EU study finds ‘strong’ case for European Innovation Council vision

Betting more money on disruptive start-ups in Europe can help solve the continent’s productivity problem.

This goal, which aligns with the vision of the new European Innovation Council (EIC) being pushed by EU Research Commissioner Carlos Moedas, finds support in a report published by the Commission on Thursday which looks at the economic impact of research and innovation spending in Europe.

According to economic data, the tech revolution is failing to deliver higher productivity, and much of the slow-down is driven by an increasing performance gap between "firms at the global frontier", whose market lead results very often from the introduction of disruptive innovations, and the companies that are lagging behind.

According to the study, “the R&I and productivity gap in Europe against the United States is driven by the fact that the EU has fewer young leading innovators”.

It is this shortage of young, thrusting companies in Europe – the likes of Spotify, Blabla Car, Feedzai or Abris-Capital tend to be the exception, rather than the norm – that Moedas has vowed to target through the new EIC, which is expected to pilot later this year.  

The goal of the EIC, which will adopt a venture capital-style approach to awarding grants, is to push the Commission to more actively seek out and reward companies pitching a truly major new wave of technology, or “market-creating innovation”.

The report suggests the initiative has a sound basis, and will help create new jobs and higher levels of productivity.

“The rationale for public R&I funding for market-creating innovations is strong given the much higher potential risks of market failures for such innovation,” the study reads. “This calls for an enhanced role of public R&I funding to lower existing barriers and for fresh rethinking on the type of activities that should require public funding, notably to include market-creation innovation.”

The study, part of a series analysing the links between EU R&D spending and economic performance, was written by civil servants in the Commission’s research directorate.

On its way to publication, it received “comments and guidance” from a number of experts, including Luke Georghiou, professor at University of Manchester; Dominique Guellec, head of division, science, technology and innovation policy at OECD; Jonathan Ostry, deputy director of research, IMF; Debora Revoltella, director of economics department at the European Investment Bank; Luc Soete, professor, UNU-MERIT; and Reinhilde Veugelers, professor at KU Leuven.

The document will feed into work by a group of 12 experts headed by former director-general of the World Trade Organization and EU trade chief Pascal Lamy, charged with drawing up a vision by June this year for the 2021- 2028 EU research programme, for now referred to as FP9.

Lamy’s findings are intended to put Moedas on a stronger footing in negotiations for the future research budget.

“Productivity paradox”

When economists speak of a “productivity paradox” they mean that, despite the significant changes brought by the rise of mobile or social networks, and the fading effects of the financial crisis, there has been no revolution in terms of productivity and effect on the economy.

The same productivity gains that stemmed from historically disruptive technology, such as the invention of the steam engine, electricity and mass production techniques in the 19th and 20th centuries, are not immediately evident today.

The analysis shows that productivity gains are low or even negative in countries such as Finland, UK and Belgium, despite significant investments in research and innovation. Investments have also played a minor role in driving labour productivity growth in countries such as Hungary, Slovakia and Slovenia. 

Europe's gains have remained smaller than those in the US: productivity in the EU is around 15 per cent lower than in the US, and this gap overall has widened in the past years.

For the authors, this raises the question of “whether we are experiencing a period when the machine that transformed R&D and knowledge creation into innovation and economic growth has been broken or become dysfunctional”.

The report does not attempt to provide a conclusive answer, as productivity gains depend on more than just public R&D spend.

A relative lack of business investment is an obvious factor. Private R&D spend in Europe remains significantly lower than in other rich corners of the world, such as the US, Japan and South Korea.

The continued fragmentation of the internal market is another issue the report identifies.