Philippe Busquin: The European Union and the Research and Development Gap, Innovation Lecture 2002 Den Haag, 9 December 2002

Innovation Lecture 2002

Dear Mr Wijn, Ladies and Gentlemen,

It is an honour and a pleasure to address you here, in the birthplace of Dutch democracy. It is also a difficult task to intervene after the profound and provocative lectures of Professor Soete and Professor Thurow.

Much has been said already on the research and innovation gap between Europe and the United States, on its damaging effects and on its causes. I will limit myself to clarifying the spirit in which the European Commission is addressing this problem. Afterwards, I will share with you a few ideas on a line of action for Europe. In doing so, I will try to reply to some of the stimulating comments made by the previous speakers.

Some people have wondered why the European Commission is putting emphasis on an objective for research. Some would have preferred to fix objectives for the innovation process, or for the outputs of innovation.

I want to reassure these people. I am looking at outputs as much as you are.

The 3% objective was not fixed for its own sake. It was decided because we believe that research is the best point of entry to address the challenges faced by the European system of innovation.

There is a real problem with the lack of investment in research in Europe. It certainly is not the only problem. But it is one of the weakest links that restrain Europe's innovation and growth potential.

Research is also a practical entry point for public policies. We have direct means of action through the public financing of business R&D, and through research executed by public organisations. Of course, this comes in addition to the framework conditions of research and innovation, which we are examining very carefully.

I want to share with you a few thoughts on these subjects.

First, the problem created by the lack of investment in research in Europe.

This lack of investment is not the fault of companies. It is our fault as policy-makers, for not making the European Research Area attractive enough for companies.

As the graph shows, multinational companies prefer more and more to invest in American research rather than in European research. In nineteen-ninety-one (1991), the larger European countries were receiving as much research investment as the United States. In nineteen-ninety-eight (1998), the US received sixty percent more research investment than these countries.

This is not really a problem for large European companies. They simply invest in the best countries outside Europe so they can stay competitive. The European Round Table of Industrialists has just made an internal survey on that subject. Its results are that forty percent of the research of these companies is already done out of Europe, and that this proportion will continue to grow.

The real problem is that less research means less growth and less employment in Europe, especially for the smaller companies. These companies need R&D to innovate more and better. As the graph shows, there is a strong correlation between long-term growth and the number of innovating firms that have research activities. In all the European countries where growth exceeded 2% per year during the nineteen-nineties (1990s) there was a high proportion of innovating firms doing R&D. Conversely, except Germany, all countries where growth was under 2% had a lower proportion of innovating firms doing R&D.

Research is also very important for the services sector, which has become responsible for the larger part of economic growth. I agree with Professor Soete that we need to develop the analysis sector by sector. But, already, the studies available show that American service companies do much more R&D than Europeans.

So we need to increase considerably investment in R&D in Europe.

Obviously, the first thing to examine is the financing of research by public programmes. And the first thing that we see is that, in Europe, public support for business research is much lower than in America. Only sixteen percent of public budgets for research are devoted to supporting business in Europe, instead of one-third of the federal government's research budget in the United States. I regret that budget cuts like the reduction of the innovation policy budget in the Netherlands will widen this gap even more.

Of course, the quality of public spending also matters. My services have set up several expert groups to study how we could increase the leverage effect of public support on research investment.

But the volume gap cannot be ignored when it is so massive. In America and in Asia, governments are responding to the crisis by increasing considerably their support to research and innovation.

In Europe, governments have agreed to redirect their public spending towards key investments such as research and innovation. This must be taken seriously.

To take only one example, I am very pleased that the Council and the Parliament have agreed on a good budget for the Sixth Framework Programme. But in America, the budget of the National Science Foundation is now increasing at a much more rapid pace. European governments must be aware that, if they don't react, the current gap will soon become a daunting gulf.

We must also look carefully at the quality of our public research. This has been intensely debated in the Netherlands. We need to intensify the relations between public research, notably universities, and enterprises. For this to happen, we must encourage universities and public research organisations to pool their resources. That way, they can be more visible for enterprises and they can also develop better services for them, for example larger technology parks.

In this context, your country has taken a very important step by opening its basic research programme to the funding of foreign partners of Dutch organisations. I hope that other research programmes both in the Netherlands and abroad will follow this initiative. Member States cannot continue to agree to build the European research area in principle, but in practice discourage European partnerships with outdated rules of funding.

What is at stake is whether we really want to make our research good enough to attract the world's best. This requires visibility, good planning and good co-operation to bring closer together resources that are currently scattered in Europe.

The new instruments of the Sixth Framework Programme will help in this process. I want also to create "European technology platforms" to develop a shared vision of the development of key technologies. This could take inspiration from the successful high-level groups ACARE and Star Twenty-one in aerospace.

However, real progress will happen only if Member States are determined to advance the European Research Area.

Progress in closing the gap also requires that we look at the whole framework conditions of research and innovation.

Some framework conditions impact directly on R&D, first of all the numbers and quality of human resources. I agree with Professor Thurow that considerable progress is needed to make scientific careers attractive in Europe and to promote better mobility between countries and between the public and private sectors .

Other framework conditions relate to innovation and to the development of new business. The 3% objective requires that we examine these framework conditions, since companies will invest in R&D in Europe only if they see that Europe is a good place to innovate and to develop their activities.

There are strong indications that Europe is doing badly in this respect. Professor Thurow has mentioned many, so I will only emphasise particularly two aspects that I consider particularly important.

One is the fact that small European companies have much more difficulties to grow than their American equivalents. This is how 80% of European largest companies date back from before 1950, while 80% of American largest companies have been created after that date.

Another aspect is that some regulations can have dire effects on R&D, as in the case of genetically modified organisms in Europe. You can see on this graph how Europeans have abandoned that field to the United States because of the bad perceptions and the stringent regulations attached to GMOs in Europe. Hopefully, this situation will change thanks to the European action plan for life sciences that has just been approved by the Council and the European Parliament.

Facing these difficulties, we could be tempted to emulate the most obvious elements that contribute to American entrepreneurship, notably the flexibility of labour market.

But I am convinced that we do not need to do this in order to compete with the United States. There, I want to comment on the hypothesis of Luc Soete that there would be a "trade-off" between the European social model and a dynamic knowledge-based model of society.

I agree that tension may occur between the economic and the social pillars of the Lisbon strategy. But this is a creative tension. I believe that there is no contradiction between "becoming the most dynamic knowledge-based economy", and creating "sustainable growth with more and better jobs and greater social cohesion".

I also agree with Lester Thurow that the key to success lies in our attitudes. It is by changing a number of too conservative attitudes towards enterprise and innovation that we can hold together the economic and social pillars of the Lisbon strategy.

First of all, we have to build on our own strengths.

• The European Union is the largest market in the developed world, and this strength will be considerably reinforced with the enlargement.

• Despite our weakness, we still have world-class research and innovation in some sectors. This is particularly in sectors where European integration is most advanced, such as aeronautics and space.

• Our universities still offer excellent education in most areas of science and technology.

• And our social model also brings advantages that are particularly valuable in a knowledge economy, such as the opportunity to manage and develop human capital with a longer-term perspective.

However, these strengths will remain useless to bolster our position the world scene, as long as our activities and policies remain deadlocked within uncoordinated national considerations. To unleash Europe's potential we must complete the single market and the European research area. I am counting on you to work on changing the attitudes of policy makers in some of the less European-minded of our Member States.

Secondly, we have to change attitudes radically towards a number of issues that are preventing us from exploiting correctly our potential for research and innovation.

Nothing in the European model of society can justify the following aberrations:

• That entrepreneurship is discouraged by unnecessary regulations and by a negative attitude towards risk-taking.

• That mobility, both geographic and between the public and private sectors, is hampered by unnecessary regulations and is not properly rewarded in career development.

• That regulations of product markets often ignore the needs of innovation.

• That research, standardisation and regulation for the same technologies are often poorly co-ordinated, if at all.

• And that patent costs five times more in the European Union that in the United States.

I agree with the previous speakers on many of these points. Attitudes are difficult to change. But, if we want to maintain our model of society we must take the means necessary to uphold it.

As you know, the Commission has launched a consultation on these issues with its communication "More research for Europe" last September. Its aim is to raise awareness and to appeal to collective wisdom to prepare the action plan that the Commission is planning for next May.

This action plan must rise to the height of the challenge it will be responding to. Our conference today reinforces my conviction that we can succeed.

DN: SPEECH/02/622 Date: 09/12/2002