2. A Competitive Europe

2.1 R&I: engine of productivity

R&I is at the core of the productivity and competitiveness of our economy. Productivity growth is a condition for more efficient use of resources that leads to a more sustainable way of production.

R&I is crucial for the EU’s productivity.

Although competitiveness, productivity and innovation are separate concepts, they are very closely interrelated – innovation drives EU competitiveness through productivity growth. 

R&I can increase firms’ efficiency through process innovation and improved goods and services. The diffusion of new technologies throughout the economy is a key source of productivity growth. 

R&I explains nearly two thirds of labour productivity growth in Europe. 

R&I, broadly defined as the aggregate of total factor productivity (TFP) and intangible investments, including R&D, economic competencies, software and databases, contributed to about 65 % of total productivity growth between 2010 and 2016. This signals its important role in productivity, even in the aftermath of the crisis.

Productivity growth is compatible with a sustainable economy, supporting the sustainable transition.

R&I can help us shape the future we want. It is enabling and driving the transition to a green and sustainable Europe tomorrow.

Boosting productivity growth requires refocusing the use of available resources and investments towards more efficient production activities and systems, which also need to be environmentally friendly to ensure a sustainable growth path. Hence, increasing the efficiency of the production process can be compatible with sustainable production and supporting the sustainable transition.

More competitive sustainable activities lead to productivity gains, further economic growth and more jobs. By 2030, 18 million jobs will be created worldwide driven by the high demand for labour from renewable energy sources. 

Over the last decade, despite the rise in digital technologies promising large productivity gains, productivity growth has been sluggish.

The gap in productivity performance between highly productive economies and firms at the frontier and the rest points to a lack of innovation diffusion. This is holding back more robust economic growth in Europe and other advanced economies.

While the slowdown is also evident in other major economies, over the last decade, productivity growth in the EU has been particularly poor compared to global competitors.

From 2008-2018, TFP growth in the EU was less than half reported over the period 1995-2007. While it was also low in other advanced economies, such as the United States and Japan, which only managed growth rates below 1 %, the slowdown in productivity growth was particularly acute in the EU.

This productivity slowdown is also observed systematically at Member-State level. Over the last decade, low EU growth was mainly driven by declines in Greece, Luxembourg and other Member States. On the other hand, Ireland, Slovakia, Latvia and Poland presented the highest TFP growth rates over the last decade.

Source: DG Research and Innovation, Chief Economist - R&I Strategy & Foresight Unit based on EU KLEMS 2019 (analytical database)
Notes: The graph highlights in blue the broader contribution of R&I (sum of R&D and other intangibles, and TFP) to labour productivity growth. Data covers 19 EU Member States: AT, BE, CZ, DE, DK, EE, ES, FI, FR, HU, IT, LT, LU, LV, NL, RO, SE, SI and SK.
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Source: ILO (2018). World Employment and Social Outlook 2018 – Greening with jobs
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Source: Andrews et al. (2016)
Notes: Labour productivity is value added per worker. The global frontier is measured by the average of log labour productivity for the top 5 % of companies with the highest productivity levels within each 2-digit industry. Laggards capture the average log productivity of all the other firms. Unweighted averages across 2-digit industries are shown for manufacturing and services, normalised to 0 in the starting year. The vertical axes represent log differences from the starting year: for instance, the frontier in manufacturing has a value of about 0.3 in the final year, which corresponds to approximately 30 % higher in productivity in 2013 compared to 2001. Services refer to non-financial business-sector services.
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Source: DG Research and Innovation, Chief Economist - R&I Strategy & Foresight Unit based on Eurostat and European Commission - DG Economic and Financial Affairs
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2.2 The state of business dynamics in Europe