Policy & Regulation
Europe remains a global leader in innovation, ability to commercialise lagging
On 14 February 2024, the European Commission published its 2024 Annual Single Market and Competitiveness Report. The report, following established KPIs that define competitiveness based on nine distinct drivers, aims to give a comprehensive overview of both positive and negative trends within the Single Market. As part of the report, the Commission also produced a staff working document on the key findings from the European Monitor of Industrial Ecosystems. Part of this document characterised the position of EU industries in the global technology race and how the EU has fared against its global competitors, in particular the US and China.
The first element covered concerns innovation capacity within the EU regarding green and digital technologies. Though the absolute number of transnational patents filed in the EU has remained stable in comparison to the US, China’s rise in the last few decades has decreased the relative share of EU patents held. The EU’s world share of transnational patents filed has decreased from around 32% in 2010 to 23% in 2020. Similarly, on green transition-related global patent applications, the EU still holds leadership, although there also its share has decreased from 30% in 2010 to 24% in 2020. There are sectoral differences regarding the patents filed by the geopolitical powers, with the EU dominating the patent environment in wind power, having an approximate world share of 62% of patents in that area. Additionally, it is tied with China in solar power, with both having approximately 27% shares of patents, whereas the US is ahead concerning energy-saving technologies, having a global share of 41,3%.
The figures presented in the document highlight well the strengths and weaknesses of the EU, applicable in the broader geopolitical discussion. Though its trend lines have remained similar to the US, though a nuanced look into their differences highlight a key difference in how policymakers have driven innovation on both sides. The EU’s dominance in wind technology is the result of a long-term strategic focus on renewable energy. The 2001 Directive on the Promotion of Electricity from Renewable Energy Sources was complemented by financial and regulatory support mechanisms, including feed-in tariffs that guaranteed prices for renewable energy producers, and research funding through programs like Horizon 2020. In contrast, the United States’ advancement in energy-saving technologies can be attributed to its innovation and business environment, characterised by substantial venture capital investment, cutting-edge research institutions, and a competitive market that drives demand for energy efficiency. The US has historically leveraged its technological prowess and policy incentives, such as tax credits for energy-efficient products, to encourage the development and adoption of energy-saving technologies. This approach has positioned the U.S. as a leader in creating high-impact energy efficiency solutions that cater to a diverse market.
The authors do note that the use of patent data has drawbacks, provided that patenting inventions is not always the optimal strategy that a company chooses to market their products. In addition, tracking the volume of patents does not indicate the quality of patents filed. Nevertheless, it should remain a good option to measure innovation in comparative assessments.
In the digital domain, the trend lines are similar, though in recent years China has overtaken both the EU and the US in the global share of patents filed in digital technologies, amounting to 23%, 20%, and 21%, respectively. While the EU has a sizeable lead in several industries, including construction, renewable energies, mobility, and textiles, it is significantly lagging behind in the digital ecosystem. This could point to the fragmented digital market in the EU, concerning the language and specific regulatory requirements that each Member State may impose in addition to supranational rules. This fragmentation can create barriers to entry and operation for digital companies, affecting the scale and speed of innovation compared to more unified markets like China or the US. Furthermore, lower levels of investment in digital innovation compared to the US and China, as well as a less aggressive approach to commercialising research and technology all can contribute to this disparity.
The EU remains competitively self-sufficient in most industrial ecosystems. The notable exceptions are the digital and electronic ecosystems, where imports have exceeded local production for over a decade. Though the EU is a net exporter and exports more than China and the US in areas such as advanced manufacturing and robotics, the EU is importing products that are based on digital technologies significantly more than it produces. Technologies such as AI or big data require the EU to look beyond its borders, as the EU’s data protection regime, while protecting consumer privacy, may also limit the data available for AI and machine learning—key drivers of digital innovation. Together with the EU’s approach to digital market regulation, aimed at ensuring competition, the regime could inadvertently slow down the rapid growth of tech giants, affecting overall digital technology development.
This is evident when looking into the scaling-up capacity of high-growth enterprises in the EU, in particular when comparing to the US. In absolute terms, at the start of 2023, there were 249 ‘unicorns’ (that still had their HQ in the EU) in the EU, compared to 1444 in the US and 330 in China. Though the gap is narrowing, in particular when comparing specific sectors, and the EU should be commended for its progress over the last decade, the fact remains that the largest economy in the World is too fragmented to be properly competitive in the digital sphere.
The report highlights the existing disparity between the EU and the other global competitors. Putting the regulatory demands that European companies must uphold aside, as innovation should not be a race to the bottom, as evident from the infringes of privacy that both the US – with robocalls and bank fraud – and China – with the government pervasively spying on its citizens – must endure, there exists an issue unique to the EU that hinders its potential – a fragmented language market driving fragmented investment. The existing vehicles to fund the commercialisation of innovation in the EU are fundamentally insufficient to compete with the low-tax environment pushed by the US and the centralised approach by China.
Even though European private equity and venture capital investments in green and digital tech firms has significantly increased since 2016, there is limited availability of private financing in contrast to the US. The failure to commercialise products in the EU has also directly benefitted the US – visit whatever prominent start-up or commercial enterprise websites that the US is currently pushing and you will see how a shockingly large proportion of research and product is driven by EU citizens who have relocated to the US. This means that the EU is losing its most skilled workers to its American competitors, whether it be due to the cutting-edge technology that those companies are undertaking, or due to stark differences in compensation, where people moving to the US can see their income rise several folds. This is a significant issue that the EU has now endured for several cycles. It was the case when Apple and Google rose to the top last decade and it is currently the case with OpenAI.
The staff working document presents some insightful findings and showcases how the EU remains a global leader in innovation in broad terms. However, it identifies how the EU is still lagging in probably the most important economic space of this decade. Though the reasons for that are manifold – and not all are negative – the fact remains that unless the EU can truly dominate the digital ecosystem and be competitive with the products and services that the US peddles, it will be too dependent in critical digital infrastructure.
