Making innovation happen: creating a conducive environment for R&D and innovation in Europe

20 February 2006

The European Policy Centre, together with the King Baudouin Foundation, held a Policy Dialogue on Making innovation happen: creating a conducive environment for R&D and innovation in Europe. Keynote speakers Esko Aho, Chairman of the Independent Expert Group on R&D and Innovation and President of the Finnish National Fund for Research and Development (Sitra), and Janez Potočnik, European Commissioner for Science and Research, were joined by panellists Luc Soete, Professor of International Economics at Maastricht University; Javier Echarri, Secretary General of the European Private Equity & Venture Capital Association; and Amar Sinha, Minister, Trade and Economic Affairs, at the Indian Embassy, Brussels. The meeting was chaired by EPC Chief Executive Hans Martens.

In his opening remarks, Hans Martens stressed the importance of research and development (R&D) in creating growth and jobs, through building strong links between research institutes and the market, improving the use of risk capital and creating a sympathetic regulatory environment. He said innovation would ensure that the EU could compete successfully in the global marketplace.

Esko Aho introduced the findings of the Independent Expert Group on R&D and Innovation report Creating an innovative Europe. He said the group began by defining “innovation” by its opposite - imitation - and stressed that countries needed to both innovate and imitate in R&D to survive.

Going for growth

Mr Aho emphasised the importance of the “Lisbon objectives” and the national target of spending 3% of GDP on R&D. However, while they were a useful guide, few countries had implemented them so far. He warned that EU growth was lagging behind the US and Japan, and that if Europe did not boost innovation, it would shortly find its research investment falling below that of up-and-coming “innovators”’ like China and India. “Action is needed before it’s too late,” he warned.

This necessitates a paradigm change in the EU approach, both in its attitude to risk- taking and in the move towards a knowledge-based economy geared to goods and services. The European Social Model will only succeed in an economically successful Europe.

Stimulating innovation

Moving on to solutions, Mr Aho proposed a four-pronged strategy: i) creating a market for innovative products and services; ii) providing the resources for R&D and innovation. iii) improving Europe’s structural mobility and iv) fostering a positive attitude to entrepreneurship.

Mr Aho explained that while the EU’s knowledge base was similar to that of the US, it had failed to create investment markets, forcing EU and global companies to invest their funds outside Europe. He gave the example of the European pharmaceutical sector, which had received ample investment funds in the 1970s but, because of Europe’s fragmented markets, had seen these funds diverted to the US and, in the future, to Asian companies.

He described seven strategic sectors of the economy where a market for innovation should be created: e-Health (using ICT to improve the healthcare sector), pharmaceuticals, transport and logistics, the environment, digital content, energy and security.

Improving structural mobility

A major obstacle to implementing R&D is the current lack of mobility at three levels: financial, human resources, and organisation and knowledge. Current national regulations make it difficult to transfer financial resources across borders, and investment patterns make investors reluctant to move resources from dying industrial to growing knowledge-based sectors. Mr Aho also stressed the importance of greater mobility among researchers as a means of stimulating innovation.

He detected the need for a greater “risk-taking atmosphere” in Europe, explaining that US investors look for “win-win”, while EU investors expect to find “win-loose” investments. “This affects our risk-taking ability,” said Mr Aho. “We will only succeed in innovation if we take risks.”

A pact for research and innovation

So how will these reforms be carried through? Mr Aho stressed the need for political commitment and recommended a Pact for Research and Innovation between political, business and social leaders to create a concerted effort that cuts across borders and sectors.

Commissioner Janez Potočnik began by comparing the Lisbon target of 3% investment in R&D with China, where investment from multinational companies has grown by almost 20% each year, and where national investment in R&D is growing by 10% annually. He said China's development was both an opportunity and a challenge, as it stimulates Europe to offer equally attractive conditions for investors.

Mr Potočnik explained that one important step-change towards implementing the report's recommendations was the Commission's decision to instigate a horizontal policy, cutting across traditional divisions of responsibility within the institution.

From proposals to commitments

He described how the Commission is supporting industry by reforming state aid for research and innovation, enhancing tax incentives and improving public research-industrial cooperation. Public procurement will be used to create lead markets by adapting regulations and standards to the needs of key technologies.

Politicians are taking the report seriously too, with the European Council and the Austrian Presidency of the European Union both closely involved. A Key Issues Paper will be presented to the March Spring Council and 18 Member States have set R&D investment targets for 2010. The Commissioner called on think tanks, stakeholders and industry to put pressure on governments to commit themselves to the Aho proposals.

The report’s suggestion of a Pact for Research and Innovation is being taken on board, with several countries - such as France, Germany and the Flanders region of Belgium - drawing up their own national pacts.

From commitments to actions

Mr Potočnik said the Commission was taking action: It is asking Member States and stakeholders to encourage public authorities to use public procurement to create lead markets for innovative goods and services. It is promoting better cooperation between public research and industry, including on intellectual property rights. Finally, it is giving Member States suggestions on how to use tax incentives to stimulate investment.

The Commission is keeping up the momentum for funding initiatives under the Seventh Framework Programme, the Competitiveness and Innovation Programme and Structural Funds, including increasing the research budget by 75%. It has also set up Joint Technology Initiatives and a Risk-Sharing Finance Facility.

However, the success of the proposals would depend on national governments translating them into action: “This is an important chance, let’s seize it before it is too late!” said the Commissioner.

Flexible innovation

While Luc Soete agreed with the report’s diagnosis, he believed that any new paradigm had to take account of the demand side of the economy. While agreeing on the need to change from industrial R&D to innovation, he said technological progress had to be flexible enough to adapt to different environments, which meant modifying innovations to external circumstances and taking users’ views into account.

Innovation and change also depend on two important items that the report omitted: higher education and employment. Top quality higher education is crucial for all R&D and here Mr Soete felt that the European system compared unfavourably with that in the US, where education spending is nearly twice as high as in Europe.

He said more emphasis should be placed on the role of employment and its impact on the interaction between innovation, creativity and the European Social Model. Getting this right would improve companies’ ability to innovate.

Mr Soete then turned to International Property Rights (IPR), pointing to a shift away from ownership of rights by large companies to a situation where IPR belonged to many small firms, and called for clearer regulations on this.

European investors - risk averse

Javier Echarri was disappointed by the lack of capital investment in Europe compared to the US. “In Europe, we have more difficulty in raising money,” he said. He explained that US investors were higher risk-takers - they expected a better return, but were prepared to lose more; an attitude European investors should adopt.

The greatest hurdle for venture capitalists is double taxation between countries, and Mr Echarri explained the problems facing investors in Europe: to invest in other countries, they have to go through circuitous routes to avoid paying multiple sets of national taxes. As a result, EU countries with the largest venture capital community innovate more as they can call on “home grown” finance.

He also argued for the creation of a European electronic stock market to generate investment, similar to NASDAQ (National Association of Securities Dealers Automated Quotations) in the US.

He was critical of the report’s suggestion of grants to support innovation, arguing this did not allow for market rigour. He also called for a “European status for Young Innovative Companies”, with fiscal measures, higher R&D investment, higher job creation, and more incentives for business angels.

EU needs an innovation-friendly market

Amar Sinha emphasised the positive aspects of Europe and its achievements over the last 50 years. As well as being one of the world’s largest economies, it has demonstrated the benefits of cooperation, and its aid and trade policies have made the world a better place. However, he agreed that Europeans were averse to risk taking, that labour laws were too restrictive and that the EU needed an innovation-friendly market, with more resources for areas that are engines of growth. “What is important is to spend more, spend better and spend more together,” he said.

He reiterated Mr Soete’s point about education, explaining how, over the last 50 years, India had used it to move from poverty reduction to innovation. He also argued that the EU should put more stress on science and mathematics in its schools and universities. “To build a house you must start at the bottom,” he said.

Turning to the question of mobility, Mr Sinha said the report had ignored the important role that controlled migration could play in bridging the gaps in technological expertise. He pointed to the US, where many of the best thinkers came from abroad to study or work in the country’s research institutes.