16 May 2012   |   Viewpoint

Policy overkill

The EU’s innovation policy isn’t working effectively to produce economic benefits. A more streamlined and simplified system is needed to catalyse growth, says a new report from Ernst and Young

Business leaders across Europe have limited awareness of the EU’s innovation policy and those that are in the know think policy is too fragmented, according to a survey of 680 executives from 15 member states.

Their perceptions of the EU’s innovation policy highlight the need for clarity and a more streamlined approach, according to a new report by the consultants Ernst and Young.

In the survey of business leaders carried out to inform the report, just 27 per cent of respondents are familiar with the work the European Commission is doing to promote innovation; 82 per cent think that access to EU funds should be made easier; and 82 per cent say EU policy is too fragmented and needs greater coordination.

Meanwhile, 69 per cent view innovation policy in the US and Japan as more effective than in the EU, and 69 per cent believe innovation policy in the EU has not matched industry’s needs.

“European policy-makers and business leaders need to come together and agree a fresh set of priorities and systems to deliver competitive advantage,” says Jay Nibbe, Ernst & Young Markets Leader, Europe, Middle East, India and Africa, in the foreword to the report.

“A huge range of programmes, projects and funding streams have been designed to help stimulate innovative activity across the member states. But therein lies the challenge. While acting with the best of intentions, the sheer variety of such activities means that the clarity and effectiveness that these times demand can sometimes prove elusive,” Nibbe says.

Innovation Union

In the aftermath of the financial crisis, and aware that the European Union is facing increasing competition from the world’s rapid-growth markets, there has been a massive increase in public funds, a proliferation of lines of action, the creation of communities, platforms, infrastructures and even a dedicated initiative, the Innovation Union.

However, this wide array of actions - though created with the best intentions- has not generated the expected level of success. Europe will again miss its goal of  spending 3 per cent of GDP on R&D by 2020, says the report, ‘The power of simplicity: Toward a smarter and streamlined innovation policy in the EU’.

Furthermore, the European Commission’s projections to 2050 show that EU member states’ share of global patents is set to fall from 40 per cent to approximately 20 per cent. This is all despite the fact that the 27 countries of the EU form the world’s largest single market.

Policy complication

Spread across countless programmes, actions and strategies, innovation has for years been pursued via intricate decision chains, objectives and proposals. This has resulted in an enormous chunk of public money being deployed by an unprecedented number of decision-makers, agencies and ad hoc institutions.

The desire to become more innovative and competitive has led to the creation of new programmes that largely overlap with pre-existing ones, the report claims.

R&D gap

Between 2005 and 2009 the sources of R&D funding in the EU have shifted towards the public purse, with a reduction, in percentage terms, of private R&D. This contrasts with the US, South Korea and Japan where private R&D spending has increased in recent years.

The only European countries where private sector R&D spending is above 2 per cent of GDP - Sweden, Finland and Denmark – are also the ones that lead in innovation performance.

The disparities in national levels of innovation, already systemic before the economic crisis, seem to have widened in the past months, according to the report.

Inadequate infrastructure

Although initiatives have been launched to develop network infrastructure across Europe, 73 per cent of respondents to the Ernst and Young survey want the EU to spend more money on building a common broadband infrastructure.

There is also currently no European single market for electronic communications, further hampering the creation of a pan-European world-class e-infrastructure. Insufficient investment has been directed toward areas such as distributed computing infrastructure systems, which would enable round-the clock access to data, and lead to increased productivity for European researchers and would-be entrepreneurs.

Limited financing options

The absence of a genuinely integrated market for many of the most innovative sectors including, most notably, knowledge-intensive services, is a serious issue. Financial markets are disjointed and the level of regulation varies across borders. The lack of harmonisation prevents cross-border venture capital investment and the creation of funds in areas where financing for innovation is most needed.

A three-tier approach

The answer, according to the report, is a new, three-tier approach to EU innovation. This aims to improve the effectiveness of the EU’s innovation policy, and reduce administrative burdens for companies wishing to make use of existing funding tools and other EU innovation initiatives.

Layer 1: Governments should act as leaders and investors, creating the main building blocks of an innovative environment, that is, a world-class infrastructure, a high-performing education systems and research and innovation-friendly regulatory systems.

Layer 2: Governments should create funding and facilitate links between researchers, entrepreneurs and private investors, possibly with the help of public funds and tax credits.

Layer 3: Governments should push existing innovation efforts in the direction of long-term policy goals through the strategic use of public procurement and by launching a limited number of partnerships that address key long-term market failures.

While there is no catch-all solution, “A smarter and more streamlined innovation policy will underpin a much-needed economic resurgence across the EU,” the report concludes.

The power of simplicity. Toward a smarter and streamlined innovation policy in the EU

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