Economic Policy Committee's report on EU research and development in 2001

January 25, 2002

Brussels, 24 January 2002

Report on research and development. Translation of letter from Mr J.-P. COTIS, Chairman of the EPC to Mr Rodrigo RATO, President of the ECOFIN Council, dated 15 January 2002. Brussels, 22 January 2002 (document 5402/1/02 REV 1 ECOFIN 20 RECH 12). Full text

[The report was endorsed by the Ecofin Council on 22 January; see related item ]

As instructed by the ECOFIN Council, following the European Council meeting in Stockholm, the Economic Policy Committee continued its work on research and development in 2001. In particular, the Committee has prepared the attached report, which could be discussed at the ECOFIN Council meeting on 22 January 2002.

The Economic Policy Committee is ready and willing to continue its work on research and development, if the Council so wishes.

The annexes can be consulted on the EPC Internet site in English only http://europa.eu.int/comm/economy_finance/epc_en.htm

Executive summary

1. Over the next ten years and beyond, the EU will face new and difficult challenges. At Lisbon European Council, leaders set themselves the goal `to become the most competitive and dynamic knowledge-based economy in the world' by the end of the decade. To achieve this goal the EU should substantially improve its R&D and innovation performance. This issue is also extensively addressed in the Broad Economic Policy Guidelines.

2. The study shows how R&D and innovation are crucial drivers of growth and productivity. Recent economic theory emphasizes the importance of a range of factors for `innovation systems' to be effective. It shows that the `supply' of R&D (for example the amount of R&D carried out, or the number of skilled researchers) is a necessary but insufficient condition for a successful innovation system. In particular, broader framework conditions including the `demand' for innovation (growth and stability oriented macro-economic environment, effective competition, good science-industry links, access to risk capital and management expertise for start-ups) and networking conditions (knowledge transfer organisations, researcher mobility) are essential.

3. The theory is then contrasted with wide ranging empirical evidence. A fieldwork study of EU member states, the US and Canada was carried out in order to gain an overview of the challenges presented by different innovation environments. In addition, the study makes extensive use of indicators of innovation and R&D performance.

4. This theoretical approach, as well as the empirical evidence, have drawn attention to a number of areas that may warrant further attention both at the Member State and the EU level. The main conclusion is that while there are examples of good performance, overall the EU innovation environment remains weak in a number of key respects and that a fully integrated European innovation system is still some way off. For instance, a key `input' indicator - business spending on R&D as a percentage of GDP - is over 2% in the US but only 1.2% in the EU; and a key `output' indicator of R&D and innovation - the number of patents per head - in the US is far higher than most EU countries.

5. A crucial finding from the fieldwork evidence and the indicators is that `market pull conditions' and knowledge networks are key areas of weakness. At present, the EU generates a great deal of knowledge in its universities and research institutes and produces large numbers of skilled personnel.

But often it does not exploit this knowledge and expertise for social and economic needs (the `European paradox'). This ability to use knowledge in wealth creation could be a key factor behind the recent weaker productivity growth in the EU compared to the US.

6. Furthermore, the challenges ahead suggest that countries and firms in the EU will increasingly have to pool their efforts, knowledge and resources in order to compete on a global scale. This requires unprecedented levels of cooperation, both in terms of action at the EU level, and sharing good practice and understanding at the national level. It also requires developing an EU innovation system where knowledge flows connect and network all member states, and continue to do so after enlargement.

7. In particular, the EU needs to grapple with the changing nature of innovation. Academic work commissioned for this study on services and innovation shows that, as the service sector increases its weight in the economy, it is becoming increasingly important to appreciate the significance of intangible assets. Much of a growing service sector innovates in very different ways to manufacturing.

The knowledge it needs to innovate often is drawn from different sources, is less easily or obviously protected using intellectual property rights, and less easy to codify. These factors combine, moreover, to reinforce the importance of skilled personnel, which often not only hold a company's most valuable knowledge, but are a crucial means of absorbing new knowledge from elsewhere.

8. Both member states and the Commission are already doing a great deal. The study welcomes and encourages efforts to introduce an innovation-friendly Community patent and to implement the Risk Capital Action Plan. However, the study recommends that further decisive action needs to be taken at both EU and national levels.

9. The study shows that general framework conditions appear to be vital. Above all a highly competitive environment is essential. This means not only having the right competition rules in place, but creating an environment in which smaller more nimble firms are able to grow extremely quickly and challenge less innovative incumbents to improve their performance. In addition, member states need to ensure that there are healthy fiscal and regulatory environments that promote innovation, a political environment which is encouraging of enterprise and scientific education, well-functioning capital markets, a well defined public-sector/private-sector interface, and an excellent education and scientific infrastructure. Therefore the first overarching recommendation applies to improving these conditions.

  • The EU and its member states should ensure that the appropriate framework conditions are in place to foster innovation. This should be pursued through further implementation of structural reforms in product, capital and labour markets with a view to promoting a growth and stability oriented macro-economic environment, creating a competitive environment and fostering investment in human capital.

10. At the EU level, the study recommends that:

  • The EU should develop a full range of intellectual property protection at the Community level, including copyrights and design rights, and take measures to promote their use more widely.
  • The review of the Community State Aid Framework for R&D needs to ensure that aid can meet specific market failures across innovation systems, while ensuring that it does not distort the single market.
  • The implementation of the 6th Framework Programme should contribute more to improving networking and knowledge flows across Europe by promoting researcher mobility and networking of industry and academia.

11. At the national level, the study notes a number of market failures, and recommends that:

  • Member states ought to look further at ways of addressing identified market failures by stimulating early stage investment through creating an adequate financial and regulatory framework.
  • Member states should do more to provide information, advice and guidance to SMEs on the value and nature of intellectual property rights available.
  • Member states could look further at a mix of direct instruments and market based incentives to stimulate private R&D, as no single mechanism is able to provide a full range of incentives.
  • Member states should aim to improve the effectiveness of public research.
  • Member states should strengthen knowledge transfers between the research base and industry....

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