Invest in R&D now, panel urges Commission

European governments that cut spending on research and innovation to help rein in budget deficits risk sacrificing the EU’s future prosperity, warns an independent panel of senior policy makers and business leaders.

“Recovery from this recession and movement into the next period of growth is dependent on innovation. The time to invest is now,” says J. Frank Brown, Dean of INSEAD, the Fontainebleau-based management school and a member of the independent Science|Business Innovation Board AISBL, which met in Brussels on July 1 for a briefing with Máire Geoghegan-Quinn, EU Commissioner for Research, Innovation and Science.

Across much of the EU, governments are rushing to trim public-sector spending to manage the ballooning deficits they created in 2008 and 2009 while fighting the worst economic downturn since the 1930s. As part of that, there is concern that R&D and innovation spending may be on the block in some Member States. Universities and technology industries say that any such cuts would be short-sighted, undermining the development of emerging technologies and growth industries. Magnifying the concern is growing competition from emerging technology powerhouses such as China, which has been ramping up R&D spending and has set up 58 technology enterprise zones to concentrate resources.

With discussions on the EU budget now beginning, Geoghegan Quinn is determined to demonstrate the added value of EU funding for research. But she is also tabling new ideas to ensure maximum impact for every euro spent, as she shapes a new innovation strategy for Europe ahead of a special European Council meeting scheduled for December.

“Everything we do has to prove to heads of state that we are adding value,” said Geoghegan-Quinn at the Science|Business Innovation Board lunch. She added that, as well as being crucial to boost private sector growth, innovation can drive public benefits and lower costs across many state sectors, including public healthcare systems, where spending has soared.

For instance, the German pharmaceutical association says that since 1986 average life expectancy in Germany has risen by nearly two years – and it attributes 40% of this improvement to innovative medicines.  “In an ageing population and a fiercely competitive world, the rapid and efficient development of new medicines and treatments will help patients live a better productive life. It will also create the jobs we need to resume rapid economic growth,” says Roch Doliveux, CEO of Belgian pharmaceutical company UCB, and a board member of the EU’s Innovative Medicines Initiative.

The economic case for R&D spending is strong. Studies show both public and private R&D investment raise overall growth:  A 2004 OECD analysis estimates that a 1 per cent increase in business R&D increases productivity in the economy by 0.13 per cent, while 1 per cent increase in public R&D raises multifactor productivity by 0.17 per cent, according to Prof. Jonathan Haskel of Imperial College Business School, who also attended the Innovation Board lunch. His own research in the UK economy suggests that the impact of public R&D is most potent when allocated to universities through open competitions.

Likewise, in the pharmaceutical sector, studies show a 1 per cent increase in the stock of public basic research ultimately leads to a 2.0 per cent to 2.4 per cent increase in the number of commercially available new chemical compounds – the building blocks for new drugs, Haskel said.

So political leaders who slash public R&D budgets risk leveling a double blow to the economy by inadvertently curtailing private sector research spending at the same time.  

“R&D is linked to Europe’s future competitiveness. You can’t have one without the other,” said Andrew Herbert, managing director, Microsoft Research Cambridge.

Top of Geoghegan-Quinn’s agenda is nurturing innovative, fast-growing small and medium-sized enterprises.  Innovation Board members suggested targeting support for clusters of research and innovation excellence, where such companies tend to spring up and thrive.   “We need to facilitate easy and supportive treatment of entrepreneurs – and mobility of talent across borders,” says Jean-Philippe Courtois, president of Microsoft International.

To increase the effectiveness of the EU’s flagship Framework Programme and speed new technologies to market, Geoghegan-Quinn is considering highly targeted European innovation partnerships, designed to accelerate research and innovation in key areas, such as technologies to combat climate change.  “It’s a way to focus our limited financial resources on big issues – and help get key technologies to market,” says one Commission official.  

Members of the Science|Business Innovation Board tabled several recommendations on how European governments can boost innovation and get greater public benefit for each euro of public money invested in research.  They included “backing winners” instead of picking winners, creating a programme for high-growth startups with innovative products or services, focusing research programmes on excellence and open competition, and using government procurement to help create demand for innovative products and services.

But different technologies may need different approaches in government R&D programmes, the panel noted.  The time to bring major new energy technologies to market, for example, may be much longer than for a new software program.   "The question is, what's in the energy technology pipeline and what's stopping great ideas from being scaled up in Europe and globally?" asked David Eyton, group head of research and technology at BP.

A key challenge for Europe is tailoring policy to a changing universe of innovation.   Today “intangible knowledge” such as software, design and marketing savvy are key drivers of innovation in everything from Apple iPads to net-based retailing.   It is important, therefore, that the new Innovation Strategy focuses, not just on research and development and patents, but also on this broader range of intangibles.

Open innovation is another key trend Geoghegan-Quinn is eager to address, as capturing its benefits requires new approaches.  Researchers now link easily across borders in real time, making collaboration faster, easier and more informal.  Embracing a more open style of innovation, however, challenges the existing standards and rules governing intellectual property rights.  “This is among the biggest challenges management experts are working on today,” says Jonathan Wareham, research director at ESADE Business School in Barcelona.

The Science|Business Innovation Board is a not-for profit association, co-founded by Science|Business, INSEAD and ESADE with support from Microsoft and BP, that brings together opinion leaders from industry, academia and policymaking twice a year to assess key aspects of innovation policy and make recommendations to the European Union.