In part 1 we have established that growth in the West relies on innovation and technology much more than growth in developing countries. We are the ones at the technology frontier, so if we want to grow, we need to be more innovative. In this blog I’ll mainly cover government policies regarding R&D and higher education, focusing a lot on expenditure (1). If you’re interested in broader measures, you could start here, with the Innovation Union Scoreboard 2014.
For those of you who like the big numbers, let me introduce you to GERD. GERD is the Gross Domestic Expenditure on R&D, which includes expenditure by business enterprises, governments and foreigners. In 2010 GERD stood at 245 673 million in absolute terms in the EU-27. Given that this does not really tell us much, GERD is normally calculated relative to GDP. Between 2000 and 2010 the ratio has roughly been flat at around 1.80-2% of GDP. This means that internationally the EU-27 figures are below those in other countries: Japan (3.45%), US (2.80%).2 There are also substantial differences within the EU. The highest expenditures in 2010 were reported from (how could it be different) Finland (3.87 %), Sweden (3.42 %) and Denmark (3.06 %).
The main reason for these differences within and outside of the EU are not the government’s R&D or higher education expenditure, but the differences in the innovative activities of the business sector. In the EU R&D expenditure within the business sector was 1.23% of GDP, while it was 2.70% in Japan and 2% in the US.(2) Put differently, in the EU (in 2009) the division of R&D expenditure between businesses/ governments/ foreigners was 55%/35%/10% while in Japan and the US businesses accounted for 80% and 70%, respectively. Within Europe, the Scandinavian countries but also Austria and Germany, have higher business expenditures than other European countries. In Bulgaria, Poland, Romania, Slovakia, for instance, the majority of the funding came from the government (Source: Eurostat )
So, it seems that the big numbers suggest that right now where Europe lags behind is R&D expenditure undertaken by businesses and not government expenditure. Ultimately, though, the fact that Europe lags behind is still on the European governments as they are responsible for creating an environment which provides the incentives for businesses to invest and innovate. Part of this environment is to ensure that we have the skilled employees and research and technology innovative businesses look for. In addition, a comparison of current data tells us very little about where we are headed in the long-run. What does a more qualitative approach tell us about R&D and the business environment in Europe?
As pointed out in a recent financial times article, just nine out of the world’s top 100 high tech companies have their headquarters in Europe. If Europe loses the most innovative companies, knowledge and technology clusters suffer and these are one of the main engines for innovation and growth. A report suggests a variety of reasons for why the Europe is falling behind: a shortage of skilled engineers, fragmented markets and a lack of strategic foresight.“ Similarly, a report of the European Commission states that we are underinvesting in knowledge. It advocates the idea of an „Innovation Union“ and, here it comes, point 1 on the agenda is:
„In times of fiscal constraints, the EU and Member States need to continue to invest in education, R&D, innovation and ICTs. Such investments should where possible not only be protected from budget cuts, but should be stepped up.“
However, has anybody pitched that to governments? Because right now it looks like the European Commission is the one organization that cares. The EU member states seem to be doing… whatever. In 2010, in the aftermath of the financial crisis, the UK government’s proposal to heavily cut funding for sciences received a strong reaction from the science community. In the end, the cuts were postponed, but in real terms, the science budget is still shrinking and cuts are still looming with every new budget discussion. In Austria we are all only too familiar with the regular bickering about university funding and the most recent culmination of political idiocy: the fusion of the ministry for science with the ministry for economics. How very surprising that one of the three departments with the main cuts in the subsequent budget had to be made in the RESORT science in the eonomics department (funnily enough, the second affected department was infrastructure, which is also an essential factor for growth and development).
I am sure, those of you who are familiar with other European countries will find similar trends in many other countries. I’m not saying that no European government is doing its job right. Both GERD and the Innovation Scoreboard highlight that there are strong differences within Europe with Scandinavia and the German speaking countries leading most rankings. But, overall, when I look into the media, I feel like the majority of European governments are taking the Commission’s Horizon 2020 project not as seriously as they should. To hear what I think good policies with “strategic foresight” look like, you’ll have to wait until the last blog of this series.
1Yes, expenditure does not necessarily translate into outcomes. Nevertheless I think in many cases funding cuts in these areas are a good indicator of the priorities of governments. Anyway, this blog entry includes a lot of links you can follow and read up on.
2China, for instance, is one of the developing countries with the highest GERD ratio to GDP. It has already surpassed a number of European countries.