Faced with falling investment in research and development (R&D) by private companies in most European countries, the European Commission is turning to smaller firms to give Europe a competitive edge. Small to medium-sized enterprises - defined by the commission as companies with less than 250 employees and with turnover under €500 million - have traditionally not engaged in this kind of activity.

That's largely a function of their size but also the nature of their business - there's clearly little sense in a corner shop investing its profits into researching new technology or processes for the retail sector.

But the commission believes that there is a small number of high-tech SMEs that can and should benefit from involvement in its research programmes.

It was ironic that on the day that the commission was briefing journalists on the need for SMEs to engage in European-funded projects, a comprehensive survey of international R&D investment found that Europe is continuing to fall behind the US and Asia. The study, by the UK department of trade and industry, revealed that European companies increased R&D spending by just 2 per cent in 2004-05, while companies in the US and Asia grew their investment by 7 per cent. More worryingly, traditional powerhouses such as the UK actually reduced their investment.

The data seems to be the final nail in the coffin for European aspiration to invest 3 per cent of GDP in R&D by 2010, one of the key goal+s of the Lisbon Agenda.

Isi Saragossi, director of the commission's directorate general research with responsibility for investment in research, said that the targets set at Lisbon in 2002 were goals to be aimed for, but admitted that the 3 per cent target will not be met.

He said that high-tech SMEs - which are variously defined as companies that are innovative, research-intensive or operate in high-tech markets - constitute only a few per cent of the total population of small firms.

"But they are very important in the development of the economy as they outperform other SMEs," he said.

Giving the biotech sector as an example, he said there are a similar number of firms in the US and Europe working in the sector, but the US companies employ more than twice as many staff, spend three times more on R&D and raise between three and four times more venture capital than their European counterparts.

The commission's main instrument for funding private companies to carry out research are its framework programmes. Currently being formulated is the seventh framework programme (FP7), which will run from 2007-2013. The budget for projects which SMEs can become involved in directly or engage research institutes to carry out work on their behalf has been doubled to €1.9 billion.

The commission has also made a number of changes to make the programmes more attractive to SMEs, such as choosing themes more relevant to them, reducing the bureaucracy involved in applying, and clearly defining who will own the intellectual property of any breakthroughs that are made.

At this week's briefing, various small firms and industry bodies who have benefited from European funding made presentations. These ranged from Smarticware, a Swedish firm working with big players such as Siemens and Infineon, to Smart Group, an electronics industry grouping that is helping SMEs to comply with legislation to move to lead-free soldering.

While they were positive about the benefits of the schemes to help them find European partners and access funding, speaking off the record, some executives bemoaned the bureaucracy involved in dealing with the commission and the time lag in getting paid for work done.

The commission acknowledges this has been a problem in the past and in FP7 it will introduce a simplified funding structure.

Although the commission has clear definitions of what micro, small and medium companies are - based on their number of employees and annual turnover - it does not have a clear definition of what constitutes a high-tech SME, or the precise number of them that are active in Europe.

With such scant information about the make-up and needs of these companies, it is going to be a challenge to get them to take up the available funding. Underlining the nature of this challenge were comments from Barry Gardiner, the UK's junior minister with responsibility for competitiveness at the department of trade and industry.

The UK government introduced the small business research initiative (SBRI) in May 2001, which diverted almost £100 million (€147.5 million) each year into purchasing products and services based on R&D carried out by small high-tech firms.

Government departments and agencies were supposed to channel 2.5 per cent of their external procurement of new technologies into the scheme.

The Irish Software Association has called for a similar scheme to be introduced here.

While the SBRI may have won fans in Ireland, Gardiner was candid in admitting that the scheme has failed++ to deliver on its promise in the UK. "The truth is that it has not been a success because there was a misunderstanding of the R&D base lines," he said. "The scheme has not done what we thought it would do."

It remains to be seen whether the commission's hopes to engage small firms in FP7 will suffer a similar fate.