Memo to CEO: spend more on R&D

The European Commission wants businesses to spend more on research and development – and to help encourage that, the agency is preparing a volley of government proposals for the Autumn. According to EU Science and Research Commissioner Janez Potočnik, “what we are preparing for the second half of the year will be a kind of umbrella communication” on research and innovation policy, aimed at nudging EU capitals to improve the overall economic and regulatory climate for business investment in R&D.

He identified weak business spending on R&D as one of the “most difficult” parts of Europe’s technological performance; and indicated in an interview with Science|Business that several changes in the overall “framework” for innovation in Europe are needed to reverse the trend. In the EU, he noted, currently 54 per cent of R&D spending is by the private sector, with 46 per cent by the public sector. By comparison, about two-thirds of U.S. R&D spending is by industry. In Japan, the figure is 70 per cent.

‘Knowledge economists’ at work

Potočnik said the commission is studying the reasons for the gap. For instance, in biotechnology, he said he has “a group of knowledge economists” analysing the trans-Atlantic spending differences. They are also studying the economic impact of European companies investing in R&D outside the EU: “If a company is investing in China, is that good for Europe or not?” He called it a complex issue, and said the economists “are trying to enlighten the picture, in a way which is not so black-and-white.”

Of course, economists –Potočnik himself is one, in his native Slovenia – have long studied the business spending gap in European R&D. And, perhaps uncharacteristically, politicians in most countries have been acting – slowly increasing public-sector R&D budgets as the political sensitivity of technology rises. Potočnik forecast that by 2010, public-sector spending on R&D will hit 1 per cent of gross domestic product – a level comparable to the U.S. and Japan. And the commission is currently negotiating a big rise in its own tech budget, to €54.5 billion over the next seven years under the so-called Framework 7 program.

Falling short?

But the official EU goal has been higher still. The 1 per cent public-sector spending target was intended to be only a third of a broader goal, set in 2002 as part of the so-called Lisbon Agenda for reform. That targeted a rise in total public and private R&D spending to 3 per cent of GDP by 2010 – with two-thirds form industry. Largely because of the slow business spending, the commissioner said, the EU could end up hitting only 2.6 per cent in 2010.

Of course, as the EU’s top technocrat, Potočnik accentuated the positive. Politically, he said, “I think it’s not wise that somebody would say we are failing, when we are putting all our efforts to go in this direction.” Even 2.6 per cent of GDP, he said, would be “a remarkable step ahead from the situation we have today.” And he called the 3 per cent Lisbon number not a target but “an indication” for policy makers. “Since two-thirds of the money (should be) coming from the private sector, then it is obvious that 3 per cent is rather a result of a well-managed economy – a result of all the actions put together. If we do things well, we could still reach 3 per cent.”

Thus, to spur better regulation of the business climate for investment, the commission is preparing new proposals for the Autumn. Two communiqués, one in September and the other in late November or December, will highlight a mix of old and new measures that the commission will urge on EU member-states. He confirmed they will be considered by the Competitiveness Council – a committee of EU government ministers.

Best practice in government

He declined to specify the contents of the communiqué, but said generally that they will be an “upgrade” from a list of 19 economic and social changes that the commission first suggested last October. They will include a mix of commission actions, recommendations to member-states, and examples of “best practice” in “tax incentives, state aids, public procurement, intellectual property and financial markets,” among other things. That’s separate from the conventional EU tech subsidies to be doled out under the Framework 7 program.

Also under consideration for inclusion in the communiqués, he said, is a proposal to create a European Institute of Technology, to rival such U.S. research leaders as the Massachusetts Institute of Technology. If adopted, the commissioner warned, the private sector would have to stump up much of the money.

Another proposal that “could be” included, he said, is a so-called “lead market” initiative: an effort to coordinate EU-wide technical standards and procurement policies to boost consumer demand for specific new technologies – a concept advanced last year by an expert panel lead by former Finnish Prime Minister Esko Aho.

Promoting reforms in labour markets, tax policy or other “framework” measures go against the political grain, the commissioner acknowledged. “The majority of the time, it’s somewhat easier…to increase the spending in the (government) budget, than it is to create conditions which would dramatically increase investment of the private sector in Europe. If we were to concentrate on which part (of policy) is more critical, where it’s more difficult, then I would definitely chose the private sector.”

The key question for politicians, he said, is: “Are you improving the situation for companies, so they invest more in Europe?”