The study, conducted by European Investment Bank economist Kristian Uppenberg and published yesterday (February 9) by the Centre for European Policy Studies (CEPS), shows that the EU is likely to fall short of achieving the Lisbon Strategy goal of investing 3% of GDP on research by 2010.
While much attention has been given to Europe's lower levels of spending in the area of information and communication technologies, the real long-term challenge could be in services, according to the report.
"Data covering the services sector is far from complete. But it appears that if Europe cannot close its R&D gap with the US in services, the overall R&D gap is likely to widen rather than narrow as the share of services in total value added grows," said Uppenberg.
He also argued Europe must not neglect large companies and innovative clusters when seeking to catch up with long-term competitors.
Uppenberg said companies tend to get better value for their investment when they are located close to other firms with high levels of R&D intensity, primarily due to a "spill-over effect".
This implies that spreading investment across member states in the interest of regional equality can prove wasteful in terms of getting an optimal return on investment.
Drawing on OECD data, Uppenberg's study shows that the share of small and medium-sized enterprises (SMEs) in total business R&D spending tends to be relatively small – less than one-fifth of the total – in countries with high aggregate R&D intensities.
This group includes the US, Japan, Germany, the UK, France, Italy, Sweden, and Finland. The report suggests that a substantial part of the solution to Europe's low overall R&D intensity is for large firms to spend more on research.
Public support aimed at spreading R&D evenly across all of Europe's regions or to create innovative centres where none existed before may thus be economically wasteful.
On balance, the decomposition of R&D investments in Europe points to the need to respect the forces of market-driven innovation when designing public policy, according to Uppenberg.
If Europe is to succeed in raising its overall R&D intensity towards the levels seen in the US and Japan, it will need to accept that large firms and existing innovative clusters will play a leading role in this expansion, he added.
