Europe: Innovating Together

The newly chosen leadership of the European Union (EU) must reform and deepen the EU and project its influence around the world. The state of innovation in Europe should be at the very top of their priority list. The digital economy is producing a G2 world, with the United States and China in the lead and Europe at a distant third. There is not one European firm among the world’s largest internet companies. Additionally, most technology unicorns are outside of the EU. Places like Shenzhen or Silicon Valley transfer significantly more technology to the market than their European counterparts.

Allowing these trends to continue will be detrimental to Europe’s future generations for a number of reasons. At a geopolitical level, if Europe fails to develop its technology base it will find itself unable to meet the geostrategic challenges of the 21st century. An outdated industrial and technological base will be unable to provide Europeans with a resilient and effective data infrastructure and will ultimately limit the strategic autonomy of European nations. At a time when the technology and innovation sector has become an important arena for US-China great power rivalry, Europe is well advised to strengthen its collective technological weight – and thereby avoid being caught in the middle.

But there are also internal reasons for greater European action. Companies that make heavy use of technology are known to be more productive and more competitive. The Organisation for Economic Co-operation and Development has termed some of these companies “frontier firms” and estimates that they captured almost all of the productivity growth in advanced economies in the last decade. It is frontier firms that create most of the high-quality and high-paying jobs. Hence, having an outdated and uncompetitive corporate base will lead to growing precariousness among our labour base and will result in talent loss. An unproductive private sector will also lead to a public-revenue challenge for governments across Europe. Fiscal traction is a product of a healthy economy. Without profitable firms and high-paying jobs, states across Europe will face funding challenges, putting additional pressure on public budgets.

Given the deep implications of either leading or lagging behind, the EU should establish a radically ambitious innovation and technology agenda. This should be a long-term effort in which stronger cooperation among European partners plays a decisive role. We foresee three areas of strategic action:

First, behind every innovation hub in the world there is a basic and applied research ecosystem made up of universities and research centres that attract talent from all over the world. The goal of these clusters is not only to provide world-class training but also to generate applied knowledge that can be transformed into high-impact companies and projects. Europe needs academic institutions that bring together the best minds from the research world with those from industry, the financial sector and the entrepreneurship community. Such institutions should also measure their success by the number of startups that are launched in their incubators, the number of jobs created by their spin offs, and by their overall contribution to the local, regional and national GDP. Unless this shift occurs, we will have an academic infrastructure that is not fit for purpose in the 21st century.

The second task for the EU will be to complete the Digital Single Market (DSM). Scale is also important when it comes to markets that enable innovation. Successful digital markets are large markets. Yet Europe is still fragmented by unnecessary barriers. There are a great number of regulations and norms to navigate in order to operate across EU borders. This is hindering the scalability and ultimately the competitiveness of European firms. The main reason why technology companies from the United States and China are thriving is that they have enormous domestic markets where they can grow and from which to launch their international expansion. It is urgent, therefore, to double down on the deepening of European integration and the belief in perfecting markets through multilateral cooperation. Standard chapters on digital trade should become part of trade agreements so that the EU ensures a level playing field both at home and abroad.

Third, the EU should, however, remain alert to malpractice and to some of the competition challenges posed by the digital economy. We know that digitalisation has produced winner-takes-all markets and that there are strong oligopolistic forces within the digital economy. Those who have access to data and the capacity to process it tend to do better than those who do not. The lack of productivity diffusion from frontier firms to others might in fact be the clearest sign that there is some severe market concentration occurring within our economies. Wage stagnation, the collapse of labour income as a share of national income and the weakening of collective bargaining procedures are other such signs. The EU has the obligation to guarantee free and fair competition within its markets. It has shown it can set a values-inspired example by agreeing to data protection rules. It must continue to ensure the rule of law applies online as it does offline and that competition in the digital economy is fair. This pursuit of a values- driven or norms-compliant innovation process would be of benefit not just to Europeans but also to citizens around the world.

There is a clear agenda for Europe to lead in the field of innovation. Europe has the human capital, the infrastructure, the institutional capacity and the financial and corporate fabric to be a world leader in technology and innovation. The new team of European leaders should double down on having an impact by developing a European model that creates ripple effects around the world. The time for action on this is now. An agenda focused on creating the right ecosystem for innovation, the expansion and deepening of European cooperation around the DSM, and a steadfast defense of free, open and rules-based markets are some of the goals that should guide a comprehensive EU strategy in this field.