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PART I - SITUATION AND TRENDS

4 Factors determining real convergence

4.6 Innovation and RDT

Introduction

Innovation 'is a means by which less favoured regions can move immediately alongside the developed regions, not by attempting to imitate what the latter have already achieved but by trying to lay the groundwork, in accordance with their own features and requirements (...), for adapting to the conditions of competitiveness in a global economy.1

It is widely accepted today that the ability of regional economies to withstand competition and adapt to technical change is related to their capacity to innovate. This, of course, is not new, but the increasing importance of knowledge (as compared with natural resources, physical capital and labour supply) in determining economic performance puts technology and innovation high on the regional development agenda.

The Lisbon European Council reiterated the importance of research and development, and innovation, for economic growth, employment creation and social cohesion. It emphasised the need to create a European research and innovation area and asked the Commission and Member States to carry out a series of measures in order to meet the aims set out in the Commission Communication, 'Towards a European Research Area.'

The importance of innovation was highlighted by the European Council, which called for, inter alia, a challenging programme for enhancing innovation and economic reform. The Commission's communication on 'Innovation Policy in a knowledge-driven economy'2 set broad policy guidelines for enhancing innovation in the EU. As innovation has come to be understood as a key element in economic development policy, so the importance of the regional dimension has been increasingly recognised. Many measures are most effectively conceived at a regional level, where the needs of enterprises, and the environment in which they operate, can best be assessed.

Understanding of the process by which technology and innovation affects regional development has evolved over time. Rather than innovation being seen as a linear process from basic research to commercial success, a more interactive model has emerged, which recognises the importance of the environment in which firms, and SMEs in particular, operate. Indeed, since SMEs lack the articulation of business functions of large firms, they have to rely more on making use of capabilities external to the firm.

Innovation has, therefore, been associated with concepts of network formation and management and of clustering. In this respect, it no longer depends solely on how firms, universities, research institutes and regulators perform, but, increasingly, on how they work together, particularly at the regional level.

In the EU today, the capacity to innovate varies significantly from one region to another, both in quantitative and qualitative terms. To give an insight into these variations, the Commission presented in September 2000 3 a first outline of a European innovation scoreboard, which indicates the extent of disparities in this area across the EU. Certain Member States, particularly the Nordic ones, scored quite highly, sometimes even higher than the US. In terms of the number of indicators with values significantly above the EU average, Sweden had the highest score (with 12 out the 16 indicators, 20% or more above average), followed by Finland (8), Denmark and Germany (both 7).

The following examines, first, the structure of national scientific and technological systems and, second, how the capacity for innovation varies across the EU.

Though converging, significant differences remain at the national level …

Expenditure on research and technological development (RTD) relative to GDP has increased in recent years in the cohesion countries, but, Ireland apart, the rise has not been enough to close the gap with the rest of the Union significantly. The technology gap between the cohesion countries and the four Member States where expenditure is highest (Germany, France, Sweden and Finland) has widened rather than narrowed (see Table 5).

Business expenditure on RTD declined relative to overall expenditure in Portugal, Greece and Spain between 1995 and 1998, as it did in the EU as a whole, though it rose in the top four Member States, and even more so in Ireland. As a result, the gap in innovation between the former three cohesion countries and the latter five could widen further, which could, in turn, reduce the chances of their competitiveness in EU or world markets improving.

Government expenditure also fell in Greece and Spain, though this was in line with developments elsewhere in the Union, while it remained unchanged in Portugal. The increase in overall expenditure in these three cohesion countries was, therefore, due to a rise in spending on higher education, which can be seen as a prerequisite for raising the skills of their labour force.

The significant gap in RTD expenditure which exists between the cohesion countries and other Member States, especially in terms of business spending, indicates a need for more encouragement for firms to undertake research activities and, accordingly, the adaptation of RTD policies to this end. This means taking a broader view than simply redistributing EU expenditure on RTD to these countries. In lagging regions, in particular, attempts need to be made to increase: the capacity of businesses to absorb new technology and know-how developed elsewhere; the capability of the work force to use this technology and adapt to new techniques; the entrepreneurial spirit to seek out new market opportunities and the availability of risk capital for innovation(See Table A.21 of R&D Indicators for the European Union, in annex).

The few data available on the candidate countries4 suggest that since the beginning of the 1990s, the funds available for RTD have been reduced (applied research more so than science), competition for funds has increased, and the demand for public RTD has fallen markedly. In 1995, RTD intensity in most countries was similar to that in the cohesion countries, while in Slovakia, Slovenia and the Czech Republic, both public and private expenditure on RTD was closer to the EU average.

The human resource potential in RTD in many of the candidate countries is relatively strong, as a legacy of the major role accorded to RTD under the socialist system, which means that they are well placed catch up with present EU Member States, so long as there is a fundamental restructuring of the RTD system (See Map A.13 on business enterprises expenditure on R&D, in 1997).

… particularly in terms of human resources

The quality of human resources is the major factor behind the invention and diffusion of technology and it is a precondition for increasing the capacity of a given economy to absorb new innovations. The difference in this respect between the most advanced countries in the EU and the cohesion countries has been reduced during the 1990s, but it remains the case that the former have around three times as many research staff in firms as the latter.

Firms in the most developed regions can count on better-targeted public assistance schemes

A third dimension of the 'technology gap' takes the form of differences across the Union in the quality and quantity of schemes for public assistance. In the case of public assistance for innovation, measured in terms of state aid to RTD in manufacturing, in the most developed Member States the amount provided over the period 1995 to 1997 was over 10 times larger relative to employment than in the lagging countries. In Denmark, Finland, France, Austria, Germany and the Benelux countries, the figure in each case was above the EU average, while in the cohesion countries, it was under 60% of the average. In addition, in the latter a much smaller share of state aids is allocated to RTD than in other parts of the Union, even though their RTD and innovation needs are greater than elsewhere.

Patent activity reflects differences in national innovation systems

Patent applications have long been used as measures of innovative activity, the output of RTD and the extent of the links between the scientific system and the productive sector. This indicator for the cohesion countries is well below the EU average, despite some convergence over the 1990s. Patent applications in Spain, Portugal and Greece amounted to 20 % of the EU average in 1998 as against 10% in 1989 (Map 13).

In sum, therefore, the scientific and technological systems in cohesion countries are characterised by low RTD intensity, over-representation of the public sector, low involvement of the private sector, weak links with the productive sector and low levels of technology transfer.

Such differences give rise to problems as regards providing support since they suggest that injections of aid would benefit the existing (public-oriented) system, so perpetuating and even reinforcing the structural problems of the system itself. In consequence, regional development policies should focus on strengthening the environment in which firms operate and, in particular, the link between the scientific system and business.

Technological capacity highly concentrated at the regional level…

The regional distribution of innovative capacity in the EU reflects the structure of national scientific and technological systems, though regional differences within Member States serve to widen disparities even further.

There is a strong concentration of RTD and innovation in the most advanced regions of the EU, the top ten regions (in Germany, the UK, France and Finland) accounting for around a third of all expenditure in the Union. At the same time, 17 of the 25 regions with the lowest RTD intensity (less than 25% of the EU average) are Objective 1 regions. Similar disparities are evident for business expenditure, human resources and patent applications.

Interregional differences are particularly large in the cohesion countries. In Greece, for example, over half of RTD expenditure is incurred in Attiki (where Athens is located), which is also responsible for two-thirds of patent applications. In Spain, over three-quarters of business RTD is located in just three regions (30% in Madrid alone).

…so affecting the innovative nature of economic activity

High RTD intensity in the private sector and efficient links between the scientific sector and businesses are key to innovation and, in turn, economic growth. In almost all the top 25 regions in terms of employment in high-tech sectors (over 12% of the total), RTD intensity is also relatively high. In the 25 regions with the lowest RTD intensity, employment in high-tech sectors (4% or less of the total) is also very low. According to the preliminary results of the second Community Survey on Innovation, the former group of regions are those with the highest innovation intensity in manufacturing, the highest number of enterprises with innovation activities and the highest turnover from innovative products. Most regions in Greece, Spain and Portugal, on the other hand, are at the other extreme.

The importance of the regulatory, organisational and institutional environment

These structural differences in science and technology alone cannot explain the weakness of the structure of economic activity in lagging regions. There is increasing consensus that the failure of firms in the regions concerned to innovate is not due primarily to scientific or technological problems, but to shortcomings in the regulatory, institutional and organisational environment in which firms have to operate.

In the less favoured regions, this environment is often characterised by a combination of structural weaknesses, such as lack of a dynamic business services sector, a poorly developed financial system, weak links between the public and private sectors, sectoral specialisation in traditional industries with little inclination to innovate, low levels of public support for innovation and aid schemes which are poorly adapted to the needs of local SMEs. In view of this, a primary aim of regional policy should be to help develop new forms of organisation and institutional cooperation, and so improve the 'structural' competitiveness of firms located in lagging regions, and encourage resources to be shifted into more dynamic and innovative areas of economic activity.



BACK

1. CEC (1995), Green Paper on Innovation, European Commission, Luxembourg.
2.COM (2000) 67 of 20 September 2000
3.Innovation Policy in a knowledge-driven economy - COM (2000) .567 of 20 September 2000 "Impact of the enlargement of the EU towards the associated Central and Eastern European countries on RTD-innovation and structural policies", European Communities 1999.
4. Impact of the enlargement of the EU towards the associated Central and Eastern European countries on RTD-innovation and structural policies', European Communities 1999.



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