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Economic reform working group - session 2

  • Date(s)
    15 April 2005
  • Location
    Brussels

The second session of the meeting, which Policy Network organised in cooperation with the European Policy Centre (EPC) on the 14th and 15th April 2005 in Brussels, was devoted to research and innovation.

In a global context, which is changing at a very fast pace, the European economy must focus on products that rely on new technologies and generate more value-added. This is the best way for the European Union to remain immune to price competition. The services sector has a growing importance, and the application of new technologies to traditional products changes the market. A strong and effective effort in favour of research and innovation is crucial to Europe’s future prosperity.

In the preparatory documents and during the discussion, the differences between “research” and “innovation” as two distinct – albeit entangled - policy areas have been highlighted. One of the main requirements of fostering research is public spending, whereas innovation is chiefly about smart regulation and setting the right environment. Consequently, it is perhaps more adequate to use the phrase knowledge society, conceived as having three main components: research (i.e. the creation of knowledge), innovation (the use of knowledge), and education (the distribution of knowledge).

What is clear is that both research and innovation are crucial to Europe’s economic future and employment prospects.

John Palmer (Political director of the EPC) introduced the discussion with a presentation of a policy paper by the European Policy Centre (EPC), An Agenda for Sustainable Growth in Europe.  The document emphasises, first of all, that the EU is not tapping into its full potential at the most advanced levels of education. There is much more to do in order to improve Europe’s educational culture, and operate a switch of emphasis from merely acquiring knowledge to learning how to use it. Second, the EU should invest more in the research and development area, which entails a greater coherence in its action (with its macroeconomic rules, the overall structure of its budget…) and a stronger commitment in various policy areas (Intellectual Property Rights, etc.). Third, the institutions and the various structures – specifically the ones facilitating the relationships between research and the market – are showing strong limits in transforming Europe into a knowledge-based society.

One of the key ‘missing links’ for the EU to make greater (and better) use of innovation are the difficulties encountered in the process of technology transfer. Greater business interest, public and private resources need to be attracted and, ultimately, the trend towards increased research capabilities and more investment in human capital must be reinforced. Moreover, the EU research framework policy must play a leading role in the emergence of technology clusters. However, both in EU and member states policies, there is a tendency to promote the development of local clusters, meant to act as drivers for the economic development of their own region. This results in scattered and small-scale R&D facilities, which do not reach the required critical mass in terms of finance, staff or business presence, to generate significant innovations. It would perhaps be more efficient to concentrate EU funding on a few clusters to turn them into global leaders.

The discussion then focused on two main sets of issues: on the one hand, the lack an innovative environment in Europe, and, on the other hand, the need to reinforce national and EU research policies.

Creating an innovative environment

The process of innovation

The crucial factors that generate innovation are knowledge, skills, performance management, and the capacities of governments and companies to promote an environment boosting new projects. Innovation is sometimes based on research, but the causal connection is not systematic. Essentially, a successful innovation strategy is based on trade, networking, and marketing between different actors at the local level. There is a lot of evidence that innovation is not a linear process, but one primarily based on interactions in a good environment, in which one’s performance relies on that of the others.

The exchange of ideas, within specific networks, and the relationships of interest and trust they establish, foster innovation. Successful networks enable people who have ideas to find partners without fear of giving these ideas away and endangering their competitive advantage. This is arguably difficult to achieve in the context of a university or a small start-up firm, because of the need to find trustworthy people with the adequate skills: this is why self-regulating networks are needed.

Given that one cannot predict what the successful innovations will be, innovation is first and foremost a systemic issue. Then, secondly, technology transfer, i.e. the commercialisation and the diffusion of technology, remains extremely important. The rationale for public intervention in innovation is not only market failure, but also system failure. Sometimes the indispensable elements are in place, but the system as such does not perform well, and innovation does not have the expected economic impact.

Start-ups and patents

The difference between the number of new start-ups in Europe and in the US over the last five years is not so important. But in Europe start-ups are located in traditional sectors, and they tend not to grow as fast. This might suggest that focusing too much about starting businesses (i.e. facilitating company creation) might not be the main challenge. Perhaps continued regulatory burdens should be a stronger concern.

In the discussion, Stephen Yeo (CEPR), emphasised the difference in the US between the “West Coast model” (small firms relying on venture capital and informal networks) and the “East Coast model” (based on a channelling innovation to larger firms). The former model has grown much more quickly than the latter. So far, it has been difficult to involve small firms in Europe.

An other element has been pointed out: we should move quicker towards the definition of a European patent, which has been blocked for more than 10 years by Member states and which is a key element of the single market.  This issue of the patentability and diffusion of knowledge is much broader and much important than is usually acknowledged.

Universities and researchers

The way innovation policy is designed today is often marked by an emphasis on the transfer from universities or research centres to commercialisation. More important than the intellectual property rights, the link between researchers and business is clearly a crucial point. The problem in Europe is that universities are not able to create a hospitable environment for entrepreneurial firms and do not favour interactions with the private sector in general.

Various factors account for that situation. The system of universities designed a hundred years ago for an elite, have radically different purposes today. European universities remain old, strongly rigid, hierarchical, and mostly public-funded structures. The consequence is an extremely difficult reform process, as there is always much reluctance to change.

Finally, innovation, being often linked to higher education, appears more frequently within a young population, while Europe is a continent with an ageing population. The US has tackled this issue by bringing researchers from all over the world in their universities. How can Europe attract more researchers to come and stay in Europe?

A comprehensive approach

A successful approach to promote innovation must take account of all its dimensions. Far from being merely technological, it must also include business innovation and social innovation. Innovation concerns a variety of economic sectors, especially that of services, which represents 70% of the EU GDP.

Adopting a “network” approach is a way to give everybody in the business community access to a greater diversity of ideas. This means combining research investment and measures that encourage the flow of ideas. The assessment of the 5th and 6th framework programmes of research and development shows that involving more businesses is a genuine problem. It is not always easy to create the conditions that persuade companies that they should do more in terms of innovation, cooperate more with universities, etc. They show some reluctance, for competition and confidentiality reasons. The new EU research programme under discussion (7th Framework programme for the period 2007- 2013) should reinforce this weak part of the previous European interventions. 

Bridging the research gap

The Barcelona target

Coming back to the Lisbon agenda, is the target of 3% of GDP dedicated to R&D realisable? According to the 2005 data, meeting the target would involve a 50% increase in spending. This is most probably achievable, but it might not be realistic as there is not enough political willingness on the part of governments to make the necessary reforms and to increase their spending. This is part of the wider problem we have about the Lisbon agenda, which heavily relies on the good will of the member states. Some countries are reaching the targets, and some are moving on the right track: for example, Jose Zapatero has announced that R&D spending in Spain has grown by 20% in one year of government. But obviously, achieving the target is also dependent on Europe’s macroeconomic rules framework. 

Although Europe’s main disadvantage compared to the US is the insufficient development of private research, it should be emphasised that the state will continue to play a key role in long-term investment. The European research area might entail a “spill-over” effect: the more integrated the market for researchers, the less member states will have an incentive to invest more money in their own research. The larger member states, though, would still benefit internally from their own investment. From this standpoint, it might seem surprising that it is the large member states that are not doing enough.

Despite the budgetary pressures, the EU’s research programme has become a driving policy instrument, especially for the Union’s small or medium members. In those, national programmes tend to be in line with European priorities.

Another consequence of the 3% target is linked to the need to attract a greater number of researchers. One question we might ask is whether we also have also the capacity to keep the best researchers in Europe. Europe still provides researchers to the US.  After five years of university and about ten years of research, 35-year-old European researchers may prefer to stay across the Atlantic, in order to benefit better working conditions and salaries.

The EU research and development programme

Kurt Vandenberghe, deputy head of cabinet of Janez Potocnik, the European Commissioner for research, specified the main novelties of the 7th programme for research and development,  which is organised in 4 points:
-          Cooperation supports everyone dealing with research in Europe to work together in key areas where we believe Europe should get leadership
-          Ideas is designed to help researchers. The creation of an European Research Council where research would be founded purely on a criterion of economic expertise is planned.
-          People offers fellowships programmes. The budget of this programme will be doubled.
-          Capacities is aimed at new infrastructures, capacity building in new member states (there is admittedly a tension between the logic of cohesion and the logic of excellence here).

The framework programme raises important issues. Does the scale really important in innovation? If the EU budget on research is doubled without hiring more staff, does it mean that bigger research programmes will be funded?. And how competitive does the innovation process need to be in order to enable people to perform well? It remains uncertain whether there are economies of scale, and even if it is the case, they do not necessarily lead to a strong performance. It could also result in a reduction in competition. In this way, it is conceivable that bringing people together to get funding could actually make them less innovative.

Another point mentioned in the discussion concerns the tension between the need for efficiency (which entails reducing bureaucratic red tape), and the political imperative for accountability and transparency.

Finally, the doubling of European money for research matters less than the signal that it sends about where, as a society, we choose to put our money. This is also important with reference to the financial perspectives, although there is an excessive discrepancy between the objectives and the reality of investment in research.

Participants

Maria-Helena André, deputy general secretary of ETUC
Carlos Buhigas Schubert, policy analyst at the European Policy Centre
Antoine Colombani, associated researcher at Policy Network
Folker Franz, Economic and Financial Affairs department, UNICE
Mireille Heijnen, government affairs manager at Microsoft, Brussels
Eivind Hoff, trade and investment advisor, WWF
Truus Huisman, European public affairs, Unilever
Göran Hultin, CEO, Caden Corporation S.A.
Peter Johnston, head of unit, DG-Information Society, European commission
Francois Lafond, deputy director, Policy Network
Roger Liddle, member of the cabinet of Peter Mandelson, EU international trade commissioner
John Palmer, political director, European Policy Centre
David Phillips, senior audit partner, PricewaterhouseCoopers, London
Antoine Quéro Mussot, member of the cabinet of Joaquin Almunia, EU economic and monetary affairs commissioner
Alain Quévreux, chief of the Europe service, French National Agency for Technical Research (ANRT)
André Sapir, professor of economics, Universite Libre de Bruxelles
Kurt Vandenberghe, deputy head of cabinet of Janez Potocnik, EU research commissioner
Stephen Yeo, CEO, Centre for Economic Policy Research (CEPR), London

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