Europe and innovation according to Mario Draghi

More than a report, an earthshaking event.

This is what Mario Draghi managed to provoke on September 9. Draghi is a former Prime Minister of Italy and former President of the European Central Bank, and because of his track record and reputation, the European Commission commissioned him a year ago to present a report on the future of the European Union.

Draghi dropped the bombshell, over 400 pages in two parts, “The Future of Europe's Competitiveness”. Better known as the Draghi Report, the document proposes a radical change in EU economic policy.

The report makes a devastating diagnosis of European competitiveness in the new global context, highlighting the slowdown of our economy over the last two decades, in comparison with the United States and China.

Since the beginning of the 21st century, Europe has been aware of this situation and has been developing, unsuccessfully, policies to try to remedy it. Until recently, the gap has been masked by rapid global economic growth, the security umbrella provided by the United States, economic liberalism and apparent global geopolitical stability.

This whole paradigm has changed.

The continuous disruptions of recent years, the slowdown in global growth, the neo-protectionism of states, the stagnation (and aging) of the European population, foreign dependence in critical sectors and raw materials, the lack of vision in a common foreign policy, the lack of investment or the defeat in the digital race threaten European productivity and growth.

Worse still, if the situation is not reversed, the report seriously warns that Europe's ability to provide its citizens with the basic principles on which it is founded (prosperity, equality, freedom, peace, democracy and sustainability) is in serious jeopardy.

Draghi proposes three pillars to turn this situation around.

• First, Europe must close the growing innovation gap with the United States and China.
• Second, Europe must coordinate decarbonization and sustainability efforts with the competitiveness of its industry.
• Third, Europe must improve security and reduce its dependence on third countries in key areas.

As PierNext is an innovation blog, in this article we will focus on the first pillar.

Barriers to innovation in Europe

The Draghi Report identifies a number of barriers to innovation in Europe:

• Europe has lost the digital revolution

It is the current and future engine of global growth and only four of the top 50 technology companies in the world are European (none in the top 10) and the gap continues to grow, as dependence on foreign technologies (microchip manufacturing, cloud storage, software development, global e-commerce platforms, social networks,...) is increasing.

Given that the World Economic Forum estimates that 70% of the new wealth created globally over the next 10 years will come from the digital economy, this is not a good scenario.

• Investment in innovation in Europe does not focus on the most dynamic sectors

While in the United States innovation has been evolving sector by sector in recent decades (in the 2000s it was focused on the automotive and pharmaceutical sectors, in the 2010s on software and hardware companies and in the 2020s on the digital sector), in Europe the main investors in R&D continue to be automotive companies, a mature sector which, let us not forget, is currently in a situation of serious crisis, and companies in the pharmaceutical sector.

The consequence is that investment in innovation in Europe is not focused on the most dynamic and promising sectors.

In other words, while European innovation has grown in the industrial field, in sectors in which the research and development effort is medium or low, in Asia innovation is more in technological production (hardware and software) and in the United States in the digital sector.

In both cases, a greater effort in R&D is required. The aggravating factor is that some of the sectors in which Europe could have been a leader are now at risk or show signs of weakness.

While the automotive sector is facing new competition from Asian vehicles, especially electric vehicles, for which it has shown itself to be unprepared, the pharmaceutical sector lacks the levels of public and private investment of its American counterparts and a related regulatory framework. And renewable energies, dominated by European technology until recently, now face Asian competition, partly because of their need for raw materials that Europe lacks.

• Europe's investment effort is lower than that of its competitors

Europe invests 2.24% of its GDP in R&D, with only five countries above 3%, compared to 3.5% in the USA, 3.3% in Japan and 2.4% in China. The main differences are in the levels of private investment, with public investment being more even.

But if we focus on public investment, it is dispersed, lacks focus and the management of aid is excessively bureaucratic.

In fact, according to the report, while public investment in R&D in the United States is made at the federal level, in Europe only 10% of investment is made at the European level in programs such as Horizon Europe, the rest being made by the States without adequate coordination. If this is not focused on the strategic needs of the Union, the chances of it being converted into innovation that benefits the economy or society are drastically reduced.

• The fragmentation of the internal market hinders the growth of start-ups and reduces their financing capacity.

This fact is aggravated by the weakness of the venture capital sector in Europe (the percentage of investment by global VCs in the EU is 5%, compared to 52% in the US or 40% in China) and this scares away companies in the growth phase. One of the big problems pointed out by the report is that start-ups founded in Europe, when they reach a certain size, tend to move their headquarters to other continents, especially to America.

This fact is also pointed out by the Letta Report, which calls for the creation of a fifth European freedom.

The EU is built on four fundamental freedoms: the free movement of people, services, goods and capital. The fifth would be freedom of movement in the fields of research, innovation, skills, knowledge and education. In other words, a single European innovation market and not 27 national markets.

• Commercializing innovation, lack of “unicorns”.

Although there are very good universities and research centers in Europe, their capacity to achieve levels of excellence in innovation and, above all, to commercialize this innovation by converting it into market products is reduced in comparison with their American equivalents. One of the reasons for this is the limited integration of European researchers in networks that also include the private sector, venture capital and start-ups.

In fact, if we look at research output (scientific publications), Europe is ahead of the United States and China. If we focus on relevant scientific publications, Europe and the United States are on a par. But if we look at market launch, Europe is far behind: in 2023, for example, 66% of the active unicorns in the world were American, 26% Chinese and only 8% European.

And if we look at university rankings, we can see that, according to Nature Index 2024, of the top 50 academic institutions in the world, 21 are in the USA, 21 in China and four in Europe and, of those four, none are in the European Union.

• Regulatory barriers, especially in the most technological sectors.

The heterogeneity of national regulations, the multiplicity of laws, rules and regulations for certain topics, an excessively preventive legislative model,... All this means that, although there are technology start-ups in Europe, they have many difficulties to grow in the domestic market and internationalize, and it is more comfortable for them to “stay small”.

• Lack of adaptation of training to market needs

Many are the companies that do not find staff adequately prepared for new technologies, lacking in digital skills and for the new management challenges, even among the new incorporations of young people.

If we add to this the stagnation and aging of the population in Europe, the talent drain and realities such as the fact that Asian countries lead the PISA ranking, the lack of trained personnel at all levels in organizations can become an endemic evil of our economy.

Not just Draghi

The challenges facing European innovation are not new. The Draghi Report is very much in line with the so-called Letta Report “Much more than a market”, presented in April 2024 by Enrico Letta, also a former Italian Prime Minister, which also proposes a catalog of measures to revitalize the European single market.

The most relevant initiatives of this Letta Report include the revitalization of the capital markets union, the creation of a pan-European state aid scheme based on national contributions, the development of a common code of commercial law as an alternative to the current 27 national laws, etc...

In the field of innovation, the report proposes, among other measures, to guarantee freedom of movement in the fields of education, knowledge, research, skills and innovation as a basic principle of the Union.

Based on actual data, the European Innovation Scoreboard analyzes 32 innovation indicators covering multiple aspects of innovation performance. The 2024 report shows that, although growing slowly, innovative performance maintains a widening gap relative to China and the United States. And in its conclusions it highlights the strong differences in innovation performance among EU member countries.

And according to the OECD, R&D investment in Europe as a percentage of GDP has increased very slightly between 2014 and 2022, by 5.5% to 2.11% of GDP. But in the same period, China has grown by 26.7% to 2.56% of GDP, and in the United States it has grown by 32.4% to 3.59% of GDP. Far behind the world leaders: Israel, where R&D expenditure represents 6.02% of GDP, or Korea, where it represents 5.21% of GDP.

How to reverse the situation?

Draghi proposes a series of measures to address the innovation challenges facing the European Union, which can be summarized as follows:

• Put R&D at the center of the EU's strategic priorities.
• Focus on excellence, avoiding dispersion and mediocrity.
• Provide scale by acting as a true single market in R&D&I.
• Focus on R&D that brings added value at the European level.
• Guide innovation through European values that define and differentiate us.

The Draghi Report proposes a set of actions, of which we would like to highlight the following:

• Reform R&D programs (especially Horizon Europe in the next Framework Program in order to reduce the number of topics and focus on those really relevant to the continent and especially disruptive innovations, reduce bureaucracy in applications and their management, focus research on results and double funding to 200 billion euros for the next 7-year period.
• Improve the coordination of European and national programs by creating a European R&D area with a common strategy.
• To improve the positioning and excellence of European institutions (universities and research centers) in the global context, promoting leading institutions and researchers.
• To facilitate the market orientation of European innovation, that is, to help entrepreneurs to commercialize their innovative products and services, reducing bureaucracy, avoiding regulations that preventively hinder certain innovations, especially in the case of SMEs, and facilitating their growth at the European level by homogenizing legislation and creating the concept of “Innovative European Company”.
• Provide an adequate financial environment to support disruptive innovation, start-ups and scale-ups by increasing the public and private funds available for R&D&I.
• Establish a simpler and more innovation-friendly regulatory framework by creating a legal status for start-ups at the European level.
• Facilitate public-private collaboration in innovation and facilitate the entry of private investment in universities and research centers.

In short, Europe's competitiveness requires positioning the continent as a leader in innovation and, to this end, it is necessary to close the innovation gap with the United States and with the booming China. It is also necessary to significantly increase investment in R&D, especially private investment, consolidate universities and research centers to place them at the forefront of excellence, support innovative companies by creating a favorable environment for emerging and technological companies, and take advantage of European values to focus on innovation.

We are already late.

Let's get to work.