EU companies spend more on R&D - but still not enough

European companies raised their R&D spending by 5.3 per cent last year - but still failed to keep up with bigger-spending U.S. and Asian competitors in the global R&D market, data from a European Commission study suggest.

According to an annual EC survey, the top 1,000 EU companies spent €112.9 billion in 2005 on research and development. As in past years, the top three spenders were Daimler-Chrysler, Siemens and Glaxo Smithkline. And the 5.3 per cent average increase was a marked improvement from the anaemic 0.7 per cent increase of 2004 and a 2 per cent decline in 2003.

But non-EU companies spent even faster - again. The top 1,000 non-EU companies spent €257.7 billion, up 7.7 per cent; biggest spenders were Ford, Pfizer and General Motors. And they continued to rate R&D as more important, with R&D budgets representing an average 3.9 per cent of net sales compared to 2.5 per cent for the Europeans.

In announcing the results, the commission put the most positive spin possible on it. In a statement, Janez Potocnik, European Commissioner for Science and Research, called the results "very encouraging. If this trend continues, we could gradually close the R&D investment gap."

But a close reading of the report suggests that, at such growth rates, the EU still won't come close to its official target of devoting 3 per cent of gross domestic product to R&D by 2010: 1 per cent from the public sector, and 2 per cent from industry. At present, the public sector already nearly hits the target. But it's in the private sector that Europe most dramatically under-shoots. The reasons include higher R&D labour costs in Europe, lower tax incentives, and in many high-tech industries a smaller market share.

One oft-suggested reason certainly isn't relevant, however, the data suggest: Corporate profitability in Europe vs. the U.S. According to the report, the EU under-spending on industrial R&D came despite a 21.2 per cent jump in operating profits - nearly twice the 11.8 per cent profit rise posted by the non-EU companies. That the U.S. companies continued to pour money into labs despite lower profit growth is something economists will no doubt be puzzling over.

EU leaders plan to meet in Finland 20 October and discuss new proposals by the Commission to improve the bloc's competitiveness in technology markets.