Innovation & Technology Transfer

Innovation monitoring systems, now well-established at EU level and in the Member States, provide evidence that despite marked national variation in the business environment a new and distinctive style of European entrepreneurship is starting to emerge throughout the Community

Innovation - the conversion of new knowledge into new products and services - has long been recognised as the key to future economic growth, especially in the high-wage economies of North America, Europe and the Far East.

The essential elements of the dynamic and self-sustaining innovation which has so spectacularly delivered employment and prosperity in the United States over the past two decades are clear.

At the top of the list are access to risk capital, availability of technical and business skills, and a culture of 'can-do' entrepreneurialism in which failure is seen as a stepping stone to success.

However, the precise conditions required for the development of such an innovation system have remained a matter of debate, and the US achievement has proved difficult to replicate on this side of the Atlantic. What should policy-makers' priorities be, if they wish to transform existing industrial and institutional structures as rapidly, as efficiently and with as little collateral damage as possible into those required to sustain European competitiveness in tomorrow's knowledge-based economy?

Measuring intangibles

Speaking to the Research Council last December, Enterprise Commissioner Erkki Liikanen made clear that the collection and analysis of data on innovation, and the benchmarking of regional innovation performance(1) were a high priority for the European Union. "Policy-makers and entrepreneurs need a firm basis and a clear rationale for the design and implementation of initiatives in the area of innovation," he said.

The OECD's Science, Technology and Industry Scoreboard similarly aims to provide governments world-wide with the best available statistical evidence of technological and economic trends, as the basis for policy design and evaluation and for comparison of their own country's performance with that of others. But the 1999 edition(2) emphasises that, in today's increasingly knowledge-based, increasingly interconnected world economy, monitoring such trends is as difficult as it is necessary.

"The competitiveness of firms depends crucially on how well they make use of their own intangible assets, such as skills and creativity, and gain access to new ones by co-operating with other firms and with universities," say the report's authors. "Yet, because of their nature, intangibles are very difficult to measure. It is far less easy to obtain facts and comparable indicators for intangibles than for tangibles."

(1) Through the Trend Chart on Innovation in Europe - see 'Benchmarking Innovation in Europe', edition 3/99.
(2) OECD, 'Science, Technology and Industry Scoreboard 1999: Benchmarking Knowledge-Based Economies'.

1. The Community Innovation Survey

Comprehensive and comparable data about the actual innovative behaviour of European firms is now collected on a regular basis.

In Europe, the Community Innovation Survey (CIS) is starting to answer policy-makers' questions about innovation - even those related to intangibles such as skills and knowledge. Co-ordinated by the European Commission's statistical office, Eurostat, and the Innovation Directorate, the second survey (CIS2) was carried out by the EU Member States in 1997/98. The results are already being used by national governments such as the United Kingdom's, which draws on CIS2 for its UK Competitiveness Indicators 1999(1), and the first Commission studies based on analysis of the data will be published during 2000.

"The real benefit of CIS is that for the first time it enables us to test propositions found in the theoretical literature of innovation," explains Georg Licht of the Centre for European Economic Research (ZEW), responsible for gathering data from German companies. "By making comparisons between countries we can see, for example, how the different structures and resources of the academic research bases in the United Kingdom and Scandinavia and those in Italy and Spain influence the way that knowledge flows within their economies. This kind of insight is of tremendous value to policy-makers at national and EU levels."

Heterogeneity

The CIS is still evolving towards a system which produces truly comparable data from all Member States. "The first survey had a number of weaknesses which invalidated EU totals and averages, so that we were only able to publish the separate results for each country," admits Frank Foyn of Eurostat. "Although there are still some issues to be sorted out, the CIS2 questionnaire and survey methodology was much better harmonised." This makes it possible to compare aggregated national data, and to calculate EU averages - for example, for the value of sales of new and improved products, by company size and sector.

Licht and colleagues at ZEW have recently produced a report on innovation in the service sector, based on exhaustive analysis of German CIS2 data, for the European Commission's Innovation Studies series(2). For him, the picture revealed by the CIS data is one of heterogeneity - not just between European countries but also between, and even within, industrial sectors. But he believes that even more reliable and useful findings could be produced if researchers had direct access to company-level micro-data, rather than simply to aggregated national figures.

At present, in order to comply with the data dissemination laws of all Member States, Eurostat has released micro-data only for eight countries, and then only in the cases of a small number of studies commissioned by the Enterprise DG. "Most researchers do not even have access to the micro-data from their own country," says Licht.

The intangibles of innovation in a knowledge-based economy are hard to measure. However, in the field of information and communication technologies, where US companies accounted for 60% of patents granted by the United States Patent and Trademark Office, the gap between the US and most European countries appears to have widened in recent years. (Source: OECD Science, Technology and Industry Scoreboard 1999)

In detail

The broad-brush comparisons which can be made using aggregated data are valuable in their own right. "Policy-makers are already gaining an insight into the relative importance of different obstacles to innovation, and into the role of the customer or of venture capital in the innovation process," Licht says. But ZEW's statistical analysis of the company-level German data makes it possible to observe trends at a much higher resolution.

He offers the example of the role of consulting firms in facilitating the flow of new technological knowledge. "In German manufacturing industry, consultants play a limited role, normally as providers of market information," he says. "In the service sector, by contrast, they form a critical link between small and medium-sized enterprises and the academic knowledge base."

But it is unclear whether this is an effect of Germany's knowledge infrastructure, or if the pattern is common to EU countries with quite different research institutions. For example, do consultants play a more or less important role in the British service sector, where universities are more engaged in contract research? Licht was able to compare German and Canadian data, and was surprised to discover that consultants perform a very similar function in the service sector there. "But comparisons of this kind require access to the micro-data, so we cannot yet compare Germany with other EU countries."

Across all EU Member States, innovation expenditure of all types is lower in the service sector than in manufacturing industry, while service sector spending on research and development is also lower as a proportion of the whole. (Source: Eurostat/CIS2)

Standardisation

Licht is hopeful that in future, qualified researchers will be given access to the CIS micro-data. "We have to find a solution for CIS3," he says. "Overcoming the differences in national data protection laws will probably take at least five years. A short-term alternative would be for Eurostat to make the data available to researchers willing to travel to Luxembourg to work on it in strict confidence."

He also looks forward to the day when other OECD countries collect comparable innovation data. "Eurostat plays an important role in encouraging international discussion, with a view to introducing a standardised survey methodology," he says. "Canada and Australia already produce some CIS-comparable data, and there are signs that the US will implement a similar system in the near future."

(1) The full report can be downloaded from the website of the UK's Department of Trade and Industry at http://www.dti.gov.uk/comp/competitive/
(2) The Innovation Studies series continues the former European Innovation Monitoring System (EIMS) reports. A list of available reports, which can also be ordered on-line, is at http://www.cordis.lu/eims/src/stud.htm

2. An Entrepreneurial Subculture

"A coherent EU Enterprise policy has to have innovation as one of its main guiding elements," Commissioner Liikanen told the Research Council.

In November, welcoming the launch of Charles Leadbetter's booklet Europe's New Economy(1), Mr Liikanen identified the key components of such a policy as "entrepreneurship, innovation and risk capital". "We have too few people wanting to become entrepreneurs - too few prepared, trained or educated to take a calculated risk to set up, run and develop a business opportunity," he said.

A new generation of entrepreneurs is emerging throughout Europe, despite widely differing institutional environments.

Knowledge-based economy

According to Leadbetter, a policy adviser to the Blair government and a former Financial Times journalist, policy-makers must engage actively in the painful but inevitable process of transformation from a European economy based on manufacturing to one based on knowledge.

"The generation, dissemination, application and exploitation of distinctive know-how is the driving force behind economic growth in a globally interconnected economy," he says. Globalisation, the shift from manufacturing to services, the increasing complexity of manufactured products and the acceleration of the flow of science into new products and new industries make intangible assets - ideas, knowledge and skills - "the fundamental sources of wealth and value".

To date, Europe has been slower than the US to respond to this new challenge, Leadbetter says. Above all, its governments, institutions, industries and entrepreneurs cling to outdated attitudes towards risk and opportunity. He calls for further deregulation, pointing to the success of telecommunications liberalisation in stimulating innovation by exposing the European industry to greater competition.

He recommends the introduction of entrepreneurship training at every level of the education system, to strengthen Europe's entrepreneurial capacity, as well as measures to encourage academic and corporate researchers to establish spin-off companies. He demands support from governments, large companies, universities and chambers of commerce for the development of networks linking investors and entrepreneurs. Finally, he calls for a legal and tax framework which facilitates and rewards entrepreneurialism.

Distinctly European

New technology-based firms (NTBFs) are the keys to economic growth, job creation and competitiveness, and policy should be directed at fostering their growth and spreading their influence, Leadbetter says. Those now emerging across Europe, despite current obstacles to their development, he calls "a new business generation... with shared aspirations, values and outlooks".

Europe's older companies are profoundly shaped by national cultures of industrial relations, corporate governance and financing. But Leadbetter finds the features shared by the new companies more striking than their differences, although there are still too few of them to have a real impact on Europe's economy. "They are not, as in the US, part of the mainstream business culture," he says.

With partners in France, Belgium and Germany, UK-based Central Research Laboratories (CRL) has recently completed a report on Success Factors in Fast-Moving High-Tech Sectors(2) for the Commission's Innovation Studies series. Unlike the ZEW study, this report is based not on CIS2 data but on in-depth interviews with 50 companies of the kind highlighted by Leadbetter, and backs up many of his assertions.

"We found world-class young firms throughout Europe," says CRL's John Weaver. "But in some countries they are still comparatively rare, and the authorities and the industrial establishment still regard them as exceptional. Despite this, the similarity between the firms was striking. We found a common, European company culture thriving in a wide variety of external environments."

Thinking big

Though they span the electronics, software, biosciences and materials industries, CRL's case studies share a number of key characteristics.

In their first few years, they tend to develop on the basis of relationships with single customers. Company founders with backgrounds in technology rapidly buy in business skills - as their first employees, 36% hired sales, 36% financial, and 20% marketing specialists. Nearly two-thirds had taken part in EU-funded research projects, but had benefited less from the technological results than from on-going business relationships developed within the research partnerships. Half want relaxation of tax laws for new companies, and for share option schemes, in preference to grants for research or innovation. Finally, although small, these companies tend to compete globally from the outset. "The majority address European, or European and North American markets from day one," says Weaver.

The problem of skills shortage is the most serious shared by the companies interviewed, contributing to the decision made by many of them to locate at least some of their research and development work in the US at the earliest opportunity. "Shortages both of business and of high-level technical skills were a major problem in all the sectors we looked at," Weaver says.

The report calls for greater efforts to raise awareness of the option of a career in NTBFs, and so stimulate the supply of qualified personnel - as employees, managers and new entrepreneurs. Among its principal policy recommendations is curriculum development for innovation-oriented education, from primary school right through to university. "It is not only that there are too few qualified scientists coming out of Europe's universities," Weaver explains. "Neither science nor business graduates are sufficiently equipped or motivated to think in terms of creating and developing enterprises of their own."

(1) Charles Leadbetter, 'Europe's New Economy', Centre for European Reform (http://www.cer.org.uk/), December 1999; ISBN 1 901229 14 9, GBP 10.
(2) A summary of the report is available from Tomás Botella at the European Commission's Innovation Directorate (see contacts on next page).

3. The Shift to Services

Detailed examination of data from the German service sector reveals distinctive features with profound implications for European innovation as a whole.

CIS2 extended the Community Innovation Survey to cover a wide range of services for the first time. With access only to German company-level data, ZEW's study focuses almost exclusively on that country's service sector, but Georg Licht believes that many of its conclusions are valid for other EU countries. "The forces which drive innovation in services - deregulation, the diffusion of information and communication technologies, and the growing tradability of services - are the same throughout Europe," he points out.

The sector itself, on the other hand, is highly heterogeneous, encompassing both traditional activities such as transport and trade and knowledge-intensive business services, where innovation is in many respects similar to that found in technology-oriented manufacturing sectors. This is one reason why careful statistical analysis is essential before any firm conclusions are drawn from the data.

In addition, Licht cautions that traditional measures of innovation inputs (research expenditure and research staff) and outputs (new products or processes, and resulting productivity growth) are often difficult to transpose to the service sector. "Due to the intangible nature of their products, most firms find traditional definitions of research hard to understand. Similarly, innovation is more often associated with changes in the quality or availability of a service than with conventional productivity gains," he says.

Especially among innovative firms, demand for highly qualified staff is greatest in IT-intensive sectors - but is likely to increase in all service sectors in coming years, according to ZEW

Incremental innovation

ZEW's research has, nevertheless, identified some features clearly. First, both the scale and the structure of innovation expenditure in the service sector is very different from that in manufacturing. "In services, product innovation is mainly incremental, with in-house development of new products more common than in manufacturing industry. But total innovation expenditure amounts to only 1% of turnover, compared to 5% among manufacturers, while both participation in research and research intensity are also lower."

The second key characteristic - the rapidly increasing demand in the service sector for highly qualified staff, which Licht refers to as a 'skills shift' - is intimately related to the first. "Investment in human capital turns out to be even more important in services than in manufacturing," he says. "Human capital replaces research as the principal input factor for product and process innovation, with service companies relying heavily on tacit knowledge embodied in owner-managers and key employees."

Employment is growing among innovative service sector firms, but the new jobs are mainly for highly qualified people. At the same time, there is little evidence of companies training poorly qualified staff to use new technologies. "In the service sector, training represents almost as large a share of total innovation expenditure as research does in the manufacturing industry. But in-house training schemes are primarily directed at the already-qualified, and new technical know-how tends to be acquired through hiring," he says.

Skills shortages

If this pattern continues, ZEW predicts both a widening skills gap and a crippling skills shortage. Innovation policy should include measures to increase the service sector's capacity to absorb new technologies, the report recommends - both encouragement to reinvest in human capital, and an improved flow of know-how from public research institutions to the sector's SMEs.

There are too few qualified information technology workers, and engineers and IT specialists lack project management and other essential business competences. In addition, university research is still geared towards industrial production processes. "The academic research base has been slow to adapt to the structural change towards a knowledge-based service economy," Licht believes.

"Universities could make a much greater contribution to the deployment of new knowledge relevant to the needs of the service sector," he concludes. "An increase in public as well as private investment in human capital is the key to successful expansion of an innovative service society."

Contact

F. Foyn,
European Commission, Eurostat
Tl. +352 4301 33037
E-m. frank.foyn@cec.eu.int
http://europa.eu.int/en/comm/eurostat/

T. Botella,
European Commission, Innovation Directorate
Fx. +352 4301 32073
E-m. tomas.botella@cec.eu.int

G. Licht, ZEW
Tl. +49 621 1235 177
Fx. +49 621 1235 222
E-m. licht@zew.de
http://www.zew.de/

J. Weaver, Central Research Laboratories Ltd
Tl. +44 208 848 6658
Fx. +44 208 848 6538
E-m. jweawer@crl.co.uk
http://www.crl.co.uk/

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