Europe’s Innovation Gap is Widening
National governments respond very differently to economic crises in terms of spending on research and development (R&D). This has created an innovation gap between the countries of Europe that is growing ever wider. This is the main finding of a study carried out by the Centre for European Economic Research (ZEW), Mannheim.
According to the study, the leading nations in terms of innovation both inside and outside the EU pursue a counter-cyclical spending strategy for publicly funded R&D, while so-called “innovation followers” – generally strong, but not leading innovators – and moderate innovators tend to take a pro-cyclical approach. Furthermore, the findings of the study show that short- and long-term financing conditions such as budgetary surpluses and public debt can influence government R&D expenditure.
For the purpose of the study, ZEW researchers examined how countries respond to periods of economic crisis in terms of public R&D spending – measured as government appropriations. Using panel data on 26 countries between 1995 and 2015 from the Organization for Economic Cooperation and Development (OECD), the researchers analysed how government R&D spending changes over the course of the business cycle measured in terms of real GDP. They found that, on average, governments organise their R&D spending in a strongly pro-cyclical manner. According to the researchers’ calculations, the average growth rate of public R&D spending was 2.5 per cent lower during an economic crisis than at other times. Conversely, a one per cent increase in real GDP leads to a 0.2 per cent rise in government R&D expenditure.
However, the study also found enormous differences between the OECD countries observed. Mainly European countries like Germany, the Netherlands and Sweden, as well as non-EU countries such as the US, Australia, Canada and South Korea, are considered leading innovators who invest in R&D on a counter-cyclical basis. This means that these countries actually increase public R&D expenditure during periods of crisis, with an average increase, according to ZEW calculations, of 2.9 per cent. On the other hand, there are “innovation followers” like France and Austria or moderate innovators like Spain, Portugal and Italy that pursue a pro-cyclical budgetary policy, cutting back drastically on public R&D spending during economic crises.
The study also found that an increase in a country’s budgetary surplus equivalent to one percentage point of the real GDP leads to short-term growth in public R&D expenditure of up to 0.8 per cent. Growing public debt has, by contrast, contributed to a steady decline in public investment in R&D over the two decades observed in the study.
“The financial and economic crisis starting in 2007 has shown that the gap between highly innovative and less innovative countries in Europe is gradually widening,” says Dr. Georg Licht, head of the ZEW Research Department “Economics of Innovation and Industrial Dynamics” and one of the authors of the study. “Innovations are the result of research and development, and both are important drivers of productivity and growth. The ‘innovation gap’ in Europe, however, threatens to make the productivity gap between European countries even wider,” says Licht. Given the global decline in productivity, which has been ongoing for some years, governments should not be shying away from making big investments in R&D.
This is, however, made more difficult by the fact that high levels of debt are putting increased pressure on governments to consolidate their budgets, which according to Georg Licht “make cuts to public investment in research and development all the more likely”.
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