[A-List] Europe/US rivalry: R&D

[Keaney Michael]

Seeking to bridge the science gap:
RESEARCH AND DEVELOPMENT: Europe's spending on R&D is lagging far behind
that of the US. Brussels has called for state and private invest 60 per
cent over the next eight years but companies may not rush to meet the
challenge, say Francesco Guerrera and Clive Cookson:
Financial Times; Feb 25, 2002
By FRANCESCO GUERRERA

Aknowledge gap hasopened up over the Atlantic in research and
development - one of the key motors of innovation and economic growth.

Europe has fallen well behind the US, as governments and businesses in
the 15 countries of the European Union fail to keep pace with the
expenditure on science and technology of their US counterparts.

Between 1995 and 1999, the latest period for which figures are
available, the difference between US and European R&D investment more
than trebled. By the end of the period, European innovators in industry
and government were spending Euros 76bn a year less than their US
colleagues.

The result is that companies and economies in the EU have fewer, and
less sophisticated, tools to go head to head with their rivals on the
other side of the Atlantic.

Many in Europe fear that achievements such as last year's sequencing of
the human genome, where European scientists made a huge contribution to
the work of their US counterparts, could become ever rarer.

"(Lower R&D investment) has eroded our competitiveness and deteriorated
our industrial and trade performance compared to the US. Taking action
to reverse these trends is imperative," says Philippe Busquin, who, as
European commissioner for research, is charged with bridging the
transatlantic knowledge gap.

After years of warm words and few actions, the European authorities seem
to have woken up to the fact that something radical needs to be done to
turn the tide.

Last month, Mr Busquin made an almost unnoticed addition to the
so-called "Lisbon agenda" - the ambitious set of targets to make Europe
the most competitive economy in the world by 2010, which was agreed in
the Portuguese capital nearly two years ago. The amendment could have
sweeping implications for businesses and governments across the region.

In a document outlining the priorities for next month's summit of heads
of state in Barcelona, the EU pledged to increase Europe's state and
private investment in R&D by nearly 60 per cent - from the current 1.9
per cent of gross domestic product to 3 per cent within eight years.

Such a rise would bring Europe in line with the US, where R&D investment
is 2.6 per cent of GDP and rising fast, and Japan, which already spends
2.9 per cent of its national wealth on research.

Will the EU make it? Many in industry, academia and national governments
believe such a rapid increase is not as realistic as Mr Busquin
believes.

They warn that practical problems, such as recruiting trained scientists
and engineers or building and equipping enough laboratory space, could
make it impossible to achieve the goal, even if companies try their
best.

The UK Treasury, for example, says it shares Brussels' vision, which was
openly supported by Tony Blair, the prime minister, in a joint letter
with Wim Kok, his Dutch counterpart, last week, but it casts doubt over
the 3 per cent target.

"We are not sure that it is right to have an explicit target. What
matters is that we have an innovation performance that will drive
growth," says a Treasury official.

The EU is limited in what it can do directly to promote research. Its
next R&D programme, known as Framework Six, will distribute Euros 17.5bn
(Pounds 11bn) worth of grants to companies and universities over four
years from 2003 - only 5 per cent of what national governments will
spend on R&D over the period. At the same time, Mr Busquin is trying to
remove the obstacles, such as national restrictions on research grants,
which prevent scientists moving freely around Europe.

But the Belgian-born commissioner believes prime responsibility for the
knowledge gap lies with businesses rather than governments. A recent
study by the European Commission showed that businesses' expenditure on
R&D in the US is 73 per cent higher than in the EU and grew nearly three
times as fast between 1995 and 1999.

Such a lag in EU businesses' investments accounts for the vast majority
of the Euros 76bn R&D difference between the US and Europe. "On current
trends, the EU will fall further behind, compromising any chance of
reaching the objective agreed at Lisbon," the study concludes. Getting
businesses to spend more on R&D at a time of an economic downturn and
uncertain stock market conditions is not going to be easy.

The Brussels authorities believe national governments should play their
part by making investment in R&D more attractive to the private sector
through four main instruments.

The first, and most direct, way of getting business people's minds
focused on innovation is to pay them to innovate. For years, state
subsidies have been Europe's traditional route to foster private R&D
investment. Last year, EU governments dispensed about Euros 4bn in state
aid for R&D by means of various programmes.

However, this policy is being threatened by external and internal
factors. Externally, the economic slowdown is putting pressure on
governments to curb expenditure - R&D, with its promises of returns in
the distant future, is an obvious target.

Internally, Mario Monti, the EU competition commissioner, is a sworn
enemy of all forms of state aid. In its latest report on state aid, Mr
Monti's department noted that countries with high state aid for R&D did
not produce more patents or a more efficient labour force - remarks that
did not go down well with Mr Busquin's experts.

But even if Mr Monti does not intervene, state aid will not make up the
entire shortfall and indirect interventions, such as tax breaks, could
play an important part in plugging the knowledge gap.

A number of EU countries already operate such schemes. In Sweden, for
example, a quarter of the income of foreign researchers is tax free,
while in the UK small and medium-sized companies have a credit of 150
per cent on R&D expenditure. The British government is now consulting on
the final details of a new tax incentive that would apply to all
companies.

Mr Busquin's study concludes that fiscal incentives "could and should be
applied in a more intensive way across the EU".

Experts fear the commissioner's call could fall on deaf ears. Georges
Haour, professor of technology management at IMD, the inter-national
business school in Lausanne, Switzerland, warns that governments "will
be reluctant to see their income decrease at a time when they have
exploding costs in healthcare, retirement benefits and so on".

Tim Bradshaw, senior policy adviser for technology and innovation at the
Confederation of British Industry, notes that tax break schemes and
state aid are linked, as some fiscal incentives could incur Mr Monti's
wrath and be classified as illegal subsidies.

"The EU may need to make changes to its rules restricting state aid to
industry if governments are to give effective tax incentives for
companies to increase R&D spending," he says.

Mr Busquin's third option is the use of so-called guarantee schemes -
government guarantees to equity and loans provided by private sector
banks for companies' investment in R&D. But, although there are several
such schemes across Europe, very few are used for research. "This form
of public support is clearly under-exploited and should be used far more
extensively," the study says.

Some within the Commission argue that to catch up with the US something
stronger is needed: Europe, they argue, should go the American way and
build a large venture capital industry.

Across the Atlantic, risk capital has become a vital funding source for
technology-based start-ups, while in Europe it accounts for a mere 0.04
per cent of EU GDP. The Commission wants governments to set up schemes
to attract venture capital for start-ups.

But that is going to take time and even if the funds were flowing in,
R&D start-ups would still be faced with a bureaucratic nightmare to
protect their discoveries. The Commission has drawn up plans for an
EU-wide patent, which would reduce costs and red tape, but these have
been stalled by a wrangle over which language to adopt in the document
and which courts should be responsible for enforcement.

For Philippe de Buck, secretary-general of Unice, the European
employers' federation, a common patent would be a big incentive for
businesses to invest in R&D.

"We have to ask ourselves, why aren't businesses investing enough in
R&D? There are a number of difficult conditions. A competitive,
enforceable and cheap patent would remove one of them."

Full article at:
http://globalarchive.ft.com/globalarchive/article.html?id=020225001227&q
uery=science+gap

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney at mbs.fi