Innovation in Europe:Quo vadis?

Luc Soete

UNU-MERIT,

Maastricht University

Seminar “The Science-Institutions-Companies Triangle: now what?“, Foro de Empresas Innovadoras, Madrid, June 29th, 2011.

Outline

• Three entry points which the current crisis – today, more or less at this moment, we have the Greek vote – brings to the forefront in any debate on strengthening European innovation capabilities whether in Spain or in any of the other EU-27 countries:– The funding of research and innovation – the “rate” of technical change – an

old concern which needs to be reassessed though within the crisis framework;– The renewed importance of the “direction” of technical change:

environmental sustainability, societal and new social innovation areas; – The regional impact of research and innovation policies in Europe: a spiky

versus a flat European Research and Innovation Area?

• All three areas raise some fundamental questions with respect to the multi-level governance of research and innovation policy – at European, at national, at regional level – within a new restrictive fiscal framework.

• All three areas bring back the prerogative of strengthening the real as opposed to the financial system´s economic performance, and in particular a country or region’s competitiveness.

1. The financial crisis mid-term 2011

• Rapidly expanding fiscal austerity in most EU Member States: – Much more in some MS than in others; – Short term financial public needs (cash access) vs long term financial concerns (ageing, health

care, welfare systems and pension payments to baby boomers);– Very different prioritisations with respect to long knowledge investments: no attention paid

to the quality of public investments (3%)...

• At real economy level, likely growth divergence between European Member States and regions over this decade:– Still growth convergence in some “new“ MS based on investment attractiveness;– Growth divergence between EU-15 countries based on centre-periphery impact of access to

EU single market;– Exacerbated by financial markets’ response to the euro-crisis.

• How will/should EU (and national) Innovation and Structural Change policies respond within a context where some MS and regions are awash with money, enabling them to “match” EU funding and others lacking desperately public funds to obtain EU RDI or structural funds.

European research and innovation policy

• Reprioritize investments in knowledge as only long term sustainable solution to the crisis. Back to basics:– European integration process is only politically sustainable if based on real

growth convergence;– International competitiveness of manufacturing, agriculture and tradable

services is essential for such real growth convergence.

• The intervention of nation states in preventing the collapse of their financial system could ex post be described as a “socialisation of debt”. In years of fiscal austerity, it is important to stress the need for a process of “socialisation of knowledge” bringing to the forefront the particular role of public sector in providing support for knowledge investment in close interaction with the private sector.

• Start from the argument (already made one year ago in an expert group report on the ERA for the EC): there is today an absolute need for a clear public funding commitment to knowledge investments (R&D, innovation, higher education) in Europe across all MS.

On Europe’s “rate of technical change”

• It made little sense back in 2002 to introduce a Barcelona 3% R&D/GDP target as part of the 2000 Lisbon strategy whereby one asked the private sector, as opposed to the public sector, to invest most in R&D (2% vs 1%) without offering private firms any means to leverage such an effort.

• Asking for more private investment in R&D without offering a credible plan for integrating further the final Single Market both in products and services, was viewed in retrospect missing the point. – Companies invest private resources in R&D only if they consider the final market large enough

to recover the investment;– Having national markets fragmented by regulation, language, and entry processes, implies an

increase in the marginal costs of the overall “time-to-market” decision, leading to a reduction of the rate of return to R&D investment;

– The institutional separation between European research, leading to proof-of-concept or prototype stage, European innovation policy and European competition policy, remained a continuous source of uncertainty;

– Many services of direct relevance to innovation (financial services, telecom services, education services, social services) remained exempt from the Single market services directive and hence became at European level dominated by fragmented national regulation.

Proposal for a new 3% knowledge investment target

• Hence the proposal for a new 3% knowledge investment target: with clear policy advantages over the old Barcelona 3% target: – It focuses on what governments are directly responsible for: whether

in terms of direct funding such as public R&D or in setting the funding rules as in the case of funding directly higher education or fixing the tuition fees with respect to higher education;

– New 3% target thus offers credibility. Public authorities can be kept accountable for succeeding or having failed reaching the target;

– All European MS are challenged to either find their own public resources to increase such knowledge investments, alternatively to call upon private resources to invest in individuals’ future human capital;

– The growth in private R&D investment as a % of GDP can then be viewed as the outcome of the policy: public R&D and higher education investment having attracted increased private domestic or foreign investment.

A new 3% national target for 2020

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Denm

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Government-f inanced R&D Tertiary education - publicly funded Tertiary education - privatly funded

2. From the rate to the direction of technical change

• Focus has been on the “rate” of technical change… Policy makers seem to have forgotten about the “direction” of technical change. Again some basis economics: remember the first, seminal NBER book on research and innovation published in 1962 on “The Rate and Direction of inventive Activity”.

• Societal Challenges represent major social problems that cannot be solved in a reasonable time and/or with acceptable social conditions, without a strong coordinated input requiring both technological and non-technological innovation, and at times, advances in scientific understanding.

• The central issue is at the opposite end of the previous one. Can resources, not just research but also procurement and other investments, be shifted across different national/European stakeholders to more productive “societal use” to influence not only the rate but also the direction of technical change and innovation?

• Societal Challenges are not “grand” rather they raise “grand policy” challenges: how to achieve compatibility between top-down initiatives and a more bottom-up, market-driven resource allocation logic that allows for multiple decentralized experiments.

• New “Innovation Union” recognizes importance of European societal challenges such as ageing and a healthy life style, climate change and energy saving.

European vs global societal challenges

• However, many such challenges are not just European: need to broaden such ideas to include the rest of the world.

• “Innovation Partnerships” with BRIC countries (e.g. in case of NER 300 and Carbon Capture Schemes and/or energy renewables), but also with other developing countries (see picture).

• Specific European societal needs:– Immigration and European identity;– Food security.

• Public funding for societal needs: health and ageing; urbanisation and quality of life; isolation and insecurity, etc. – Role of social finance:– Harnessing private finance interests in social innovation:

• CSR from ethical/philantropy to strategic, shared value; • Align CSR policies with regional development plans.

– Public-private partnerships: social RSFF, social impact bonds, community investment bonds.

• Need to address the systemic risks associated with social innovations: “destructive creation” vs “creative destruction” both at local and global level.

The sustainability research challenge:

3. Cohesion and inclusiveness

• Third focus is on the territorial dimension of research and innovation.• Excellence in research and research quality assessment is heavily dependent on

scale: the European scale is ultimately the logical scale for selecting excellence in publicly funded research, for reducing costs in selecting and evaluating research proposals and for enabling high quality research specialization.

• Europe’s regional scope represents by contrast the long tail of European opportunities for innovation and growth specialisation based on diversity.

• Towards a European common research policy, towards a European regional innovation policy: implications for multi-level governance.

• Central claim: there are more synergies at a regional/local level between “smart, sustainable and inclusive growth”(EU2020) than at national level:– Smart growth in achieving a smart specialisation growth pattern based on local problem-

based and/or demand driven innovation and local user expertise. It is at local level that knowledge externalities can be reaped most easily (Dominique Foray).

– Similar argument for sustainable growth: exploiting demand-led local applications: green buildings, cities, housing, mobility, planning authorities, etc.

– Inclusive growth in terms of local social cohesion, quality of life, inclusive cities. Managing locally welfare schemes depend on local colloboration: the role of social innovation.

On regional disparity and social cohesion

• At the geographical level, the crisis has increased the gap between front runners and laggards in knowledge investments by exacerbating the different existing capacities of countries and regions to respond.

• The crisis challenges also regional cohesion policies, and in particular the role of research and innovation in those policies (for memory €86 bn out of the €344 bn of structural funds is directed towards innovation compared to €50 bn for the whole of FP7. Currently only 26% has been allocated to operations). Yet, income inequality in Europe is already higher than in the US and other large countries in the world.

• It is at the regional-local level that the success of inclusive innovation growth strategies is likely to become the most visible: – E.g. through local, social innovation policies taking into account specific local

conditions (composition of population, unemployment, mobility, etc.);– Effectiveness of successful policies is strongly influenced by the density of

social networks. Likely to be much higher in cities;– Importance of local collaboration as a form of innovation (Diogo Vasconcelos).

Income spread across regions

Regional knowledge concentrations

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Conclusions

• Three future scenario’s:

– Scenario 1: Nobody cares, but the European Commission... or from FP8 (CSF1-Horizon 2020) to FP13 (CSF5-Horizon 2050)?

– Scenario 2: The EU undre threat: sálvese quien pueda

– Scenario 3: Rennaissance Europe...

Scenario 1: Nobody cares...

but the European Commission... • Most realistic scenarion: a “business as usual” scenario:

– R&D policies remain primarily decided at national levels, the Barcelona targets are kept but something for MS to decide how and when to achieve (with soft criterion);

– Global societal challenges are designed and implemented at EU level but with different MS giving priorities in different areas;

– ERA continues to remain hampered by MS’ specific regulations and rules on employment of researchers and immigration;

– Innovation policy is not very effective. Gap with US and emerging countries remains: a lot of overlap in policies between MS;

– FPs continue with MS monitoring more intensively what they get out of them;

– European research and innovation policies remain marginal, compared to national policies: as a result a lot of overlap in policies.

Scenario 2: sálvese quien pueda

• всеки сам за себе си

• každý za sebe

• hver mand for sig selv

• ieder voor zich

• jokaisen ihmisen itselleen

• chacun pour soi

• Jeder für sich

• καθένας για τον εαυτό

• ognuno per sé

• każdy sobie

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• fiecare om pentru el însuşi

• varje man för sig själv

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Research and innovation policies

Sounds an increasingly realistic scenario... • North-South trust divide spurt in the EU following the financial eurozone crisis:

– North no longer ready to allow structural and cohesion funds to the South;– South no longer interested in participating in European research and innovation policies

leading to brain drain to the North;

• EU moves back to its “free trade zone” essence – no longer involved in any kind of structural change policies;

• Increasingly intra-European competition in national research and innovation policies;

• FPs are discontinued as is the notion of an ERA because the “costs of Europe” are too high to the weakest MS; and the costs of non-Europe too low to the rich MS;

• New non-ERAs emerge between MS and old colonial and historically linked countries in research and higher education;

• Global issues are dealt with primarily in international organisations with the large MS trying to keep their positions and the small MS attemting to unite...

Scenario 3: EU Rennaissance

Towards a United Nation of Europe • Opposite scenario to scenario 2: a trend towards further political and

economic integration as a result of the financial eurozone crisis:– At political level: realisation that “European” as opposed to “national

representation” is essential for a growing number of common, macro-issues at E(M)U level;

– “Research” is discovered as the policy which needs to be both developed and implemented at EU level: towards a Common Research Policy;

– MS increasingly commit themselves to coordinate their national policies both in volume (3%) and in the sort of R&D support oriented towards sectors with the most significant externalities;

– Innovation policies are carried out in close collaboration with regions: no longer on the basis of the EC as distribution agency, but on basis of new private funds leverage/externality focus;

– As a result significant impact of GPT on TFP growth across EU MS and regions and across sectors, including public sectors;

Central policy points

• Smart growth with significant volume and TFP impact of research and innovation policies (including ICT in every aspect of life), strong realisation of EU synergies;

• Sustainable growth as central priority in FPs and in structural funds (SET plan, NER300, renewables, energy efficiency, etc.), in close cooperation with private sector;

• Inclusive growth is enhanced through social innovation, including ageing which have become new comparative strengths of Europe, opening up new areas to creativity and private investment;

• Europe becomes attractive to “skilled” migrants: local “skill shortages” as the new smart region’s attractor poles;

• Multi-culture and multi-linguism are the new assets of Europe’s education system (European university statute) and local design schools (product diversity);

• Savings and investments within the EU are becoming more balanced and the EMU is now illustrating its strong macro stability advantages in limiting debt variance between MS;

• Concerns over growing inequality within MS bring to the forefront a new debate on equity and inequality, includign in education;

• A new Treaty is proposed to formalize the further integration process.

Specific research and innovation points

• Scale advantages at EU level in research and innovation:– EU patents of high quality,– European procurement with SBIR leading to European yollies growth;– Standardisation of some key applied products (example of GSM): e.g. electric cars, biofood, etc.

• Finance alignment between private and public funding for research using large amounts of savings in EU: competitive venture capital market, booming blue angels, innovative social funding systems, etc.

• European Innovation Union in a global setting:– Global societal challenges in collaboration with G-20 but with EU as pilot;– Specific European societal challenges: healthy ageing, local energy independence (smart energy mix), green

cities, sustainable transport,– Open access to European research,– Attractiveness to foreign scientists and entrepreneurial innovators from all over the world because of

European lifestyle (open, democratic, multi-cultural, local variety, environmental conscience, etc. )

• Agricultural demand of the EU on the rest of the world: reform of the CAP into an innovation program for agriculture.

• EU showpiece of multi-level governance in R&D and innovation: EU, national, regions.

Conclusions

• Only way out of our current “internal crises” is the “EU rennaissance” scenario: – Financial crisis: dependency on each other implies strengthening aspects of political union; – Environmental crisis: implies a common position in international negotiations and EU as the

show case (emission trading, SET plan enlarged to CAP, etc.);– Demographic crisis: Schengen as tool for migration solution to EU’s ageing and population

needs;– Fossil fuel energy dependency crisis: will lead to regional experimentation with smart mix

within an EU energy policy framework; – Skills crisis: European universities, lifelong learning schemes and territorial and mobility

dynamics;– Innovation crisis: efficiency of EU2020 smart, sustainable and inclusive growth depends on EU

integration of national policies.

• “External crises” affect a “fragmented EU” much more than an “EU renaissance”:– As shown in case of financial crisis: EU banks and countries much more affected;– The EHEC infection crisis illustrative of pandemics impact on EU-27... See response of Russia; – Inflow of North African migrants in Lampadusa and the crisis impact on maintaining Schengen;– Nuclear crisis in Japan affecting European fossil fuel energy dependency– Young European researchers and S&E moving out of Europe to US but also increasingly to

China, but also to Turkey...

Thank you for your attention!

Luc SoeteUNU-MERIT

Universiteit Maastricht

soete@merit.unu.edu