Why Europe needs research spending (link)

Brussels, 9 June 2005

On 6 April 2005 the European Commission made a proposal for a spending programme for research and development from 2007 to 2013. This programme, in line with the Commission’s proposal on the overall budget for this period, envisages a doubling of EU funds for research and development. This reflects the EU’s political priority for growth and jobs. The Commission’s proposal is backed up by an impact assessment study which examines the link between research investment and increased competitiveness. The present background note highlights some of the findings of the impact assessment. It identifies the strong and positive impact that research and development in general, and the European Framework Programme in particular, has on the European economy. It describes the added value of working together at European level and the effect on job creation within the EU.

Boosting Europe’s economic growth and competitiveness

The new Framework Programme (FP7) will boost Europe’s GDP, increase exports and reduce imports, all of which contribute to reversing Europe’s problems of slow economic growth and declining competitiveness.

Europe suffers from low economic growth, with the International Monetary Fund recently revising downwards the Eurozone’s potential growth to about 2% annually. Europe’s competitiveness – measured in terms of standard of living, labour productivity and high-tech trade performance for instance – is also declining. In 2002 the EU25 was running a trade deficit in high tech products of €33.7 billion. The EU has been unable to increase its share of this market, while countries such as China have experienced stellar growth.

Research and Development (R&D) is the principal engine of productivity and economic growth, a contention borne out by modern economic literature. One recent study found that for each extra percent in public R&D, there is an extra 0.17% growth in productivity. To put this into context, average annual labour productity growth in the Eurozone was 1.2% between 1995 and 2003. An increase in EU R&D spending, especially if accompanied by increases in spending at national level, could therefore have considerable impact on productivity. Another study has found that a 0.1% increase in R&D intensity boosts output per capita growth by 0.3-0.4%.

Public R&D has a considerable “crowding-in” effect – each €1 of public funding for R&D given to business leads to additional business investment of between €0.70 and €0.90. Taken together with a recent Austrian report that found that a rise of business R&D from 0.8 to 1.1% of GDP produced an additional 0.3% in growth, we can see that R&D spending is important in economic terms.

This is a key point in mobilising private sector investment in research, which should contribute two-thirds of the R&D spendingtarget of 3% of GDP. Last year’s EU Industrial R&D Investment Scoreboard showed that investment by the top 500 R&D spending companies in the EU in 2003 was 2% down on 2002, while it grew by 4% for the top 500 companies outside the EU.

The impact assessment includes the following table outlining the different scenarios for investment in R&D at European level, as compared to a moderate increase in FP7 funding:

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Item source: MEMO/05/199 Date: 09/06/2005 Previous Item Back to Titles Print Item