ECJ EUROPEAN Cleaning Journal

Europe’s industries top global investment in research and development (R&D). Yet the region is failing to see levels of payback in terms of getting products, services and technologies to market compared with its major competitors, reports Hartley Milner.

EU corporations increased their R&D investment by 9.8 per cent in 2023, outpacing their counterparts in the United States (up 5.9 per cent) for the second year in a row and China (9.6 per cent) for the first time since 2013.

Figures from the latest edition of the EU Industrial R&D Investment Scoreboard also rank the bloc second globally for R&D private investment (18.7 per cent), trailing the US (42.3 per cent) but ahead of China (17.1 per cent), Japan (8.3 per cent) and countries in the rest of the world (13.6 per cent).

Despite a global slowdown in research investment growth (up just 7.8 per cent compared to 12.6 per cent in 2022), the world’s top 2,000 investors – headquartered across 40 countries and representing more than 900,000 subsidiaries – collectively spent €1,257.7 billion on product research in 2023. This accounted for 85-90 per cent of all business-funded R&D.

More than 40 per cent of the total spend was contributed by just 50 companies, including 11 based in the EU, indicating that a small number of players control a significant portion of business sector investment. The top 10 rankings were dominated by US firms, with only Volkswagen flying the flag for Europe in fifth place, investing €21.8 billion.

The EU’s top 800 R&D investors, located across 19 member states, spent €247.7 billion during 2023, representing a growth rate for the year of 8.7 per cent. The automotive sector dominated the table, accounting for 45.4 per cent of global R&D investments, followed by the health sector (19.3 per cent), ICT hardware (14 per cent) and ICT software (7.8 per cent).

EU companies in the semiconductor, automotive component and biotech/pharma sectors saw “extraordinary increases” in R&D investment, ranging from 200-5,000 per cent over the past decade. “Such investment increases point to the ongoing diversification and growth potential in these areas,” the Scoreboard report notes.

Encouragingly, the top EU-800 companies include 99 small and medium-sized businesses with fewer than 250 employees, 74 of which are in the health sector and based in Sweden, France, Denmark and Germany. French SMEs lead in R&D investment, comprising 34 per cent of the total, followed by Sweden (21.3 per cent) and the Netherlands (16.6 per cent). Together, they invested €2.4 billion in 2023, a 3.7 per cent increase compared to the previous year.

Closing innovation gap

“Research and innovation investments will determine tomorrow’s economy, industry and competitiveness,” said Ekaterina Zaharieva, EU commissioner for start-ups, research and innovation. “We count on the contribution of European corporate leaders to help close our innovation gap with other world regions. Solid innovation ecosystems will boost our start-ups and SMEs and contribute to our shared prosperity, building on our robust industrial base.”

However, while the fall in R&D productivity is a global phenomenon, EU-based scoreboard firms show lower R&D productivity levels in terms of generating sales and commercialising ideas, and no signs of catching up with competitors from regions such as China and the US that have higher productivity. This puts them at a competitive disadvantage and suggests that pushing for more investment in research and development is insufficient as a policy on its own.

“Improving R&D routines/processes, attracting and retaining top R&D talent and crafting more effective policy instruments to steer R&D incentives towards impactful innovations are also needed,” the scoreboard report stresses.

Last year Mario Draghi, former head of the European Central Bank, delivered a report titled The Future of European Competitiveness, forewarning of a cycle of “low industrial dynamism, low innovation, low investment and low productivity growth” across all 27 member states. More chillingly, he warned: “We have reached the point where, without action, we will have to either compromise our welfare, our environment or our freedom. It’s going to be a slow agony.”

Presenting his report to the European Parliament, Draghi said the region was facing a world undergoing dramatic change. Global trade is slowing, geopolitics is fracturing and technological change is accelerating. Long-established business models are being challenged and some key economic dependencies are suddenly turning into “geopolitical vulnerabilities”.

Europe most exposed

“Of all the major economies, Europe is the most exposed to these shifts,” he said. “We are the most open: our trade-to-GDP ratio exceeds 50 per cent compared with 37 per cent in China and 27 per cent in the United States. We are the most dependent: we rely on a handful of suppliers for critical raw materials and import over 80 per cent of our digital technology. We have the highest energy prices: EU companies face electricity prices that are two to three times higher than those in the United States and China. We are severely lagging behind in new technologies: only four of the world’s top 50 tech companies are European.

And we are the least ready to defend ourselves: only 10 member states spend more than, or equal to, two per cent of GDP on defence in line with NATO commitments (a recurrent gripe of US president Donald Trump).

“In this setting, we are all anxious about the future of Europe. My concern is not that we will suddenly find ourselves poor and subservient to others. We still have many strengths in Europe. It is that over time we will inexorably become less prosperous, less equal, less secure and as a result less free to choose our destiny.”

At the heart of Draghi’s economic report was an urgent call for a new strategy to tackle the EU’s massive investment underspend, which he said will have to increase by between €750 billion and €800 billion a year to put the bloc on a level playing field with the United States and China and remain competitive with other large global players.

In December, the European Commission set out plans for a European Innovation Act, which were welcomed by the European Parliament and will go out to public consultation this year. Commissioner Zaharieva told MEPs: “As the Draghi report has highlighted, Europe is failing to translate innovation into commercialisation. Innovative companies meet obstacles at every stage due to regulatory hurdles, burdens and fragmentation.“

The diagnosis is clear. We must act now and step up our efforts to address these challenges. This will be the main objective of the European Innovation Act. It will simplify and streamline our regulatory framework, facilitate access to venture capital and support industries in testing new solutions and technologies. It will also build on a dedicated EU start-up and scale-up strategy that I will present next year.

“By simplifying our regulatory framework, we can reduce the barriers to entry for new businesses, making it easier for them to innovate, grow and create jobs. By enhancing access to funding and investment opportunities, we can ensure that start-ups and scale-ups have the resources they need to develop and commercialise their ideas here in the EU.”

Zaharieva wants the Act to focus on overhauling existing but “underutilised and fragmented” tools to make them more effective in supporting innovation. She gave as an example regulatory sandboxes, which help companies test their products under market conditions and get their first major order. She said: “We must advance them to give more certainty to innovators. And we must look at other regulations that could be more unified across the EU.”

Improve working conditions

On funding innovation, the commissioner spoke about the need to mobilise more private capital. With the 27-member bloc accounting for just five per cent of venture capital funds raised against 52 per cent in the US and 40 per cent in China, the added value of pulling in more resources for innovation was strong. “Every euro invested by the European Innovation Council crowds in more than €4 of additional investment into tech start-ups and SMEs,” she pointed out.She said another imperative must be to improve working conditions for researchers in order to attract and retain talent, adding: “The appeal of the EU as a place for talent depends on the resources we can offer innovators, not only in terms of venture capital but also hard and soft infrastructure.”

In his report, Draghi said Europe’s goal to reduce greenhouse gas emissions to zero by the middle of the century offers the bloc a chance to build and export clean technologies around the world. And he cited artificial intelligence as an opportunity for the region to correct its failings in innovation and productivity as well as restore its manufacturing potential. Plus he called for AI to be “integrated into our existing industries so that they can stay at the front”.

Zaharieva told MEPs she will also put forward a proposal for a European artificial intelligence research council to improve access to world-class resources for researchers across key areas. It will form part of a broader strategy to boost the uptake of the technology by industry and the public sector, and more generally. “AI is an engine for Europe’s innovation and competitiveness,” she said.