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Overcoming Europe’s
Innovation DeficitREINHILDE VEUGELERS
FEBRUARY 2019
LONDON
Diagnosing EU’s R&D deficit
GERD as % GDP2010
GERD as % GDP2016
BERD as % GDP2010
BERD as % GDP2016
EU-28 1.84 1.93 1.12 1.24
EU-15 1.99 2.10 1.24 1.35
US 2.74 2.74 1.86 1.95
Japan 3.14 3.14 2.40 2.47
Korea 3.47 4.23 2.59 3.29
China 1.71 2.11 1.26 1.63
Source: OECD, MSTI Indicators
EU US
R&D intensity (2015) 2,6% 5,6%
Share of Young in number of region’s R&D
leaders
23% 51%
Share of Young among top R&D leaders 19% 54%
R&D intensity of Young R&D leaders 4% 10%
R&D intensity of Old R&D leaders 3% 4%
Share of Innovation Based Growth Sectors
in region’s R&D
31% 52%
Share of the region’s Young in Innovation
Based Growth Sectors
62% 84%
R&D intensity of Young in Innovation Based
Growth Sectors
13.9% 12.6%
We argued before…
…the lack of young leading innovators in new innovative sectors in the EU
correlates with EU’s gap in business R&D investment
Source: Bruegel calculations on the basis of EC-JRC-IPTS, EU Industrial R&D Investment Scoreboard
Innovation Based Growth Sectors: sectors
which (i) have an R&D intensity above
average, (ii) an R&D growth rate above
average and/or (iii) an above average share
of young companies among its leading
innovators.
aerospace, biotech, computer
hardware&services, health care
equipment & services, internet,
pharmaceuticals, semiconductors,
software, telecom equipment.
Young: young companies (born after 1975)
who have made it into the R&D scoreboard
of world leading innovators
Amazon, Google, Microsoft, Qualcomm,
Amgen…
Geography:
shift to east: rise of china
Technology:
digital transformation
Institutional:
increasing concentration on “superstars”
Institutional:
contestability of “superstardom”: incumbent vs new superstars
A fast changing global corporate R&D landscape
Implications for EU’s business R&D deficit ?
Geography:
shift to east: rise of china
Technology:
digital transformation
Institutional:
increasing concentration on “superstars”
Institutional:
contestability of “superstardom”: incumbent vs new superstars
Full list of 2500 JRC Scoreboard companies by size of R&D expenditure, 2015
The top corporate R&D investors and the growing importance of digital/ICT
Geographic Shifts in the global corporate R&D scoreboardChina EU US Japan
NR Scoreboard Cies 2018 438 576 778 339
NR Scoreboard Cies 2014 199 633 804 387
Share in World R&D 2018 10.1% 28.2% 38.7% 14.1%
Share in World R&D 2014 7% 30% 36% 16%
RDI 2018 2.8 3.4 6.3 3.4
7Source: Own calculations on EC-IPTS, 2500 largest R&D spenders worldwide, various editions
Regions’s share in NR Scoreboard Cies; by decile; 2018
Caveat:
Scoreboard classifies firms by location of Headquarter, but top Corporate R&D investors are global
On average, each top 2 000 R&D investor has affiliates in 21 economies
The rise of digital & China-US
Source: Bruegel calculations based on JRC-R&D Scoreboard 2018
Number of Scoreboard Firms; By Sector; By Region
US strength in digital sectors;China specializing in digital sectors;EU’s stronghold is in automotives
Characterizing the Digital Ecosystem
• Layer I: Network element providers (e.g. Cisco, Samsung, Alcatel, Ericson, Nokia, Apple, Huawei, ZTE…),
• Layer II: Network operators (fixed and mobile) (e.g. AT&T, BT, DT, Vodafone..),
• Layer III: Software & ICT service providers; Platform, application providers (e.g. Google, Facebook, Alibaba, SAP…).
With telecommunications liberalization, competition and digital technology innovations: shift to Layer III & commoditization of the historical and incumbent Layers I and II.
2018 N RDI ShareR&D ShareN
ICT 709 0,067
ICT-I 509 0,069 0,626 0,718
ICT-II 32 0,018 0,035 0,045
ICT-III 168 0,084 0,339 0,237
R&D Scoreboard by Digital Layer
Source: Bruegel Calculations based on JRC-Scoreboard 2018; Note: Layer I includes Electronic Equipment Manuf
Source: Bruegel calculations based on JRC-R&D Scoreboard 2018
Number of Scoreboard Firms; By ICT-Layer; By Region
US strength in ICT-I and especially ICT-III;China specializing in ICT-I & ICT-III;EU’s strength (?) in ICT-II, especially weak in ICT-III
Geography:
shift to east: rise of china
Technology:
digital transformation
Institutional:
increasing concentration on “superstars”
Institutional:
contestability of “superstardom”: incumbent vs new superstars
• Economies of scale & scope in the R&D process, large sunk investments forbuilding R&D capacity, the need to access networks and alliance partners are allcharacteristics that lead to R&D races increasing characterized as “winner take most” (Schumpeter Mark I: big firms for R&D)
• Cumulativeness of knowledge stocks, learning, where incumbent firms are themost likely winners (Schumpeter Mark I: incumbent firms for R&D).
However
• The speed with which the latest technological innovations get diffused or spillover voluntarily or involuntarily will lead to catching up and dissipating of previousleadership positions.
• Incumbent technology leaderships can be quickly overturned by radically newtechnology avenues, creating room for new winners (Schumpeter Mark II). Even if the landscape will still be concentrated: turbulence in leadership
What do we expect: (digital) technological change is pre?icted to lead to ‘winner takes most’ industries
Size and incumbency:Increasing concentration in corporate R&D?
Size and incumbency in the platform based new digital landscape: winner take all ? Big tech?
• Having large scale is an advantage in new platform-based digital sectors. The benefits mostly emerge from network effects operating on the two sides of the market: a large user base and a large base of applications and equipment.
• These two-sided network effects and large switching costs create a major barrier to entry for new entrants, and a strong advantage for established incumbents: ie advantage of scale and incumbency;
• Bargaining power within platform for small new developers relative to large incumbent platform providers will be higher in open, compatible platforms
• Nevertheless, as technology changes rapidly, incumbent advantages may also be quickly depreciated. New entrants offering radical innovations can quickly surpass existing entry barriers. This feature of new digital sectors constantly challenges incumbent positions.
Competition/cooperation between new and old
• The relationship between new firms and incumbents is often seen as one of competition, where the start-up innovation, spurring the Schumpeterian 'gale of creative destruction' destroys the existing sources of market power.
• There is also ample evidence of cooperation between start-up innovators and more established firms through licensing, strategic alliances or outright acquisition.
• Incumbents can develop their own innovations and compete with the new entrants, or can buy up these new entrants and develop further their innovations, or buy up and shelve the invention if too destructive for their incumbent business;
• Gans, J. & Hsu, D & Scott Stern, 2002. When does start-up innovation spur the gale of creative destruction?, Rand Journal of Economics, vol. 33(4), pages 571-586,
• Henkel, J., T. Ronde, M. Wagner (2010), And the winner is –acquired: entrepreneurship as a contest with acquisition as the price, CEPR Discussion paper 8147.
Importance of size and incumbency:R&D concentration trends in digital sectors: winners-take-all?
Trends in concentration in R&D, by sector
Source: Bruegel based on JRC-Scoreboard
Trends in concentration in R&D
• No increasing inequality in R&D, on the
contrary, the trend is one of slow decline.
• Nevertheless, this downward trend
seems to have stopped since 2011.
• Since 2012, the Top1% R&D spenders
have forged ahead.
Also in digital, no increasing concentration in R&D,but more recently increase in Top 1% share;
Incumbents versus new leaders: Schumpeter Mark I or II?
Among the 1314 time traceable Scoreboard companies • 6% (N=83) are persistent leaders (i.e. belonged to the Top 10% in their sector across almost the entire time from 2005 till 2015, ie 10 or 11 times). • 83% are persistent non-leaders, ie never belonged to the Top10%. • Only 9 firms are “new leaders”, ie companies entering the Scoreboard in the Top10% and stay among the group of leaders in all years until 2015 (one lapse
allowed). • The rest are switchers, ie moving in and out of top leadership position.
Source: Bruegel calculations on the basis of EC-JRC-IPTS R&D scoreboard data
Persistency in R&D leadership
Share in Total R&D expenditures
Source: Bruegel calculations on the basis of EC-JRC-IPTS R&D scoreboard data
Digital less “incumbent” than BioPharma
Persistency in R&D leadership
Digital (N=466) Share of sector R&D
2005
Share of sector R&D
2015
Persistent top 10% firms (5%) 46% 43%
Old firms (40%) 62% 40%Youngest firms (28%) 9% 19%
Top 10% firms in 2005 64% 48%
Top 10% firms in 2015 43% 62%
Source: Bruegel calculations on the basis of EC-JRC-IPTS R&D scoreboard data
Persistency of Leadership in Digital
Next to Alphabet, Microsoft,
Cisco, Oracle and Qualcomm as
young persistent leaders, there
is also in 2015 Huawei in 5th
position, Apple in 6th, Facebook
in 12th position.
None of these young new R&D
leaders are EU.
Bio/Pharma (N=145) Share of sector R&D
2005
Share of sector R&D
2015
Persistent top 10% firms (7%) 60% 54%
Old firms (48%) 85% 76%Top 10% firms in 2005 68% 63%
Top 10% firms in 2015 57% 63%
There are 11 persistent R&D leaders
(Novartis, Roche, J&J, Pfizer, Merck,
BristalMyersSquibb, Sanofi,
AstraZeneca, Bayer, GSK, EliLilly) in
BioPharma.
All of these persistent leaders are
“old”.
A few young (biotech) firms made it
close to this group of 10: Abbvie;
Amgen, Celgene, and Gilead
Sciences.
All of these companies are US.
Persistency of Leadership in BioPharma
Source: Calculations on the basis of EC-JRC-IPTS R&D scoreboard data
All Sectors2015
EU’s position at the corporate R&D frontier
Shar
e o
f re
gio
n in
Sco
reb
oar
d F
irm
sLeaders are firms that belong to the Top10% R&D spenders in their sectorPersistent Leaders are firms that have been leaders across the whole period 2005-2015
Europe’s position at the digital R&D frontier?
The evidence of declining concentration is a positive sign, but its high
incumbency characteristic, its slow downward pace and particularly its losing
momentum more recently, requires further monitoring and analysis to
understand its implications for overall corporate R&D and growth performance;
Especially in digital technologies
Is there still room in digital sectors for new leading firms to displace
incumbent leaders? From EU?
Implications
With the US, and more recently China, hosting most of the new R&D leaders, especially in digital sectors but also in other sectors, the weaker creative-destruction power of the EU corporate R&D system could contribute to a shifting regional R&D pattern to Europe’s detriment.
Policy implications
• For innovation policy, it is important to recognise that overall corporate R&D performance depends on a handful of firms.
• Understanding the innovation advantages and barriers incumbent leaders and/or new leading firms might enjoy will matter for assessing the power of innovation to generate growth.
• For competition policy, it is important to understand the impact of a highly concentrated R&D landscape
• Are trends in concentration associated with leading R&D firms enjoying innovative advantages?
• How contestable are existing leading positions?
• Do leading firms use their dominant R&D positions to raise entry barriers against more efficient new innovators?
• How R&D leaders can turn their R&D weight into market power?
Competition policy is an important part of the innovation policy mix; with all of its instruments: mergers, anti-trust and state-aid
Some referencesVEUGELERS, R., 2018, ARE EUROPEAN FIRMS FALLING BEHIND IN THE GLOBAL
CORPORATE RESEARCH RACE? BRUEGEL POLICY CONTRIBUTION 18-06,
BRUEGEL, BRUSSELS.
VEUGELERS, R., 2012, NEW ICT SECTORS: PLATFORMS FOR EUROPEAN
GROWTH?, BRUEGEL POLICY CONTRIBUTION, 2012/745, BRUEGEL, BRUSSELS;
VEUGELERS, R. AND M. CINCERA, 2010, EUROPE’S MISSING YOLLIES, BRUEGEL
POLICY BRIEF 2010/06, BRUEGEL BRUSSELS
DOWNLOADABLE AT WWW.BRUEGEL.ORG
