Innovation spending in danger as corporate investment is forecast to drop by 45%

The president of the European Investment Bank (EIB), Werner Hoyer, has warned investment in innovation will take a big hit in the economic fallout from the COVID-19 pandemic, with 45% of EU companies expecting to cut investment in the coming year.

“Investments in digitalisation and innovation are most affected by this,” Hoyer said, launching EIB’s annual investment report on Wednesday.

“Looking at the effect of the first phase of the pandemic, our economists estimate that European funds could be forced to cut investment in this area by between 20% and 30%, depending on how much they are able and willing to increase leverage,” he said.

That fall will compound the fact the EU was not doing enough to foster research and innovation even before the pandemic struck, Hoyer said. “For over 15 years, we have invested every year around 1.5 percentage points of GDP less in research, development and innovation than our main competitors, in particular North America and Asia.”

Corporate investment in green and digital research and innovation in the coming years is vital to the EU’s future and achieving its climate goals.

The EIB, the lending arm of the EU, provides funding and guarantees for businesses to invest in projects that are in line with the bloc’s policy goals, including research and innovation. Last year, the bank invested a total of €77 billion, around half the EU’s annual budget, of which 40% supported green growth.

By the end of the decade, the EIB hopes to mobilise €1 trillion for climate action. This means financing energy efficiency projects in all sectors, investing in renewable energy, green innovation and research, according to Hoyer.

The bank’s investment report suggests that while EU companies do not invest enough in R&I overall, they remain leaders in green innovation. The EU registers 50% more patents in green technologies than the US, and 76% more patents that combine green and digital technologies than the US and four times more than China.

But stagnating investment in research and development is bound to catch up with the EU. It is already showing in fast growing digital sectors, where Chinese and US companies dominate the market.

Despite the looming economic crisis, it is important to act now. “At the intersection of green and digital technologies, leading early in innovation may create a winner-takes-all effect,” the report says.

Businesses that have invested in green innovation agree that climate spending is creating more dynamic markets, where more and more competitors are entering, but a competitive edge can be maintained.

The EIB hopes it can provide additional firepower for green innovation, enabling Europe to maintain leadership. The European Investment Fund, the EIB’s venture capital investment arm, supported over 330,000 SMEs and small mid-cap companies last year. “We keep on working so that the EIF can further meet the many ambitions that Europe has in the fields of SMEs and innovation and alleviate the effects of the crisis where it is most needed,” said Hoeyr.