Tackling the EU’s ‘innovation deficit’

Date: 08/06/2000

By Renée Cordes

IF a teenage computer genius in Belgium wanted to follow in the footsteps of so many young American these days by launching an Internet company, he or she would almost certainly be quickly discouraged.

Anyone seeking to set up a firm in the country today is required by law to have a secondary school diploma or equivalent, an official chamber of commerce certificate showing that he or she is capable of creating a company, and at least five years of experience running a commercial enterprise. Without this, the firm cannot be granted limited liability, leaving its founder open to potentially enormous costs if things go wrong. For many young Bill Gates or Esther Dyson wannabes on this side of the Atlantic, this is not an option.

The lack of incentives for companies to enter new markets and launch products is not just limited to one country, but stretches right across the EU. And Georges Jacobs, president of European employers' lobby group UNICE, warns that the Union risks falling further behind the US and Japan in terms of competitiveness, living standards, economic welfare and jobs if governments and companies do not take rapid action to boost innovation. "European regulators need a dramatic change in attitudes," he insists.

What better way to catch their attention, argues UNICE, than to bring together more than 800 people representing some 45 countries from small and large businesses, non-governmental organisations and the Union's key policy-making bodies?

That is the aim of the first-ever European Business Summit organised by UNICE and the Belgian employers' federation which begins in Brussels tomorrow (9 June). Their remit: to map out a battle plan for helping companies on this side of the Atlantic to catch up with the US and Japan quickly.

While the world's business leaders have for years gathered at the World Economic Forum in Davos or joined forces through the Trans-Atlantic Business Dialogue, never before has there been such a forum with a strictly European focus.

After all, where else can the head of a relatively small company in the Belgian countryside rub noses with the likes of Microsoft chief executive Steve Ballmer and half a dozen European Commissioners including enterprise chief Erkki Liikanen, compare notes with one another and set up future lunch appointments?

It will, of course, take more than a three-day meeting to come up with a panacea for the EU's ills, but even those who are critical of trying to set such ambitious goals agree that if the first steps to correct the Union's 'innovation deficit' are not taken soon, European businesses risks falling even further behind.

The conference's organisers plan to draw up a paper afterwards setting out their ideas, providing the first comprehensive input from business into future EU policy.

The meeting will also be followed by regular 'benchmarking' reports measuring business success or failure in different areas, and, if all goes according to plan, further European Business Summits every two years.

This year's gathering comes less than three months after EU leaders meeting in Lisbon called for local telephone monopolies to be dismantled by the end of next year and set themselves an ambitious target for creating at least 20 million jobs in a decade. "Policy is not about doing things on islands," emphasises UNICE Secretary-General Dirk Hudig. "It is about the big picture."

But putting the Lisbon plan into action will be no easy task, given Europeans' severe lack of information technology skills and a general scepticism towards new inventions in contrast to their American counterparts. The only notable exception is mobile telephony, where the Union has led the field for years.

Negative attitudes towards new technology in Europe have resulted in more regulation, which discourages entrepreneurs from turning many bright ideas into new products.

The impact of over-regulation is perhaps best illustrated by the length of time it takes to get new drugs to market in Europe. UNICE's benchmarking report on stimulating creativity and innovation, released late last month, shows that getting innovative veterinary medicines approved can take 40% longer in the EU than in the US. Europe's slow clearance procedures also make the cost of new product development significantly higher than in the US.

But while there is an increasing amount of capital available to fund new companies in Europe, there are not enough innovators coming up with new ideas. "The amount of money available for seed and start-ups in Europe has multiplied by nearly ten times in the past few years," says Serge Raicher, secretary-general of the European Private Equity and Venture Capital Association (EVCA). "Today there is not a lack of money but a lack of projects."

Even companies which do find start-up capital find that once they are up and running, they remain stuck in the slow lane. The UNICE study found that in many European countries, lengthy write-off periods and a lack of tax credits increase the level of pre-tax income needed to recover investments in research and development. In addition, companies in the EU receive government support equal to 9% of business R&D, compared to 15% in the US.

This is just the tip of the iceberg, with European companies facing greater tax and regulatory burdens than their American counterparts. Add together greater costs of Internet access, higher taxes on share options for employees and relatively steeper costs for obtaining and protecting patents, and you have a recipe for disaster.

To remedy the situation, UNICE is calling for the creation of an EU-wide patent, lower taxes on gains from stock options by employers and employees, and a major overhaul of the Union's tangled web of cumbersome bankruptcy laws.

Of course, the real test of efforts to change the environment for innovation is what concrete steps policy-makers take to match their fancy words. When the 800 or so delegates leave this weekend's three-day conference they hope to be taking home more than a briefcase full of papers and new business cards.

"The business community needs to boost itself every now and again," says Garry Parker, spokesman for EU small and medium enterprise lobby group UEAPME. "But the best way of getting through to the Commission is to have direct meetings on a regular basis."

EVCA's Raicher agrees, calling on Union governments to put more money into setting up university chairs in entrepreneurial education and less on staging conferences or dispatching officials onto the speaking circuit.

"Policy-makers need to stop talking and start acting," he says. "We have had enough conferences saying let's foster entrepreneurship. Let's just do it."

That is precisely the message which business hopes to deliver loudly and clearly to EU decision- makers at this weekend's summit.

Major feature on the European Business Forum, Brussels, 9-11.6.00.