Commissioner Philippe Busquin welcomes Prime Ministers Blair and Kok's call for increased business investment in R&D

February 25, 2002

Brussels, 21 February 2002

In a letter to José Maria Aznar, President of the European Council, Prime Ministers Tony Blair and Wim Kok have called for determined action by the EU and its Member States to create "a fully integrated European Research and Innovation Area", including notably "the stimulation of business investment in R&D"(1). This is welcomed by the European Research Commissioner, Philippe Busquin, who has been warning against the considerable increase of Europe's R&D investment gap with the US and Japan in recent years. This gap is now in the order of €80 billion a year and still growing. Low investment from the business sector is causing almost 90% of the gap. In its report to the Barcelona European Council(2), the Commission has called for action to make Europe more attractive for investment in R&D. The Commission has asked Member States to agree on a global R&D target for the Union of 3% of GDP by 2010, against 1.9% of GDP now. As the Commissioner for Research, Philippe Busquin, puts it: "Europe cannot pretend that it wants to lead in the knowledge economy while producing far less knowledge than its competitors".

At the Lisbon European Council in March 2000, Heads of State and Governments had set the goal that the European Union should become "the most competitive and dynamic knowledge-based economy in the world" by 2010. The Commission is warning that the current R&D investment gap is putting that goal into jeopardy.

Ministers of Research and Industry acknowledged the usefulness of working towards an ambitious, quantitative R&D spending target at their informal seminar in Gerona on 1-2 February 2002. They agreed that appropriate policy measures should be established to induce the private sector to contribute in achieving the European target of 3% of GDP by 2010, considered by many Member States as essential to increasing the level of innovation(3). For Commissioner Busquin, a global target including both private and public R&D is important, as the necessary thrust on business R&D must not be at the expense of equally important public research.

Today, several European countries are close to or beyond these levels. It can only be reached, however, by a sustained and concerted effort implying a combination of actions at both national and European level. The Commission intends to facilitate this effort through an open coordination process based on benchmarking and exchange of best practices. It is also taking direct action, for example through the Framework Programme for R&D, through its agreement with the European Investment Bank for joint funding schemes for R&D, and through various initiatives to make the European Research and Innovation Area more transparent and attractive to investment.

Background

In 1999, research expenditure in Europe totalled €153 billion, €76 billion less than in the US. Furthermore, from 1995 to 1999 the intensity of R&D expenditure has grown significantly both in the US (+0.15% of GDP) and in Japan (+0.24% of GDP), while stagnating in Europe (+0.03% of GDP). R&D investment by the enterprise sector accounts for almost 90% of the total investment gap and is the main cause for its widening in recent years. In 1999 it represented 1.1% of GDP in the EU compared to 1.8% in the US and 2.1% in Japan.

Evolution of R&D intensity (Gross Domestic Expenditure on R&D as% of GDP)

1995 1999 EU-15 (1) 1.89 1.92 United States 2.49 2.64 Japan (2) 2.69 2.93

(1) EU-15: (a) Luxembourg is not included. (b) Derived from data in ECU/Euro.

(2) Japan: Data for 1995 were adjusted by OECD.

Source: OECD/Eurostat/DG Research.

Evolution of R&D investment funded by the enterprise sector as% of GDP

1995 1999 EU-15 (1) 1.01 1.09 United States 1.50 1.76 Japan 1.94 2.12

(1) EU-15: (a) Luxembourg is not included. (b) Derived from data in ECU/Euro.

Source: OECD/Eurostat/DG Research.

In order to close the gap, the Commission and Member States must focus public policies on making Europe a friendlier place for private investment in R&D. In 1999, funding from the enterprise sector accounted for 66.7% of total R&D investment in the US, while it accounted only for 56.6% in Europe. The same year, the US allocated 35% of government R&D funding to the private sector, while the equivalent figure in the Union was only 12%.

Public authorities have a wide range of instruments at their disposal to stimulate private investment in research:

Subsidies are particularly appropriate where governments want to orient research efforts towards public policy objectives. State Aid regimes must be considered in order to maximise their impact. The current review of the "Community Framework for State Aids for R&D" represents an opportunity from this point of view.

Fiscal incentives are increasingly used in Member States. France, for instance, offers an incremental tax credit whereby 50% of the increase in R&D expenditure above the average of the two previous years can be deducted from corporation tax; the United Kingdom offers SMEs a tax credit of 150% on their R&D expenditure on wages and consumables; the Netherlands offers a tax credit on wage costs; in Sweden, 25% of the income of foreign researchers is free of taxes and social security contributions; and Belgium offers a tax credit of approximately €2000 for firms hiring qualified researchers.

Guarantee schemes can be applied both to equity and loans provided by private or public banks. They provide considerable leverage effect. A guarantee scheme is currently being studied jointly by the European Investment Bank and the European Commission. This form of public support is still clearly under exploited for research and technological innovation.

Venture capital plays an increasing role in financing R&D particularly in the early stages of new high-tech firms. At European level, the European Investment Fund has become a major player in this field, investing a total of €2 billion in 160 funds throughout Europe. Nevertheless, the full potential of venture capital remains under exploited for research.

Private investment in research should also be encouraged by creating a favourable environment. At least four areas are directly concerned:

Human resources, mobility and education: public authorities must create conditions which assure a sufficient supply of researchers, engineers and technicians, as well as possibilities for their mobility between countries and between university/industry. Significant efforts remain to be made at both national and European level to attract more young men and women to scientific studies and careers, and to create the conditions for genuine mobility.

The regulatory environment should be made more supportive of research and innovation. An example of regulations playing a key role is the series of rules related to research and development in biotechnology and its various applications. On a more general level, all the pending regulations, at national and Community levels, related to financial markets, procurement policy or bankruptcy should be scrutinised in order to ensure that they facilitate, rather than discourage, investment in R&D.

Intellectual Property Rights are a key main factor determining the amplitude of return on investment in R&D. A fundamental issue, here, is the rapid adoption of the Community Patent with provisions ensuring that it will be widely used, notably by being easily accessible and of reasonable cost. Besides this outstanding question, existing Intellectual Property regimes, in particular those applied to research in universities, should be carefully examined and, where necessary, adapted.

The take-up of research into innovation can be helped by establishing physical structures, like Technology Parks and incubators, and by organising contacts between researchers, industrialists and entrepreneurs, in particular in relation to publicly funded research programmes. (1) http://www.number-10.gov.uk/news.asp?ne wsID=3657

(2) The Lisbon strategy Making change happen, Commission communication to the European Barcelona Council, COM (2002) 14, 15 January 2002

(3) The results of the Gerona seminar are available on the Spanish presidency Website: HYPERLINK http://www.ue2002.es http://www.ue2002.es

DN: IP/02/290 Date: 21/02/2002

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