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(Economic Development Committee EDC-11-00\(p.3\))Tj
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(Date: 22 June 2000)Tj
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(Venue: National Assembly for Wales, Committee Room 1)Tj
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(Title: Operating Aids)Tj
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(Purpose )Tj
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(1. )Tj
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/LBody <>BDC
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(Committee commissioned a further paper at its meeting on 12 April 2000 t\
o report back on further )Tj
0 -1.2 TD
(negotiations with Treasury, and to consider the issue of connectivity wh\
ich was also raised at that meeting.)Tj
ET
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/P <>BDC
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(Fiscal Incentives)Tj
ET
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/Lbl <>BDC
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(2. )Tj
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/LBody <>BDC
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(As Committee requested, we have pursued the question of R & D support wi\
th Treasury and the State Aids )Tj
T*
(branch of the DTI. Letters from Treasury and the State Aids branch are a\
t annexes A and B respectively.)Tj
ET
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/P <>BDC
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(3 The Treasury letter concentrates on two points: )Tj
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(distortion through displacement - both geographical as well as economic;\
and)Tj
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(compliance costs - on business as well as Government.)Tj
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(These are both important points. Although the Committee's attention has \
not previously been directed to the )Tj
T*
(question of compliance costs, geographical displacement has been discuss\
ed at previous meetings and the )Tj
T*
(Committee is also well siezed of the danger of allowing a "brass plate" \
economy to develop in West Wales & the )Tj
T*
(Valleys, giving the statistical impression of prosperity without the sub\
stance. )Tj
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(4 However, the Treasury letter says little about the problem of deadweig\
ht, paying for something that would have )Tj
T*
(been done anyway. However, deadweight can add enormously to the costs of\
public sector interventions. Every )Tj
T*
(year, scores of thousands of jobs are created throughout Wales without a\
ny public sector intervention whatever, and )Tj
T*
(firms make thousands of investments of all kinds. Any general type of pu\
blic sector intervention must first pay for all )Tj
T*
(this activity before it can have any effect. )Tj
ET
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(5 The only types of public intervention that do not carry this enormous \
overhead of deadweight costs are those )Tj
T*
(which target activities )Tj
/TT0 1 Tf
(which would not be carried out but for the intervention)Tj
/TT1 1 Tf
(. The general test applied is to )Tj
0 -1.2271 TD
(identify an element of market failure relating to the activity. The Work\
ing Group has concentrated on identifying such )Tj
0 -1.2 TD
(activities because intervention in relation to those activities would be\
more likely to make a difference to the )Tj
T*
(prosperity of Wales. )Tj
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(6 Market failure is a fairly rare phenomenon - markets that are operatin\
g at a less than satisfactory level are not )Tj
T*
(necessarily failing. It should therefore come as no surprise that few ma\
rket failures have been identified. However, )Tj
T*
(some of the new interventions that the Working Group has developed promi\
se to provide some assistance towards )Tj
T*
(combating social exclusion. The Committee has welcomed these in past dis\
cussions.)Tj
ET
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(Connectivity)Tj
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(7 At the Business Partnership Council meeting on the 13 April 2000 the F\
irst )Tj
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(Secretary raised the question of connectivity. He invited business to co\
ntribute views on where the key blockage )Tj
0 -1.2 TD
(was. He asked whether it was, for example, not being able to afford the \
computer and connection to the web, or was )Tj
T*
(it training and familiarisation for proprietors and staff? We have recen\
tly received a letter from the Federation of )Tj
T*
(Small Businesses \(FSB\), \(Annex C\). On first sight, the FSB seems to \
have provided a good analysis of the )Tj
T*
(problems. However, it is not clear why private sector advisers have not \
moved into what appears to be a growing )Tj
T*
(and potentially lucrative market. Nor is it clear that the National Asse\
mbly should necessarily take the lead in filling )Tj
T*
(the gap. However, One of the key priorities of the National Assembly is \
to transform the economy of Wales and )Tj
T*
(secure economic prosperity. Assisting businesses to recognise that effec\
tive use of Information Communication )Tj
T*
(Technologies \(ICTs\), and particularly the take up of e commerce, along\
with facilitating the establishment of an )Tj
0 -1.2 TD
(appropriate business support infrastructure as well as physical telecomm\
unications infrastructure, is key to )Tj
0 -1.2 TD
(achieving this. )Tj
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(8 A range of public and private sector support programmes are underway a\
nd planned to help address these, )Tj
T*
(including major ones by agents of the National Assembly such as the WDA \
and the WTB, to help meet these targets )Tj
T*
(and assist in improving the competitiveness of Welsh businesses. These p\
rogrammes can be accessed via )Tj
T*
(Business Connect and include the following: )Tj
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( )Tj
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(Business Connect IT Support Centres)Tj
/TT0 1 Tf
( - an impartial all Wales network of Support Centres which )Tj
0 -1.22711 TD
(specifically help small and medium sized companies \(SMEs\) get the most\
from information technology. )Tj
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/Lbl <>BDC
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( )Tj
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(WaleSME-business)Tj
/TT0 1 Tf
( - a large scale awareness raising and one to one mentoring programme. B\
y the end of )Tj
T*
(next year the programme aims to target 10,500 SMEs to demonstrate the im\
portance and benefits of ICTs )Tj
0 -1.2 TD
(and trading electronically. The programme allows for 1,500 of these SMEs\
to have to have in depth, one to )Tj
0 -1.2 TD
(one consultancy advice. )Tj
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( )Tj
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(Technology Means Business \(called @TEB in Wales\))Tj
/TT0 1 Tf
( - a programme established to develop a )Tj
0 -1.22711 TD
(recognisable ICT accreditation scheme to provide trusted, and quality as\
sured independent business advisers )Tj
0 -1.2 TD
(to create a national network. Advisors will understand both the technolo\
gical and business development )Tj
0 -1.2 TD
(aspects of ICT and help businesses to make appropriate ICT decisions. @T\
EB accredited advisors are being )Tj
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(used to deliver the consultancy support aspect of the WaleSME-Business p\
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(Innovation Technology Councellors \(ITC\) - )Tj
/TT0 1 Tf
(The first tranche of projects agreed for the Pathway to )Tj
0 -1.22711 TD
(Prosperity fund doubled the number of ICT advisers in Business Connect t\
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(and medium enterprises per year to be assisted.)Tj
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(UK)Tj
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( )Tj
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(Information Society Initiative/Interforum E Commerce awards)Tj
/TT0 1 Tf
( - these awards are run annually and )Tj
0 -1.22711 TD
(aim to recognise and reward companies who use electronic communication t\
o good effect in their business. )Tj
0 -1.2 TD
(Both regional and national winners will be used as case studies to provi\
de exemplars of best practice to other )Tj
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(Objective 1 - )Tj
/TT0 1 Tf
(Opportunities to further e-commerce developments in Wales will become av\
ailable as a result )Tj
0 -1.22711 TD
(of the European Regional Development Fund Objective 1 strategy. The Sing\
le Programming Document )Tj
0 -1.2 TD
(supports major initiatives to promote the use and take up of ICTs and e \
commerce. It also acknowledges and )Tj
0 -1.2 TD
(supports the availability of a comprehensive broadband telecommunication\
s infrastructure to provide a )Tj
0 -1.2 TD
(foundation for combating the problems caused by peripherality for many b\
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(BetterBusinessWales)Tj
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( - a project being developed by a private/public/voluntary sector partne\
rship for early )Tj
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(Objective 1 consideration. It aims to increase prosperity and wealth in \
Wales by supporting the growth of the )Tj
0 -1.2 TD
(small business sector. This is to be achieved by encouraging the use of \
e commerce and the adoption of ICT )Tj
0 -1.2 TD
(to improve business performance. The key drivers of this major programme\
are the TUC, BT and HSBC. The )Tj
T*
(programme has a number of elements including the establishment of a Cent\
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(provision of in depth adviser support; and the creation of an all Wales \
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(9 In the paper for the Economic Development Committee meeting on 12 Apri\
l 2000, we noted that the creative )Tj
0 -1.2 TD
(industries had been invited to make suggestions for new ways of assistin\
g their industries. We have now received a )Tj
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(suggestion for two studies of IT development in the Welsh books industry\
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(asked them to work up details of the studies.)Tj
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(Conclusion)Tj
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(10 The Committee are invited to note the present position.)Tj
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(ANNEX A)Tj
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( )Tj
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(London SW1E 5EB)Tj
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(Tel 020 7270 4955)Tj
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11.51781 0 0 11.51781 397.83966 408.47801 Tm
(Fax 020 7451 7534)Tj
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(daniel.storey@hm-treasury.)Tj
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( )Tj
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(Allan Moss Esq)Tj
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(The National Assembly for Wales)Tj
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(CF10 3NQ)Tj
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(7 June 2000)Tj
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(FISCAL INCENTIVES AND REGIONAL ECONOMIC DEVELOPMENT POLICY)Tj
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(Thank you for visiting the Treasury last week with your colleague Karyn \
Pittick to discuss proposals from the )Tj
T*
(National Assembly\222s Economic Development Committee for supporting bus\
iness growth in Wales\222 assisted areas. In )Tj
T*
(this context, we discussed with my Inland Revenue colleague, David Coope\
r, the new Research and Development )Tj
T*
(\(R&D\) tax credit for small and medium sized enterprises \(SMEs\), and \
some of the policy issues surrounding the )Tj
T*
(National Assembly\222s suggestion of introducing regional variation in t\
his measure to provide extra incentives for )Tj
T*
(companies operating in assisted areas. I agreed to write to you setting \
out the Treasury\222s overall stance on business )Tj
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(taxation and some specific observations on the R&D tax credit.)Tj
ET
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(Since its first Budget in July 1997, this Government has made active use\
of the tax system to send clear signals )Tj
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(about the economic activities which the Government wishes to encourage a\
nd discourage, and the values it wishes )Tj
T*
(to entrench in society. This approach has included taxation affecting bu\
siness activity, where the Government has )Tj
T*
(sought to encourage investment, entrepreneurship and innovation across t\
he UK economy by reducing the levels of )Tj
T*
(business taxation, particularly for SMEs, and encouraging particular act\
ivities, such as R&D. On the other side of the )Tj
T*
(equation, the Government is using the tax system to encourage business t\
o make more efficient use of energy and )Tj
T*
(reduce use of other environmental pollutants, as part of the Government\222\
s strategy of sustainable development.)Tj
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(In using the tax system to advance the Government\222s policies in areas\
other than simply revenue-raising, the )Tj
T*
(Government works to a series of clear principles: to encourage work, sav\
ings and investment, and fairness. There )Tj
T*
(are also practical considerations of design, compliance cost, and intern\
ational competitiveness. The Chancellor\222s )Tj
T*
(first Budget Report in July 1997 describes the Government\222s general a\
pproach to using the tax system to further its )Tj
T*
(wider policy goals. I attach the relevant extract of this report to this\
letter.)Tj
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(In the context of corporation tax, the Government\222s overall approach \
in the four Budgets since May 1997 has been )Tj
T*
(to reduce the marginal rates of tax across the board, and particularly f\
or SMEs, in order to leave more revenues in )Tj
T*
(the hands of companies for future investment. The smaller companies rate\
has been reduced to 20 per cent \(from )Tj
T*
(23 per cent\), and a new 10 per cent starter rate has been introduced wh\
ich benefits companies with profits up to )Tj
T*
(\24350,000.)Tj
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(This general policy has been supplemented by a number of specific UK-wid\
e incentives to further encourage )Tj
T*
(specific investment, in particular by smaller businesses, which typicall\
y face greater difficulties than larger firms in )Tj
T*
(raising external finance for investment. The measures introduced in this\
context include:)Tj
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(enhanced 40 per cent first year capital allowances for SMEs\222 investme\
nt in plant and machinery,)Tj
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( )Tj
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(enhanced 100 per cent first year capital allowances for small firms\222 \
investment in information and )Tj
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(communications technology \(ICT\) equipment,)Tj
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EMC
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( )Tj
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(enhanced 100 per cent first year capital allowances for all firms\222 in\
vestment in qualifying energy-saving )Tj
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(technologies, as part of the package of measures, including the Climate \
Change Levy, designed to enable the )Tj
T*
(UK to meet its international environmental obligations)Tj
ET
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( )Tj
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(R&D tax credit for SMEs)Tj
ET
EMC
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(l)Tj
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( )Tj
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/LBody <>BDC
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(new definition for R&D for use in context of the R&D tax credit and the \
continuing 100 per cent first year )Tj
T*
(capital allowances for investment by all firms in R&D capital stock.)Tj
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(Each of these measures involves making a trade off between the )Tj
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(general)Tj
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( approach to corporate taxation of low )Tj
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(rates and wide tax base, which minimises distortion to economic decision\
making, versus introducing a )Tj
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(specific)Tj
/TT0 1 Tf
( )Tj
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(distortion to encourage certain business activity, at the expense of gre\
ater fiscal complexity.)Tj
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(One of the key factors to consider in this trade off is the integrity of\
the resulting tax system, and particularly the )Tj
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(extent to which any specific allowances/incentives can be properly targe\
ted on the activity to be encouraged, while )Tj
T*
(preventing abuse of the system through firms reclassifying or reordering\
their existing activities simply in order to )Tj
T*
(take advantage of tax differentials. In the case of capital allowances, \
there are clearly defined categories of eligible )Tj
T*
(investment, be that in plant and machinery, ICT equipment, or energy-sav\
ing technologies. Qualifying firms are also )Tj
T*
(clearly defined, most often by reference to standard statutory SME defin\
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T*
(for SMEs \(and the continuing R&D allowance for all firms\222 capital sp\
ending on R&D equipment\), the Inland Revenue )Tj
T*
(and DTI have invested a substantial amount of time and effort, in consul\
tation with business, to devise a robust and )Tj
T*
(workable definition of the activities which should be classified as busi\
ness research and development.)Tj
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(In all these cases, the Treasury has formed the view that it feasible an\
d desirable to create a reasonably robust and )Tj
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(sustainable tax differential in favour of a particular business activity\
, the benefits of which outweigh the additional )Tj
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(economic cost of distorting the basic framework of business taxation. Th\
ey are designed within the UK tax )Tj
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(framework, so they are clear, straightforward and accessible to all busi\
nesses, without imposing significant )Tj
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(administration or compliance costs on business or the Revenue.)Tj
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(It is our view that a similar case has )Tj
/TT1 1 Tf
(not)Tj
/TT0 1 Tf
( been made for a regionally differentiated R&D tax credit for SMEs. Ther\
e )Tj
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(are several arguments against such a measure:)Tj
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(the R&D tax credit is based upon an assessment of the difficulties which\
)Tj
/TT1 1 Tf
( UK SMEs in general)Tj
/TT0 1 Tf
( face in )Tj
T*
(financing investment in R&D over a sustained period. There is little evi\
dence of which we are aware on any )Tj
0 -1.2 TD
(specific R&D financing difficulties which firms located in one particula\
r region of the UK might face;)Tj
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( )Tj
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(if such a differentiated R&D tax credit were to be introduced, it would \
risk undermining the integrity and )Tj
T*
(usefulness of the tax credit overall. Regional differentiation would cre\
ate strong incentives on existing )Tj
T*
(businesses to put in place arrangements to tap into a regional tax credi\
t without actually making any )Tj
T*
(significant investment in the tax-favoured region \(eg via use of "brass\
plate" business premises\). This could )Tj
T*
(add substantially to the cost of the R&D tax credit without making any i\
mpact on the distribution of business )Tj
T*
(R&D activity in the UK;)Tj
ET
EMC
/Lbl <>BDC
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(l)Tj
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( )Tj
ET
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11.51781 0 0 11.51781 41.13501 535.95692 Tm
(the existing R&D tax credits rules could not be used as they stand. They\
are designed to operate UK-wide )Tj
T*
(and would need to be substantially modified to prevent leakage and explo\
itation. Any special rules to ring-)Tj
T*
(fence a regional R&D tax credit would be complicated and restrictive, to\
ensure that only valid R&D activities )Tj
T*
(could qualify. They would impose an additional administrative burden on \
business, and such extra costs )Tj
T*
(would dilute, possibly to quite a considerable extent, any additional be\
nefit from an enhanced regional tax )Tj
T*
(credit;)Tj
ET
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( )Tj
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(furthermore, the Inland Revenue would also have to bear additional costs\
administering the scheme and to )Tj
T*
(ensure compliance. These extra costs, on both business and the Revenue, \
could substantially undermine one )Tj
T*
(of the key advantages of a nationwide R&D tax credit, that it is relativ\
ely straightforward for companies to )Tj
T*
(access the investment incentive through their annual corporation tax ret\
urns;)Tj
ET
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/T1_0 1 Tf
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(l)Tj
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( )Tj
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/LBody <>BDC
BT
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(the R&D tax credit rules currently have no regard to where the company a\
ctually carries out its eligible R&D )Tj
T*
(activity. This liberal approach tallies with market practice in which ma\
ny UK-based SMEs conduct their R&D )Tj
T*
(on a UK-wide and international basis, through contracts and partnerships\
with other organisations. The R&D )Tj
T*
(tax credit is designed to help companies which are taxable in the UK to \
invest more in R&D, regardless of )Tj
T*
(where this activity is carried out. This is consistent with our obligati\
ons under the EC Treaty and European )Tj
T*
(law. Limiting the benefit to activities carried on in a particular place\
raises unresolved issues regarding )Tj
T*
(freedoms of establishment, in addition to the State Aids questions, whic\
h will be covered separately by Ruth )Tj
T*
(Henrywood from the DTI.)Tj
ET
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(There have been regionally-targeted tax measures, notably those for Ente\
rprise Zones and 100 per cent first year )Tj
T*
(capital allowances for Northern Ireland. No new Enterprise Zones have be\
en created since 1995. Evidence on their )Tj
T*
(impact suggests that they have been more likely to achieve their objecti\
ves of reducing long term unemployment )Tj
T*
(\(rather than simply displacing business from neighbouring regions\) whe\
n allied with other non-tax policy measures. )Tj
T*
(The Northern Ireland first year allowances were introduced as part of a \
financial package to underpin the Good )Tj
T*
(Friday agreement. The package as a whole reflected the unique political \
and social issues that affect this area. They )Tj
T*
(are quite separate from the wider problems experienced by the more econo\
mically disadvantaged areas in the UK )Tj
T*
(generally.)Tj
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(I hope you find this reply helpful in clarifying the Treasury\222s and I\
nland Revenue\222s views on these issues.)Tj
ET
EMC
/P <>BDC
BT
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(Daniel Storey)Tj
ET
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(Enterprise team)Tj
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( )Tj
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( )Tj
ET
EMC
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/TT0 1 Tf
11.51781 0 0 11.51781 19.8997 642.94196 Tm
(Alan Moss)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 19.8997 613.48929 Tm
(National Assembly for Wales)Tj
ET
EMC
/P <>BDC
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(Cathays Park)Tj
ET
EMC
/P <>BDC
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(Cardiff)Tj
ET
EMC
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(CF10 3NQ)Tj
ET
EMC
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BT
/TT1 1 Tf
11.51781 0 0 11.51781 472.53101 702.15948 Tm
(ANNEX B)Tj
ET
EMC
/P <>BDC
BT
/TT1 1 Tf
11.51781 0 0 11.51781 340.899 672.70683 Tm
( )Tj
ET
EMC
/P <>BDC
BT
/TT1 1 Tf
11.51781 0 0 11.51781 340.899 643.25417 Tm
( )Tj
ET
EMC
/P <>BDC
BT
/TT1 1 Tf
11.51781 0 0 11.51781 340.899 613.8015 Tm
(Department of Trade and Industry)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 340.899 584.03662 Tm
(Kingsgate House, )Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 340.899 554.58397 Tm
(66-74 Victoria Street )Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 340.899 525.1313 Tm
(London, SW1E 6SW)Tj
ET
EMC
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11.51781 0 0 11.51781 340.899 495.64333 Tm
( )Tj
ET
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( )Tj
ET
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( )Tj
ET
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( )Tj
ET
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( )Tj
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1 1 1 rg
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(\\)Tj
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(Direct)Tj
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(line 0207 215 4428)Tj
ET
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/TT0 1 Tf
11.51781 0 0 11.51781 19.8997 452.40462 Tm
(Local fax 0207 215 4468)Tj
ET
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(Our)Tj
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(Date 14 June 2000)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 74.043 334.59396 Tm
(Dear Alan)Tj
ET
EMC
/P <>BDC
BT
/TT1 1 Tf
11.51781 0 0 11.51781 8.22701 305.14131 Tm
( Operating Aid)Tj
/TT0 1 Tf
( )Tj
ET
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/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 74.043 275.37643 Tm
(I am writing to set out reasons why forms of assistance other than opera\
ting aid could be used to )Tj
0 -1.2 TD
(achieve regional development objectives. )Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 74.043 232.1024 Tm
(I should first clarify that there are many forms of State aid which are \
compatible with the Treaty. While )Tj
T*
(operating aid, aid for initial investment and employment aid are cited i\
n the regional aid framework, )Tj
T*
(there are many other frameworks governing State aid, including training,\
R&D, SMEs, environment etc. )Tj
T*
(These frameworks set out the conditions under which State aid may be app\
roved by the Commission )Tj
T*
(as being compatible with Article 87 of the Treaty. In addition, the de m\
inimis rule permits aid of up to )Tj
T*
(\200100,000 per firm to be granted over a period of three years, without\
the obligation to notify the )Tj
T*
(Commission.)Tj
ET
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/P <>BDC
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/TT0 1 Tf
11.51781 0 0 11.51781 74.043 119.72157 Tm
(It might be helpful if I set out the definition of operating aid, as con\
tained in paragraph 4.15 of the )Tj
T*
(Guidelines on National Regional Aid \(OJ C74, 10.3.1998, p9\):)Tj
ET
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BT
/TT0 1 Tf
11.51781 0 0 11.51781 74.043 76.44756 Tm
("Regional aid aimed at reducing a firm\222s current expenses \(operating\
aid\) is normally prohibited. )Tj
T*
(Exceptionally, however, such aid may be granted in regions eligible unde\
r the derogation in Article 87\(3\))Tj
T*
(\(a\) provided that \(i\) it is justified in terms of its contribution t\
o regional development and its nature and )Tj
T*
(\(ii\) its level is proportional to the handicaps it seeks to alleviate.\
It is for the Member State to )Tj
ET
EMC
Q
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(demonstrate the existence of any handicaps and gauge their importance.")Tj
ET
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/TT0 1 Tf
11.51781 0 0 11.51781 74.043 731.29994 Tm
(While operating may be approved by the Commission in very exceptional ci\
rcumstances, such )Tj
0 -1.2 TD
(assistance causes the greatest distortion of competition of all forms of\
State aid. By subsidising )Tj
T*
(elements such as payroll costs, operating aid could be used to maintain \
the viability of an )Tj
T*
(uncompetitive firm in difficulty. Unlike other forms of compatible State\
aid such as aid for R&D, training )Tj
T*
(aid, or aid for initial investment, there is little or no incentive for \
the beneficiary of operating aid to )Tj
T*
(become competitive. The Commission is much more likely to look favourabl\
y on assistance which )Tj
T*
(promotes competitiveness than operating aid. )Tj
ET
EMC
/P <>BDC
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/TT0 1 Tf
11.51781 0 0 11.51781 74.043 618.91911 Tm
(In addition, paragraph 4.17 of the regional aid guidelines states that "\
\205operating aid must be both )Tj
T*
(limited in time and progressively reduced." Operating aid must therefore\
be degressive and only used )Tj
T*
(as a short term measure.)Tj
ET
EMC
/P <>BDC
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/TT0 1 Tf
11.51781 0 0 11.51781 74.043 561.82373 Tm
(To summarise, operating aid may not be the most effective means of achie\
ving regional development )Tj
T*
(objectives; other forms of State Aid might better meet these objectives \
and would stand a better )Tj
T*
(chance of receiving approval from the Commission as being compatible wit\
h the Treaty.)Tj
ET
EMC
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/TT0 1 Tf
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(Yours sincerely)Tj
ET
EMC
/P <>BDC
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/TT0 1 Tf
11.51781 0 0 11.51781 74.043 475.27568 Tm
(Ruth Henrywood)Tj
ET
EMC
/P <>BDC
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/TT0 1 Tf
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(Manager, State Aid Policy Unit)Tj
ET
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/TT0 1 Tf
11.51781 0 0 11.51781 74.043 416.37036 Tm
(Internet: ruth.henrywood@eirv.dti.gov.uk)Tj
ET
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/TT0 1 Tf
11.51781 0 0 11.51781 74.043 386.91769 Tm
(X.400: S=Henrywood G=Ruth O=DTI OU1=EIRV P=HMG DTI A=Gold 400 C=GB)Tj
ET
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( )Tj
ET
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/P <>BDC
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/TT1 1 Tf
11.51781 0 0 11.51781 8.22701 328.32458 Tm
(ANNEX C)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 298.55971 Tm
( )Tj
ET
EMC
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/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 269.10704 Tm
( )Tj
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/TT0 1 Tf
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( )Tj
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9.21423 0 0 9.21423 531.41356 211.94279 Tm
(6nd)Tj
11.51781 0 0 11.51781 546.78291 208.99425 Tm
( June 2000)Tj
ET
EMC
/P <>BDC
BT
/TT1 1 Tf
11.51781 0 0 11.51781 8.22701 179.85379 Tm
(Mr Rhodri Morgan AM)Tj
ET
EMC
/P <>BDC
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/TT1 1 Tf
11.51781 0 0 11.51781 8.22701 150.40112 Tm
(National Assembly for Wales)Tj
ET
EMC
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11.51781 0 0 11.51781 8.22701 120.94847 Tm
(Cardiff Bay)Tj
ET
EMC
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11.51781 0 0 11.51781 8.22701 91.18359 Tm
(Cardiff)Tj
ET
EMC
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BT
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11.51781 0 0 11.51781 8.22701 61.73093 Tm
(CF99 1NA)Tj
ET
EMC
/P <>BDC
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/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 32.27827 Tm
(Dear Rhodri )Tj
ET
EMC
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(Ref: Response to question on the \221blockage\222 in the use of e-commer\
ce by small firms \(Business )Tj
0 -1.2 TD
(Partnership Council\))Tj
ET
EMC
/P <>BDC
BT
/TT1 1 Tf
11.51781 0 0 11.51781 8.22701 700.85638 Tm
(The Federation of Small Businesses in Wales have completed a study which\
focused on the level of use of )Tj
T*
(ICT within the small firms sector, by drawing on the experiences and vie\
ws of our membership.)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 657.27016 Tm
(The findings very much mirror those contained in a recent report complet\
ed by the University of Durham Business )Tj
T*
(School \226 )Tj
/TT2 1 Tf
(Mind the Gap! Information Communications Technologies and Small Firms)Tj
/TT0 1 Tf
(.)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 613.97913 Tm
(Our own findings very much point towards the level of impact ICT is havi\
ng on specific aspects of the business, and )Tj
T*
(that it is also creating completely new ways of doing business. The Inte\
rnet, for example, opens up new markets to )Tj
T*
(firms, whilst reducing the need for a physical presence in these market \
areas. Small firms that fail to adopt and )Tj
T*
(assimilate ICT will miss out on these or, at the very least, are less li\
kely to maximise their performance and enhance )Tj
T*
(their competitive position. )Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 529.24101 Tm
(A new ICT-enabled business landscape is creating both opportunities and \
threats for small firms \226 opportunities for )Tj
T*
(those that manage to exploit the benefits of the technology, and a threa\
t from increased and global competition from )Tj
T*
(those that do not. Standing still is rarely an option for the small firm\
today.)Tj
ET
EMC
/P <>BDC
BT
/TT2 1 Tf
11.51781 0 0 11.51781 8.22701 472.16264 Tm
(Problems:)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 442.69296 Tm
(Existing measures of ICT penetration are crude, and offer little insight\
into the effectiveness with which hardware )Tj
T*
(and software are used, or the business benefits gained by the firm. Such\
measures tend to be quantitative and tend )Tj
T*
(only to account for \221ownership\222 of a particular technology or appl\
ication. This report suggests that it is the )Tj
T*
(assimilation of the technology into business which is both important and\
troublesome for the small firm, not )Tj
T*
(ownership, and this approach calls for many complex issues to be account\
ed for. This report identifies and )Tj
T*
(describes many of these issues.)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 344.1335 Tm
(There is a real \221gap\222 between what the small firm needs from ICT a\
nd what the ICT supplier is able or willing to )Tj
T*
(supply. The two sides are effectively \221speaking two different languag\
es\222. The needs of small firms are expressed in )Tj
T*
(terms of \221business development\222 and \221business problems\222, whi\
lst the language of the ICT suppliers is based around )Tj
T*
(technology features such as Megahertz, Megabytes, busses, routers and mo\
dems. Routine staff training will not )Tj
T*
(bridge the gap.)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 259.3954 Tm
(Whilst most intervention measures encourage small firms to leap the gap \
and understand the technology better, the )Tj
T*
(fact remains that most small firms simply do not have the ability to lin\
k technology features to their business )Tj
T*
(development, nor have the available resources to see things through. )Tj
ET
EMC
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BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 202.3 Tm
(Although some of the blame for this situation can be attached to small f\
irms themselves, the main problem lies with )Tj
T*
(the major corporations and intermediaries, who continue to deal with the\
small firm market at arms length, and fail to )Tj
T*
(address the assimilation needs of the small firm. This makes ICT assimil\
ation difficult and uncertain, and with no )Tj
T*
(indication of expected rewards for the effort. This supply side failure \
is resulting in many small firms not realising the )Tj
T*
(full potential of ICT.)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 117.5619 Tm
(This gap can be visualised as an \221ICT Assimilation Path\222 \226 a se\
ries of steps down which the firm must pass if it is to )Tj
T*
(analyse successfully its needs, implement the favoured solution, and rea\
p the anticipated benefits. This approach )Tj
T*
(links together the various issues and the actors or stakeholders into a \
holistic framework, and provides new insight )Tj
T*
(into the challenge which ICT assimilation poses for the small firm.)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 46.64516 Tm
(The small firm sector is often described as heterogenous, and this appli\
es equally to their approaches to ICT )Tj
T*
(assimilation. Our research suggests a typology of small businesses that \
may help in understanding the way in which )Tj
ET
EMC
Q
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(different firms approach ICT adoption and assimilation. It also identifi\
es the need for suppliers and those who work )Tj
0 -1.2 TD
(with small firms to work closer with individual firms in order to unders\
tand better their specific and individual needs.)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 716.72101 Tm
(Quite simply, the needs of small firms have not been well understood or \
met. What is required is not just the selling )Tj
T*
(of a specific piece of generic hardware or software, but help in navigat\
ing the \221ICT Assimilation Path\222. This calls for a )Tj
T*
(new type of \221hybrid\222 adviser who understands both the technologica\
l and business development angles. Such )Tj
T*
(advisors will be able to speak with the small firm in their own business\
development language, can help the small )Tj
T*
(firm to identify business development opportunities, and can help the fi\
rm manage its way past those barriers such )Tj
T*
(as learning, sourcing and managing the change.)Tj
ET
EMC
/P <>BDC
BT
/TT1 1 Tf
11.51781 0 0 11.51781 8.22701 618.17854 Tm
(The Future:)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 588.70888 Tm
(The relationship between small businesses and ICT can go down three main\
routes:- )Tj
ET
EMC
/Lbl <>BDC
BT
/T1_0 1 Tf
11.51781 0 0 11.51781 26.73775 559.25621 Tm
(1. )Tj
ET
EMC
/LBody <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 41.13501 559.25621 Tm
(ICT become an issue of compliance. Extensive ICT is required simply to b\
e in business. However, for most )Tj
T*
(small firms achieving compliance will involve a long and ever changing p\
rocess of ICT assimilation, which will )Tj
T*
(divert time and resources from their core activity. )Tj
ET
EMC
/Lbl <>BDC
BT
/T1_0 1 Tf
11.51781 0 0 11.51781 26.73775 517.79213 Tm
(2. )Tj
ET
EMC
/LBody <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 41.13501 517.79213 Tm
(There is a changing and uncertain business landscape, which demands that\
ICT can be quickly assimilated if )Tj
T*
(small firms are to be able to deploy systems and capitalise on short ter\
m market opportunities. In these )Tj
T*
(uncertain times, taking risk on large scale ICT investment will be the p\
reserve of those who can see how their )Tj
T*
(long term future will unfold. )Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 41.13501 446.87538 Tm
(ICT products and services which more specifically address the needs of s\
mall firms will be slow to emerge )Tj
T*
(because of the fast moving and lucrative opportunities elsewhere for ICT\
suppliers. However, this scenario )Tj
T*
(represents the \221business as usual\222 and is the most likely scenario\
to dominate over the next few years.)Tj
ET
EMC
/Lbl <>BDC
BT
/T1_0 1 Tf
11.51781 0 0 11.51781 26.73775 389.78 Tm
(3. )Tj
ET
EMC
/LBody <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 41.13501 389.78 Tm
(There is a business landscape based on mutual benefit and trust rather t\
han one based on power and )Tj
T*
(adversarial relationships. ICT is now being correctly viewed as a tool f\
or business development of the small )Tj
T*
(firm, and not just as an untapped market for large and powerful ICT supp\
liers. Small firms are encouraged )Tj
T*
(and helped to develop by their trading partners and be re-born ICT suppl\
iers who now work closely with their )Tj
T*
(small firm clients, listening to and addressing their specific needs.)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 305.04189 Tm
(These scenarios demonstrate three very polarised views of the way that t\
he future may unfold for the small firm and )Tj
T*
(its use of ICT. In reality, no one single scenario is likely to be the o\
ne that actually unfolds, and we can already see )Tj
T*
(elements of all three beginning to emerge for different technologies, di\
fferent firms, and different situations.)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 247.9465 Tm
(The power of these scenarios lies in demonstrating that the issue of ICT\
adoption in small firms is much wider than )Tj
T*
(just the small firm and its relationship with ICT. Indeed there are many\
actors who will carve out and shape the )Tj
T*
(future for the small firm in this context. This includes government and \
its policies for small firms, intermediary )Tj
T*
(bodies, either providing advice or acting as a sales channel, customers \
of small firms, and the ICT supply side.)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 177.02975 Tm
(The scenarios further demonstrate how the business environment, and the \
position and role which is assigned to )Tj
T*
(the small firm will also have an important influence on the role that IC\
T will have within the small firm.)Tj
ET
EMC
/P <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 8.22701 133.75574 Tm
(Each of the scenarios highlights the need for ICT suppliers and intermed\
iaries to really change, to focus upon small )Tj
T*
(firm needs and to address the barriers to assimilation. Each of the scen\
arios would be deeply affected by two key )Tj
T*
(elements:- )Tj
ET
EMC
/Lbl <>BDC
BT
/T1_0 1 Tf
11.51781 0 0 11.51781 26.73775 76.66035 Tm
(1. )Tj
ET
EMC
/LBody <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 41.13501 76.66035 Tm
(Relationship between supplier and small firm:)Tj
ET
EMC
/Lbl <>BDC
BT
/T1_1 1 Tf
5.7589 0 0 5.7589 61.81686 47.20769 Tm
(m)Tj
/T1_0 1 Tf
( )Tj
ET
EMC
/LBody <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 74.043 47.20769 Tm
(Direct relationships between supplier and small firm, not one maintained\
at arms length;)Tj
ET
EMC
/Lbl <>BDC
BT
/T1_1 1 Tf
5.7589 0 0 5.7589 61.81686 33.38632 Tm
(m)Tj
/T1_0 1 Tf
( )Tj
ET
EMC
/LBody <>BDC
BT
/TT0 1 Tf
11.51781 0 0 11.51781 74.043 33.38632 Tm
(Taking a proactive interest in small firm business development, not just\
on ICT sales;)Tj
ET
EMC
Q
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(Helping the small firms to see, plan and manage the assimilation path, a\
nd to exploit the potential )Tj
0 -1.2 TD
(rewards.)Tj
ET
EMC
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(1. )Tj
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(Technologies available which:)Tj
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EMC
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(Provide \221out of the box\222 business benefits;)Tj
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(Provide business solutions which are not constantly being re-invented an\
d updated, and do not need )Tj
T*
(constant re-iteration of the assimilation path by the small firm.)Tj
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EMC
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(I hope the above will be of some use to you, and should you require any \
further information on this topic area, )Tj
T*
(please do not hesitate to contact me.)Tj
ET
EMC
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(As a note, I would like to express FSB Wales\222 support for the current\
developments made on the export promotion )Tj
T*
(front within the National Assembly for Wales. Both Russell Lawson and I \
met with Trevor Samuel and Dave Long )Tj
T*
(from the Assembly\222s Overseas Trade Unit to discuss matters of mutual \
interest. )Tj
ET
EMC
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(We were more than pleased to learn of the envisaged structure the new In\
ternational Trade Unit would have, and )Tj
T*
(have agreed to arrange regular meetings with Trevor Samuel in order to e\
nsure that future developments are )Tj
T*
(sensitive and responsive to the needs of both existing and first-time ex\
porters within the SME community of Wales.)Tj
ET
EMC
/P <>BDC
BT
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(Fel arfer, mae FSB Cymru yn fwy na parod i weithio gyda\222r Cynulliad a\
r materion fel allforio, yn enwedig pan mae )Tj
T*
(diddordebau a syniadau tebyg yn dod i\222r golwg.)Tj
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(Yn gywir)Tj
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( )Tj
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( )Tj
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(Si\342n Thomas)Tj
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(Dirprwy Pennaeth Materion Cyhoeddus, FSB Cymru)Tj
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