Research Commissioner Janez POTOCNIK: Strengthening Competitiveness of the Enlarged EU 30th Annual Conference of the European International Business Academy

December 7, 2004

Ljubljana (Slovenia), 6 December 2004

Dear participants,

Dear colleagues,

Ladies and Gentlemen,

I am very pleased to speak to you in this morning’s plenary session on the challenge we face to strengthen the competitiveness of an enlarged EU of 25 Member States.

I wish to offer you some views on this challenge from a pan-European policy perspective, in the context of the on-going mid-term review of the so-called Lisbon Strategy.

I will say something about how we are actively tackling the challenge at EU level, and suggest where efforts might be made to accelerate the rate of progress, particularly in my own domain – science and research.

The Lisbon Strategy

In 2000, the Lisbon European Council set a strategic goal for the EU to become by 2010 “the most competitive and dynamic knowledge-based economy in the world”. This political vision and ambition applies equally to the EU of 25 Member States as it did to the EU15.

While enlargement has clearly brought with it specific challenges regarding competitiveness, it also has brought new markets and opportunities to the EU economy, as well as increased dynamism to the wider EU project.

However, rather than dwell on enlargement specificities per se, I think it is more relevant and useful for you if I address the overriding competitiveness policy issue affecting the whole of the EU25 at the present juncture – i.e. the need to breath new life into the faltering Lisbon Strategy, and bring about a programme of realistic actions and attainable reforms which will make up for the disappointing progress achieved since 2000.

In the run up to the European Council’s Lisbon Mid-Term Review next March 2005 we have a prime opportunity to reconstitute a more focussed and concentrated agenda, and it is one which we cannot afford to miss taking full advantage of.

Knowledge for competitiveness, growth and employment

The recent report from the High Level Group headed by Wim Kok which carried out an independent review of the Lisbon Strategy, is a useful input at this initial stage, with its diagnosis of the current delivery gap, its several recommendations, and notably its reaffirmation of the validity and ambition of the Lisbon strategy.

However, if the Lisbon Strategy is to be effective, we – the EU with all 25 Member States - must overhaul its overloaded agenda of conflicting priorities, and come to its origins - growth and employment derived from knowledge-based competitiveness.

Thus, Kok calls for urgent action to realise the knowledge society as a top priority, underlining knowledge as central to securing EU competitiveness and sustainable economic growth. Indeed, the generation of new knowledge through research and intangible investment, its exploitation through technology and innovation, and its dissemination via education, training, human capital flows, technology transfer and Information and Communication Technologies, make it the lifeblood of the economy and society.

Kok, moreover, highlights the need to raise private and public R&D spending as “the centrepiece of a concerted effort to increase the creation and diffusion of scientific, technological and intellectual capital”. It laments the fact that “the importance of R&D remains so little understood and that so little progress has been made”.

Yet, the evidence of the positive impact of R&D on economic growth in the economic literature is overwhelming. Studies demonstrate that up to 40% of labour productivity growth is generated by R&D, and that there are powerful economic spillover effects between firms, sectors and countries with the normal range of economy-wide rates of return to R&D investment found in econometric studies to be from 50 – 100 %.

A new “Knowledge for Growth” Pact

So clearly, a renewed and enhanced commitment to research, innovation and education is required in order to reinforce the knowledge-based competitiveness policy agenda at the heart of Lisbon.

But what form could such a knowledge-focused policy agenda take?

I believe we need to develop and implement a specific “Knowledge for Growth Pact” as a complementary mechanism to the “Growth and Stability Pact”. While the aim of the latter is to ensure macro-economic stability and fiscal discipline, the former should ensure, at the micro-economic level, relevant conditions and incentives for a sufficient level of knowledge-related investment to revive economic growth, and contribute strongly to stability in the long run.

For the EU to fully embrace the knowledge era, the knowledge for growth pact should aim at reinforcing the knowledge triangle (education, research and innovation) and make it productive via its integration with policies that bring about favourable and supportive framework conditions. It should involve the social partners at the EU level, and could easily be translated into national agreements between all concerned stakeholders.

The pact would be organised around a limited number of quantitative objectives with a set of measurable indicators and a clear list of actions with the appropriate policy-mix (internal market, education, enterprise, research, innovation, JAI, employment,...) as well as instrument-mix (legislative action, funding and coordination).

The actions would be implemented at national and EU levels, as appropriate, and would involve a clear commitment from the EU and Member States to do so within a specified timeframe. In certain key areas where national action could benefit from EU co-ordination and exchange, implementation would be via a revamped Open Method of Co-ordination.

I expect the debate around such a knowledge pact to evolve and mature rapidly. You will hear more about it in the days and weeks ahead.

Meanwhile, let me take a few minutes to illustrate the extent of the competitiveness challenge facing the EU25, as seen through the specific “research investment” lens of the Lisbon Strategy.

The Barcelona goal – the 3% Action Plan

Europe invests almost 40% less in R&D than the US, and almost 80% of this gap is due to lower private investment (according to latest official figures from 2002).

Recognising the seriousness of this deficit, the 2002 European Council in Barcelona set the goal of raising Europe’s overall level of research investment from its current level of 1.95% of GDP to 3% by 2010, of which two-thirds should be from private sources.

To make progress towards this goal, the Commission and Member States have been implementing the “Investing in Research” Action Plan, adopted by the Commission in April 2003.

The Action Plan takes a systemic approach by addressing all factors affecting directly and indirectly the performance of research and innovation systems – financing mechanisms, intellectual property issues, competition and state-aid rules, product market regulation and standards issues, researcher careers and mobility, private–public research relations, etc.

This reflects the fact that the research/competitiveness challenge is not only a matter of quantity - the quality of the knowledge produced and the capacity to diffuse and absorb it is equally important.

The broad set of actions contained in the Plan, requires a concerted policy-mix approach to implementation, mobilising in a coherent manner policies and instruments in the area of research and innovation, as well as in several other policy domains, and at both EU and national levels.

Most of the research investment increase has to come from industry - private investment in R&D will have to double to reach the necessary level of 2% of GDP. But industry will only invest more in R&D in Europe if it can expect reasonable returns on investment. This is why much of the Action Plan concerns itself with making the overarching business framework conditions more attractive and conducive to increasing private investment.

However, we should not underestimate the vital role of increased public R&D investment. Countries with high levels of public investment in R&D tend to have high levels of private investment. Studies also show that direct public funding of research and fiscal incentives for R&D have a leverage effect on business R&D investment.

This can come about in two ways:

  • Firstly, different forms of direct support have a stimulative effect on the level of industrial investment;
  • Secondly, increased public funding can raise the quality and excellence of the science base, creating poles of excellence and a critical mass of knowledge and competence which provide an attractive investment environment for R&D intensive businesses.
At EU level, the main instrument of research policy is the RTD Framework Programme, with EU competitiveness and strengthening the scientific and technological bases of industry as its central objective. The Commission aims to double the budget of the next (seventh) Framework Programme.

The focus of expenditure of other policies and instruments, where appropriate, can also be increasingly directed to knowledge investment objectives. Examples include cohesion policy - the structural funds, and competition policy - the framework for R&D state aid. At national level, public procurement is also a potentially important means to foster R&D and innovation in areas where the public sector can act as a launching customer for new research intensive products and services, in areas such as health, transportation and e-government.

Progress to date

Progress towards the Barcelona goals depends mainly on what Member States do, given that responsibility for most actions lies mainly in their hands.

For those actions which lie primarily within Member State competence, the so-called “open method of co-ordination” process has been launched by Member States with the support of the Commission. This aims to foster exchange of good practice, mutual learning and the co-ordination of actions and policies between Member States and/or with EU level. The experience over the first year has been promising but there is a need and the potential in Member States to strengthen and make it more effective.

Nearly all Member States have set individual quantitative targets and are putting in place policies to enhance research efforts and the performance of their research and innovation systems. The targets vary significantly from country to country, reflecting differing starting points as well as differences in industrial structure. Finland, for example, has just set itself a new research investment objective of 4% GDP as part of its new globalisation strategy.

Recent developments show an increasing use of indirect public support measures in Member States, in particular fiscal incentives, to stimulate an increase in business research expenditure. The volume of these measures makes them the single most important element of public support to business R&D in some Member States (e.g. Spain, Hungary, The Netherlands & Austria).

However, the Member State investment targets are often not acted upon sufficiently, policy measures are too incremental, are not implemented as planned, and the overall resultant effort and ambition are not yet commensurate with the Barcelona 3% goal.

To reach the 3% goal, the real annual growth rate of research investments from 2003 to 2010 should be 8.6% - whereas from 1997 to 2001 the average annual growth rate was at 4.7 %. Even if we assume that all national objectives are achieved, the level of research investment in the EU will still only reach about 2.5% of GDP in 2010.

This failure to progress decisively is due to several factors:

  • Relatively low priority still given to research as an instrument of economic growth policy, in terms of allocating budgetary resources particularly in countries in a tight budgetary situation;
  • Unfavourable conditions for private investment in research due to the economic downturn during the 2000-2003 period;
  • Difficulty to develop and implement appropriate policy mixes requiring co-operation and mobilisation of joint action between several Ministries.
Aside from supporting OMC, the Commission also has an important role in the implementation of the Action Plan involving legislative proposals, regulations and stimulating actions by Member States by establishing strategic orientations on specific issues to be implemented on a voluntary basis (action plans, guidelines, etc.).

To give some examples:

  • Revision earlier this year of two block exemption regulations relating to SME state aid and technology transfer, and work begun to prepare the revision of the Community Framework for State Aid for R&D.
  • Strengthening the EU’s financial instruments, in particular through the EIB’s Innovation 2010 Initiative which aims to invest an additional € 40 billion in research and innovation up to 2010.
  • Adoption this year of proposals for directive and two recommendations to facilitate the entry and stay of non-European researchers, on which a political agreement was reached just last month by the Member States in Council.
  • Reform of cohesion policy placing specific emphasis on competitiveness, focusing on research and innovation.
  • The take-off of European Technology Platforms as a boost to critical mass RTD in areas of strategic importance for the EU.
Despite such advances, insufficient overall progress means that a substantial delivery gap has opened up. Action must be taken immediately if we are to make up for lost time. The Commission’s proposal to double the budget for the next research Framework Programme sends a strong signal to Member States about the size of the step-change that is now necessary.

Dynamising the process with a number of key high-impact initiatives

It is clear that supplementary effort must be made if we are to make decisive progress towards the Barcelona and Lisbon goals. The Commission and Member States must work together closely in this regard, and take full advantage of the Lisbon Mid-Term Review and the ecomomic up-turn. Attitudes of trust and mutual support will need to be fostered in order to ensure effective implementation of the difficult reforms and policy action programmes embarked upon.

In its proposals for the next phase of the Lisbon Strategy, the Commission will come forward with a number of key initiatives to mobilise public and private research investment. These initiatives will make optimal use of the Commission’s own instruments while fostering and supporting actions taken in the Member States, dynamising their commitment, and raising their ambition to a level which is commensurate with the Barcelona goals.

This support can take the form of ‘policy guidelines’ to be implemented on a voluntary basis in areas where there is mutual interest for concerted action between Member States, or where increased effectiveness can stem from complementary action at EU and national levels.

Specific areas under consideration include: fiscal incentives for research; a scheme under FP7 to facilitate access to EIB financing of large European RTD projects, involving loan guarantees, etc.; developing the role of ‘foundations’ and similar bodies in the EU for R&D funding; exploiting the potential of public procurement by raising the R&D and innovation intensity of procured goods and services; developing a systematic anticipative approach to identify and rectify regulatory and standards gaps or impediments to the development and deployment of new technologies.

Maximising the Commission’s support role to Member States will help increase ownership and engagement at national level, and in particular, will strengthen the role of the so-called “Open Method of Co-ordination” as a driver of effective national policies and actions.

The Seventh RTD Framework Programme

Given the centrality of the competitiveness objective to the RTD Framework Programme, I should point out the features of the new programme which have been proposed and which are presently being debated.

Four axes of the new Programme dealing with collaborative research, human resources, research infrastructures and the co-ordination of national and regional research programmes represent the continuation and reinforcement of EU-level research policy actions conducted under the sixth framework programme. They have proven their merit in raising scientific and technological excellence and underpinning EU S&T competitiveness.

Two new axes – European technology initiatives and basic research – constitute a substantial qualitative and quantitative leap for EU research policy. The first aims at launching major large-scale research endeavours in key technology areas. This follows the development of technology platforms which bring together industry and other stakeholders to define strategic research agendas. In most cases EU level support to implement these agendas will be via the range of implementation modalities available. However, in a very limited number of cases the existing instruments may not be sufficient and new large scale public private partnerships could be envisaged.

The basic research axis foresees the establishment of a European Research Council to implement an individual research team grant scheme covering all fields of science and with excellence as the sole criterion. This will raise the level of research excellence and creativity in the EU, increasing its attractiveness to world-class researchers and globally-mobile investments in knowledge-intensive business.

There are two additional lines of action which the proposals for the 7th Framework Programme foresee, and which may well have particular interest to new Member States. They concern realising the full research potential of the EU25 and developing a regionally orientated action given that the regional level is increasingly significant in relation to research and innovation investment issues.

The main objective of the latter would be to strengthen the research potential of research groups and institutions which are currently not using their possibilities to the full or that are in need of new knowledge. It would be open to all such organisations regardless of their location, though would clearly be relevant to organisations from new Member States and peripheral or less developed parts of the EU. It could well have a primary focus on “human resource” tools especially through exchanges of researchers.

A new Regions of Knowledge scheme would help regions to build capacity for investing in R&D in a better and more efficient way, by optimising all possible funding sources for R&D investment and in particular the EU Structural Funds. It would also help European regions to better prepare their R&D operators for participation in the Framework Programme.

The Commission launched an open consultation on these proposals and received a high level of response (over 1700 responses) from universities, industry and other interested organisations and individuals. The responses demonstrate widespread support for the proposals and a large consensus that support for research at European level must be strengthened.

Conclusion

The message of Kok report is clear and simple. The Union is not making progress at a rate commensurate with achieving the Lisbon vision. Therefore both changes and a different approach are necessary.

The current delivery gap demands that we take new, decisive action if we are to get back on track. The decisions related to the structure of the EU budget in the next Financial Perspective will be a clear signal if we are aware of the seriousness of the situation. If high-impact initiatives can be initiated rapidly, they could play a significant role in advancing towards the Barcelona and Lisbon goals.

But as much as such strong and decisive actions are needed, they require the political will and commitment of Member States. In some areas they depend very much on our capacity to act jointly rather than in isolation.

This is the spirit in which I propose a “knowledge for growth pact” - a positive, forward looking project for the EU capable of mobilising people, especially the younger generations because of its inherent benefits for them, but also a project that builds public support for the needed reforms to boost our knowledge-based competitiveness, with its effects on sustainable growth, employment and welfare.

Ultimately, by acting together through such a pact we can better ensure that the knowledge society will fully develop in Europe and play its rightful role in securing quality of life of all European citizens.

Thank you for your attention.

Item source: SPEECH/04/516 Date: 06/12/2004

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