Threads of Innovation: the European Union Innovation Gap and the Textile Industry

Supervisors: Dr. W. L****

Firas A. ID i******** Pigeonhole *** E-Mail: ******** Date: 18/07/2010 Graduation Dossier II Version: final draft

Firas A. (i********) Bachelor Thesis II 2010

Contents
1. 2. 3. Introduction ............................................................................................................................... 3 The Lack of Innovation in the EU: Analyzing Cause and Effect ................................. 4 A Concise Overview of the EUs Textile and Clothing Industry ................................. 7 3.1 4. SWOT Analysis of the European Textile Industry ................................................. 9

Innovation and a Traditional EU Textile Industry: Do They Mix? ........................ 11 4.1 4.2 4.3 The Role of Novel Technologies in the EU Textile Industry .......................... 12 The Importance of New Production Technologies .......................................... 12 Intelligent Textiles as an Opportunity for Europe .......................................... 13

5.

The International Economic Dimension........................................................................ 13 5.1 Analyzing the Effects of Trade Agreements on Intl. Trade Relations .......... 14

6.

The EU Policy Dimension: Analyzing Challenges and Responses ......................... 16 6.1 6.2 Technological and Scientific Research Development Framework .............. 17 Policy Challenges and Responses to the Textile and Clothing Sector ......... 19

7.

Conclusion ................................................................................................................................ 21

Bibliography .................................................................................................................................... 23

Firas A. (i********) Bachelor Thesis II 2010

1. Introduction
The difficulty lies not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.
British economist John Maynard Keynes, 11th of June 1935

Over the period of the last decade, the European clothing and textiles industry has experienced fundamental restructuring. Not only has production shifted towards high-quality articles, but also the productivity has increased considerably. This is closely linked to the ongoing and intensive modernization of the industry, which has been shifting greater focus on innovation. Together with this process of modernization and the restructuring of the industry came the reduction of more than one-third of the European workforce employed in this sector. Further factors which are predicted to significantly affect and alter the industry over the coming decade are the European Union (EU) enlargement, increased competition as a direct result of research, innovation, quality, and skills, and, above all, the recent abolition of quotas together with its opportunities as well as challenges which pose themselves on a globalized and international commercial landscape (Fahnemann, 2005). This paper mainly revolves around the relationship between the EU innovation gap and the textile and clothing industry. The following research question is therefore central to this paper: What is the effect of the EU innovation gap on the textile industry? However, this paper also deals with the following questions: What are the policies employed to stimulate innovation and aid the troubled textile and clothing industry? How effective are they? This paper examines the hypothesis stating that innovation is the savior of the textile and clothing industry. In other words: innovation is essential for the survival of the EUs textile and clothing industry on a globalized, increasingly competitive market economy. In order to shed light onto these and other issues this paper begins by analyzing the cause and effect of the lack of innovation within the EU. This is followed by a concise overview of the EUs textile and clothing industry, serving to establish a common basis for further discussion on the topic of innovation in the industry. As part of this a SWOT analysis on the EU textile and clothing industry is conducted, allowing the reader to gain an improved understanding of the strengths, weaknesses, opportunities as well as threats associated with the industry. Subsequently the interplay between innovation and the traditional EU textile and

Firas A. (i********) Bachelor Thesis II 2010 clothing industry is examined, covering the role of new (production) technologies and intelligent textiles as an opportunity for the EU. This chapter is followed by an analysis of the internal economic dimension of the EU textile and clothing industry which also includes the effects of EU trade agreements on international trade relations. Finally, the EU policy dimension is addressed, analyzing challenges and responses to the innovation gap and the troubled textile and clothing industry, thereby covering the technological and scientific research development framework programme. A comprehensive conclusion summarizes the main findings of this paper and addresses its limitations, suggesting further venues of research.

2. The Lack of Innovation in the EU: Analyzing Cause and Effect

The word innovation is a central key-word in this paper. For sake of establishing a clear framework the word innovation is defined below. Additionally, innovation gap is another concept which is fundamental to his paper and is further elaborated on later in this chapter, illustrated by means of cause and effect as well as statistics to support claims made regarding the innovation gap. It is important to mention that there are several, even opposing, definitions of innovation. However, the ongoing debate on the definition on the aforementioned term is beyond the focus of this paper. Instead the definition of innovation as established by the American Chamber of Commerce to the European Union (AmCham) is found to be appropriate in this particular context. AmCham defines innovation in its publication Recommendations for Closing Europes Innovation Gap published in 2006 as the successful commercial exploitation of new ideas [by means of] incorporating new technologies, design and best practice to enable businesses to compete effectively in the global environment. AmCham continues by stating that innovation in the widest sense includes the development of new products and services (product innovation), new ways of working (process innovation), and new commercial arrangements, business models and ways of eliciting the best from people and resources (AmCham, 2006). According to research conducted by the Community Research and Development Information Service (CORDIS) in 2005 the European Union invests about a third less in research than the United States while at the same time emerging countries like China and India are fast becoming world-class centers of research and innovation (CORDIS, 2005). 4

Firas A. (i********) Bachelor Thesis II 2010 This can be illustrated by the statistics collected by the Organization for Economic CoOperation and Development (OECD) in 2005, as seen in figure 1 below:

Figure 1

Figure 2

Figure 2 above clearly shows that Japan and the United States are still ahead of the European Union in terms of innovation. With a composite index gap value of 0.04 in 2003 and 2004 and an even lower value in 2005 the EU is far behind the US and Japan. While the US is stable around 0.14, Japans composite index gap value has been steadily increasing over the years, reaching 0.18 in 2005 thereby defining the highest value yet. According to the 2006 CORDIS report 70 percent of the EU25 innovation gap can be attributed to EUs underperformance in the following areas: information and communication technology investment (ICT), USPTO patents and population with tertiary education. The European Union does not lack cutting edge technological capabilities, an educated work force or renowned research institutes and universities. In fact it has been found to have a strong capacity for innovation (AmCham, 2006). Thus, despite the aforementioned favorable elements, the EU is finding it difficult to accelerate competitiveness and economic growth to a level similar to that of Japan and the US, as illustrated in figure 2 above. In the light of the challenges faced by the EU in this context, the former Finish Prime Minister Esko Aho chaired an independent expert group which operated under the framework of the Commission. The expert group concluded that if Europe cannot offer an innovation-friendly market for the creative outputs of its business, then those businesses will fail to thrive or will go elsewhere (European Commission, 2006).

Firas A. (i********) Bachelor Thesis II 2010 For a large number of sectors the EU cannot be said to be functioning in an innovationpromoting manner when compared to third countries. There are plenty of examples to support this claim. One example is the absence of common standards for energy-efficient technologies, which has the effect of impeding the use as well as success of such technologies. Another example is given by considering how oftentimes companies are discouraged from innovating and developing new products due to laws dictating disproportionate product liability. Furthermore, the level playing-field which is needed for companies in order to innovate effectively is commonly distorted due to state aid regulations being based on geographic location, country of possession of a corporation and size instead of specific market failures (Keenan, Saritas, & Kroener, 2004). The result of these and other similar factors can be observed in figure 3, where the EU as a location of the worlds high-tech manufacturing output has been steadily declining since the year 1990. This chart has been prepared by the United Nations Industrial Development Organization (UNIDO), illustrating how the US represents the leading location of the worlds high-tech manufacturing output, with China quickly catching up with the European Union and Japan.
Figure 3

The EU is aware of the above mentioned weaknesses and has therefore made it, over the period of the last decade, to one of its main priorities to reach its objective of becoming the most competitive global knowledge economy in the world. This endeavor has received support by European leaders and has been subsequently supported by a wide range of assessments, strategies and funding programmes. Despite all this, the EU has not been able to achieve the aforementioned objective yet (this topic is discussed in section 5 of this paper in more depth). Reasons for this have been identified to be the failure to invest efficiently or suitably in the creative environments, competences, and infrastructure and, generally, the businesses needed for successful innovation in the 21st century. The Business Panel on the Future of EU Innovation Policy has criticized the EU for the fact that public support for innovation is primarily provided through complex, slow and uncoordinated programmes while noting that private finance mainly backs the same low

Firas A. (i********) Bachelor Thesis II 2010 risk investments (Innovation Unlimited, 2009). As a consequence companies, entrepreneurs and individuals are often left with a large number of barriers while finding only limited support in order to realize their creative, ambitious and innovative ideas. The aforementioned business panel also notes the alarming trend of public services and broader public policy only taking little advantage of the power of innovation to transform society. Therefore the innovative potential of the majority of the enlarged Union remains untapped. This holds true despite the difficult economic situation and societal transformations such as increasing globalization and an aging population which are only intensifying the aforementioned weaknesses, leaving the call for radical change louder than ever.

3. A Concise Overview of the EUs Textile and Clothing Industry

This chapter provides an overview of the European Union textile industry, serving to establish a common basis for further discussion on the topic of innovation in the textile industry. As part of this chapter, the economic, social and political aspects of the EU textile industry are touched upon in order to convey an overall picture of the state of the European textile industry, and the most apparent trends emerging in the aforementioned sector. Developments which are taking place beyond the EUs borders are also incorporated in order to complete the overview. The annual turnover of the EU15 textile and clothing industry roughly accounts to 200 billion, while employing more than 2 million people distributed amongst 177,000 companies. Recently the number of people employed in the textile industry rose to 2.7 million due to the EU enlargement. Over the period of four decades trade in clothing and textiles rose from $6 billion in 1963 to $343 billion in 2001, which means an increase of over 60 times compared to the initial level. As a consequence 5.7 percent of world exports can be attributed to the textile and clothing sector. It should be noted that a large part (56 percent) of world trade in the textile and clothing industry can be associated with clothing alone indicating that the clothing sector is increasing at a faster pace than the textile sector. The EU has emerged as the worlds largest exporter of textile products and the second largest exporter in the clothing sector making it stand out as a world leader in the clothing and textile trade (CEC, 2003). Due to the gradual abolition of World Trade Organization (WTO) 1995 quotas, EU imports have been gradually increasing. Over the past two decades the geographic distribution of clothing and textile production has undergone fundamental change. According to the

Firas A. (i********) Bachelor Thesis II 2010 International Labor Organization (ILO) European Union output has dropped by more than 32 percent over the aforementioned period. While the output of the United States has increased by 97 percent and the output of Asia has increased by 97 percent. Research has shown that the EUs share of global output has declined from 53 percent in 1980 to less than 30 percent in the year of 1995. Traditionally, declining production is coupled with declining employment. Investigating the employment landscape of the textile and clothing industry quickly reveals that most jobs in this sector are semi-skilled. As a consequence those people occupying semiskilled positions within companies usually transfer to other low-wage occupations with only little chance of landing a higher income job. Research by the ILO has shown that in the period between 1990 and 1996 employment in the textile and clothing industry declined by 31 percent. The trend continued between 1996 and 1998, where employment fell by another 15 percent. Calculating these numbers reveals a disturbing figure: more than 1 million jobs in Europe were lost in less than a decade (ILO, 2000). The EUs textile and clothing industry now stands before the challenge of not just maintaining but also improving its position in an increasingly globalized market. Rapid advancements in technology and innovation from abroad are adding to the pressure in Europe. However, international competition from countries outside the European Union is not just stemming from advancements in technology and innovation, but also from low labor costs abroad (especially in developing countries) which has been resulting in an ongoing process of relocation of production facilities. An increasing number of European-based companies are choosing to relocate in favor of the low labor costs abroad in order to guarantee their longterm financial sustainability and competitiveness (Keenan, Saritas, & Kroener, 2004). Sub-contracting labor-intensive production processes to North Africa, Turkey and Eastern Europe and other cheaper locations has become common practice. The emphasis on high-quality secondary products with greater added value has also been increasing over the past few years. Thus there is no doubt that the industry is undergoing fundamental restructuring in terms of the location of production facilities, the technological procedures, as well as the quality of products manufactured (CEC, 2003). It seems that the modernization of production processes in the European textile and clothing sector, which has already begun (albeit progressing at comparatively slow pace) has gained even more importance in the light of these developments.

Firas A. (i********) Bachelor Thesis II 2010

3.1

SWOT Analysis of the European Textile Industry

SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is a commonly used strategic planning method, employed in order to identify the aforementioned factors, typically in the context of a business endeavor or project. However, the range of usage is very broad, allowing a SWOT analysis to be conducted on a particular industry without any difficulty in this case the European Textile industry. As part of a SWOT analysis internal and external factors are identified. Internal factors are shaped by the industry itself while external factors are shaped by the environment and other dynamics outside the influence of the EUs textile industry. Strengths and Weaknesses are internal while Opportunities and Threats on the other hand are external. The SWOT analysis below (figure 4) confirms the statements made in the previous chapter: while Europes textile sector benefits from a large production base and solid infrastructure, it is suffering from high labor costs coupled with a low research and development (R&D) commitment bringing about a shortage in innovation. Increased globalization is amplifying the growth of low-cost imports from developing countries, especially China. However, as also previously mentioned, the modernization of production processes in the European textile and clothing sector is underway, steadily increasing efficiency. Added value production, product diversification and especially technical textiles represent great opportunities for the troubled textile sector of the EU. Finally, the SWOT analysis helps gain a better understanding of the industry by examining it from numerous angles covering Strengths, Weaknesses, Opportunities, and Threats, thereby extending the general overview of the textile and clothing to provide further valuable insights.

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Firas A. (i********) Bachelor Thesis II 2010

Table 1 SWOT Analysis of the European Textile Industry Strengths Tradition & expertise in textile & clothing Quality and design Short delivery times Organizational flexibility World leader in technology usage An effective production network disguised in industrial sectors & exchange of information Enlargement increases EUs authority & influence in trade talks Strong family firms with professional management Opportunities Market access in certain important export markets Increasing efficiency Product diversification Investment in people Goodwill Adding value through innovation, design and branding Investments in technical textiles

Weaknesses Low profitability in the clothing sector Fragmentation of sector High labor turnover in clothing manufacturing Dependence on a few multiples (i.e. raw materials from China) Growing shortage of qualified human resources (i.e. textile engineering) R&D commitment is extremely low compared to other industries

Threats

Growth of cheap imports from developing countries and within the EU Sectoral decline in Western Europe, growth in Eastern Europe Increased cost of labor, energy, and environmental compliance Piracy or illegal copying of designs and brands

Source: (Euratex, 2004)

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Firas A. (i********) Bachelor Thesis II 2010

4. Innovation and a Traditional EU Textile Industry: Do They Mix?

Over the last decade less developed countries have shifted their focus to the production of low and medium quality sectors. These countries have become highly competitive in the aforementioned area of production. Reasons for this include: know-how imported from developed countries, low labor costs and high-quality textile equipment. The unique mix of these factors has enabled developing and least developed countries to excel in the aforementioned area of production, which led the EU15 to specialize in innovative and highquality textiles as well as clothing products in order to cope with these and similar challenges. Over the recent years textile production has become more capital-intensive and increasingly automated. As a result of this development labor wages only account for 40 and 60 percent of production costs within the textile industry and the clothing industry respectively (Fraiman, Singh, Arrington, & Paris, 2002). Today a wide range of raw materials is utilized in the textile industry, both synthetic and natural. The complexity of the fabrics is increasing, as new innovations are widening the application spectrum of textile in general (e.g. smart textiles). This area of the textile industry has a relatively higher rate of R&D, as customer requirements are changing at a fast pace and manufacturers generally base their actions on customer requirements. In this environment the EU15 has been able to assert itself in the field of technical textiles, aided by technology, capital and extensive know-how. According to the European Apparel and Textile Organization (Euratex) the field of technical textiles (further elaborated on later in this chapter) is one of the EUs most attractive markets both in terms of returns on investment (ROI) and general profitability (Euratex, 2004). An increasing number of companies which were active in the production of traditional textiles are turning their focus towards technical textile, where they are assuming a pioneering role. A recent survey conduct by CORDIS found that more than 75 percent of textile production in the Northern Europe is focused on technical textiles; while in Germany 50 percent of current production is focused around technical textiles (CORDIS, 2005). Thus, as a preliminary answer to the title of this chapter it can be said innovation and the EU textile industry do mix and they must if the EU textile industry seeks to survive! The remainder of this chapter is dedicated to the examination and analysis of how modern production and management methods are used in the aforementioned industry, closing with stimulating assumption and predictions on this particular topic.

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Firas A. (i********) Bachelor Thesis II 2010

4.1

The Role of Novel Technologies in the EU Textile Industry

As previously established, the European textile industry has undergone major restructuring. Part of this is reflected in the customers demands for more product diversity, smaller orders and shorter lead times. Such developments have made it even more important for existing companies to make use of modern technologies in order to be able to cope with their customers demands. As is illustrated later in this chapter this is indeed the case, as an increasing number of companies are realizing that simply drawing on economies of scale (which used to be the recipe for success) does not necessarily yield positive economic profit. Demonstrated by statistics in the previous chapter, a large part of European producers are focusing their production around technical textiles and enjoy large market shares in this sector. Non-wovens play a major role in this respect. Examples of non-wovens include sophisticated products for the automotive industry, geotextiles, hygiene products, military grade protective textiles and industrial filters (Abernathy, Dunlop, Hammond, & Weil, 1999). Thus it is apparent that in order for European companies to preserve and extend their competitive advantage in this sector they must successfully embrace advances in production technologies. Examples of such production technologies include process automation facilitators, ICT as well as new raw materials, including multifunctional textiles.

4.2

The Importance of New Production Technologies

In the light of the increasing trend of mass-customization and quickly changing consumer preferences new production technologies have gained further importance. They enable computer-based and automated production, increasing overall efficiency of the production process and providing more flexibility. In the past production technologies were mainly improved in order to speed up production processes and increase quality (CEC, 2003). However, today Europe has to compete on a different level, which explains the shift of focus extending priorities from quality and speed to flexibility and individuality. Mass-produced clothing is widely produced in less developed countries; however, the EU must realize new production technologies as an enabler to saturate the growing need for tailor-made products which are then produced in a cost-effective manner within mass-production systems. This should emerge as a distinctively European competitive advantage over mass-produced clothing.

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Firas A. (i********) Bachelor Thesis II 2010 With new production technologies comes the unique opportunity of processing traditional materials in a new, innovative manner. Having analyzed numerous publications on the future of this sector quickly reveals a surprisingly large number in scientific breakthroughs in the field of textiles. Developments in nanotechnologies, laser, biochemistry, biotechnology and plasma will allow for new ways of yarn laminating, forming or coating processes. The fusion of such scientific advances with the European textile industry would bring about a high degree of desirability in terms of the final product characteristics (important for the consumer) as well as the successive processability (important for the producer).

4.3

Intelligent Textiles as an Opportunity for Europe

Smart or intelligent textiles represent a rapidly growing market. It is a new sector where high-tech innovation meets traditional European industrial design skills and engineering. Improving the characteristics on the micro-fiber level does not only change the way such materials are processed in the factory, but it also opens up a whole new range of usagescenarios. Smart textiles may find use in the context of protective clothing, military gear as well as work, leisure and sportswear to name but a few. In such usage scenarios the reaction to external conditions could prove extremely advantageous, serving to entertain, inform, alert or relax the owner of such wearable technologies. Textiles reacting to fire, chemicals, temperature changes, humidity, light, electric discharge, mechanic use or even bacteria have already been developed and tested successfully. Another area of research concerns textiles with light or electricity conducing properties, information storage chips as well as energy accumulation technology. Thus returning to the statement made at the beginning of this subchapter: the fusion of such technologies with the long-established know-how of the European textile industry in the areas of industrial design and engineering may prove to be the recipe for success allowing the EUs textile industry to both maintain and enhance their competitive advance on a global scale (Fraiman, Singh, Arrington, & Paris, 2002).

5. The International Economic Dimension

In section 3 of this paper A Concise Overview of the EUs Textile and Clothing Industry it was already briefly conveyed that the textile and clothing industry is undergoing a fundamental transformation. This transformation is both triggered and spurred by increasingly open and globalized markets and the connected financial networks of the 21st century. In order

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Firas A. (i********) Bachelor Thesis II 2010 to understand the developments taking place in the European textile and clothing industry a holistic approach, going beyond the borders of the EU, is necessary. As a result this chapter is dedicated to analyzing the international economic dimension of the European textile and clothing industry. Over the past decade the EU15 textile and clothing sector has been experiencing a rapid decline in employment and production. Between 2001 and 2002 the production dropped by almost 9 percent, while employment declined by more than 8 percent. According to a European Commission report in 2005 the overall trade deficit in this sector amounted to 26 billion in the year 2002 (European Commission, 2005). Analysis in previous chapters has shown that the general decline in employment and production can be associated with a combination of factors, amongst them the abolition of quantitative restrictions, lower labor costs abroad and increasingly fierce competition from less developed countries equipped with expertise from industrialized nations. The fact that the EU15 only has restricted access to third countries further contributes to the existing trade deficit. Brussels based Euratex has been working toward achieving a less restricted world market access for a number of years, stating that freer markets would most certainly boost European textile and clothing exports. With a growing middle class worldwide and especially in less developed countries an increasing number of individuals are able to afford European high-quality and added-value products, previously only obtainable by the affluent in the West. This exact phenomenon was observed in the 1990s as Mexico, South Korea and Brazil opened up their markets in the framework of EU trade agreements (Euratex, 2004). WTO trade agreements on the other hand lack the characteristic of symmetric reciprocal obligations. This means that EU countries may be removing trade barriers, granting third countries unrestricted access, however third countries are not obliged to do the same for the EU countries. Despite the European Commissions considerable influence on trade talks the process of symmetric market liberation is moving forward only very slowly (CEC, 2003). This topic is further elaborated on in section 6.2 of this paper.

5.1

Analyzing the Effects of Trade Agreements on Intl. Trade Relations

For the last four decades the international trade relations in textiles and clothing have been largely dominated by the so called Multi-Fiber Arrangement, or short MFA. The MFA has played an important role in protecting producers located in the United States and Europe. However, together with the Uruguay Round of the General Agreement on Tariffs and Trade

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Firas A. (i********) Bachelor Thesis II 2010 (GATT) in 1995 a phasing out process of the MFA began. The plan was to phase out the MFA in three stages, over a ten year period, starting from 1995. The process was completed on the 1st of January 2005. From this date the textile trade fell under the jurisdiction of the WTO. As a result of the dismantling of the quotas, which were in place under the MFA, textile and clothing exports from China to the West increased by more than 100 percent (GATT, 2005). A number of experts predicted this would happen long before the MFA was phased out, bringing about extensive repercussions for domestic manufacturers. In 2002 quotas were removed for a limited number of products. Almost immediately Chinas exports to the European Union increased by more than 180 percent in the respective categories. Other countries on the other hand only increased exports to the EU by 10 percent in the same product categories. This was seen as an indicator of what should be expected from China in 2005 with the removal of the rest of the quotas (Dicken, 2003). This drastic increase in imports from the Chinese had been anticipated by the European Union and the United States. Therefore, as part of Chinas entry agreement to the WTO, a special safeguard was negotiated which specifically focused on textiles. In short, this special clause enables any WTO member to re-impose a proportional quota on the Chinese clothing and textile sector for a maximum period of three years (2005 2008). The main condition for this clause to be allowed was if Chinese exports significantly disrupted domestic markets with the consequence of harming home producers. The US did not hesitate and made direct use of the clause, limiting growth to 7.5 percent while the EU, only after massive pressure from interest groups, limited growth to 10 percent. Such developments left an increasing number of people doubting the possibility of full trade liberalization in the textile and clothing sector. In the absence of new quantitative export restrictions, some industry spokespersons argue, China will seize more than half of the global textile and clothing exports before the year 2011. Such quantitative export restrictions are also suggested to benefit China itself, as it would have to deal with less anti-dumping cases (Dicken, 2003). Many see China rising to the worlds largest exporter in this sector as unfair considering the circumstances which enable such dominance in the first place: workers for example earn less than US$120 per month, the currency is undervalued by 40 percent, state owned companies are financially invulnerable while enjoying economies of scale on the national market and an increasing number of companies are gaining access to capital manufactured in Italy, Germany and Japan, together with large parts of the know-how (Keenan, Saritas, & Kroener, 2004). However, voices are getting louder stating that the

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Firas A. (i********) Bachelor Thesis II 2010 solution to such a crisis cannot be sought by leveling the playing field of free trade. In fact, the idea of putting a policy of affirmative action in place is gaining more popularity. This option would grant poorer countries tariff and quota advantages over competitors from developed countries. In this context the European Union has already been utilizing the General Scheme of Preferences, permitting less developed countries to export garments at significantly lower prices. Along with this the EU has granted quota-free market access to poorer countries (European Commission, 2005).

6. The EU Policy Dimension: Analyzing Challenges and Responses

This chapter can be said to be one of the most central parts to this paper. In the first part of this chapter the approach of the EU institutions towards innovation policy is examined. This is followed by an insight into the technological development and scientific research framework programmes. Finally policy challenges and responses are evaluated, after shortly elaborating on specific key-policy fields such as research and innovation policy as well as trade policy. However, it is by no means the objective of this chapter to represent an exhaustive list of studies conducted on the main regulatory and policy challenges in the areas of trade policies and recent managerial and technological developments in the textile and clothing industry. This chapter is intended to provide a well-balanced overview and analysis of the challenges and responses faced by the EU on a policy-making level. Starting in the 1990s innovation policies as such started to appear in the public documents of the community institutions. The Green Paper on Innovation in 1995 marked the first step toward innovation policy. One year later, in 1996, the First Action Plan for Innovation in Europe was published, bringing forward policy suggestions (though sparing in number) which later defined the direction of development. Generally, the suggested actions were organized in three categories depending on their intended purpose, which was either to foster an innovation culture, better articulate research and innovation, or to establish a framework encouraging innovation (CEC, 2000). Such steps were taken in order to foster innovation in a knowledge-driven economy, where a paradox exists which is namely that satisfactory research performance is not successfully matched by adequate innovation performance. This paradox has been identified and acknowledged in numerous publications by a wide range of European institutions. For examples see COM (2000)567 or COM (95)688. In such publication the European innovation performance was benchmarked again

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Firas A. (i********) Bachelor Thesis II 2010 Japans or the United States performance, leading to the identification of serious deficits on the European side. An important milestone in Europes approach to innovation policy was achieved in 2000 with the Lisbon European Council. The conclusions of the Presidency set ambitious goals to be fulfilled by the EU over the period of the coming 10 years. Amongst those objectives, voiced within the framework of the Lisbon strategy, was the desire to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion (CEC, 2000). Together with the Lisbon strategy, innovation became a priority within the EU policy framework, accepting the reality that competitiveness on a global economy largely depends on the introduction of new, innovative, products and services. This holds particularly true for the textile and clothing industry, as discussed in chapter 4 of this paper, where the importance of innovation in the aforementioned industry is paramount in order to compete successfully on a global level. In a wider context innovation policies began to be regarded as a vital component of industrial and enterprise policy strategies. This represented a shift in theoretical perspective and an end to the previously employed method of framing innovation policy within the context of research policy. According to Mytelkaand, professorial fellow at Maastricht Economic and Social Research and Training Center on Innovation and Technology the last decades have been marked by European institutions being influenced by a number of unorthodox approaches, including national systems of innovations and economics of complexity leading to a paradigm shift in the analysis of technological change and innovation. This stands in contrast with the past where heterodox economic theories played a decisive role, shaping European policymakers intellect within institutions such as the Commission. Thus numerous evolutionary developments have been taking place within European institutions, placing innovation in a more relevant position. (Mytelka & Smith, 2002).

6.1

Technological and Scientific Research Development Framework

Since the early 90s innovation and research activities of the European Union are placed under one main platform: the Frame Programme (FP). So-called research framework programmes represent the EUs key legal and financial instruments utilized to implement the European

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Firas A. (i********) Bachelor Thesis II 2010 Research Area, or short ERA. In March 2002, during the Barcelona Summit, the objective of increasing investment to 3 percent of the Unions overall GDP by the end of 2010 was set. ERA plays a major role in achieving this objective as it is a key element to the aforementioned strategy, which at the same time represents a political and legal obligation stemming from the Treaty of Amsterdam. Generally, Framework Programmes last for a period of four years and are composed by the Commission. The Council and Parliament on the other hand has the obligation to adopt the frameworks. Currently the 7th Framework Programme (FP7), which is the natural successor of the 6th Framework Programme (FP6), is in place. The main priorities of the FP7 have been outlined by the European Commission in their Communication Science and technology, the key to Europe's future - Guidelines for future European Union policy to support research. FP7 is highly focused on achieving the Lisbon objectives, which have been addressed earlier in this chapter. As part of this the management tools, organization, content and implementation modes of FP7 are designed as a key contribution to the relaunched Lisbon strategy (EurActiv, 2006). According to Science and Research Commissioner Potonik FP7 will not be just another Framework Programme. In the past, Framework Programmes have been central to European as well as international multidisciplinary cooperation and research activities. The 7th Framework Programme aims to continue this task, however differs from other Framework Programmes as it is larger (see budget comparison, figure 4) and more comprehensive (European Commission, 2007). Commissioner Potonik further states that FP7 is centered on innovation and knowledge for growth, it will continue the drive towards the European research area (ERA) - thus aiming at building the internal market of knowledge

(EurActiv, 2006). FP7 is the product of years of consultation with European policy making and research institutions, the scientific community, as well as other interested parties.
Figure 4 Source: (European Commission, 2007)

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Firas A. (i********) Bachelor Thesis II 2010

6.2

Policy Challenges and Responses to the Textile and Clothing Sector

This sub-section is intended to relate the general policy responses outlined above to the textiles and clothing sector and more specifically to one of the research question of this paper: What are the policies employed to help the troubled textile industry and how do they perform? One of the Commissions communications lay out the objectives from a perspective of the textile and clothing industry particularly well: If it is the primary responsibility of enterprises to meet the challenges [facing the sector], the role of public authorities is and will remain the establishment of favorable framework conditions in which textiles and clothing, like other sectors, can develop and enjoy the opportunity to compete, domestically and internationally, on the basis of equity (CEC, 2003). The European Commission, being responsible for trade policy in the EU, has made it clear from an early stage that it is not willing to take actions which are aimed at privileging the European textile and clothing industry by means of subsidies, or the replacement of quotas of 2005 by other trade barriers (Rossi, 2005). Judging from the Doha Development Agenda negations the European Commission seems much more interested in the introduction of a level playing field instead of introducing such new restrictions. Ultimately the Commission wants to see improved conditions of market access to third countries, which are comparable across the globe and fair at the same time. The least developed countries however are exempt from such demands. Thus in order to improve domestic conditions for textile and clothing producers the EU has called upon all WTO members to eliminate non-tariff barriers while at the same time cutting customs duties to the lowest possible level. Such a call can be understood considering that, as mentioned in chapter 5 The International Economic Dimension of this paper, WTO trade agreements lack the characteristic of symmetric reciprocal obligations. This means that EU countries may be removing trade barriers, granting third countries unrestricted access, however third countries are not obliged to do the same for the EU countries. As part of the EUs Barcelona Process the extension of the Pan-European arrangement of diagonal cumulation of origin to the Mediterranean countries should be fiercely pursued. This is necessary in order to maintain and improve the complete chain of production close to the EU market. This chain of production is the most effective way of combining the economic advantages of geographic proximity, quality as well as production costs. Today the cumulation of origin includes the CEECs, EFTA, Turkey and of course the EU (CEC, 2003).

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Firas A. (i********) Bachelor Thesis II 2010 Such endeavors are conducted under the framework of the Barcelona Process which has the objective of putting in place a free trade area (FTA) encompassing the European Union and Mediterranean countries. Such an FTA will enable manufacturers to draw from intermediate products located around the entire area without having to deal with economic barriers, while allowing for the successful exploitation of the competitive economic advantages of different regions. The final result of such efforts is hoped to decrease the negative effects of the abolition of import quotas which used to protect European markets under the Multi-Fiber Arrangement (MFA), which is discussed in chapter 5.1 of this paper. However, the fact that numerous countries in the Mediterranean region still do not have properly arranged FTAs with one another represents a considerable hindrance to the smooth functioning of a diagonal cumulation of origin. The 7th Framework Programme, discussed in section 6.1, also contains numerous funding possibilities which are potentially highly valuable for the textile and clothing sector. Such funding possibilities for the textile and clothing industry can be found in the second, third and sixth priority areas of the FP7 for Research and Development. Priority two for example focuses on information society and technologies, while priority area three focuses on nanotechnologies, new production processes and devices as well as knowledge-based multifunctional materials (discussed in section 4). Priority six on the other hand focuses on sustainable development (EurActiv, 2006). Those are all areas which are related to the innovative textile and clothing industry of 21st century Europe. In fact, the aforementioned priority areas already include research activates directed toward the textile and clothing sector. This is expected to aid the EU industry to remain competitive while modernizing at the same time. It should be noted however that a larger number of publicly funded research and development in the European Union is financed by its Member States (MS) therefore a comparatively greater responsibility to let the textile and clothing sector benefit from such work lies in the hands of the individual MS. Policies in support of human resources underlie very similar regulations. The EUs Leonardo da Vinci II Programme for example provides support for newly established training programmes and skills, which have benefitted the aforementioned sector. In this case, again, it is up to the MS to improve skills in this sector as most of the MS have their own programmes of skills development and specialized training. In the light of such fragmented and inconsistent operations the Commission realized the opportunity of erecting a Europe-wide approach to skills development and training (which it

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Firas A. (i********) Bachelor Thesis II 2010 is currently encouraging amongst the MS). Such a common program would be focused on identifying best practices in the industry while coordinating future progression in order to avoid the duplication of efforts (Rossi, 2005). As pointed out in the SWOT analyses conducted in section 3.1, the EUs clothing and textile industry has its strengths in fashion, design, branding and to some extent innovation. Having said this, one may wonder about how such intellectual property rights (IPR) are protected abroad. The importance of IPR policy is uncontested, as the lack of thereof would severely limit the motivation for innovation and novel designs in the industry due to declining profitability. The European Commission has recognized this and made the improvement of IPR enforcement and protection in third countries a priority. This includes monitoring the compliance with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). In addition to informing EU rights-holders about registration requirements (proper registration of e.g. trademarks) necessary to be eligible for protection under TRIPs, the Commission also engages in political discourse with trading partners, stressing the significance of TRIPs compliance (Keenan, Saritas, & Kroener, 2004).

7. Conclusion
Coming back to the main research question of this paper (stated in the introduction) What is the effect of the EU innovation gap on the textile industry? it can be safely concluded that it is a significant one. Analysis in this paper has shown that innovation, or the lack thereof, will largely determine the fate of the EU clothing and textile industry. This confirms the hypothesis presented in the introduction of this paper: innovation is essential for the survival of the EUs textile and clothing industry on a globalized, increasingly competitive market economy. The EU has to fuse the already available excellent expertise, quality, design and technological affinity of its traditional textile and clothing industry with innovation in order to unlock its full potential effectively turning threats to the industry into strengths and weaknesses into opportunities (speaking in terms of the SWOT analysis conducted in chapter 3.1). Throughout this paper it has become clear that a knowledge society is not enough in order to successfully compete on an increasingly competitive world market. It is vital for the European Union to form an innovation society where valuable knowledge is utilized swiftly and powerfully for the purpose of the development as well as benefit of society. Indeed, this requires an effective transformation away from closed approaches which are fragmented and 21

Firas A. (i********) Bachelor Thesis II 2010 only deal with single issues, to a flexible, open and networked approach. While closed approaches typically favor large incumbents, open approaches favor new ideas and entrants, which ultimately leads to more innovation. This paper is also intended as a call to all EU policy makers, including EU institutions, regional as well as national governments, to actively back this vital transformation. After all (referring to the opening quote of this paper) The difficulty lies not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds. More than 75 years later, this quote by British economist John Maynard Keynes still holds true.

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Firas A. (i********) Bachelor Thesis II 2010

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Firas A. (i********) Bachelor Thesis II 2010 Fraiman, N., Singh, M., Arrington, L., & Paris, C. (2002, July 27). Zara. Retrieved June 06, 2010, from Columbia Business School Marketing Cases: http://www.3isite.com/articles/ImagesFashion_Zara_Part_II.pdf GATT. (2005, December 02). International Textile Trade Arrangements. Retrieved March 12, 2010, from GATT Digital Library: http://gatt.stanford.edu/bin/search/simple/process?offset=0&length=10&query=arrang ement+regarding+international+trade+in+textiles&search=Search ILO. (2000, April 29). Labour practices in the footwear, leather, textiles and clothing. Retrieved June 06, 2010, from International Labor Organization: http://www.ilo.org/public/english/dialogue/sector/techmeet/tmlfi00/tmlfi-r.pdf Innovation Unlimited. (2009, October 08). Reinventing Europe through innovation. Retrieved April 09, 2010, from Innovation Unlimited: http://ec.europa.eu/culture/keydocuments/doc/forum/innovation_consultation.pdfSN0FA&sig2=DASRO3VpDi4RzB Sx4HgtxA Keenan, M., Saritas, O., & Kroener, I. (2004). A dying industry or not? The future of the European textiles and clothing industry. Foresight, 313-322. Mytelka, L. K., & Smith, K. (2002). Policy Learning and Innovation Theory: An Interactive and Co-Evolving Process. Research Policy, 1-13. Rossi, F. (2005, October 29). Innovation policy in the European Union: instruments and objectives. Retrieved March 29, 2010, from Universita di Modena e Reggio Emilia: http://mpra.ub.uni-muenchen.de/2009/1/MPRA_paper_2009.pdf

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