Investing in research

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In line with the goal of creating a European Research Area, the Commission and member states have agreed to increase investment in research and development activities to 3% of GDP by 2010.

The creation of a European Research Area was made a key element of the Lisbon strategy to bosst growth and jobs in Europe (see our Links Dossier on the Lisbon Strategy relaunch). The Barcelona European Council of March 2002 adopted the target of increasing spending on R&D and innovation to 3% of GDP by 2010 with at least two thirds of the total investment coming from the private sector. 

To achieve this objective, the Commission called for better incentives for firms to invest in R&D while preserving sound fiscal policies in its recommendation for the 2002 Broad Economic Policy Guidelines for member states to follow.

Since then, several communications have been put forward by the Commission with recommendations for member states, industry and other stakeholders for achieving the 3% objective: 

  • September 2002: 'More research for Europe: towards 3% of GDP'; 
  • April 2003: 'Investing in research: an action plan for Europe'; 
  • October 2005: 'More Research and Innovation - Investing for Growth and Employment: A Common Approach', and; 
  • January 2006: Aho Group Report 'Creating an Innovative Europe'. 

Measures proposed by the Commission include: Improving the effectiveness of public support to research and technological innovation, improving the careers of researchers, bringing public research and industry closer together, and improving framework conditions for research and innovation, intellectual property protection, regulation of product markets, competition rules, financial markets and the fiscal environment. 

Average R&D intensity stagnating in Europe

Despite multiple EU initiatives aimed at increasing investment in research, the Key figures 2007 on Science, Technology and Innovation, presented in June 2007, show that average R&D intensity has been stagnating in the EU since the mid-1990s and has even decreased since 2000. Only a few countries, such as Finland and Sweden, have already reached the 3% target, with some even exceeding it.

The Key Figures 2007 states that in 2005 the EU-27 average was only 1.84% of GDP compared to some 2.5% in the US and 3% in Japan and that a low level of business R&D investment remains the main problem regarding the gap between the EU and its competitors. The EU is perceived as providing less attractive conditions for private investment, due both to lower and possibly less effective public support and various obstacles in the wider framework conditions for European research and innovation.

At the current rate of increase of R&D expenditure, some 0.1% a year, the Barcelona objective of spending 3% of the GDP on R&D will be achieved some time in 2050. 

  • To see the latest data on R&D expenditure in the EU 27, see the following Eurostat table.
  • To see the latest data on R&D expenditure in the EU 27 by source of funds, see the following Eurostat tables: industrygovernmentforeign sources.
  • To see R&D expenditure by type of funding (basic/applied), see Eurostat Statistics in focus.

Research Commissioner Janez Poto?nik has repeatedly urged member states to put in practice the agreed policy measures to support private-sector investment. "It is obvious that, on the level of R&D financing, what we [the Commission] are doing is not having a lot of influence," Poto?nik conceded in June 2007.

State aid and tax incentives

Investment in research can be encouraged in several ways. One of them is state aid, which is prohibited under EU law unless it has been explicitly authorised by the Commission, for example, to develop certain economic activities without distorting competition. It has traditionally served as a means of supporting declining industries such as ship-building, coal and steel. 

In November 2006, the Commission presented plans to widen the scope of state aid to include the promotion of R&D and innovation. According to the new plans, aid will be accepted for activities that address specific market failures deemed to hamper innovation. Such projects could include aid for feasibility studies, young innovative enterprises, the loan of highly qualified staff and the development of innovation clusters. 

These plans include the more efficient use of tax incentives in favour of R&D, which usually provide for a reduction of the cost of research by reducing the amount of corporate tax paid. The Communication on the issue clarifies the legal conditions arising from EU case law and encourages member states to improve the use and coordination of tax incentives on specific R&D issues.

Other incentives 

In December 2007, the Commission adopted a Communication on pre-commercial procurement to boost innovation on sustainable high quality public services. The new strategy cleared the way for member states to invest public money in high-risk technological research to procure innovative new products and services that address the needs of tomorrow. 

Yet another way to increase funding for R&D in the EU is to attract Foreign Direct Investment (FDI) in R&D. FDI is investment of foreign assets directly into a domestic company's structures, equipment, and organisation. FDI in R&D means investment in creative work undertaken systematically to increase the stock of knowledge and its application, including basic research, applied research, and experimental development. 

Finally, an expert report on the role of philanthropy in funding European research was published in January 2006. Philanthropic 'instruments' include fundraising organisations, endowments providing research grants, family- and trustee-controlled foundations, corporate foundations (including those promoted by financial institutions) and university foundations. 

The report, which examines ways to increase charity donations, states that too little attention is paid to the role of foundations and other charitable bodies in the field of research and therefore its potential not currently being realised fully. In the EU, only the UK is said to have a well-developed donation and charity culture. To encourage foundation funding of research in Europe, the study suggests improving the regulatory and fiscal environment for foundations and improving conditions for cross-border donations. 

"We have to be aware that predominantly the decisions influencing the private-sector investments are in the hands of the member states, and the commitments there would need to be stronger," said Research Commissioner Janez Poto?nik, adding that he would be "the happiest person" if the EU could reach even 2.6% of GDP by 2010. "But there would need to be a clear member-state commitment and good transposition of policy measures in reality and practice in order to reach this."

"To promote the role of foundations in financing European R&D, the EU needs to initiate a regulation on a European statute for foundations and national governments need to reconsider their fiscal policies, legal and regulatory framework and matching policies," noted Dr. George Papaconstantinou, rapporteur of the expert report on the role of philanthropy in funding European research. 

"There are a lot of foundations in Europe, but they are far weaker than their American counterparts. Further, a lot of foundations are local, regional or national and not transnational or European. Those willing to expand their activities at European level face many obstacles, such as fiscal ones, which need to be remedied," said Yves Mény, the Chairman of the expert group who drafted the report 'Giving more for research in Europe'. 

"Foundations can act much more freely, flexibly and quickly than any other research funding bodies. Their actions are independent from election periods and from shareholder views. The research they support can be risk-taking and they can back new things early on," explained Vice-Chair of the European Foundation Centre Wilhelm Krull. "They also have a role to play in creating public debate on science and promoting science journalism," he continued. 

UNICE supports the 3% objective, and specifically welcomes actions designed to create a more favourable environment for R&D investment in Europe. The association points out that while higher and more effective R&D is a crucial prerequisite for innovation, the effectiveness of the whole value chain should be the main focal point of the efforts undertaken by the EU and member states. The only criticism concerns the proposed widening of block exemptions for SMEs for state aid which according to UNICE should be applicable to the industry as a whole.

The European Round Table of Industrialists (ERT) doubts whether the 3% objective, and especially the goal of achieving 50% funding from the private sector, is realistic. While companies are planning to increase the overall level of their global R&D expenditure in spite of the economic slowdown, this increase in investment is not likely to occur in the EU, it says. 

To stop this trend and the resulting decrease in private investment as a percentage of European GDP, the EU needs to dramatically reappraise its approach to R&D and its framework conditions for business, the group argues. The ERT put forward several recommendations to this effect regarding financing, human resources, infrastructure and the regulatory and legislative environment.

The European Chemical Industry Council (Cefic) feels that the Commission's Communication provides a good basis for R&D policies in Europe and stakeholder dialogue. In particular, it highlights the importance of a strong and integrated science base in view of the current shortage of skills in the area of interdisciplinary R&D. Also, efficient structures for technology transfer must be developed to enhance Europe's ability to innovate. 

Cefic points out the significance of intellectual property rights and other legal aspects to foster an environment that can attract private investment.

The Marie Curie Fellowship Association suggests that pressure be put on countries with large deviations from the average R&D indices to start gradually increasing their contributions. National targets for R&D investment should be established, together with concrete plans detailing the measures to be taken. 

In particular, the association recommends creating research centres that are co-sponsored by industry, national governments and the EU, rewards for companies hiring professionals demonstrating an academic record in research, fiscal regimes encouraging private investment in R&D and strict audit control and accountability.

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