By Clemens Fuest, Daniel Gros and Jean Tirole

Research and development and resulting innovations have competitiveness of economies and thus for the economic prosperity is of central importance. That's why it's worrying that Europe and Germany are facing the the USA, and now also China.

How do you recognize this descent? It is evident both in the input side, i.e. the expenditure on research and development, as a also in the results of these investments, which are reflected in patents, patents, patents, patents start-ups and ultimately in the macroeconomic productivity development.

More than 20 years ago, as part of the 2000 Lisbon Strategy, the EU had set itself the goal of competitiveness of the European economy. In order to should be achieved, among other things, the share of overall expenditure on research and development up to 3 percent of gross domestic product (GDP) in 2010. That The goal was missed by far. Today they are at 2.2 percent of GDP hardly higher than then.

In the United States, spending on research and research is development, on the other hand, 3.5 percent of GDP there. In absolute numbers spending in the USA is more than 730 billion euros twice as high as in the EU with 322 billion euros. In Europe, there are there are considerable differences: especially in southern European countries Economies such as Italy and Spain are investing little; There the rates are around 1.5 percent. Germany stands with 3.1 percent.

The amount of expenditure on research and development (R&D) is but only one aspect. Their composition is also important. Here first of all, it should be noted that the share of government expenditure on R&D in terms of economic performance in the EU and the US. The difference is mainly due to the fact that the European companies invest less in research and development. The private investment in the EU is only about 1.2 percent of GDP half as high as that in the USA (2.3 percent).

Between high technology and medium technology

How does this gap come about? It is mainly due to the fact that research-intensive US companies are active in other areas. It is common in technological development between "high-tech sectors" and "medium-tech sectors". The high technology, for example, the development of software and hardware for the digital industry, biotechnology or the aerospace industry. and space travel. On the other hand, the development of cars and industrial machinery, chemicals or telecommunications systems is classified as medium technology.

High-tech sectors play a significant role in the United States. greater role. In the European Union, companies are investing roughly the same amount in R&D in high-tech and mid-tech industries - about 45 percent of total expenditure. In Germany, the At 57 percent, the share of midtech industries is even higher than in the previous year. EU average, the high-tech share is only 36 percent. US companies, on the other hand, are concentrating their research and development mainly on high-tech industries. They account for 85 percent of the private sector expenditure on research and development in the United States.

About classifications of different areas as high or high Medium technology is undoubtedly debatable. The delimitation can be difficult, among other things, because digital innovations, for example, play an increasingly important role in the automotive industry. However German car companies are showing considerable Weaken. It is clear that the companies in the high-tech sectors much faster in recent decades. have grown. As a result, research spending has also increased have risen faster. In the EU, they have developed in recent years has roughly doubled in two decades, but quadrupled in the USA.

Mercedes, Siemens and VW with highest research expenditure

The dynamism in the USA is also evident when you look at the companies spend the most and whether and how this will be group. The three companies with the highest expenditure on R&D in the EU in 2003 was Mercedes, Siemens and VW. In the USA, it was Ford, Pfizer and General at the time Engine. In both cases, the car industry dominated. In the year In 2022, VW and Mercedes were still in the top group in the EU, only Bosch has replaced Siemens. The dominance of the car industry had in Europe (and Germany). In the USA, on the other hand, this industry is now secondary. In 2022, Amazon, Alphabet and Meta in R&D spending.

If, instead of spending on research and development, we consider international patent applications that are subject to high cost to meet certain quality standards, then a similar picture. Europe is a leader in the car industry or in the Special machine construction. But these are among the midtech sectors that are accounted for only 6.7 percent of all international patents in 2023, with a further downward trend. High-tech sectors have 35 percent of the a significantly larger and growing share of patents. Here dominate the USA, while China is catching up and Europe is being left behind.

It fits into the picture that the high investments in fast-growing high-tech sectors are also facing increasing economic disparities. between the US and the EU. This is drastically evident that among the world's leading emerging technology company does not come from Europe. The gradient is also clearly when one considers the development of labour productivity. considered. Until the mid-1990s, EU countries had compared to the USA. Since then, however, this trend has continued rotated. The EU is falling behind the United States again. While labor productivity is influenced by many factors, but innovations play an important role in productivity development. important role.

Is the specialisation of Europe, and Germany in particular, in Are medium-sized technologies really a disadvantage? You could give that that it is a question of an international division of labour and specialisation, in which all those involved are focused on the what they do best. This is for two reasons not entirely convincing: Firstly, the framework conditions for Research and development are significantly influenced by government action. Secondly, there is also a lack of private research and development in private significant path dependencies.

This can be clearly seen in the software sector. The US high-tech companies are much more profitable. The difference in the average profit margins between high and high Mid-tech companies in the U.S. are at 7 percentage points, with in the EU, it is only 3 percentage points. When it comes to software, the difference is even greater. This may explain why so much more capital is invested in the U.S. high-tech sector is flowing. One reason for the lower Profit margins in Europe's high-tech industries must be ensured also in the fragmentation of markets and higher regulatory density, especially in the software sector.

Undoubtedly, the high profits of U.S. technology companies at least in part the result of market power and monopoly or Oligopoly positions created by network effects. In terms of technology policy, however, this results in the problem that high Gain funding for research and development in the high-tech sector in the USA. As a result, the market dominance of these companies.

This leads to a self-reinforcing process in which the EU falling further and further behind. For these reasons, the current situation is not only as the result of efficient market processes. But this does not change the fact that the EU has been left behind and it would take a huge effort to attract European companies to in these sectors. This is also shown by the Experience of the European flagship company in the field of artificial intelligence, Mistral, which is a cooperation with Microsoft.

Improving the conditions for breakthrough innovation

One could also argue that the classification of the sectors as Midtech or high-tech is questionable because it suggests that the High-tech sectors are necessarily more promising than the mid-tech sectors. It is hardly possible to predict today in which cases European economies will play a particularly important role in the future. high added value. Nevertheless, it must be taken into account that: that the high-tech sectors have been significantly higher for some time now. growth rates and thus also increase the volume of research and development expenditures there are expanding faster.

The fact that the large EU states are falling behind in the From this perspective, investment in research and development is at least risky. Last but not least, it should be borne in mind that above all Germany in its core competence, the automotive industry, through the Change towards electric drives and networked mobility concepts competitive advantages. Recently, a ranking of the automotive research institute CAM concludes that among the 10 world's best-selling electric cars, none comes from Germany.

What follows from the finding that Europe is in a kind of medium-tech trap and is increasingly becoming the target of high-tech Losing touch? At first glance, it seems obvious call for more public funding to be channelled into computer or software industry. resources in a targeted manner in fields where European companies are involved in the international competition is already largely left behind, but offers hardly any opportunities for success. It is more promising, without a narrow sectoral definition the conditions for breakthrough innovation across all sectors . This requires changes in the state promotion of research and development, but also a comprehensive approach to strengthening innovation in Europe.

American innovation agencies as role models

The American innovation agencies ARPA are used worldwide (Advanced Research Project Agencies) as a role model when it comes to breakthrough technological innovations. The best known among them is DARPA, which focuses on armaments projects and has has an annual budget of around 4 billion euros. More ARPA agencies promote fundamental innovation in energy and Bless you. In Germany, the Federal Agency for Sprunginnovation (SPRIND). It pursues the same purpose, but is financially very weak.

At EU level, the European Innovation Council has been in place since 2021, which, similar to ARPA, breakthrough innovations. Of course, it does not makes sense to simply copy the US model ARPA - too different are the conditions for innovation on both sides of the Atlantic. Nevertheless, EU innovation policy must be judged by whether it achieves its goal of promoting breakthrough innovations. Thereby projects that are still far from being ready for the market and therefore not privately financed.

This is where major weaknesses become apparent. The European Innovation Council not only has too little, but also too few highly qualified personnel to carry out projects from in all industries. The decision-making structures should reform by reducing the influence of the EU Commission and top scientists will be given more competences. In addition, that the European Innovation Council's programmes should combine innovation objectives with other economic policy concerns, especially the promotion of medium-sized companies. The involvement of actors from poorer Member States in research and development through the Requirement of broad cross-border cooperation is good but dilutes the focus on groundbreaking innovation and impairs the effectiveness of the means used.

Making better use of existing funds

Instead, existing EU programmes should be consistently based on breakthrough innovations. Projects should be independent whether they are supported by large or small companies. or research institutions. Collaborations should be be voluntary and not a prerequisite for funding forced. In this way, the available funds, at least more than 1 billion euros per year. The However, the funds made available at EU level are only part of the state promotion of innovation. The national innovation policies should be reviewed and more responsive to disruptive innovations.

In order to achieve tangible progress, it is not enough to just state funding of disruptive innovations. What is needed is a comprehensive economic policy agenda to Strengthening innovation. Private capital markets need to be developed to increase the flow of risk capital for start-ups. Tax law must not hinder the financing process, for example by excessively restricting the compensation of losses. The regulation of the labour market, it should be possible for start-up companies to enable staff to be built up quickly, but also to reduce them. Last but not least it is crucial to overcome the still significant barriers to cross-border economic activity in the EU internal market in order to provide better growth opportunities for new companies.

F.A.Z.

Daniel Gros (69) is a professor of economics and director Institute for European Policymaking at Bocconi University in Milan. He was an adviser to the Delors Committee, which drew up the plans for the European Monetary Union. He also advises the EU Parliament and various central banks. In his research, Gros, who comes from Wiesbaden, deals with monetary policy, foreign trade and Clemens Fuest (55) is President of the Ifo Institute, Director of the Center for Economic Studies of the Ludwig Maximilian University of Munich and also professor at LMU for Economics. Fuest is a sought-after political consultant. But he also sees his task as a scientist in disseminate findings to the general public in order to address critical debates. As a liberal economist, he always advocates as much as possible.Jean Tirole (70) is Professor of economics and co-founder of the Toulouse School of Economics (TSE) and the Institute for Advanced Study in Toulouse (IAST). Tirole comes from Troyes, France. His research focuses on Industrial Organization, Regulation, Game Theory, Banking and Currency crises. He is the most cited economist in Europe and has received many awards, including the Nobel Prize in Economics in 2014.