Europe is lagging the US in innovation, but that’s about to change

Obsession
Davos
Obsession
Davos

Innovation is not what it used to be. It’s no longer just a matter of coming up with a new product. It’s also about how you manufacture it—developing cloud-based control systems to run factories around the world where the product is made and harvesting economies of scale. Or it’s about creating digitalized supply and delivery chains that operate automatically around the clock.

The digitalization of manufacturing is at the forefront of today’s remaking of the business world. US firms have a big advantage in the service sector because of their digital advances over the last two decades, but Europe still holds a slight lead in manufacturing expertise. Within a few years, manufacturing will be fully digitalized too. If we don’t innovate our manufacturing quickly with massive investment and a greater appetite for new approaches that carry a high risk and high potential return, there is a real possibility that Europe will be left behind the US for generations.

The organization I head, the European Investment Bank, is owned by the EU member states. A new study by the bank’s economists shows the alarming proportion of the innovation gap between Europe and the US. It is time for all of us to face the urgent need to remedy decades of underspending—and under-thinking—about innovation.

US innovation pushed ahead of Europe in the 1990s. Today, the companies dominating digital services are largely American—Google, Amazon, Facebook, and Apple. The aftermath of the financial crisis of 2008 further exposed Europe’s lack of competitiveness. One reason our economy did not rebound as strongly or as fast as the US was our long-term lack of investment in research, digitalization, and education.

There are structural reasons for this investment gap. Whereas the US essentially operates as a unified entity using one language, Europe’s single market is incomplete. Labor mobility is hampered by the many languages we speak. Different countries still have different regulations for the same product. We have gained tremendously from integration, but we are still far from being a genuinely integrated single market.

Even Europe’s strong reliance on bank financing puts our companies at an innovation disadvantage. Innovation often needs someone to identify promising businesses and take risks, as well as liquidity. That’s what venture capitalists do, and the US has a far more developed venture capital scene.

The investment Europe needs is massive. A study by EIB economists to be released this week at Davos shows we require:

  • An additional €130 billion ($142 billion) a year to meet the EU’s target of spending 3% of GDP on research and development, which would take us close to the R&D investment ratios of other leading economies,
  • €90 billion a year to keep up with advanced manufacturing technology,
  • €35 billion a year to match US venture capital financing,
  • €10 billion for state-of-the-art education facilities,
  • And €65 billion to reach EU targets for broadband, data center capacity, and cyber-security.

If anyone wonders why Europe needs to integrate further, the scale of this challenge is the answer. No European country could meet it alone.

The EIB is at the forefront of financing for innovation. Our lending to innovative projects was a record €18.7 billion last year, compared to less than €10 billion in 2008. Every one of those investments is strategic. In 2014 we loaned €30 million to an Italian data company’s R&D program. The company’s products include the laser marking and machine vision that will run factories in the so-called Fourth Industrial Revolution. The EIB-financed project is expected to yield 130 new patents over three years. Without new advances such as these, European manufacturing will be left behind.

We are funding the next generation of innovators too. Europe has fallen behind in higher education, while the US spends twice as much per student as Europe. Last year the EIB made its biggest-ever university loan with €278 million for the University of Oxford’s scientific research facilities.

Crucially, the EIB Group is implementing the financing of a program with the European Commission that I believe will revitalize the continent’s ability to innovate. Under the European Fund for Strategic Investments, the EIB will make higher-risk loans backed by a guarantee from the EU budget and some of our own funds. The aim is to draw private capital into projects in which we invest by taking some of the risk onto ourselves, mitigated by the EU guarantee. Over three years, this will support €315 billion of new investment in infrastructure, small and mid-sized companies, and innovation.

On its own, this will not be enough to cover the investment gap—no single plan can. But cash is abundant in the European economy. What we need is momentum behind new investment and risk-taking to make sure money is put to work. If everyone plays their part by simplifying regulation, completing the internal market, and helping projects attract available finance, the scale and timeframe of the Commission’s Investment Plan for Europe can deliver this momentum. In the second half of last year, we already supported €50 billion of new investment under the plan.

With that kind of investment, I believe innovation will become a common practice for European companies. It has to be. Because if we don’t innovate, our customers will go to the company—or the continent—that does.

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