All the EU’s mistakes on innovation. Reports
The executive summary of the report “ EU Innovation Policy: How to escape the middle technology trap ” by the European Policy Analysis Group, dedicated to innovation policies in the European Union
Encouraging innovation has long been a priority for European policymakers, with the implicit goal of reaching the technological frontier represented by the United States. This objective was not achieved. Innovation scoreboards published regularly by the European Commission have consistently found that the EU lags behind the US on many indicators.
The latest scoreboard indicates that the transatlantic divide has widened.
This report argues that current European efforts, while commendable, are insufficient, both in terms of quantity and quality. Major reforms are needed to enable Europe to compete in the value creation space.
THE EU INVESTS IN RESEARCH AND DEVELOPMENT: THE PROBLEM IS IN THE PRIVATE SECTOR
Europe's disappointing results may surprise the reader, given that public support for research and development (R&D) has grown gradually over the past two decades and is now about the same level as in the United States (around 0.7% of GDP). It is in the private sector that there is a large quantitative difference between the US and the EU. Business spending on R&D (BERD) in the EU, at 1.2% of GDP, is about half that of the United States (2.3% of GDP).
Furthermore, R&D by European companies is concentrated in medium-technology sectors, such as the automotive industry.
These industries compete by applying the latest technological advances to manufacturing, but they do not require the same R&D intensity or offer the same growth potential as high-tech industries that produce the latest technologies. The main reason why US private R&D is double that of Europe is therefore the much higher weight of high-tech industries in the US.
THE TECHNOLOGICAL GAP WITH THE UNITED STATES
European specialization in mid-tech, the “mid-tech trap”, has persisted for two decades.
The largest companies in the EU in terms of R&D spending are almost always car manufacturers, while in the US car manufacturers, which were important 20 years ago, have been supplanted by software companies. The EU's comparative advantage in the automotive sector is worrying: despite massive investments in R&D, the EU automotive industry risks being overtaken by US and increasingly Chinese manufacturers. Foreign manufacturers can leverage their leadership in electric and autonomous driving technologies.
Today the transatlantic gap is particularly large in software development, where US companies represent 75% of the global total, compared to 6% in the EU (less than China). Much of the growth in U.S. business R&D spending over the past decade has been driven by software companies, underlying U.S. dominance in the latest advances in artificial intelligence (AI). The quasi-monopoly position of the US high-tech sector also applies to next-generation software (most cutting-edge LLMs are US) and hardware (see Nvidia for semiconductors, etc.). China is rapidly catching up in terms of high-tech R&D spending.
THE EU MUST CHANGE ITS APPROACH ON TECHNOLOGICAL INNOVATION
A change in the direction of EU innovation towards high-tech industries therefore appears highly desirable.
Breaking the trap of middle-of-the-road technology would foster growth and increase the EU's geopolitical weight. But to achieve this, governance must match the ambitions. Simply put, the EU does not have the institutions necessary to meet the innovation challenge of the 21st century.
The majority (90%) of public support for R&D in the EU originates at national level. The EU contributes through the Horizon Europe programme, which allocates around 11-12 billion euros per year to support innovation, research and development more broadly.
However, less than 5% of Horizon Europe supports breakthrough innovation, which has the potential to create new markets but is far from commercial applications. Distinguishing between the various types of R&D is important (yet neglected), as projects aimed at bringing known technologies closer to the market cannot be expected to produce disruptive innovations.
The recent creation of the European Innovation Council (EIC) was a positive step towards reorienting R&D efforts, but it is hampered by several limitations. Firstly, it depends too much on the European Commission. Second, it only marginally addresses innovative research, which is still substantially underfunded.
The EIC appears more oriented towards remedying perceived capital market imperfections than promoting innovation, as a substantial part of its spending supports the capital structure of small and medium-sized enterprises (SMEs) and, to a more limited extent, of startups. Furthermore, serious governance problems can undermine its mission to stimulate innovation: the EIC is mostly led by EU officials rather than high-level scientists; some eligibility criteria impose severe constraints, making the selection mechanisms highly bureaucratic; collaborations are forced rather than accompanied; and the disbursement of financing is slow.
WHAT TO DO: THREE PROPOSALS
Institutional change is therefore needed to stimulate the development of the EU's high-tech industries. In particular, we propose to
- to give leading scientists a more central role in the EIC Board and in project selection;
- shift decision-making power from the European Commission to a greater number of independent project managers; And
- draw resources from underperforming Horizon Europe programs and other parts of the EU innovation ecosystem to expand the size and scope of programs effectively dedicated to innovative research, without changing the current multiannual financial framework.
Our budget-neutral but radical reform of the EIC could provide the EU with an innovation engine modeled on the US ARPAs (advanced research project agencies). ARPAs have been widely credited with supporting the advancements of several innovative technologies and the development of America's biotechnology, software, and hardware industries. A thriving innovation ecosystem would create the right incentives, attract private investment and stimulate the growth of high-tech industries, helping the EU escape the middle-tech trap.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/innovazione/eu-innovation-policy-sintesi/ on Sun, 21 Apr 2024 05:25:36 +0000.