Power & Politics Hub

This is the first of two articles on this blog that will focus on the horizontal policy areas and proposals in Mario Draghi’s report on the future of European competitiveness. This article will specifically pay attention to the proposals related to accelerating innovation.

The report starts off, on page 228, by rightfully noting that research and innovation (R&I) are the main drivers of productivity and people’s well-being. Innovation generates positive externalities, with new technologies serving as stepping stones for further innovation. This, on its behalf, creates spillovers that justify government intervention to fund R&I. 

In Europe’s case, innovation will be critical to pursue transitions such as the green and the digital ones. As an example, achieving the EU’s climate objectives would require Europe’s ability to rapidly deploy robust investments in clean technologies. Relevant decarbonisation solutions such as green hydrogen, or carbon capture, are still very expensive making them unaffordable for widespread deployment. Technological development can help change that, as it did with solar and wind energy.

The innovation capacity of the EU as a whole continues to lag behind that of the US. EU convergence with the US in terms of innovation capacity has slowed during the last decade, with the US remaining ahead by almost seven percentage points according to the Summary Innovation Index of the European Innovation Scoreboard (page 229). China, on its behalf, is becoming innovative at an even faster pace than the USA.

The EU has further problems like innovative tech start-ups often failing to scale up. While Europe is now creating a comparative amount of start-ups compared to the USA, European start-ups much more often fail to make it past the growth stage. Many such European businesses relocate to the USA. Europe is lagging behind in nurturing companies specialising in developing ‘high tech’ R&D, with only 12 out of the top 50 companies with the highest R&D budgets in the world being European. 

The R&D investment gap is a major reason why the EU has a competitive weakness in innovation. The EU is investing less in R&D compared to the US, Japan and also China, which is making impressive progress. In 2022, the EU spent 2.24% of its GDP on R&D resulting in an investment deficit of around EUR 123 billion, relative to its target of achieving 3% R&D spending as a percentage of GDP. As a comparison, the US spends 3.5% of its GDP on R&D, Japan 3.3%, and China 2.4% – all higher than the EU. The gap with the US is even more striking when stated in absolute monetary amounts. The US outperforms all other major economies in total annual R&D expenditure, investing EUR 877 billion in 2022, compared to EUR 355 billion by the EU in the same year. Of course, there are significant discrepancies among different EU member states in terms of R&D expenditure with states like Belgium, Sweden, Austria, Germany and Finland exceeding the EU’s 3% spending target, while others such as Lithuania, Slovakia, Bulgaria, Latvia and Romania spending below 1%. Most importantly, Member States do not coordinate their national public spending on R&D to align it to EU-wide priorities, which causes several problems. As some large-scale innovative projects can only take place at an EU level, due to big size and high risk profile, such projects cannot be introduced. Secondly, the lack of coordination amongst Member States may lead to potential duplication and reduce competition for funding based on excellence. Thirdly, the lack of coordination among Member States limits the capacity of public entities to promote EU-wide excellence and to collaborate with the private sector on breakthrough innovation projects. Lastly, fragmentation diminishes the bargaining power of individual Member States when negotiating procurement contracts for innovative projects, such as research infrastructure. Projects such as CERN have only been a success story due to co-operation and it being executed on an EU-wide level.

EU educational institutions also have a series of problems. Compared to the top US universities, European universities often have more limited resources and more restrictive rules, which prevent them from offering tailored and attractive compensation packages, or expediting promotion for top researchers. Salaries are also often lower and not contractible. In the US, there is significantly more salary differentiation aimed at attracting and retaining the very best researchers. Moreover, heavy administrative workloads act as a tax on the time and energy of the most productive scholars. The links between higher education and business are weak and researchers have few incentives to become entrepreneurs. There are several reasons why the links between higher education and business are weak, including insufficient awareness of the potential benefits of collaboration and an insufficiently developed manage- ment of intellectual property rights (IPR) and the commercialisation of research. 

As far as companies are concerned, EU companies often rely on non-European capital markets to become listed and support their growth. Entrepreneurs and investors of innovative EU companies seek financing and exit opportunities through initial public offerings (IPOs), mergers and acquisitions, getting listed in non-EU stock markets and involving non-EU investors and competitors. As a result, the share of non-European buyers of EU companies is today high, exceeding 60%. IPOs of EU companies or their acquisition by foreign investors may also result in relocating the company’s headquarters or part of its operations outside the EU. Companies in the EU also fall victim to multiple regulatory, legal, and bureaucratic barriers. Several regulatory, fiscal, and legal differences across Member States limit the ability of EU companies to scale up efficiently and fully leverage the advantages of the EU single market. The EU’s extensive and stringent regulatory environment (exemplified by policies based on the precautionary principle) may, as a side effect, restrain innovation. EU companies face higher restructuring costs compared to their US peers, which places them in a position of huge disadvantage in highly innovative sectors characterised by the winner-takes-most dynamics.

In order to solve these problems, Draghi makes several propositions going forwards the most notable of which include putting research and innovation at the centre of EU strategic priorities, focusing on excellence, providing scale, added value, openness and European values. 

One concrete proposal towards achieving these goals is expanding incentives for business ‘angels’ and private or public seed capital investors to accelerate the creation of innovative business ventures. The re-investment of capital gains from initial successful ventures can catalyse innovation activity, and foster the emergence of successful high-tech clusters. So-called business ‘angels’ – wealthy individuals investing in start-ups on their own account – have become increasingly important as a source of equity finance at the early stages of company formation. The proliferation of angel investors not only enables existing entrepreneurs to thrive, but also helps attract new entrepreneurial talent, initiating a self-sustaining cycle of innovation. An alternative, according to Draghi, would be to generate an increase in  equity and debt funding available to start-ups and scale-ups. 

Draghi also proposes that the commercial exploitation of academic research is facilitated. The EU should set up a blueprint for fair and transparent royalty sharing between institutions and researchers. This blueprint should specifically assist public universities and RTOs in overcoming bureaucratic barriers to managing IPR with their researchers. Member States should remove any legal obstacles to this process. Researchers should also get access to information on the management of IPR. Intellectual property rights can also be exploited by companies not directly related to universities and RTOs via licensing. Since licensing is sometimes too costly for start-ups with limited financial resources, the EU could promote the issuance of shares and stock options to finance the cost of using IPR owned by universities and RTOs. 

It is also recommendable that all EU member states adopt the Unitary Patent and support its uptake. Fully adopting the Unitary Patent14 system in all EU Member States would reduce patent application costs, offer broader and uniform territorial protection of IPR for patent holders, and limit litigation uncertainty through the jurisdiction of the Unified Patent Court. To support the uptake of the EU Unitary Patent system and promote the protection of Intellectual Property Rights, training programmes for IPR professionals should be enhanced and possibly subsidised.

Support for innovative start-ups should also be stepped up and streamlined. During their early stages, start-ups are very vulnerable and need enhanced support. Currently, support is extremely fragmented, as also witnessed by the emergence of so-called ‘one-stop shops’, which makes it impossible for start-ups to find the most suitable instruments. Therefore, greater coordination of instruments across Member States is needed to ensure a level playing field. EU-level instruments (e.g. the EIC, EIF, InvestEU) should be more aligned. This should be facilitated by providing an EU-level platform bringing together all relevant information, and developing an ecosystem of services for start-ups. Such a platform should help start-ups to analyse their situation and needs, and to find the most appropriate solutions. The platform should exploit the state-of-the-art digital solutions, including AI. 

Lastly, public procurement rules should be reviewed. Currently, the potential of public procurement for stimulating innovation is heavily underutilised in the EU, with most public procurement characterised by an excessive focus on minimising risks and meeting pre-specified requirements. Investment in innovation procurement, including both R&D procurement and the public procurement of innovative solutions, represents only about 10% of total public procurement expenditures in the EU, falling short of the recommended level of 20%. All Member States should put in place ambitious national innovation procurement policy frameworks, with clear goals, resources, timelines, and an effective monitoring framework. In particular, European innovative SMEs should be able to benefit as suppliers of innovative solutions and ensure their wide deployment. EU institutions, including the Commission, should lead by example and create their own action plan to mainstream innovation procurement. The EU should revise its rules and directives of public procurement to better emphasise its strategic importance for innovation. The EU should also set a target for Member States’ innovation procurement, introduce more innovation-friendly IPR provisions, and prioritise quality over price when awarding contracts, thereby helping to establish a level playing field with low-cost countries.