State-of-European-Innovation-White-Paper-2014
The State of European Innovation October 2014
Contents
Executive summary 04 Overview of the paper
I: The Macroeconomic Context06 Productivity lags behind
High debt burdens
Unfavourable demographics
Credit growth
II: The Future of Work10 The Industrial Internet
Advanced Manufacturing
The Global Brain
III: Innovation in Europe12 Is Europe already an innovation success story
Is Europe’s attitude to innovation different - Insights from GE’s Innovation Barometer Germany: manufacturing powerhouse
Infrastructure and innovation: virtuous circle
IV: Key Priorities for Public Policy20 Setting the boundary conditions
Stimulating investments
Talent Pool
Innovation and trade
V: Concluding Remarks27
This new wave of innovation could bring tremendous benefits for Europe. Already today, Europe sports world-class examples of successful innovation: three European countries, Switzerland, the United Kingdom and Sweden, topped the 2014 Global Innovation Index1; Germany is a competitive powerhouse in manufacturing. Estonia is a start-up heaven. But while there are major innovation success stories in Europe, Europe as a whole is not yet an innovation success story.
This is apparent in productivity levels, significantly below those prevailing in the US; and in productivity growth, which, with the exception of Norway and Germany, varies from mediocre to dismal. This helps explain why Europe’s recovery from the Great Recession has disappointed, and growth remains weak through large parts of the Union. Faced with high unemployment, high debt burdens, weak credit growth and adverse demographics, Europe desperately needs stronger productivity growth.
What is holding back Europe’s success on innovation? The 2014 GE Global Innovation Barometer, a survey of executives around the world engaged in innovation strategy, unveils some key issues. First, what we might call ‘an attitude problem’. Compared to other regions, European executives place less emphasis on speed and have less faith in a structured innovation
process—relative to spontaneous creation.
Greater speed is a defining feature of the
new innovation wave, and a structured
process is essential to scale the results
of innovation. Second, there are four key
innovation areas where Europe falls short
compared to other regions, according to
Europe’s executives: collaboration, the
ability to attract private investment, the
quality and level of government support to
innovation, and the ability to attract and
retain talent. It is in these areas the efforts
should be intensified.
Faster innovation could bring huge
benefits to Europe. It holds the key to
strong sustainable growth in jobs and
incomes, and is the only way to reconcile
the need for fiscal prudence with the
desire for a resilient social safety net. But
faster innovation hinges on greater efforts
by both public and private sectors.
For the private sector, the imperative
should be to embrace speed and
collaboration, realizing that the new
wave of innovation brought forth
by the Future of Work requires a
complete change of attitudes, based on
openness, collaboration, flexibility, and
an acceleration of the cycle of design,
prototyping, testing and adapting. The
private sector should also realize that
attracting, retaining and nurturing
talent will be an increasingly important
competitive advantage.
Private sector investment in innovation
should be increased. European private
investment in innovation lags behind other
regions; private and public sector should
collaborate to create more supportive
ecosystems comprising research
institutions, funding schemes, and a robust
legal framework to protect investments
and intellectual property.
For the public sector, the overarching
priority should be to put in place
predictable and viable long-term
objectives; innovation pipelines can
cover 10-15 years, and the stability and
reliability of a policy framework supporting
research, technology development and
innovation is one of the key conditions for
attracting investments and stimulating
entrepreneurship. Public support
should be focused on a select number
of areas critical to building Europe’s
competitive advantage and improving
living standards: these should include
health care, renewable energy, advanced
manufacturing and digital technologies
such as the industrial internet.
The public sector should also endeavour
to bolster the quality of fundamental
research, while providing appropriate
support for mid-sized projects in applied
and technology oriented research.
Together with a more business friendly
environment, and stronger support for
start-ups and SMEs, this would create the
conditions for innovation to accelerate and
be quickly translated into new products
and services.
One issue of concern is the potential skills
gap that is emerging in Europe which
has a real risk of inhibiting innovation
and growth potential. Even today when
unemployment is so high in many parts of
Europe, there are more than two million
vacancies that cannot be filled, many of
which are in high tech innovation driven
sectors.
When it comes to innovation, Europe’s
size and diversity is a key strength which
Executive Summary
The pace of innovation is accelerating, driven by three
hugely disruptive forces: the Industrial Internet, Advanced
Manufacturing, and the Global Brain.
At GE, we see these three forces as the interdependent
elements of a new technological revolution, that we call
the Future of Work. The Future of Work is about speed
and collaboration; it accelerates innovation and change;
it redefines economies of scale, enabling micro factories
and new artisanal activities; it reshapes supply chains and
distribution networks; it redefines the relationship between
employers, who get access to a wider pool of talent; and
workers, who gain greater entrepreneurial control over their
skills, talent and careers.
1https://https://www.sodocs.net/doc/d413600895.html,/ (Cornell University, INSEAD, WIPO)
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needs to be exploited to best effect. Europe should establish a Single Market for innovation, an ecosystem to reduce bureaucracy, allow greater cross border co-operation and promote the development and mobility of talent and skills. Examples of successful pan-European innovation collaboration already exist—such as
the Biobased Industries Consortium—they should be scaled and multiplied. Public-private partnerships (PPP) or looser clusters should be encouraged by governments as a further accelerator. Infrastructure deserves special attention. Innovation and infrastructure go hand in hand. Infrastructure is a key enabler of innovation: communications infrastructure is essential to the collaboration that is at the heart of the global brain, and to the digital thread of advanced manufacturing; power distribution infrastructure is
key to the generation of new ideas and their translation into products, and transportation infrastructure helps translate it all into revenues, wages
and profits. Conversely, innovation can dramatically increase the efficiency and productivity of infrastructure, as well
as its reach. In the case of the European
Union there is an added dimension, as
infrastructure is a primary arena for
cross-country collaboration, essential
to turn twenty-eight different countries
into the world’s largest economy. In fact,
the benefits of a common infrastructure
have always been at the heart of the
European projects, including the idea
of a common currency. The high-speed
train infrastructure in Europe is a perfect
example of this synergy.
Embracing the new innovation wave of the
Future of Work can transform Europe’s
economies and boost the living standards
of its citizens. But with an accelerating
pace of innovation in a highly competitive
globalized economy, the costs of inaction
are equally high. The alternative Europe
faces is simple: innovate or stagnate.
Overview of the paper
The rest of the paper is organized
as follows — Section 1 outlines the
macroeconomic background, assessing
Europe’s growth (under)performance
and the main economic challenges
ahead; Section 2 summarises GE’s vision
of the Future of Work, highlighting the
key features of the Industrial Internet,
Advanced Manufacturing and the Global
Brain.
Section 3 looks at the current innovation
landscape in Europe. It highlights some
of the success stories and discusses
the main shortcomings and challenges,
including some insights from GE’s Global
Innovation Barometer. Section 4 gives our
perspective, as an investor in innovation
in Europe, on some of the key priorities for
public policy action. Section 5 concludes.
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6 of 28 The State of European Innovation The UK recovery has been gathering momentum over the last couple of years, whereas the Eurozone’s recovery appears more fragile—as underscored by the stagnation recorded in Q2 2014. This weak performance has generated a sometimes contentious debate on the best policy
response, and the focus has been too often on the classic instruments of fiscal and monetary policy. Some experts and commentators argue that weak growth is due to a misguided insistence on fiscal consolidation - austerity. Others insist that the only answer lies in a more powerful response by the European Central Bank, including a quantitative easing along the lines seen in the US and Japan. Adverse shocks have no doubt played an important role: after the global financial crisis, the Eurozone faced a debt crisis that at its peak led some economists and investors to fear the common currency
might disintegrate. These concerns were
unfounded, and have been dispelled by a forceful commitment on the part of the ECB. But they have left the area with a strong focus on debt reduction, and on the need to deepen banking and fiscal integration. The latter raises economic and political issues that go well beyond a standard macroeconomic response to a downturn—and make traditional fiscal stimulus harder to implement at this juncture. An important complicating factor is the unevenness in performance across EU countries. In the recent recovery, the economic performance within Eurozone members has taken divergent paths, with so-called “core” countries seen as strong, in contrast to the “weak” periphery. But even within each category there are important differences. In the periphery, Ireland and Spain are now experiencing a more robust recovery, having put in place substantial adjustment measures. Greece and Portugal still lag behind. Among core countries, Germany remains very resilient, despite recent softness in large part due to the crisis in Ukraine. France, on the other hand, seems to be struggling to generate faster growth. Italy, traditionally a “core” country, joined the ranks of the “periphery” during the crisis, and its economy has contracted in eleven of the twelve quarters between June 2011 and June 2014. Productivity Lags Behind While adverse external shocks have played a part, the fact that the recovery has been so disappointing, and so much weaker than in some other advanced economies, raises one fundamental question: to what extent are Europe’s problems deeper and more structural? Does Europe have a productivity problem? While monetary and fiscal policy can do a lot to manage the economic cycle, it is ultimately productivity growth that drives any improvement in per capita incomes and living standards. And productivity growth in Europe has been less than impressive in recent years.
I. The Macroeconomic Context
That Europe has a growth problem is clear. The recovery from the Great Financial Crisis and the ensuing recession has been much weaker in Europe than in the United States—with the exception of Germany.
According to the latest IMF forecasts, by the end of 2014 real output in Canada will be 11% higher than in 2007; in the US nearly 8% higher; in Germany it will be about 6% higher; the gains however will be only under 2% for the United Kingdom and less than 1.5% in France; in Spain and Italy output will still be well below the 2007 level, by 5% and
8% respectively.
Chart 1 – Real GDP Change (Index: 2007 = 100) Source: GE Estimates, 2013
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Chart 2 above plots labour productivity
measured as output per employed
person. In the post WW II period,
European countries started with a
substantial productivity disadvantage
compared to the US. Then, as capital was
rebuilt and new technologies introduced,
they started catching up, especially
during the 1970s and 1980s. In the 1990s,
however, labour productivity in the US
accelerated, and Europe once again fell
behind. Only Norway was able to keep up
with and even exceed the US, but it too
fell behind after the global financial crisis.
Between 2003 and 2013, labour
productivity in the US has increased
by 14%; in France, Germany and the UK by less than that: 7%, 6% and 6% respectively; in Italy it declined by 3%. Only Spain and Portugal post increases similar to the US, but both were starting from a much lower base. Comparisons of labour productivity, especially between Europe and the US, have been hotly debated. Some European economists have argued that rather than measuring output per worker, one should measure output per hour worked. Olivier Blanchard, currently Chief Economist of the International Monetary Fund, observed years ago that Europeans expressed a clear and legitimate preference for leisure compared to Americans: they worked fewer hours, but in those hours were as productive as their counterparts across the Atlantic 2. While this was broadly true in the mid-1990s, it is much less true today, however. Chart 3 plots GDP per hour worked, always in PPP terms:On this metric, Norway is an overachiever. Other European countries, however, have lost ground to the US. The picture is very similar to that in Chart 2: Over the last ten years the improvement in France and the UK (6%) has been less than half that recorded in the US (14%); Germany has done better (10%) and Italy has stagnated (1%).
Chart 2 – Labour Productivity, (GDP per worker, PPP) Chart 3 – Labour Productivity (GDP per hour worked, PPP)Source: Conference Board Total Economy Database. In PPP (purchasing power parity)
terms to offset exchange rate fluctuations, at 2013 prices.
2
Blanchard, Oliivier “The Economic Future of Europe”, NBER Working Paper n. 10310, March 2004Source: Conference Board Total Economy Database. In PPP (purchasing power parity)
terms to offset exchange rate fluctuations, at 2013 prices.
These productivity statistics send two clear messages:
1. Labour productivity growth in Europe is very uneven, with strong performance in some countries (Norway and to some extent Germany), middling in others (France, UK) and dismal in Italy.
2. Productivity levels overall are significantly below those prevailing in the US. In terms of output per worker, France, Germany and Italy are ~25-30% below the US; in terms of output per hour worked France is 12% lower, Germany 15%, Spain 26% and Italy 33%.
These comparisons are not meant
as a beauty contest. They are meant
to illustrate that European countries have the potential to achieve much higher levels of productivity and competitiveness.
Boosting competitiveness is especially important as Europe still faces some very substantial challenges. High Debt Burdens
Debt to GDP ratios in the EU have increased substantially since the onset of the global financial crisis. Governments tried to cushion the impact of the downturn with expansionary measures, took on their books some of the excess private sector debt, and suffered the reduction in revenues triggered by the recession.
The tensions experienced during the Eurozone debt crisis then highlighted the importance of placing debt ratios
on a sustainable path. There is currently a fierce debate on the right degree and pace of fiscal consolidation. But is fiscal austerity a headwind to productivity and competitiveness? To the extent that austerity reduces the resources available for public investment in infrastructure and education, it is very likely to have a damaging impact on productivity. Europe’s productivity problem, however, is long-standing and predates the crisis. Moreover, as in many countries public spending is in the region of one-half of GDP, it should be possible to implement fiscal consolidation while safeguarding productive public spending.
Chart 4 – Public Debt / GDP (%) - selected EU countries
8 of 28 The State of European Innovation
The State of European Innovation 9 of 28
Unfavourable Demographics
European populations are ageing. While
other advanced economies (and some
emerging ones) face the same problem,
European countries display some of the
most challenging demographic trends.
Population ageing has an important
impact on public finances: on current
demographic trends, the generous
pension regimes adopted decades ago
would be unsustainable, and pension
reforms have been undertaken or are
being considered to reduce the weight
of pension spending. Ageing also puts
pressure on healthcare spending. These
pressures absorb resources, and require
either tax increases—which can raise the
cost of doing business—or cuts in other
areas of spending, which might include
public infrastructure investment.
The impact of ageing can be mitigated
by increasing the retirement age, and /
or by allowing stronger immigration to
boost the labour force. But raising labour
productivity would also help. Credit Growth Credit growth in Europe is currently rather weak. During an economic downturn it is always difficult to distinguish the impact of credit supply and credit demand, and there is evidence that demand for credit is depressed. In other words, one reason why credit is not currently flowing into the system is that in many EU countries both corporates and consumers lack the confidence to consume and invest. We also know, however, that the European banking sector is still recovering from the impact of the financial crisis. Within the Eurozone in particular, banks face a new round of stress tests, and are in the process of bolstering their capital ratios. In addition, the Eurozone debt crisis has caused some fragmentation in the Eurozone financial market, with banks concentrating more of their lending within their respective national borders—partially reversing a trend of cross-border banking. The net impact of all this is an increased difficulty for European businesses to
obtain credit. This is particularly the case for SMEs, and the problem is particularly acute in countries that have been more severely affected by the debt crisis, and where the cost of funding has remained higher than elsewhere in Europe. This problem is especially troubling because European firms are much more reliant on bank credit than US firms. The fact that SMEs are more affected is also a concern. According to GE’s 2014 Global Innovation Barometer 85% of innovation executives believe collaboration with start-ups and entrepreneurs will drive innovation success in the future. How can these SMEs thrive without funding, and how can large companies innovate if SMEs are not
being supported?
Chart 5 – Rate of natural population increase
The Industrial Internet
The Industrial Internet is the merger of software and hardware, of big data and big iron, with the integration of cloud-based analytics with industrial machinery. The rapid decline in the price of electronic sensors today makes it cost-effective to equip industrial machines with a large number of these sensors that make them increasingly able to analyse their environment, react, and interact with each other and with us. At the same time, lower costs of storing and processing data are enabling us to harvest massive amounts of data from industrial equipment and
to process it with increasingly advanced analytics, generating insights that allow us to operate the equipment more efficiently. The Industrial Internet allows us to shift from reactive to preventive maintenance, fixing machines before they break, dramatically reducing unplanned downtime and raising the efficiency of individual machines as well as entire systems: reducing delays in hospitals or air traffic, increasing the efficiency of power distribution.4Advanced Manufacturing The second driving force is Advanced Manufacturing. At the core of Advanced Manufacturing is a digital thread that links together design, product engineering, manufacturing, supply chain, distribution and remanufacturing (or servicing) into one cohesive and intelligent system. This encompasses new production techniques like additive manufacturing, or “3D printing”, which allow us not only to create completely new parts and products with new properties, but also to accelerate the cycle of design, prototyping and production. Engineers today can “print”
a prototype, test it, adjust the digital design as needed and reprint an improved version—all using the same additive manufacturing machines. This translates to increased speed and flexibility of production, at lower costs. Moreover, the digital thread connecting all aspects of the manufacturing process also allows for real time adjustments to the production process and to supply and distribution logistics.
II. The Future of Work
The pace of innovation is accelerating, driving a powerful and far-reaching transformation of industry.
This transformation affects design and manufacturing processes, supply chains and distribution networks, and the way that work is performed and organized. It is redefining the competitive landscape across industrial sectors, and will impact international trade patterns and the distribution of global growth. It will reshape the labour market and affect the level and distribution of incomes across countries.
At GE, we call this transformation the Future of Work3. It is driven by three fundamental forces: the Industrial Internet, Advanced Manufacturing, and the Global Brain. These three forces are interdependent and mutually reinforcing.
10 of 28 The State of European Innovation
The Global Brain
The third driving force is the Global Brain. This is essentially the collective intelligence of human beings across
the globe, integrated by digital communication networks. Many of us take for granted the ability to cooperate seamlessly with colleagues in different locations via email, cloud-based file sharing platforms, tele- and video-conferencing. Today, open-source platforms and crowd-sourcing are quickly emerging as the most effective ways to unleash the creativity and entrepreneurship potential of the Global Brain. Individual companies are starting to gain expertise that extends well beyond their four walls, accessing a larger pool
of talent which can vary depending on the problem at hand. Companies gain flexibility. Workers, on the other hand, gain greater entrepreneurial control over their skills and talents. The Global Brain will gradually redefine the relationship between employers and employees,
to the benefit of both. And the process will be magnified as global economic growth brings millions more people both connectivity to the internet and the time to take advantage of it. Better access to clean water, food and healthcare will free up precious hours, while improving health and longevity.
The Future of Work is shaping up to be a powerful accelerator for the traditional innovation process. The digital world
has long enjoyed the benefits of Moore’s Law, manifested in exponential growth of cost-adjusted performance. As digital and physical become intertwined, some of these benefits will accrue to the world of industrial equipment. Of course, physical machines are still subject to physical laws that impose more binding constraints than in the world of software—but as they become increasingly digitised, the pace
at which their performance improves
will experience a significant acceleration. The Global Brain will accelerate new discoveries through at least two channels. First, by a sheer increase in the number of people able to participate in the innovation process; second, through
the increased scope for collaboration, which will make the Global Brain the human equivalent of High Performance Computing5. At the same time, the greater flexibility and speed introduced by Advanced Manufacturing will allow the industrial system to quickly adapt and translate new innovations into new technologies deployed across sectors. Innovation is disruptive, and this faster-paced innovation will be even more so. It will present new challenges for individual companies. It will have painful short-term costs in segments of the labour market, as some jobs will be displaced and some skills made obsolete. But for companies and individuals alike, innovation will
also be a major source of opportunities, opening up new markets and careers. At a time of persistently low economic growth and high unemployment, it is natural
to feel more threatened by the added challenges that innovation brings. But today innovation is the primary force that can ensure sustainably higher growth
in jobs and incomes. In an increasingly globalised economy, embracing the disruptive forces shaping the Future
of Work will be essential to remain competitive and take advantage of the rapid growth of global markets.
3Annunziata, Marco and Biller, Stephan, "The Future of Work", GE White Paper, April 2014.
4See Annunziata, Marco and Evans, Peter "The Industrial Internet: Pushing the boundaries of minds and machines", GE White Paper, Month 2012; and "The Industrial Internet @ Work", GE White Paper, Month 2013
5High Performance Computing leverages the power of “clusters” of interconnected computers, referred to as “nodes”. The coordinated computing power of the nodes delivers much higher performance, enabling to solve large-scale high-complexity problems in business, science and engineering.
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12 of 28 The State of European Innovation Is Europe already an innovation success story
The focus on Europe’s growth challenges
should not obscure the fact that some EU
countries already excel in innovation and
competitiveness.
Switzerland, the United Kingdom and
Sweden topped the 2014 Global Innovation
Index 6—the leading benchmark based on
a survey of 143 economies around the
world on 81 indicators, to gauge both their
innovation capabilities and measurable
results. Finland and the Netherlands
helped Europe complete a clean sweep
of the top five positions in the annual
rankings published by Cornell University,
INSEAD and the World Intellectual Property
Organisation. These global innovation
leaders have created well-linked innovation ecosystems, where investments in human capital combined with strong innovation infrastructure contribute to high levels of creativity. Their key areas of strength are innovation infrastructure, including information and communication technologies; business sophistication such as knowledge workers, innovation linkages, and knowledge absorption; and innovation outputs such as creative goods and services and online creativity.Except for the UK, however, Europe’s global innovation champions are relatively small economies. For innovation to truly transform Europe’s large economy, it needs to become much more pervasive. There are major innovation success stories in Europe, but Europe is not yet an innovation success story.
III. Innovation in Europe The disruptive forces shaping the Future of Work could be leveraged to reboot Europe’s productivity, fuelling sustainable high growth in jobs and incomes, and helping reconcile prudent debt management with a resilient social safety net. But is Europe positioned to exploit this opportunity?
Innovation can only unleash its full potential in an environment where the key enabling conditions are in place: one in which government supports the innovative process through investment and a regulatory environment that ensures the protection of intellectual property, does not impose laws that stifle business processes, and that is open to foreign investment to help seed innovative plans; one in
which businesses are open to and agents of change, investing in and adopting the latest technology; one in which the education of the
population and enrichment of the workforce is a top priority.
Chart 5 – Global Innovation Index - Top Ten
6https://https://www.sodocs.net/doc/d413600895.html,/ (Cornell University, INSEAD, WIPO)
Sweden: A European success story
Sweden is ranked in the top three
places in the Global Innovation Index,
the Innovation Capacity Index and the
European Commission’s Innovation
Union Scoreboard. According to
the Innovation Union, Sweden
outperforms the EU average in 23
of 26 indicators covering human
resources, research systems, finances,
entrepreneurship, intellectual assets,
innovating industries and economic
effects. These strengths are built
on a high rate of R&D investment
(public and private) at just under
3.4% of GDP. However, an area for
concern is that Sweden significantly
underperforms in the share of sales
of new innovations, a key measure of
innovation productivity.
Vinnova, Sweden’s innovation agency
(Vinnova.se), has overall responsibility
for innovation issues working closely
with Tillv?xtverket (Agency for
Economic and Regional Growth)
to implement key EU programs in
Fig 1. GE technician at work in Uppsala, Sweden
Sweden such as Horizon 2020. A Array national innovation strategy has
been launched with the following
vision for 2020: Sweden is a country
characterized by innovative ideas
and pioneering new ways of thinking
and acting to shape our future in a
globalized world. People in all parts
of Sweden can and will contribute to
creating value for people, the economy
and the environment through new or
better solutions.
This strategic vision is met through
the delivery against objectives set in
six areas:
? Innovative people
? High quality research and higher
education for innovation
? Framework terms and
infrastructure
? Innovative companies and
organisations
? Innovative public sector
organisations
? Innovative regions and
environments.
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Is Europe’s attitude to innovation different - Insights from GE’s Innovation Barometer
Is there something specific in Europe’s attitude to innovation that constrains the region’s success? The results of GE’s Global 2014 Innovation Barometer, a survey of 3,000 executives in 28 countries across the globe, reveals that European firms have a different attitude to innovation than firms across the rest of the world:
Less emphasis on speed We have noted that Advanced Manufacturing techniques are fuelling a trend toward greater speed –adopting a test fast, fail fast, adjust fast approach. A shorter design-prototype-manufacture cycle allows companies to bring new ideas to market more rapidly. Our Global Innovation Barometer reveals this move toward speed is not as prevalent in Europe as it is in other parts of the world.Less faith in a structured innovation process Compared to executives in other regions, European executives feel that successful innovation is driven spontaneously, through interactions of creative individuals. While individual creativity
is an essential ingredient of innovation, structured processes are useful to foster innovation and scale its results. The Innovation Barometer’s results may indicate that the processes in place in Europe are not seen as effective.
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The State of European Innovation 15 of 28GE’s Innovation Barometer suggests that European firms and economies are falling short in four key innovation areas: These are four areas where Europe needs to step up its efforts to better develop an environment that can promote innovation. These results from the Innovation Barometer also suggest that there is a need to change attitudes and strategies in both the private and public sector. Firms need to adopt a more open attitude: open to collaboration with external partners, and open to foreign investment. Governments need to rethink the
policies and funding devoted to supporting innovation,
as current efforts are clearly perceived as insufficient.
Both private and public sector need to work together
to develop and retain the right talent.
Ability to attract private investment
Only one third of Europeans
think it is important to attract
investors to fund innovative
programs—and yet private
investment is all the more
important at a time when
governments are cash-
strapped. Also, Europeans
feel that SMEs are driving
innovation, whereas in the rest
of the world innovation is seen
as driven by large multinational
companies that have a
successful localisation strategy. Collaboration Over the last two years, GE’s Innovation Barometer has shown that collaboration with governments, customers, and other external third parties is a key trend among companies looking to innovate. Two years ago this was seen as a future trend, and this year collaboration has been put into action, with 64% of respondents to the survey saying that revenue and profit
from collaborative activities has
increased over the past year.
Over half of respondents work
at companies that embrace
open source innovation
and one-third have utilised
crowd sourcing to solicit
innovative contributions to the
business. However, European
respondents are more likely to
want to contain the innovative
process within existing lines
of business and teams, and
less likely to believe that
innovation is becoming global
and that firms need to share
talent insights and resources
across the globe. Moreover,
Europeans prefer subsidies
going to domestic innovators,
but at a time when domestic
investment is limited because
of a weak economy, enticing
foreign investment could be
especially helpful. Government support Compared to half of respondents in the rest of the world, only about one third of Europeans believe that governments and public authorities allocate an adequate share of their budgets to support innovative companies. Nearly 70% believe that public authorities do not do enough to support SMEs in their innovation efforts. Less than 30% of respondents feel that government support for innovation is efficiently organised compared to over 40% for the rest of the world. Less than half feel that international trade regulation and agreements are favourable to innovation.Talent European executives are less likely to believe attracting and retaining talent, adopting emerging technologies and encouraging disruptive and creative behaviour are as important as executives from around the world do. While 85% of US and 80% of UK executives feel this is important, respondents from the continent were less likely to feel retaining talent is important, with 76% of Polish, 75% of Swedish, 71% of Germans and 67% of French feeling this way. Only Italian respondents were on a par with the US at 85%.
Important efforts in this direction are already underway. In 2010, the European Union launched Innovation Union.
The Innovation Union is a strategy to create an innovation-friendly environment. One of the seven flagship initiatives of the Europe 2020 strategy, Innovation Union aims to boost the region’s R&D spending to 3% of EU GDP by 2020 (from less than 2%); the EU estimates this could create 3.7 million jobs and increase GDP by €795 billion by 2025. Europe currently spends less on R&D than the US and Japan, and emerging markets are catching up fast.
Horizon 2020
Key to the success of the Innovation Union is the €80 billion investment of funding over the 2014-2020 timeframe called Horizon 2020. To simplify the process
to apply for and administer grants, Horizon 2020 brings together a previously disparate group of funding streams under three pillars:
? Excellent Science: extend the
excellence of the Union’s science
base to make the Union’s research
and innovation system more
competitive on a global scale
? Industrial Leadership: speed up development of the technologies
and innovations that will underpin
tomorrow's businesses and help
innovative European SMEs to grow
into world-leading companies
? Societal Challenges: reflect the policy priorities of the Europe 2020
strategy and address major concerns
shared by citizens in Europe and
elsewhere Public-private and
public-public partnerships
These are one of the key elements of
Horizon 2020. To date, the private sector
has committed to invest nearly €10
billion in Joint Technology Initiatives. In
addition, eight contractual Public Private
Partnerships in areas such as electric
vehicles, green buildings and advanced
manufacturing processes have been
launched, leveraging over €6 billion of
investment.
Compared to the previous European
R&D programs (FP and CIP), the Horizon
program provides a renewed opportunity
to increase the European industry
innovation footprint in Europe. Firstly, the
funding rate of 100% makes the program
more competitive compared to other
regions than in the past. Secondly, the
project typology fits both the European
industry better and meshes with the
emerging trend toward speed to market;
there is more emphasis on demonstration
and pilot projects and less on
fundamental research. Thirdly, the topics
that will be funded match the European
industry core business and strategy much
better. The focus of the Innovation Union
is on key areas such as climate change,
energy efficiency and healthy living;
topics that have been introduced include
shale gas, flexible power plants and the
industrial internet.
On the other hand, two aspects may still
be an issue. First of all, timing remains a
challenge. Although the total cycle time
has been reduced from the historical 300
days, still a substantial amount of time
is needed in between application and
grant agreement. This means that only
strategically important projects with a
long term commitment are suitable for EU
funding. Secondly, some of the (perceived)
IP issues also remain. The demand from
some parties for a “Europe First” strategy
and over-regulation may deter industries
from participating in EU funded projects.
In our opinion, the handling of IP rights
should be left to the parties involved.
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Germany: manufacturing powerhouse
More than 30% of the European GDP is generated in Germany and of that, industry is a major pillar that accounted for more than 30% of national GDP in 2012. Manufacturing represents more than two thirds of this, and employs ~30% of the workforce. This lower reliance on the service sector compares favorably with the much lower industrial output of 21% in the UK and 19% in France. A key sector is the SME manufacturing firms known as the Mittelstand which often specialise in high-tech niche products, and which form a major part of the German economy. An estimated 1,500 German companies occupy a top three position in their respective market segment worldwide. In about two thirds of all industry sectors, German companies belong to the top three competitors worldwide.
To maintain this strong global footprint, the German government has launched the Industry 4.0 initiative as part of its overall “high-tech strategy”. The initiative is funded with €200MM across several ministries and promotes concepts such as Smart Production
and the Smart Factory, which are characterised by digitalization, interconnection, adaptability, resource efficiency and ergonomics as well as the integration of customers and business partners in business and value processes. Current lighthouse projects are run by “Clusters of Excellence” consisting of several participants from industry and research. The governmental Industry 4.0 initiative is strongly backed by important industry associations such as VDMA, ZVEI and BITKOM who have launched the “Platform Industry 4.0”, and includes industrial heavyweights like Bosch, Siemens, Deutsche Telekom and SAP.
An organisation that shapes innovation processes in Germany and drives forward the development of key technologies - such as Advanced Manufacturing - is the Fraunhofer-Gesellschaft. With a workforce of over 23,000, the Fraunhofer-Gesellschaft is Europe’s biggest organisation for applied research, and currently operates a total of 67 institutes and research units. Its core task is to carry out research aimed at practical applications in close cooperation with its customers from industry and the public sector. Several different Fraunhofer units are currently engaged in developing new concepts and solutions to merge the physical world with the virtual world and make production and factories smarter. According to Fraunhofer and BITKOM the underlying market potential of these concepts is an additional €78 billion gross value added until 2025 in Germany alone.Estonia: Start-up heaven Estonia, a country with 1.3 million inhabitants, holds the world record in start-ups per person. It has embraced digital technology much faster than most other European countries. After gaining independence from
the Soviet Union, Estonia was left with little public infrastructure and virtually no commercial activity. As
it needed to build high-functioning government services for its residents and the emerging private sector, Estonia’s government focused on technology, investing aggressively in efforts to bring services and citizens online. A high level of technology adoption and the lack of bureaucracy created a fertile ground for start-ups. Estonia is homeland to Skype, Kazaa, TransferWise and Playtech, among others. Given the country’s tiny domestic market, start-ups have been forced to think global. The government builds bridges between Estonian start-ups and global investment funds and venture capital providers. It also established its own seed fund for start-ups.
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Infrastructure and innovation: virtuous circle Innovation and infrastructure go hand in hand. Infrastructure
is a key enabler of innovation: communications infrastructure
is essential to the collaboration that is at the heart of the global brain, and to the digital thread of advanced manufacturing; power distribution infrastructure is key to the generation of new ideas and their translation into products, and transportation infrastructure helps translate it all into revenues, wages and profits. Conversely, innovation can dramatically increase the efficiency and productivity of infrastructure, as well as its reach. In the case of the European Union there is an added dimension, as infrastructure is a primary arena for cross-country collaboration, essential to turn twenty-eight different countries into the world’s largest economy. In fact, the benefits of a common infrastructure have always been at the heart of European projects, including the idea of a common currency. High-speed trains
The high-speed train infrastructure
in Europe is a perfect example of this synergy. There has been a strong upswing in the demand for high-speed rail services in Europe, and this is expected to rise even faster between now and 2020.
By then long distance rail traffic will represent around 315 billion passenger-kilometers (pkm) annually, an increase by two thirds since the turn of the century. The traffic demand on medium distances (typically under 3 hours) has also increased six times in the last 20 years. Leading operators of high speed trains remain the historical national operators: Deutsche Bahn in Germany, Renfe in Spain, SNCF in France and Trenitalia
in Italy who are preserving European leadership in the high-speed lines, with the support of the European Union and its vision of a Single European Railway Area and Trans-European High-Speed rail network.
The growth of the high speed train market in Europe has been possible due to a large number of small innovations rather than the introduction of radically different
technologies. European engineers have
improved the aerodynamics of vehicles,
designed robust wheels, introduced more
efficient brake systems and improved
on the powertrain such that the trains
achieve a speed of 200 mph and bring
the medium distance lines below 3 hours.
However, further development is needed
and this is not possible without a co-
ordination at a European level.
The EU started government-funded
research and innovation programs while
setting the imperatives on improving
the quality of rail services by increasing
reliability and punctuality, reducing
combustion and CO2 emissions, while
doubling railway capacity, and cutting
the cost of infrastructure and rolling
stock. Additionally it sought to retain
Europe’s leadership in the global rail
market. The “Shift to Rail” EU program
drives the innovation on railways. The
EU together with rail industry leaders
and manufacturers focus on five key
Innovation Programs: cost efficient and
reliable trains, including high speed
trains and high capacity trains; advanced
traffic management & control systems;
cost efficient and reliable high capacity
infrastructure; IT solutions for attractive
railway services; and technologies for
sustainable & attractive European freight.
Efforts in these areas hold the promise
of making the European railway network
even more efficient, lowering transport
costs, while stimulating new technological
advances that could also find applications
in other industrial fields.
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Long term objectives and focus
Governments need to have long-term objectives in place and these objectives should not be volatile but predictable and viable. While establishing long term objectives, one should take into account that innovation pipelines may cover 10-15 years. This means that a government’s objectives have to overarch the usual election periods (4-5 years) and need to be embedded on an operational level in the relevant ministries and government agencies. Reliability of a policy framework supporting research, technology development and innovation is one of the key conditions for attracting investments and stimulating entrepreneurship. Governments should create boundary conditions supporting their long term
objectives, leaving the specifics of R&D
efforts to industry and academia.
The current way most European
governments stimulate innovation
resembles the model of ‘shared poverty’.
Everyone gets a share of government
funding, enough to survive, but not
enough to thrive. Instead of promoting
regionalism and spreading R&D
investments, efforts should be focused on
a select number of areas deemed critical
for the future of Europe’s competitive
advantage in the 21st century. Focus areas
can include current fields of strength of
the European industry, like renewables,
or topics of emerging importance for
European societies like healthcare under
conditions of profound demographic
change. Also, potentially revolutionary
developments in the Industrial Internet
and Advanced Manufacturing should
be high on the priority list. Lastly, as
pointed out in GE’s Innovation Barometer,
collaboration is a key to success, since this
creates synergies instead of competing
silos.
A Single Market for
Innovation
When it comes to Innovation, Europe’s
size and diversity should be a key strength
which needs to be better exploited to best
effect. The United States and European
Union differ significantly in terms of their
innovative capacity: the former has been
able to gain and maintain world leadership
in innovation and technology while the
latter continues to lag.
The higher mobility of knowledge,
capital, and population in the US not
only promotes the agglomeration of
research activity in specific areas of the
country but also enables a variety of
geographic mechanisms to fully exploit
local innovative activities, synergies
and regional resources. This contrasts
with the situation in the EU where
imperfect market integration and
institutional and cultural barriers across
the continent prevent those engaged in
driving innovation from maximising the
benefits from external economies and
localised co-operation. Compensatory
forms of geographical process may be
emerging together with greater European
integration.
If driving innovation across Europe is
a serious goal – a Single Market for
Innovation across the EU needs to be
created: an innovation ecosystem from
ideation to commercialisation, which will
reduce bureaucracy, allow greater cross
border co-operation and promote the
development and mobility of talent and
skills.
Addressing Cultural
Barriers
Entrepreneurship is an important driver
of economic growth and innovation.
According to the Global Entrepreneurship
Monitor (source: Global Entrepreneurship
Monitor 2013 Global Report) the rate of
entrepreneurship in Europe is lower when
compared to Brazil, China, India, South
IV. Key Priorities for Public Policy
The discussion in the previous sections shows that while Europe already sports some areas of technological excellence, innovation needs to be raised to a higher level, and public policy has a very important role to play—both at the national and at the European level.
The 2013 EU Innovation Scorecard (European Commission) again shows that South Korea, the US, and Japan have a performance lead over the EU. South Korea's lead is increasing, but since 2008 the EU has been able to close almost half its gap with the US and Japan. The EU still lags considerably behind the global leaders notably in terms of business R&D expenditures, public-private co-publications, and patents, as well as in tertiary education. The EU continues to perform better than Australia, Canada, Brazil, Russia, India, China and South Africa. This lead has been declining with China, remained stable with the other BRICS countries and has been increasing compared to Australia and Canada.
Setting the boundary conditions
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