that governs FDI-SME policies across the 27 EU Member States, including the organisational structure, role and responsibilities of the various public institutions. It presents a typology of governance frameworks and sheds light on policy implementation, inter-institutional coordination and policy evaluation, which are essential elements of a conducive institutional environment.
Strengthening FDI-SME linkages and spillovers requires policy action to be taken across different institutions operating at the intersection of investment, SME and entrepreneurship, innovation and regional development policy. Governance arrangements across these four policy domains vary greatly across EU Member States, and with them the type of government actors involved in policy design and implementation.
This chapter presents the findings of the EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages, which was addressed to relevant government agencies operating in the 27 EU Member States (see Chapter 3 for methodological details and Annex 4.A for the list of institutions). The survey allowed to map 110 implementing agencies and 24 line ministries across the EU area, and to examine the role, responsibilities and mandates assigned to them as well as their policy coordination mechanisms and monitoring and evaluation practices. Based on the information collected, the chapter offers an overview of the institutional frameworks in place in EU countries and proposes four stylised models of governance of FDI-SME policies taking into account the institutional complexity, ease of policy coordination and mode of governance of specific policy areas.
The EU policy framework complements and supports national initiatives for investment promotion and SME development
In the EU area, competences over SME and entrepreneurship policy are shared between the EU and Member States. The Treaty of Lisbon, signed in 2007, stresses the importance of SMEs for creating a competitive and knowledge-based EU economy, and the Small Business Act (SBA), adopted in 2008, stipulates the EU policy framework for entrepreneurship development (CoR, 2019[1]). The SBA includes ten principles and related actions for Member States to address challenges faced by SMEs such as proposing smarter regulation to cut administrative burden, improving access to finance, making the Single Market more accessible and improving competition policy to make it more SME friendly (EC, 2016[2]). Several strategic policy documents have been adopted by the European Commission since the adoption of the SBA to create an enabling environment for European SMEs to scale up, innovate, access new markets and benefit from knowledge and technology transfers.
In EU Member States, policy priorities and strategic objectives set at the EU level are translated into concrete SME support schemes (e.g. financial instruments, technical assistance programmes) financed by the EU Structural and Investment Funds (ESIF) and designed and implemented by national and subnational governments. Many government agencies responsible for SME and entrepreneurship development also host programmes that are directly managed by the EU such as the Enterprise Europe Network1, the Horizon 2020 initiative and the programme for the Competitiveness of Enterprises and SMEs (COSME) (CoR, 2019[1]). By fostering synergies with EU programmes and institutions, governments of Member States can complement national and regional instruments and tailor them to the needs and specificities of local entrepreneurial ecosystems.
International investment policy is an area where the EU holds specific competences as part of its Common Commercial Policy (CCP). This includes negotiating and concluding international investment agreements (IIAs) on behalf of Member States, proposing reforms that create a more transparent and predictable business climate for investors, encouraging investment that supports sustainable development, and fostering cooperation and the exchange of information among national authorities on the screening of investments from non-EU countries (FDI Screening Regulation) (EC, 2023[3]). Over the past decade, the EU has negotiated and implemented investment rules in trade agreements or in self-standing investment agreements concluded with non-EU countries, and promoted a reformed investment dispute settlement approach with clearer and more precise rules on investment protection.
Policy efforts to attract and facilitate FDI in line with national development objectives and priorities remain, however, under the remit of national governments. EU Member States can set up dedicated investment promotion agencies (IPAs) to promote their country as an attractive investment destination, provide support services to potential foreign investors, and design and implement their national investment promotion strategies. Depending on the policy instruments used to promote investment, national governments, however, must comply with EU rules. This is the case of investment incentives and other financial support provided to domestic or foreign firms. The EU State Aid rules set comprehensive requirements on how governments can grant incentives, the value of benefits, to which sectors, as well as reporting requirements (EC, 2023[4]). The rules aim to ensure that incentives do not distort competition and are regularly monitored to ensure their cost-effectiveness. As is the case with SME and entrepreneurship policy, many investor support schemes implemented in EU Member States are linked to policy priorities set at the EU level (e.g. green and digital transition) and financed by the EU Structural and Investment Funds.
FDI-SME policies are often implemented by specialised agencies, with a wide range of cross-country differences
The formulation and implementation of FDI-SME policies does not fit neatly within a single governmental department or agency. In most EU Member States, responsibilities over these areas are scattered across various government bodies. The policy mapping undertaken for this report reveals that FDI-SME policies are implemented primarily by specialised implementing agencies (78% of all initiatives, compared to 22% by sectoral ministries), reflecting longstanding trends towards a decentralisation and agencification of public governance (Figure 4.1). Depending on the core function that these government bodies exercise, they can be distinguished as investment promotion, SME and entrepreneurship, innovation and regional development agencies.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2021).
Implementing agencies responsible for FDI-SME policies may have one or multiple core functions depending on the number of formal mandates that have been assigned to them by their sponsor ministry. For instance, almost one third of SME and entrepreneurship agencies also operate as their country’s innovation agency and support both business research and development (R&D) and applied research by the public sector (e.g. Croatia, Czech Republic, Estonia). Other agencies may have a single core function (e.g. investment promotion) but be given complementary mandates in relation to their core activities. Among EU Investment Promotion Agencies (IPAs), 77% of them have been tasked to promote investments that contribute to other policy goals such as fostering innovation, improving the competitiveness of regions or supporting the internationalisation of the economy (e.g. Lithuania, Ireland, Hungary, Estonia, Bulgaria).
Large variations exist across EU Member States in terms of the number and functions of implementing agencies, reflecting the disparities in their governance models, but also potentially varying policy priorities given by their respective governments (Figure 4.2). All EU Member States have a national IPA, with the exception of Belgium which has three subnational IPAs (one for each federal state) and Italy, where two IPAs (i.e. ICE and INVITALIA) operate in a complementary way. SME and entrepreneurship development is entrusted to specialised agencies in 25 EU Member States. Cyprus2 and Romania are notable exceptions since SME support programmes are administered only at the Ministerial level.
Note: This figure illustrates the number of specialised implementing agencies that have been mapped across the investment promotion, SME, innovation and regional development policy areas in each EU Member State. Regional development agencies operating at the subnational level have been mapped only for 12 EU Member States (Finland, Slovenia, France, Croatia, Sweden, Slovak Republic, Portugal, Lithuania, Denmark, Italy, Poland, Latvia). In Belgium, the 3 IPAs operating at the subnational level (one for each federal state) have been mapped.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2021).
Regarding innovation agencies, certain countries have established multiple specialised bodies to promote innovation, with some focusing on business adoption and diffusion (e.g. of new technologies) and others on knowledge (co-)creation (e.g. funding of scientific research and the commercialisation of R&D, e.g. Slovak Republic, Spain, Czech Republic). For instance, the Slovak Innovation and Energy Agency (under the supervision of the Slovak Ministry of Economy) offers technical support to enhance the innovation performance of domestic business enterprises, while the Slovak R&D Agency and the Research Agency work under the supervision of the Ministry of Education to offer financial support for collaborative research activities (OECD, 2022[5]).
Evidence from 12 EU Member States shows that the role of regional development agencies also varies. In some countries, regional agencies have been established by subnational governments to pursue region-specific priorities and implement business promotion policies (including investment and SME development programmes) that are tailored to local needs (e.g. Croatia, Denmark, France). In other EU countries, regional development agencies report to ministries and serve as an extension of the central government services to the subnational level (e.g. the Regional Coordination and Development Commissions, CCDRs, in Portugal and Regional Development Centres, ELY, in Finland) (Box 4.1).
The structure and legal form of implementing agencies can determine their degree of autonomy in the design, coordination and implementation of FDI-SME policies (Figure 4.3). Depending on the way they are supervised, managed and controlled, it can also have a particular incidence on how they interact with other government actors and the type of strategic relations they form with them.
Government agencies responsible for FDI-SME policies are more often established as autonomous legal entities (66%), resulting in a high degree of autonomy in planning and managerial decisions vis-à-vis their political principals, i.e. reporting ministry. The delegation of roles and competences to autonomous or semi-autonomous executive bodies has been a common trend among EU governments that seek to achieve efficiency gains in the administration of public policies. As part of their policy implementation role, autonomous agencies can decide on the tools and methods to be used to achieve the outcomes prescribed at the ministerial level. They can also serve as intermediary organisations between the central government and the final beneficiaries of public support (e.g. foreign investors, SMEs, start-ups) with various benefits relating to economies of scale, proximity to business and reduced transaction costs in handling administration.
Close to 15% of public agencies responsible for FDI-SME policies operate as a department in ministries or subnational governments. This is the case of the Netherlands Foreign Investment Agency (NFIA) and the Danish Business Authority (DBA), which are part of their respective Ministry of Economy. Due to their proximity to central government, these agencies may benefit from greater access to resources and more opportunities to influence the design of policy interventions. Importantly, they can play a policy advocacy role by transmitting business insights and feedback from the private sector directly to higher levels of government, and contribute to the creation and enhancement of an enabling policy framework for FDI promotion and SME development. Previous OECD evidence on IPA practices has found that 90% of IPAs operating within a ministry dedicate staff to policy advocacy, while 63% of autonomous public agencies do (OECD, 2018[6]).
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2021).
Although only 8% of the total number of agencies operate as state-owned financial institutions, they make up a relatively large share of the SME and entrepreneurship agencies (22%) (Figure 4.3). These usually include national promotional banks, public investment funds and export credit agencies which are established with the mission to expand credit supply for SMEs’ innovation and export-related activity by providing loans, equity finance, guarantees and other hybrid funding instruments. As to public-private entities (7%), they are often governed by a board of public and private sector representatives (e.g. Slovak Business Agency, Business Sweden), which allows for the integration of industry priorities and insights into their policymaking processes.
In Portugal, important prerogatives in the area of regional policy are in the hands of the Ministry of Planning, which is responsible for the management of the EU Structural and Investment Funds, and the Ministry of Territorial Cohesion, which formulates and implements regional development policies. To ensure better coordination with regions in the use of EU funds for the implementation of regional initiatives, the Portuguese Government has also established the Agency for Development and Cohesion (Agência para o Desenvolvimento e Coesão, AD&C), which operates as a Department within the Ministry of Planning. AD&C ensures coordination by issuing technical guidance notes on the implementation of the EU funds, by participating in working groups dealing with policy design and implementation, and by leading or participating in functional networks in areas such as investment incentive schemes, regional dynamics, smart specialisation and science, technology and innovation support.
Portugal has not established a regional government level, unlike many other EU countries. Instead, there are five Regional Coordination and Development Commissions (CCDRs) (one for each of the five NUTS 2 regions of mainland Portugal), which serve as decentralised branches of the government and carry out tasks in the areas of the environment, land and town planning, and regional development. They also play a significant role in formulating and implementing regional smart specialisation strategies together with the Ministry of Planning, the Ministry of Economy and Digital Transition, and the Ministry of Science, Technology and Higher Education.
Source: OECD (2022[7])
It is important to note that regional development agencies, which often operate closer to local FDI-SME ecosystems, exhibit a more diverse legal structure than other agencies. Only four EU Member States have regional development agencies operating at national level (e.g. Portugal, Sweden, Latvia, Italy, France) either as autonomous agencies or as part of a Ministry (Box 4.1). At the subnational level, local public companies (LPCs) have been established by subnational governments to deliver local public services, including in areas related to local economic development, spatial planning and infrastructure. Standing at the crossroads of the private and public sectors, LPCs are particularly common in Europe and can be 100% publicly funded or a combination of public and private capital (OECD, 2017[8]). Finally, cooperative associations involving several municipalities are also common. In Portugal, for instance, 21 Inter-municipal Communities (CIMs), corresponding to the NUTS 3 level, have been established to reinforce inter-municipal cooperation and fulfil tasks beyond the borders of single municipalities, including on investment attraction and local business development (OECD, 2022[7]).
Ministries of Economy are most often responsible for the strategic oversight of FDI-SME policies
Agencies responsible for FDI-SME policies can have different reporting lines depending on their legal status, the policy domain within which they operate and the broader institutional environment. Some of them may also report to multiple ministries, reflecting the diversity of their mandates and inter-institutional coordination approaches.
The most common ministries to which agencies report to are those bearing responsibility for economic growth policies (55%), including investment and entrepreneurship policies, and those promoting innovation, scientific research and technology transfers (25%) (Figure 4.4). These ministries often focus on the design and coordination of national competitiveness and industrial development programmes and are responsible for devising national strategies and action plans that provide overarching directions and set national priorities, goals and policy objectives (e.g. Smart Specialisation Strategies). With the ministry of economy being responsible for SMEs and investment policy in most EU member States, it is likely easier to foster synergies between these two policy areas and ensure the necessary coordination to strengthen FDI-SME linkages and spillovers.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2021).
Other ministries have a less prominent role in the formulation of FDI-SME policies, and often complement the efforts undertaken by key actors described above. Ministries of Foreign Affairs, for instance, participate in investment promotion activities in collaboration with IPAs through their diplomatic missions abroad. Many IPAs report directly to the Ministry of Foreign Affairs – rather than to the Ministry of Economy, which is usually the one with overall responsibility for investment policy – to exploit potential synergies arising from the government’s economic diplomacy portfolio (e.g. Denmark, Greece, Hungary, Portugal, Sweden). Similarly, in some EU countries, the Ministry of Foreign Affairs oversees specialised business support centres that focus on trade promotion and strengthening the export capacity of domestic SMEs. This is the case of Slovakia’s POCE Business Centre, which helps Slovak SMEs find new business partners and expand their operations abroad through an online portal (OECD, 2022[5]).
Ministries in charge of regional development coordinate the work of regional development agencies, subnational IPAs and local entrepreneurial support institutions (e.g. business incubators) and implement targeted policies and programmes to ensure that the benefits from economic development are shared more evenly among regions. Beyond the supervision of subnational entities, these ministries also play a strategic role in the implementation of territorial development and smart specialisation initiatives that have a strong focus on improving the quality of the business environment in less developed regions (Box 4.1). They are, therefore, often at the epicentre of place-based policy approaches that target local FDI-SME ecosystems.
Institutions enabling FDI-SME linkages combine different roles and responsibilities
Institutional environments differ from one country to another, and with them the scope and diversity of roles and responsibilities assigned to different government bodies. Agencies responsible for FDI-SME policies can be either fully dedicated to a core function (e.g. investment promotion, SME support, innovation promotion, regional development) or integrate several complementary mandates under the same roof. When looking more closely at the scope of activities that these institutions fulfil, it becomes clear that large variations exist across policy areas (Figure 4.5).
IPAs and SME and entrepreneurship agencies are most often tasked with promoting innovation (57% and 78% respectively), strengthening the domestic entrepreneurial ecosystem (50% and 100%), and supporting exports (47% and 38%). The combination of these mandates can be motivated by the need to maximise synergies and foster economies of scale by grouping together policy areas that target different aspects of investment and business growth (e.g. internationalisation, innovation, productivity). This is particularly true for governments that seek to strengthen the domestic business environment, in particular SMEs, by attracting innovation-oriented, export- and R&D-intensive investors, as similar industries and markets can be targeted.
The complementary responsibilities assigned to innovation agencies follow a rather different rationale. Although most of them (64%) seek to support the innovation capacities and technological upgrading of domestic SMEs, they are also increasingly focusing on the commercialisation of applied research and the development of research infrastructure networks (30%) that can be used by different types of market and non-market stakeholders (e.g. R&D organisations, startups, non-profit entities). These mandates are linked to the broader role of innovation agencies as intermediary institutions that seek to foster knowledge-intensive linkages between the business and R&D sectors. In certain EU Member States (e.g. Portugal, Croatia, Slovak Republic), they are also responsible for administering R&D incentive schemes (21%), including direct funding (e.g. grants, loans) and tax relief, for the implementation of knowledge-intensive investments.
Regarding regional development agencies, their mandates focus on aspects that directly affect the local economic environment in which they operate, including entrepreneurship development (54%), innovation promotion (50%), and investment promotion (33%). In many EU Member States, regional development policies are driven by policy priorities identified in smart specialisation strategies, and financed by the EU Structural and Investment Funds, which remain a significant source of financing for many subnational governments. This is reflected in the responsibilities of regional development agencies who are legally mandated to manage EU funding instruments (25%), often in collaboration with ministries for regional development, and to provide technical support (13%) to subnational entities operating in their areas (e.g. industrial parks, business incubators, special economic zones, technology centres).
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2021).
The combination of these mandates reflects the interlinkages between different policy domains that act upon FDI-SME linkages. It also reveals that knowledge and technology diffusion is an issue requiring policy responses that do not fit neatly within any single government department or agency. Tailored policy considerations and increased focus on complementary policies within a single institution are, to a certain extent, necessary to support FDI-SME ecosystems. Yet, overlapping mandates across institutions also calls for policy coordination to avoid disjoined actions and separate strategies across different ministries and implementing agencies (Section below).
If not combined with the necessary resources, such wide mandates can weigh on agencies’ ability to properly achieve their mission. Some governments choose to establish separate agencies with a narrow mandate to ensure that their skillsets are sufficiently specialised and activities targeted to respond to the needs of their respective clients. In 2014, the Hungarian Investment and Trade Agency (HITA) was divided into two institutions, the Hungarian Investment Promotion Agency and the Hungarian Export Promotion Agency. The split aimed at establishing a sector-focused organisational structure to improve the targeting of their respective policy initiatives.
As addressed in the following sections, the success of such organisational reforms depends on the characteristics of the institutional environment, including the type of governance framework, the capacities of the public administration and the quality of policy coordination mechanisms.
The governance framework for FDI-SME policies varies from one country to another
Governance systems within the EU vary, ranging from highly integrated settings where FDI-SME policies are the responsibility of a single line Ministry and, in certain cases, a single implementing agency; to fragmented governance systems where several ministries and agencies are responsible for investment promotion, entrepreneurship development, innovation and regional development policies (Table 4.1; Figure 4.7).
A key characteristic of fragmented institutional frameworks is the multiplicity of government actors involved in policy design and implementation as well as the presence of several highly specialised agencies with a narrow mandate that report to different line ministries. In Portugal, for instance, the primary responsibility for SME and business innovation policy lies with the Ministry of Economy and Digital Transition and its two implementing agencies, the SME Competitiveness Agency (IAPMEI) and the National Innovation Agency (ANI) (OECD, 2022[7]). The Ministry of Foreign Affairs coordinates national investment promotion and trade policies and supervises the work of the national IPA (AICEP Portugal Global). Important prerogatives are also in the hands of the Ministry of Planning, which is responsible for the management of the EU Structural and Investment Funds, and the Ministry of Territorial Cohesion, which formulates and implements economic growth policies in regions.
Similarly in Denmark, the Danish Business Authority, which is responsible for promoting business growth, reports to the Ministry of Industry, Business and Financial Affairs, while the Danish IPA, Invest in Denmark, operates as a department within the Ministry of Foreign Affairs. Innovation Fund Denmark, a public financial institution supervised by the Ministry for Higher Education and Science, also plays an important role in supporting R&D collaborations between business and research institutions.
In contrast, other EU Member States with an integrated institutional framework such as Finland, Lithuania, Latvia and Estonia target the entire FDI-SME ecosystem through consolidated “mega-agencies” that report to a single Ministry. Such institutional frameworks are usually the result of government reforms aimed at improving public sector efficiency. In Slovenia, a single implementing agency, SPIRIT Slovenia, has been entrusted to promote investment and entrepreneurship as well as support the internationalisation and innovation of the domestic economy. Enterprise Estonia is also the largest institution within the Estonian business support system that provides financial assistance, counselling and training for domestic and foreign firms, individual entrepreneurs, research institutions as well as the public and non-profit sectors.
These “mega-agencies” often operate as umbrella organisations bringing together a wide range of government initiatives and actors targeting foreign investors and domestic SMEs. Business Finland was established in 2018 as an association of two entities, offering internationalisation, investment and tourism promotion services. Similarly, the Netherlands Foreign Investment Agency (NFIA) operates as an administrative unit within a larger public organisation responsible for promoting innovation and entrepreneurship, the Netherlands Enterprise Agency (RVO). Such institutional set-ups usually aim to facilitate access of firms to public support by making the delivery of business services smoother and by implementing comprehensive policy packages that support FDI-SME ecosystems at every step of their growth trajectory (e.g. investment facilitation, innovation funding, advise in growing internationally, skills training).
Overall, the majority of EU Member States has partially integrated governance frameworks. In this group of countries, a common trend is for the IPA and the SME and entrepreneurship agency to report to the same ministry – usually the Ministry of Economy – (e.g. Ireland), which could facilitate inter-institutional planning and decision-making across the investment and SME policy agendas. Responsibilities for innovation promotion, on the other hand, are often split between the ministries responsible for economic policy, science and education. In the Slovak Republic, both the Slovak R&D Agency (under the supervision of the Ministry of Science and Education), and the Slovak Innovation and Energy Agency (under the supervision of the Ministry of Economy), offer technical and financial support to promote knowledge and technology transfers and enhance the innovation performance of the domestic economy (OECD, 2022[5]).
Although investment promotion, SME and innovation policies can be more or less integrated into the same ministry, regional development policy usually stands apart. Most EU Member States, have a dedicated ministry for regional development, which implements territorial development programmes, manages the allocation of EU Structural Funds to regions and coordinates the implementation of tailored initiatives with subnational governments.
There are however a few exceptions. In Finland and Slovenia, responsibility for regional policy sits within the Ministry of Economy, allowing for the diffusion of regional priorities into economic and business promotion policies. Hungary and the Netherlands do not have an explicit regional development policy, but apply a regional focus to several policy domains managed by different ministries (OECD, 2019[9]; OECD, 2019[10]). Finally, in highly decentralised countries like Spain and Germany, regional development is mainly a responsibility of subnational governments (i.e. the Autonomous Communities in Spain and the Länder in Germany), with central government having a coordinating and financing role (OECD, 2019[11]; BMWK, 2022[12]).
Institutional complexity is a key determinant of policy coordination strategies
Institutions responsible for FDI-SME policies operate in a dense and complex network of stakeholders – both public and non-public – which requires strong cooperation and coordination skills and processes. Although there is no standard inter-institutional coordination approach to the successful implementation of FDI-SME policies, much of the success or failure of attempts to coordinate appear to depend upon country contexts. The complexity of the institutional setting has implications on how much coordination effort is required and what type of coordination mechanisms should be deployed to ensure policy coherence. The links between institutional settings and coordination approaches are described in Table 4.1.
Fragmented institutional settings may induce more complex governance systems – i.e. higher risks of information asymmetry, transaction costs and trade-offs – and require robust coordination mechanisms to overcome policy silos. Given the number of institutions involved, top-down approaches relying on the authority of a lead government body (e.g. the President or Prime Minister’s Office, high-level government council) are often used to make joint strategic and operational decisions. In Latvia, for instance, a collegial advisory authority chaired by the Prime Minister was established in 2014 to facilitate planning and evaluation of the country’s long-term development objectives, initiate structural reforms and ensure coherence of national and local government policy (OECD, 2019[13]). This was complemented by a Cross-sectoral Coordination Centre that reports directly to the Prime Minister and aims to foster collaboration and joint actions between ministries.
On the other hand, integrated institutional settings could rely on informal types of coordination such as ad hoc meetings among civil servants and informal networks of high-ranking officials responsible for investment and economic growth policies. The concentration of mandates in mega-agencies implies low transaction costs and limited information exchange barriers, and could therefore facilitate the implementation of cross-cutting policies such as those required to strengthen FDI-SME linkages and their impact on productivity and innovation.
The survey finds that, in the EU, inter-institutional relationships in the area of FDI-SME policies involve coordination primarily with implementing agencies (84%) that offer investment promotion, innovation and business support services and are therefore in direct contact with foreign investors and domestic SMEs; ministries (69%) responsible for the design of these policy interventions; and regional and local authorities (60%), which are often essential in promoting local SME ecosystems, accompanying the national IPA in conversations with investors and providing investment facilitation and aftercare services in regions and cities (Figure 4.6).
Although to a lesser extent, one third of surveyed public institutions also cooperate with the Centre of Government (CoG) (31%), i.e. the body or group of bodies that provide direct support to Heads of Government and the Council of Ministers (e.g. President’s Office, General Secretariat of the Government). The role of the CoG has expanded in recent years from purely monitoring and strategic planning functions to playing a more strategic leadership role of facilitating coordination across government siloes. This trend has been further accentuated by the COVID-19 crisis (OECD, 2020[14]), during which governments had to swiftly and efficiently implement large support packages for businesses affected by the containment measures, and therefore leadership and coordination from the highest government ranks was necessary to manage the immediate economic fallout.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2021).
Instruments of horizontal coordination can be complementary and used interdependently by different government bodies
When looking at the main horizontal coordination mechanisms (i.e. among institutions operating at the same level but across different policy areas) for the implementation of FDI-SME policies (Figure 4.8), entrenching coordination requirements in laws and regulations remains the main approach to aligning action across government portfolios. Half of the EU institutions involved in FDI-SME policies formalise coordination across-the-board through legally binding provisions (49%). Such laws describe the role and responsibilities of each institution, their internal management processes, and the policy areas where interaction with other public actors is required. They also stipulate governance frameworks to ensure inter-agency collaboration. In Ireland, there is a requirement for ministerial representation in the management board of Enterprise Ireland, while in Portugal the SME and entrepreneurship agency (IAPMEI) sits in the board of the national innovation agency (ANI) (OECD, 2022[7]).
High-level government councils, inter-agency committees and working groups dealing with investment, entrepreneurship and broader competitiveness issues have been also established to ensure policy coherence (43%). For instance, the Portuguese Government has set up Startup Portugal, a public-private task force to coordinate the implementation of the National Strategy for Entrepreneurship (OECD, 2022[7]). Coordination on investment matters takes place through the Permanent Commission for Investor Support (Comissão Permanente de Apoio ao Investidor, CPAI), which is managed by the IPA (AICEP) and gathers representatives from the SME agency (IAPMEI), the Portuguese Environment Agency, the Tax and Customs Authority, the Ministry of Economy and Digital Transition and regional authorities.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2021).
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2021).
In certain EU Member States, these inter-institutional structures take the form of public or semi-public collaborative networks, whose role goes beyond horizontal coordination to also include vertical coordination (e.g. across tiers of government) and the exchange of information and streamlining of business support services. The Netherlands Foreign Investment Agency operates the Invest in Holland Network, which comprises regional development agencies, several large cities and other non-profit entities (NFIA, 2022[15]). The network aims to provide a continuum of support services to foreign investors and connect them with the right government partners depending on the type and location of their investments. Similarly in Finland, the Team Finland Network has been established to coordinate all the internationalisation services offered by different public entities and streamline them into client-oriented packages which are easily accessible to foreign investors and domestic entrepreneurs.
Contracts and other forms of written agreements are the third most common instrument used to establish organisational links and formalise relationships between institutions involved in FDI-SME policymaking (35%). In Poland, the working relationship between the Ministry of Economic Development and the Polish Investment and Trade Agency is defined in a contract, while in Italy, the national IPA, INVITALIA, has signed a Memorandum of Understanding (MoU) with the Agency for Territorial Cohesion (ACT) to promote investments in economically weaker regions. In recent years, cooperation protocols have been also signed between the Slovak Business Agency and subnational authorities in the Eastern parts of the Slovak Republic to provide tailored SME support services in regions and cities (OECD, 2022[5]).
Inter-agency joint programming (32%) and specific programme rules (19%) are relatively frequent. Business France, BPI France, and the French Tech Mission administrate joint programmes at the intersection of FDI, SME, and innovation policy, with Business France focusing on projects supporting the internationalisation of French companies, and BPI France and the French Tech Mission strengthening their technological capabilities and facilitating access to finance. The Scale Up Tour programme is an example of collaboration among the three agencies. Organised annually, the programme involves a series of events promoting the French tech ecosystem to some of the world’s leading foreign investors abroad, leading to the exchange of know-how and best practices and forging links with foreign markets.
Only a few institutions report coordinating operations through civil servant staff exchange programmes and informal channels of communication (15%). In OECD countries, staff exchanges and secondments vertically across levels of government and horizontally at the same government level have proven to be an effective tool to address resource and skill-related gaps in public administration (OECD, 2017[16]). However, in most countries they are implemented on a voluntary basis and require the mutual agreement of sending and receiving institutions.
Multi-level governance arrangements vary by country, region and policy area
Engaging with subnational actors and operating in proximity to foreign investors and local SMEs can be strong enabling factors for the effective implementation of FDI-SME policies. Coordination with subnational agencies can, however, bring a number of challenges. Disparities in the socio-economic development, investment attractiveness and skills intensity of regions means that central government agencies have to increasingly tailor their policies to a range of different local needs. The capacities and competencies of subnational actors also vary; networks of regional development agencies are usually heterogeneous, which means that different collaboration strategies may be needed depending on the region. For this reason, multi-level governance systems matter. In highly decentralised countries (e.g. Spain, Germany, Belgium), robust coordination mechanisms involving subnational authorities are de facto warranted to ensure the effective implementation of FDI-SME policies.
Because of the diversity of their mandates and organisational characteristics, institutions involved in FDI-SME policies need to take into consideration a multitude of factors when deciding how to distribute roles and responsibilities across levels of government, including the number and extent of their mandates, available resources, the ease of coordinating with subnational actors, and the policy priorities ascribed to them by their sponsor ministry. Depending on the institution’s internal organisation as well as its strategic orientations, different options are available as regards how to strike the right balance between headquarter vs. local presence.
The survey reveals that more than half of investment promotion (63%) and SME and entrepreneurship agencies (62%) within the EU have established and operate subnational offices to ensure that foreign and domestic firms have access to business support services (e.g. information provision, technical assistance, training) close to where they operate (Figure 4.9). In contrast, only one third of innovation agencies (33%) operate regional offices. This potentially reflects the different type of support that many of them provide, often focused on the administration of innovation/R&D funding, which does not necessarily require proximity to business.
Regional development agencies, on the other hand, operate primarily at the subnational level (80%). They are established and managed by regional and local authorities with a mandate to implement local economic development action plans and promote local entrepreneurial ecosystems. Only a few EU Member States have established national agencies to administer regional policies (20%). As described in the previous sections, these national bodies are responsible for the implementation of territorial development programmes, managing and coordinating EU funds for less developed areas and providing technical assistance to regional and local administrations.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2021).
As one would expect and as reflected on Figure 4.10, the establishment of regional offices appears to be positively correlated to the size of the country and the type of governance model. Territorially large EU countries (e.g. France, Sweden, Italy, Poland) tend to have on average more government agencies with subnational offices than small EU countries. This is likely motivated by the increased distance that separates their headquarters from remote regions, which may need a local presence to ensure the effective delivery of FDI-SME policies. Similarly, the average number of agencies with subnational offices tends to be higher in partially integrated and fragmented institutional frameworks (e.g. Portugal, Belgium, Denmark), reflecting the complexity of these institutional settings and the multiplicity of government entities that operate at both national and subnational levels.
Effective coordination with subnational actors depends, first and foremost, on the different types of regional office settings. As illustrated in Figure 4.11, the majority of institutions involved in FDI-SME policies have subnational offices that are fully affiliated to their headquarters, while less than one third of them are administratively located in the premises of other national or local actors (e.g. regional development agencies, municipalities, regional offices of other national agencies). Sharing premises can be an effective way to bring down siloes and improve communication across policy areas and tiers of government (see Box 4.2). Business Finland, for instance, has an extensive network of regional offices which are managed in collaboration with regional development centres (“ELY Centres”).
The role and responsibilities of subnational offices vary; not all institutions operate at the local level in the same way. As many specialised agencies cover multiple mandates, their subnational offices can respond to different needs and perform different functions (e.g. trade, investment and tourism promotion). For instance, the Latvian Investment and Development Agency (LIIA) has established regional offices in the form of business incubators to support the growth of domestic firms, while investment promotion and facilitation are undertaken at central level at the agency’s headquarters. When it is deemed necessary, investment facilitation is provided in direct collaboration with regional and local authorities rather than the agency’s subnational offices.
The scope of activities undertaken at the subnational level also affects their organisational structure. Certain IPAs and SME agencies operate fully fledged subnational offices with sufficient resources to engage in investment promotion and provide business support locally. Others choose to establish a small number of regional representatives in premises shared with local organisations, focusing on promotional activities and partnership building. The Croatian Agency for SMEs, Innovation and Investments (HAMAG-BICRO) has recently established a small number of agency representatives within business incubators and technology centres operating across the 20 counties of Croatia to promote its SME support programmes and facilitate communication between regional actors and HAMAG-BICRO’s headquarters in Zagreb.
Note: The categorisation of EU Member States by governance model is based on the typology presented in Table 4.1. The categorisation of EU Member States by size is done on the basis of land area and includes the following countries: i) Small: Malta, Luxembourg, Cyprus, Slovenia, Belgium, Netherlands; ii) Medium low: Denmark, Estonia, Slovak Republic, Croatia, Latvia, Lithuania, Ireland; iii) Medium high: Czech Republic, Austria, Portugal, Hungary, Bulgaria, Greece; iv) Large: Romania, Italy, Poland, Finland, Germany, Sweden, Spain, France.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2021).
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2021).
Business Finland has adopted a comprehensive approach to coordinating with national and subnational actors involved in investment promotion, innovation and entrepreneurship development. The head office of the agency is located in Helsinki in premises shared with Finnvera, the official export credit agency of Finland, and the Finnish Industry Investment Ltd (Tesi), a state-owned investment company that promotes the growth and internationalisation of domestic companies. Outside Helsinki, the agency has established offices in 16 other locations, in shared premises with Finnvera and the local Centres for Economic Development, Transport and the Environment (“ELY Centres”). Finland has a total of 15 ELY Centres, which are tasked with promoting local sustainable development. The services offered by ELY Centres cover internationalisation of business operations, improvement of management skills in small businesses, funding for investment and development projects, and innovation promotion.
Business Finland’s extensive network of subnational offices has improved the availability of investment promotion and SME support services in regions and allowed the agency to tailor its programmes to the priorities and needs of local FDI-SME ecosystems. Sharing premises with national and regional development institutions has also facilitated coordination at the subnational level and made it easier for client companies to access services that suit them. Collaboration among these government bodies is supported by the Team Finland Network, which gathers all public actors offering internationalisation services to companies. The network is managed by the Ministry of Economic Affairs and Employment and the Ministry of Foreign Affairs, with Business Finland coordinating the network’s operations at the national level and the ELY Centres coordinating the operations at the regional level. This coordination framework has helped improve the efficiency and quality of services. During the COVID-19 pandemic, network members collaborated and served together more than 10,000 clients including by providing joint counselling sessions, responding to enquiries, funding and organising joint events.
Source: OECD based on Business Finland (2021[17])
Institutions that do not have any secondary offices use a variety of channels to extend their services in regions in which they do not operate. Bilateral collaboration agreements (e.g. contracts, MoUs) are mentioned by several government agencies as key instruments to nurture strategic links with regional and local entities (e.g. in Croatia, Austria, Netherlands, Sweden). The Portuguese IPA (AICEP) has formalised their partnership with the Azores Business Development Society through a MoU to implement joint initiatives in the Azores autonomous region, while the Spanish Centre for the Development of Industrial Technology has signed collaboration agreements with the Autonomous Communities (NUTS2 regions) for the implementation of multi-year innovation programmes.
Inter-institutional networks and specialised task forces are frequently used to coordinate policies across tiers of government. In Croatia, the BOND Network of Entrepreneurial Support Institutions has helped foster synergies among more than 100 subnational entities involved in local initiatives related to entrepreneurship, innovation and skills development (Box 4.3). In other countries (e.g. Spain, Netherlands, Romania, Germany) associations of regional development agencies have been established to facilitate the exchange of experiences and strengthen the capacities of regional administrations. Such policy networks often help address challenges arising from the fragmentation of subnational business support systems which is a longstanding issue in many EU Member States. By fostering policy dialogue, they can also help attenuate inter-regional competition in attracting investments and standardise the quality of SME and entrepreneurship services across regions.
The fragmentation of the institutional framework for entrepreneurship support has been a longstanding issue in Croatia. The Croatian Agency for SMEs, Innovation and Investments (HAMAG-BICRO) is the main government entity supporting the development of Croatian SMEs, improving the innovation process and encouraging investments in Croatia. Created in 2014 through the merger of several government entities, the agency’s activities include promotional activities for small businesses, financing SME operations by making available grants, loans and guarantees, and providing technical assistance to support innovation and R&D.
Although the set-up of a single implementing agency at the national level has helped streamline the provision of business support services, a rather complex and multi-layered network of subnational entrepreneurial support institutions is still in place, creating a cumbersome environment for businesses who have to navigate through it. The Entrepreneurial Infrastructure Improvement Act, in force since 2013, allows regional and local authorities to set up seven different types of institutions, including development agencies, entrepreneurship centres, business incubators, entrepreneurship accelerators, business parks, science and technological parks and competence centres. This has resulted in the establishment of more than 200 support institutions which are currently operating across Croatian regions.
In 2017, HAMAG-BICRO established a Network of Entrepreneurial Support Institutions (“BOND Network”) with the aim to connect with subnational actors and ensure that the same quality of SME support services is provided across Croatia’s regions. The Network members established an online educational platform, which allows them to communicate, exchange experiences, and undertake virtual trainings to improve the quality of their services. Up until 2022, more than 22 thematic workshops and seminars had been organised throughout Croatia, with the participation of more than 1100 representatives of entrepreneurial support institutions, who had the opportunity to learn about good practices in the delivery of SME support services. The network’s activities will expand further in 2023 to include the standardisation of other areas of business support, such as internationalisation services, mentoring, and student entrepreneurship.
Source: OECD based on HAMAG-BICRO (2022[18])
Policy evaluation practices are limited among government agencies responsible for FDI-SME policies
Evaluating the impact of public policy interventions on the domestic economy can help governments identify potential policy gaps and take corrective action to enhance their effectiveness. The adoption and use of monitoring and evaluation (M&E) frameworks by government institutions is particularly important for policy initiatives targeting FDI-SME ecosystems, which often require public action from across different policy areas and therefore enhanced scrutiny to ensure that policy action achieves the expected results.
The survey reveals that government agencies responsible for FDI-SME policies identify policy implementation as being their primary activity (94%), followed by policy design (65%) and, to a much lesser extent, policy evaluation (20%). A few agencies (22%) respond that they undertake other types of activities such as administering financing instruments, providing technical assistance to public bodies and coordinating EU funds. These trends appear to be the same when looking at the core activities undertaken across policy areas (Figure 4.12). Investment promotion, SME and innovation agencies regard themselves primarily as policy implementers rather than policy evaluators.
In contrast, regional development agencies undertake a more diverse set of activities, with 38% of them conducting policy monitoring and evaluations and 50% undertaking other activities such as offering financing solutions for local development projects or providing technical assistance to municipalities and regional authorities. These findings may be linked to the inter-linkages between regional policy and the administration of EU Structural and Investment Funds. In many EU Member States, government actors involved in the management of EU funds have to adopt comprehensive M&E frameworks to allow for the collection of data and the implementation of ex-ante and ex-post policy evaluations. In Portugal, for instance, the Agency for Development and Cohesion (AD&C), which is responsible for supporting the competitiveness of regions through territorial development programmes, is also responsible for coordinating the evaluation of policy initiatives financed by the EU funds. The agency has established a Monitoring and Evaluation Network (Rede M&A) to promote M&E activities and the exchange of good practices among public sector entities.
Source: EC/OECD Survey of Institutions and Policies enabling FDI-SME Linkages (2021).
Undertaking policy evaluations does not appear to depend on the type of governance framework adopted by a country (Figure 4.13). However, there seems to be some variation when looking at the core activities of different legal entities. 80% of agencies that operate as part a subnational government undertake policy evaluations, while that share is 21% for autonomous agencies and 20% for agencies operating as part of a ministry.
Overall, the limited evaluation practices of agencies involved in FDI-SME policies are in line with evidence from other government institutions in EU Member States that implement policies linked to the EU’s smart specialisation strategy. In a 2020 survey conducted by the EU’s Joint Research Centre (JRC), half of the national and regional implementing authorities considered their capacity to collect and analyse data inadequate, with potential negative consequences on the process of policy learning and adaptation (Hegyi et al., 2021[19]). Previous OECD findings from OECD IPAs also show that OECD IPAs favour qualitative evaluation methodologies – such as benchmark comparisons (78% of IPAs), client surveys (75%), and stakeholder consultations (69%) – over quantitative ones (e.g. quality control assessments, cost benefit analyses, and econometric assessments) (OECD, 2018[6]). The main challenge that most agencies have to overcome is the partial information and incomplete or ambiguous results that qualitative evaluations often provide. Qualitative tools should ideally be complemented by more quantitative and systematic approaches, whenever possible.
The 2021 OECD Survey on Prioritisation and Monitoring & Evaluation of Investment Promotion Agencies provides a few interesting findings on the M&E practices of IPAs in the OECD area. Nearly three quarters of surveyed IPAs view M&E as a key factor that shapes their investment prioritisation strategies, which can influence the kind of investment that is attracted into the local economy.
Most IPAs prioritise certain types of investments over others. To select priority firms and guide their decision on whether to assist a particular investment project, IPAs rely on Key Performance Indicators (KPIs) related to outcomes. In particular, some KPIs aim to assess the contribution of a project to local development and sustainable growth. The most used KPIs in this respect are those relating to productivity and innovation (92%), 32% of which refer specifically to indicators on research and development (R&D), followed by those on quantity and quality of jobs (87%). Export (or trade balance) related metrics and KPIs related to low carbon transition are also used by about half of IPAs. Other sustainability- and inclusiveness KPIs are less frequently mentioned: KPIs related to digital transformation are reported to be used by 35% of IPAs and those on gender equality by 16% (albeit rarely concrete metrics are indicated).
Several IPAs have also developed internal sustainability scoring systems (e.g., Denmark, Finland, Germany, Sweden) that encompass several relevant factors. For example, the investment assessment model of Business Sweden considers factors relating to investment size (jobs and capital); innovation, skills, and technology content, including R&D; export opportunities for Swedish companies; and other factors (e.g., brand recognition).
Agencies differ strongly in the type of KPIs used for M&E. While some agencies put more attention on sustainability-related KPIs – such as Germany, Ireland, Finland, Denmark (located to the left on the graph), other IPAs – such as Greece, Japan, Slovenia, or Colombia (located to the right) – tend to rely predominantly, or exclusively, on metrics relating to the number and value of investment projects. Some IPAs – such as Latvia, the United Kingdom, or Italy – in turn, use output indicators to a larger extent, relating primarily to IPAs’ activities, including the number of meetings, participants, inquiries, and visits, rather than outcome KPIs. On average, 39% of KPIs used for monitoring and evaluation by OECD IPAs relate to the number of projects; 25% to sustainability and inclusiveness; 16% to activities and processes, and 8% to investment value
Most OECD IPAs have not undergone econometric impact evaluations. Only 28% of OECD IPAs report to have undertaken econometric impact evaluations of their services, another 25% are currently in the process of preparing it or would like to undertake it in the future. This highlights the general interest in the subject as well as potential challenges. For example, lacking resources are an oft-quoted reason for not having undertaken the analysis thus-far. Several IPAs that either have undertaken, or are planning to undertake, such evaluations have done so by forging critical partnerships, including with the administrative bodies providing additional rich data, academia or international organisations.
Source: (Sztajerowska and Volpe Martincus, 2021[20])
References
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Notes
← 1. The Enterprise Europe Network is a one-stop-shop for SMEs providing access to market information, legal advice and potential business partners across Europe.
← 2. Note by Türkiye: The information in this document with reference to “Cyprus” relates to the southern part of the Island. There is no single authority representing both Turkish and Greek Cypriot people on the Island. Türkiye recognises the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is found within the context of the United Nations, Türkiye shall preserve its position concerning the “Cyprus issue”.
Note by all the European Union Member States of the OECD and the European Union: The Republic of Cyprus is recognised by all members of the United Nations with the exception of Türkiye. The information in this document relates to the area under the effective control of the Government of the Republic of Cyprus.