Innovation is a key part of growth, especially in times of austerity. Reinhilde Veugelers argues that Europe’s future competitiveness depends on the active promotion of innovation based growth sectors. Policymakers now need to encourage innovation by reducing entry and exit costs for entrepreneurs, making greater use of public procurement for early-stage innovation, as well as introducing policies aimed at the further integration of European capital, labour, goods and services markets.
We are confronted today with a daunting post-crisis growth challenge that will influence the policy agenda well up until and beyond 2020. But already before the crisis, Europe’s growth performance had been diagnosed as poor. Multiple studies have examined this poor overall growth performance in Europe, especially compared to the US. The analysis traces the roots of the problem to path-dependent sectoral specialisation. European countries are specialised in medium-tech sectors, missing strong positions in new high-tech sectors, which were the drivers of growth in the late 1990s in the US. European companies in traditional sectors do not innovate less than their competitors in the US. But Europe has much fewer young leading innovators (“Yollies”) in sectors characterised by high levels of innovation and rapid productivity growth, particularly in ICT sectors.
Europe’s failure to redirect towards innovation based growth sectors is likely to matter for Europe’s post-crisis recovery dynamics. In the new ICT eco-system (i.e. post-internet), the locus has shifted to those where platform, content and application providers are more pivotal. These ICT sub-sectors were the sectors where most of the pre-crisis ICT growth opportunities emerged and those that also experienced only a minor reduction in growth rates during the crisis. In these sectors, Europe is weakly represented by (young) leading innovators.
The missing Yollies problem is not to be so much in the generation of new ideas, but rather in bringing ideas successfully to world market. Obstacles include the lack of a single market, the limited role of advanced early (public) users, fragmented IP, lack of an entrepreneurial culture, poor access to risk capital and strong clusters with pooled skills.
As the barriers to growth need to be overcome for young firms in new growth sectors, does this imply a call for a targeted policy approach? Not necessarily. Since young innovators need to find a complementary overall innovative environment, a policy to redress the age and sector structural deficit needs to fit into an overall innovation and growth policy.
This overall policy should further the integration of the European capital, labour, goods and services markets, making it easier for players in the innovation system to interact and, at the same time, create competition. Combating fragmentation caused by uncoordinated national regulations, of relevance for new sectors, cannot be high enough up on the policy agenda. This includes not only product or service market regulations. The fragmentation in IP rights within Europe should also be tackled.
Having made progress on the EU-wide patent system, policymakers’ attention should also be directed towards an integrated EU approach to digital rights, copyright and data privacy policies. And without jeopardising quality standards, the European Patent Office’s examinations should be much more open towards new technologies and soft protection mechanisms. Updating Europe’s overall innovation and growth policy framework should also involve a closer look at competition policies, where getting the balance right between promoting new entry and creating incentives for innovators by protecting their innovation is a delicate undertaking.
Nevertheless, a specific policy is also needed to address the specific barriers faced by young highly innovative firms in new highly-innovative sectors. But this specific policy does not require targeting or cherry-picking technologies, sectors or firms, as the following, non-exhaustive, list of recommendations details:
- Lower entry and exit costs would allow more experimentation by entrepreneurs with new highly risky ideas. This requires product market reforms to decrease the red tape and administrative burden to ease the starting of new businesses.
- But equally important for getting experimentation, but politically less popular, particularly during crisis times, are reforms of bankruptcy law allowing easier exits and particularly not precluding new starts.
- Addressing the access-to-finance-barrier for new firms with highly innovative and risky projects warrants specific attention, especially now during the crisis. In particular policy should address the early commercialisation and larger-scale deployment of innovative projects. For a concrete proposal for a Young Innovator’s Program at EU level, see Bruegel Policy Brief 2010/9. In addition, removing barriers to EU-wide venture capital markets has long been on the policy agenda but is still not been achieved.
- Concerning the demand for innovative products and services, Europe should make greater use of public procurement for nurturing early-stage innovations, at least in those sectors in which the public sector can act as a pivotal lead user. New ICT markets offer ample examples. Public procurement is not about picking and protecting winners. Procurement policies should encourage the entry and growth of new firms, nurture potential competition and the development of complementary actors. When done at a European integrated or at least coordinated scale, risks and resources can be pooled across a larger public market. Removing the fragmentation in the European public procurement markets should therefore be high on the policy agenda.
- Standards and regulations, by overcoming market uncertainties, can help early-stage innovations to come to market sooner. Nonetheless they may also carry a risk of becoming trapped too early, precluding the emergence of new and better technology breakthroughs. If and when governments intervene in standards and regulations, they should be designed with a technology-neutral and open perspective, which will allow new future innovators to continue to compete.
Most of these policy recommendations do not require targeted approaches, only focusing on barriers that are particularly important to young sectors and young firms. Nevertheless policy makers should be advised to engage in the monitoring of emerging markets to evaluate whether the right mix of horizontal policy instruments is present and effective for ensuring the smooth development of firms in these new sectors.
With a highly complex area to address and limited evidence about which policy instruments are best to use, designing an appropriate policy for new growth markets is bound to be a challenging endeavour. Learning from best practices, experimenting with new instruments and regularly evaluating existing programs, including abandoning or restructuring them when inefficient, should therefore be high on the policy agenda.
This article first appeared at Policy Network.
Reinhilde Veugelers will speak at Policy Network’s conference on “The quest for growth: ideas for a new political economy and a more responsible capitalism” on Thursday 6th September, 2012.
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Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.
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About the author
Reinhilde Veugelers – Bruegel
Dr. Reinhilde Veugelers is a professor at KULeuven (BE) at the Faculty of Economics and Business, where she teaches international business economics and game theory. She is a senior fellow at Bruegel whose activities include coordinating Bruegel research in the area of competition, innovation and sustainable growth. She is currently a CEPR Research Fellow and a member of Commissioner Potocnik‘s Knowledge for Growth expert group. Her research concentrates on industrial organisation, international economics and strategy, innovation and science, and she has authored numerous publications in leading international journals.
