Protectionism slows down EU innovation

The EU’s much-criticised Lisbon Agenda was given an apparent boost by the results of last year’s EU research and development (R&D) scoreboard.

The strategy, whose initial (and much mocked) ambition was to turn Europe into the world’s most competitive and dynamic knowledge economy by 2010, had been running out of steam. Results last year, however, showed that the top 1,000 EU companies increased spending on research and development by an average of 5.3% in 2005.

According to the Lisbon Agenda, by 2010 member states are supposed to be investing 3% of overall gross domestic product in research. Increasing private sector investment will be a key factor in achieving EU R&D intensity targets. At the moment, with the notable exception of Finland and Sweden, member states are falling short of this figure.

The results of last year’s scoreboard, published annually by the European Commission, were a marked improvement on previous figures. Results for 2004, for example, showed a modest increase of only 0.7% among Europe’s top 700 businesses. But, with investment growth hitting double digit figures in countries such as China, the EU still has to raise its game.

Whether or not there has been an improvement is disputed. The Centre for European Reform, in its annual scorecard on the Lisbon Agenda, awards the EU a grade of D plus for innovation, worse even than the C minuses of each of the preceding four years.

Private-sector spending in R&D will require important changes in the EU’s business environment. A four-member expert group, including Esko Aho, a former prime minister of Finland, in 2005 recommended a number of demand-side initiatives to boost EU research and innovation. Emphasis was placed on areas such as intellectual property and public procurement with the aim of creating market conditions that would encourage private-sector investment.

The Aho group’s ideas have received much support. "In order to foster innovation in Europe, it’s not sufficient to concentrate on targets like R&D intensity. You need to have better R&D spending in the private sector in the first place, which in turn requires a business environment favourable to innovation," says Pier Carlo Padoan, professor of economics at the University of Rome.

"We need to go beyond simple quantitative targets and move towards a more efficient business environment for innovation," he says. "We need appropriate regulation, access to business services, low tax rates, strong human capital, a good financial system and a healthy relationship between universities and the business world. It’s the interaction of these that creates a favourable business environment."

In some quarters, however, the group’s views are viewed as being simplistic. "It’s one of those great ambitions that is never going to be realised. The ideas are not wrong, but they are unrealistic," says Iain Begg, visiting professor at the European Institute of the London School of Economics.

The main obstacle to innovation, according to Begg, is entrenched protectionism in certain industries. The situation for some industries that continue to enjoy ample protection from protectionist governments is still a little bit too cozy. "Network industries have the scope for innovation, but because they are protected, there is not much room for innovation," he says. "Companies that have to be quick on their feet in order to survive tend to innovate more rapidly."

Economic nationalists have a lot to answer for, but while companies still have to get through 25 different sets of regulations, public procurement authorities and intellectual property regimes to launch their innovations, the EU will continue to lag behind in terms of R&D intensity.

The EU’s much-criticised Lisbon Agenda was given an apparent boost by the results of last year’s EU research and development (R&D) scoreboard.