In a policy brief published on 26 February 2008, Bruno van Pottelsberghe, a senior fellow at Bruegel, argues that common European R&D targets "make little economic sense in an EU where industrial specialisation differs substantially across countries". Van Pottelsberghe argues that setting a business-funded R&D target at the country level is "either wishful thinking or an implicit industrial policy".
He explains that it makes no sense to compare countries like Luxembourg, which specialises in finance, and Finland, which specialises in ICT, because the innovative efforts that are required to introduce new financial products are not included in R&D statistics. On the contrary, Finland's specialisation in an industry which is highly R&D intensive would, in fact, lead one to expect even higher R&D intensity than is currently the case.
"Similarly, a country specialised in tourism, fashion, services or food would logically have lower R&D intensity than a country specialised in the pharmaceuticals, engineering or biotech industries," writes Pottelsberghe.
According to him, only Sweden and the United States outperform other countries, such as Finland and Japan, in R&D intensity once industrial specialisation is taken into account. "Something other than technological specialisation thus seems to drive R&D intensity" in these countries, writes Pottelsberghe.
The reasons for the Swedish and US performance, put forward in the Bruegel policy brief are two-fold. First, the larger the market for products and services, the bigger the expected return on investment and the more the business will invest in R&D. "The US benefits from a huge homogeneous market with one main language and regulation," writes Pottelsberghe, adding that a patent granted by the European Patent Office costs about 11 times more than its US equivalent.
Market size cannot, however, be the explanation for the Swedish performance, which is rather the result of very high spending on academic research - the highest, as a percentage of GDP, among all OECD countries. Strong emphasis on academic research is also a stimulus for business R&D as universities generate new ideas, which are then transferred to the private sector, writes Pottelsberghe. Furthermore, academic research attracts more business funding and "promotes the setting up of scientific clusters".
The brief reiterates Bruegel's former observation that Europe invests too little in higher education and that European universities "suffer from poor governance, insufficient autonomy and often perverse incentives". EU governments are urged to remedy the situation and to provide more funding for universities' research activities as "the alternative for Europe will be to lose related business research, and ultimately to lose business," concludes the brief.
To read Bruegel's full policy brief 'Europe's R&D: missing the wrong targets?', click here.
