The following extracts were taken from a commentary authored by Reinhilde Veugelers and Michele Cincera for Brussels-based think-tank Bruegel.
"A common explanation for the EU's tame business R&D performance is its specialisation in medium-tech rather than high-tech sectors. Compared to the United States, the EU has fallen behind particularly in key information and communications technology (ICT) sectors, which were the drivers of US growth in the late 1990s.
But that still leaves the question of why the EU, on average and in contrast to the US, has been unable to redirect its specialisation pattern so that these new growth sectors are covered. The limited firm-level analysis available for ICT sectors suggests that the problem is not the level of investment per se, but rather that in the EU, unlike in the US, there are constraints holding back the rapid growth of new, technology-based firms.
The EU's R&D spending deficiency seems therefore to be a symptom rather than a cause, with the cause rooted in the structure and functioning of industry and enterprise in the EU.
What the US has that the EU hasn't
1. There are fewer EU-based than US-based yollies (R&D intensive young innovators).
2. The EU-based yollies are less R&D intensive than their US counterparts.
3. In addition, the EU-based ollies (those established before 1975) are also less R&D intensive than their US counterparts.
Almost all of the explanation for the lower R&D intensity of EU yollies can be found in a different sectoral composition. Europe simply has fewer yollies in the high R&D-intensity sectors. This provides an explanation for EU yollies, on average, being less R&D intensive than their US counterparts.
The highest levels of R&D intensity are found in either health or ICT sectors which, with the exception of pharmaceuticals, are all 'young' sectors in which an above-average share of total R&D is done by yollies.
The most frequently cited explanation for the differences between the EU and the US is a greater willingness on the part of US financial markets to fund new firms in new sectors. A further common explanation is the more fragmented nature of Europe's product markets as potential barriers to innovation, compared to the US (O'Sullivan, 2008).
For new firms in new sectors, this holds particularly with respect to markets where there are early users willing to take up and co-develop innovations. In addition, the lower exit and re-entry costs for firms in the US, and the greater flexibility of the US labour market, are factors spurring the emergence of new firms and industries in the US.
Policies aimed at raising R&D expenditure across all types of industries and firms do not address the root causes of the EU's innovation deficit. Such an overall innovation policy remains necessary, but is not sufficient.
Policymakers must also tackle the specific barriers faced by new firms in new sectors. Some of these barriers, such as access to early-stage risk financing, reflect general, non sector-specific failings, and can therefore be addressed by non sector-specific measures.
EU innovation policy recommendations
An extensively discussed barrier facing young innovative companies is access to finance. Previous Bruegel publications (Veugelers, 2009, and Dewatripont et al, 2010) have proposed an EU programme of financing for the early stages of highly risky innovative projects. These proposals have also suggested ideas for reducing the cost of intellectual property rights protection for young firms.
As EU competition policy authorities are the guardians of the arena in which large incumbent firms interact with young innovators, dynamic competition effects and the openness of technology markets that shape the future working of innovative markets should be much higher on their priority list.
Taking a lead from the successes of US public procurement in ICT markets, the EU should make more use of the public procurement instrument for nurturing early-stage innovation, at least in sectors in which the public sector can be a pivotal user.
On the adoption of regulations and the setting of standards for stimulating innovative markets, past experience is mixed. Regulations and standards, by minimising market uncertainties, can enable new innovations to come to market sooner than they otherwise would. But regulations and standards might also carry the risk of creating a straitjacket, precluding the emergence of new and better technological breakthroughs. The choice of when and which regulations or standards to use should be carefully evaluated ex ante on the basis of their longer term impact on the development of new markets.
If and when governments intervene, regulations and standards should be designed to be technology-neutral and open, allowing new innovators to continue to compete."