Innovation is the backbone of the economic and social system in Europe. Indeed a century ago, the continent was a global powerhouse of innovation, but today this has changed, and now the majority of the innovative companies are found in the US, China among others.
Aside from a few notable exceptions, Europe seems to be falling behind in areas of innovation and growing sectors such as artificial intelligence, quantum computing, and genomics.
So then, what can help this region regain its competitive edge? Instead of playing catch up, there are ways that Europe can use to build its strengths because fragmentation and lack of scale have been her enemy.
Here are the fundamental building blocks that can help Europe compete for global innovation leadership.
What is the Innovation Challenge that is Being Experienced in Europe?
The European region has a relatively low reliance on natural resources and high wage costs. However, its economic and social system depends on innovation. The European companies actually do a quarter of the entire global industrial R&D, but this has been changing for the years as US companies continue to increase their share, strengthening their leadership position.
Additionally, South Korea and China are catching up, thus challenging the continent’s ability to maintain its growth model into the future. The number of Europe’s true innovators seems to be declining compared to the US figures, and as a result, the latter seems to be leading in disruptive innovation.
Here is What is Happening in Europe
Productivity Boost from New Frontier Technologies and Innovation to Support Economic Growth
Although the continent’s economy has started to regain momentum following years of sluggish growth, it has a fragile short-to-medium-term outlook. Indeed the European productivity growth dropped significantly in the past two decades.
However, its economic prospects are pegged on innovation such as new frontier and digital technologies like blockchain, Internet of Things, Artificial Intelligence, engineering, biology, and high-power computing.
It’s these technologies that will provide the necessary productivity that Europe needs. It’s forecasted that if European-based companies were to develop and deploy AI according to the continent’s relative position in digital technology globally and its current assets, then it will add over €2.7 trillion by 2030 to its economic output.
Further, €900 billion will help close the gap between Europe and the US, thus bringing a total of €3.6 billion into the economy.
Additionally, innovation is needed in Europe in order to counter the adjustment challenges and frictions in the labor market caused by automation. Technically automatable activities in just the five largest European countries are linked to nearly 62 million full-time employees or over $1.9 trillion in wages. However, innovating new products and services that need unique and high-demand skills can minimize wage risk and employment pressure.
Actually, organizations looking forward to innovative models from AI have the highest potential of expanding their workforce. That is to say that they are highly motivated to upgrade skills to avoid being locked out on opportunities.
Low Adoption and Investment in Both General and Digital Innovation
Generally, Europe is lagging when it comes to innovation; however, its startup scene is thriving. In fact, the number of its AI startups has grown threefold in the last few years, making it relatively comparable to the US. As a result, early-stage startups are now receiving adequate funding than previous years, and European tech is at its peak.
In terms of talent, the continent is a research powerhouse. It has a large and diffuse research community compared to the US and China. The volume of the tech workforce in startups has expanded even as the number of software developers grows.
On the other hand, Europe is lagging in key innovation areas such as equity finance, a key driver for digital investment and innovation, but remains undeveloped. Actually, almost 90% of the EU’s venture capital funding focuses on eight member states. This has created an enormous challenge for companies sourcing funding to support their growth.
Additionally, compared to the US, the European countries don’t invest heavily in intangible like intellectual property, databases, and software, as well as economic competencies such as organizational capital and training. These are critical factors for innovation capacity.
The competing regions seem to have a higher digital adoption than in Europe. As a result, the continent’s gap is nearly a third the level in the US. Hence its companies are less mature in their diffusion state of digital technologies and the usage of innovative technologies such as new processes, services, or business models.
Another big challenge is scaling startups into mature companies. Actually, Europe is doing what the US and Tel Aviv are doing.
The Growing Global Platform Clearly Indicate the Need to Change the Scene
The intangible investment has overshadowed the tangible kind, and so the growth of platforms and the ability to quickly scale is paramount in a section of the innovation ecosystem.
However, the European region is fragmented and characterized by several national legislations and different systems of regulations and VAT. The components are very hard to change and especially for domestic companies.
On the other hand, the top 10% of companies with over $1 billion in annual revenue are becoming more important as gauged by economic profit. On average, these companies earn 1.6 times more economic profit than what similar companies earned 20 years ago.
Apart from revenue, these firms have shown relatively higher digitalization levels, innovation intensity, huge skilled labor input, intangible assets, in addition to deeper integration into international flows of finance, trade, and service than others. But the number of such companies has dropped significantly compared to Canada, the US, and the Asia-Pacific region.
As mentioned earlier, Europe is a research powerhouse, but even as R&D is growing, the continent is losing share, especially in digital sectors. Actually, 250 companies provide about two-thirds of the entire world’s business R&D investment. Most of these companies are automotive players. However, the continent’s expenditure on software and computer service firms’ R&D is below what Chinese and US-based companies spend.
The Fundamental Building Blocks for Reviving Innovation in Europe
As highlighted above, largely Chinese and US tech and platform companies are taking the lead. In fact, US-based tech companies have been spending a lot more in R&D compared to their peers in the S&P 500. These include Apple, Amazon, Google, Facebook, Netflix, and Microsoft.
For instance, between 2013 and 2018, Google alone spent $12.6 billion in acquiring over 300 startups. On the other hand, Europe has half of the US unicorns, is inactive in tech R&D, and doesn’t have giant internet platform companies.
While there is no direct treatment to European structural scale disadvantages, there are certain pathways that the continent can use to change its present situation. The following are well-known ingredients of innovation that can help Europe play eternal catchup despite fragmentation.
1. Take Advantage of Its Industrial Strength
The innovation playing field is slowly switching from B2C to B2B due to the development of technical applications that are applicable across supply chains and industries.
Indeed, the continent is known for its industrial prowess. For instance, its manufacturers top the list of global innovators, and the region has an edge in digital in big sectors like the financial industries and healthcare as well as B2B.
Further, the European stakeholders are known for collaborating and navigating issues together. For example, the automobile industry is involved in setting standards related to connected driving and safety.
In view of that, Europe should build on its industrial strength and an impressive record of collaboration to strengthen cooperation among its competing companies across industry boundaries. Take, for example bringing together the automobile industry competitors such as suppliers, vehicle manufacturers, vendors, and operators and encouraging them to combine their efforts and investment in R&D with a goal of scaling customer and data access.
Further, the region can create sandboxes or coordinated testing areas that allow entrepreneurs to test innovations on a geographically limited basis. For example, the UK’s financial regular, the Financial Conduct Authority (FCA), created a safe environment where fintech startups can experiment with their products and services prior to taking them to the market. These include blockchain, biometrics, online platforms, and more. As a result, 90% of the firms that tested their offerings on this space progressed to a larger market after the launch.
Still, the region can form large European players in various sectors. Actually, most sectors in this region are relatively fragmented geographically, including banking and telecommunications. However, creating a single market can be helpful.
Further, the continent should review its market access investment policies and subsidies, as well as relax its antitrust policies.
2. Rethink Data and User Access
Today, the demand for stringent data protection and privacy standards is high even as the number of internet platforms grows. The good news is that Europe is the leading actor, particularly with the introduction of the 2018 General Data Privacy Regulation (GDPR) as well as the legislation on the free flow of data.
However, giving innovators access to data pools that they don’t own, such as the government data in sectors like healthcare and transportation, could lead to tangible benefits, including increased drug effectiveness, smart cities, and transport.
In other words, a data alliance will enable research institutions and companies to access anonymized data. At the same time, the citizens are allowed greater control over the kind of data that will be captured by whom and when. Such government-driven examples exist in Spain, Finland, Estonia, and Belgium.
Further, creating standardized interfaces and regulations can help smaller companies access private firm-held data. This follows the change of the data ownership and location. Such changes can help startups create innovative services that benefit citizens.
Europe should also encourage open technology standards, thus building a tradition of successful standard settings like GSM.
3. Create Public Demand at Scale
The region’s public services and products procurement spending is 14% of its GDP per annum. Taking advantage of such public-sector procurement, developing smart intervention, and increasing the budget towards innovation can positively impact this region.
Estonia is an excellent example because of its creation of e-Estonia, a digital government. However, creating such a platform requires open innovation and a coordinated Europe–focused approach.
Happily, such transformations are being reported because out of the 10 leading countries in digital government, half of them are from Europe. The European electronic identification, authentication, and trust services (eIDAS) initiative work towards secure transactions between government agencies, citizens, and businesses.
Coupling the European public procurement spending with innovation components can increase the need to scale inventions in sectors like education, healthcare, and public works.
The investment gap in innovation, research, and other intangible assets in other economies is lower due to increased public investment; however, the gap in Europe is higher. One of the solutions is to rethink how breakthrough innovation is funded. The second is to allow institutional investors like pension funds to build an innovation scale-up fund to support key competitive sectors. Actually, this will bridge the overall research gap that exists between Europe and the US.
4. Leverage the Scale of Global Firms
It’s important for Europe to rethink how it’s scaling innovation internally. But, the region can also benefit from giant non-European firms. For instance, the continent can ensure that its citizens continuously benefit from services that these non-European companies offer, as well as encourage them to create Europe-based innovation, employment, tax income, and customer value.
This can be achieved when the continent identifies the major challenges stopping these companies from bringing more value to Europe. Next, the region should respond by providing incentive programs.
However, this should be done after careful research and deliberations to avoid introducing risks such as the loss of intellectual property, which outweigh potential benefits.
5. Compensate Its Fragmentation with Connectedness and Openness
Businesses in Europe struggle to find top talents due to a lack of high-skill labor and demographic change. The reason behind this low high-skill labor is because 25.4% of immigrants in this region have a high-level education while 35.6% go to Organization for Economic Co-operation and Development (OECD) countries.
Europe has a legacy of collaboration across borders, so nearly 50% of the tech hubs workers in London and Berlin come from abroad. Further, many employee candidates are willing to relocate to Europe, and reported by several startup founders in this region.
The reason why Europe is attractive is because of its wages, public spending, visa requirements, political factors, and overall quality of life. As mentioned, the flow of world-class talent is still low, but the continent can leverage its strengths and geopolitical climate to attract more high-skill migrants as well as encourage Europeans working abroad to return home.
A key strategy towards attracting international talent is by creating better opportunities for high-skill professionals. Europe should leverage social media to promote these opportunities. For instance, EURES is a European portal that lists job vacancies on its website and social media platforms. Expanding such a platform to focus on non-European citizens can greatly help the region to maintain or improve the flow of high-skill migrants.
Additionally, it can grow the entry of professionals through open and collaborative innovation. Some of the outstanding examples are France’s Cap Digital, Innovate UK, and EU Science Hub.
According to European Strategic Cluster Partnerships (ESCP), the continent should leverage a “triple helix model” of innovation. It’s very easy to amplify innovation when intermediaries facilitate connections between industries, universities, and governments.
TasLab is an excellent example of how a cooperation cluster strategy can open innovation in a region or a country. The Trento, Northern Italy-based platform has built advanced innovation infrastructure by opening e-government portals, creating four large-scale open data projects, and investing in citizens and businesses’ infrastructure (communications and information technology).
As a result, over 800 top-notch researchers and tech giants like Siemens, Nokia, and IBM are in the TasLab cluster.
Changing the taxation on stock options can help the EU tackle the compensation practices touching startups and small companies. For instance, employees working for American startups have two times more upside exposure than their counterparts in Europe.
Therefore, simplifying both the rules and taxation framework will enable workers to be more engaged in the operation and success of their companies because they know stock option remuneration favors them. The taxation scheme in countries like Spain and Germany has made it hard to set up stock option schemes, and as a result, the region lags behind the US.
The post has revealed that Europe has a lot of ingredients to support the successful adoption of innovation. However, the continent needs an innovation model and leverage its strength when scaling instead of playing catchup with the US and Asia.
Part of the solution is to improve data access and governance, attract more foreign activities, invest in public-sector digitalization and demand, strengthen industry ecosystems and promote talent migration.
Such measures will help Europe scale innovation, regain a competitive edge and compete for global innovation.
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