MEMO/05/199
Brussels, 9 June 2005
Why Europe needs research spending
On 6 April 2005 the European Commission made a proposal for a spending
programme for research and development from 2007 to 2013. This
programme, in line with the Commission’s proposal on the overall budget for
this period, envisages a doubling of EU funds for research and development.
This reflects the EU’s political priority for growth and jobs.
The
Commission’s proposal is backed up by an impact assessment study which
examines the link between research investment and increased
competitiveness. The present background note highlights some of the
findings of the impact assessment. It identifies the strong and positive
impact that research and development in general, and the European
Framework Programme in particular, has on the European economy. It
describes the added value of working together at European level and the
effect on job creation within the EU.
Boosting Europe’s economic growth and competitiveness
The new Framework Programme (FP7) will boost Europe’s GDP, increase exports
and reduce imports, all of which contribute to reversing Europe’s problems of slow
economic growth and declining competitiveness.
Europe suffers from low economic growth, with the International Monetary Fund
recently revising downwards the Eurozone’s potential growth to about 2% annually.
Europe’s competitiveness – measured in terms of standard of living, labour
productivity and high-tech trade performance for instance – is also declining. In 2002
the EU25 was running a trade deficit in high tech products of €33.7 billion. The EU
has been unable to increase its share of this market, while countries such as China
have experienced stellar growth.
Research and Development (R&D) is the principal engine of productivity and
economic growth, a contention borne out by modern economic literature. One recent
study found that for each extra percent in public R&D, there is an extra 0.17% growth
in productivity. To put this into context, average annual labour productivity growth in
the Eurozone was 1.2% between 1995 and 2003. An increase in EU R&D spending,
especially if accompanied by increases in spending at national level, could therefore
have considerable impact on productivity. Another study has found that a 0.1%
increase in R&D intensity boosts output per capita growth by 0.3-0.4%.
Public R&D has a considerable “crowding-in” effect – each €1 of public funding for
R&D given to business leads to additional business investment of between €0.70
and €0.90. Taken together with a recent Austrian report that found that a rise of
business R&D from 0.8 to 1.1% of GDP produced an additional 0.3% in growth, we
can see that R&D spending is important in economic terms.
This is a key point in mobilising private sector investment in research, which should
contribute two-thirds of the R&D spending target of 3% of GDP. Last year’s EU
Industrial R&D Investment Scoreboard showed that investment by the top 500 R&D
spending companies in the EU in 2003 was 2% down on 2002, while it grew by 4%
for the top 500 companies outside the EU.
The impact assessment includes the following table outlining the different scenarios
for investment in R&D at European level, as compared to a moderate increase in
FP7 funding:
Doubling funding
under FP7, rapid
growth
in FP funding
thereafter
Indicator
No FP7
Doubling funding under
FP7, moderate growth
in FP funding thereafter
Extra GDP (%)
Extra GDP when taking
account of increases
over time in the quality
of products (%)
Change in exports to
outside Europe (%)
Change in imports from
outside Europe (%)
- 0.84
+ 0.45
+ 0.96
- 1.31
+ 0.69
+ 1.66
- 1.92
+ 0.64
+ 1.57
+ 1.43
- 0.27
- 0.88
Source: Adapted Nemesis econometric model
These projections rely on a number of important assumptions:
- Member States will not reduce national investment
- FP7 projects will be at least as successful as past FPs and national projects in
attracting complementary private sector funding.
- FP7 will allow smooth conversion of new knowledge into new products, processes
and services.
FP7 can also provide the necessary framework conditions to attract foreign R&D
investment. Currently, the EU is losing R&D investment to other countries; the
diagram below shows flows of R&D funding.
948
13 644
USA
15 399
Total
Business
Sector
182 784
EU
574
Total
Business
Sector
10 362
110 094
Japan
Total
Business
Sector
1 827
70 448
1 418
Source: Adapted OECD, Activity of Foreign Affiliates database and Secretariat
estimates
In 2001 there was a net outflow of R&D funding from the EU amounting to over €6
billion.
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Strengthening Europe’s human resources
In employment as with economic growth, the European outlook is worrying, with
9.1% unemployment across EU15 in 2003. Analysts are noting an increase in longterm unemployment and the deterioration of labour markets. While these problems
are particularly acute for the low-skilled, there is also a shortage of high-skilled
people, especially researchers. This calls into question the EU’s ability to reach its
target of 3% of GDP invested in R&D by 2010, which will require at least 700,000
additional researchers according to latest estimates.
An increased budget for European R&D could have a major impact on employment,
creating as many as 1 million jobs by 2030. By supporting future-oriented industries,
FP7 will support those sectors of the economy that hire more high-skilled people and
pay them better, and create more employment than average: between 1997 and
2002 the growth rate was 11.9% for total high-technology sector employment and
16.2% for knowledge-intensive industries, as compared to 8.1% for total
employment.
A recent Commission study found that technological change promotes employment
– countries with higher than average increases in the rate of growth of Total Factor
Productivity (TFP – related to improvements in the efficiency of production of
technological progress) also tend to have higher than average employment growth.
Again, compared with a moderate increase in funds under FP7, we can see that
doubling of funds would have significant effect on employment in the EU:
Indicator
+ 418,000
Doubling
funding
under FP7,
rapid growth
thereafter
+ 925,000
+ 40,000
+ 214,000
Doubling funding
under FP7, moderate
growth thereafter
No FP7
Extra employment (#)
- 840,000
Extra jobs in research
-87,000
(#)
Source: Adapted Nemesis econometric model
Investing at European level to add value
There are many good reasons to fund projects at European level. By doing so, the
EU encourages researchers to co-operate across national boundaries and to share
complementary skills and knowledge. This maximises scarce resources and reduces
wasteful duplication of research spending: better value for tax payers’ money.
Many research activities are of such a scale and complexity that no single Member
State can provide the necessary resources. EU funding enables partners to pool
their funds, facilities and knowledge, culminating in a critical mass that would not be
possible at national level. Concrete examples of this phenomenon include the
Network of Excellence on Allergies and Asthma, or the Construction Technology
Platform.
By working at European level, industry has better access to the knowledge it needs,
and researchers have more certainty that their work will be taken up. By providing a
framework for disseminating research results across Europe, FP7 will increase the
chances of their being transformed into innovative products, processes and services.
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Increased competition is an effective way of promoting higher quality and excellence.
The creation of a European Research Council to support cutting-edge frontier
research should take this one step further, with individuals or teams selected by their
scientific peers. Higher quality output and more dynamism in research will boost the
European knowledge and industry base.
National research programmes still account for the vast bulk of public research
spending in the EU. However, there is considerable overlap in some areas, while
other areas are insufficiently covered. By improving the coordination of Member
States’ activities, while at the same time addressing issues that are not given
sufficient attention in national programmes, FP7 will ensure more efficient spending
on R&D across Europe, and foster sectors with significant potential. For example,
though FP6 represented 5-6% of total EU public R&D expenditure in general, it
represented much more in some cutting-edge areas with high-growth potential, i.e.
up to 30% of public investment in nanotechnology.
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