01 Oct 2004

R&D and the Financing of Ideas in Europe

Laura Botazzi / Daniel Gros / Jørgen Mortensen

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In March 2000 in Lisbon, EU heads of state and government set the strategic goal to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion. These goals were confirmed at the Barcelona European Council, which added that investment in European R&D should be increased to 3% of GDP by 2010.
This Working Document argues that the weakness of R&D and the slow accumulation of knowledge in the EU is probably a major reason why Europe has failed to catch up with the US productivity performance during recent decades. But the emphasis of the Barcelona Council on the spending target for R&D could be misplaced as the question is not so much one of increasing the level but rather of enhancing the efficiency of R&D in Europe. Thus it is important to understand how countries compare in their abilities to encourage greater levels of knowledge, and asks why the countries vary in their abilities to turn R&D into innovative and commercial products through the creation of new, successful companies (and consequently more employment).
After an examination of various potential constraints on innovative entrepreneurship, efforts towards the enforcement of competition policy, the introduction of a European patent, adaptations of the tax systems in favour of entrepreneurship, a reduction of red tape, the adaptation of bankruptcy rules and the easing of finance for new ventures are all welcome measures. Nevertheless, actively subsidising investment by venture capitalists may not necessarily deliver the desired results. Consequently, policy measures aimed at enhancing the efficiency and productivity of R&D in Europe should focus on the level of knowledge of workers and the capacity of entrepreneurs to translate scientific excellence into viable technological innovation.