Giorgio Presidente

Funding Innovation in Europe with the Next Framework Programme: a commentary by Daniel Gros, and Giorgio Presidente

Competitiveness has returned to the top of the EU agenda, with the EU Competitiveness Compass highlighting the need for innovation-driven growth. But European industry has fallen behind in innovation by specializing in mid-tech industries, now increasingly subject to Chinese competition.

Since the start of Horizon 2020, the EU budget has provided about €100 billion to support research and innovation. But this seems to have had little impact.

A large proportion of Horizon funding has gone to a small number of big corporations with modest innovation and growth performance. Another sizable share goes to SMEs that are part of wider corporate groups.

Moreover, the lion’s share of Horizon funding has gone to collaborative programs, with detailed guidelines on research topics and expected outcomes, typically involving broad-based consortia with more than 20 participants. Yet our analysis suggests that bottom-up programs undertaken by individual recipients yield better results, but only if the recipients are independent SMEs.

Any new Framework Program should thus focus on funding ideas, not companies. They key is not more money, but rather leaving space for disruptive innovation by encouraging bottom-up initiatives, especially by small independent companies.

Through its missions and governance, Horizon Europe does not meet the innovation challenge and anchors our industry in the mid-tech range. This report argues that current European efforts, while laudable, are insufficient, in both quantity and quality. Important reforms are required to enable Europe to compete in the value-creating space. 

A second term for Donald Trump could structurally intensify the trend toward trade fragmentation, heightening tensions, particularly between the United States and China, the world’s two largest economies.

Robust port infrastructure can significantly mitigate the risk of supply chain disruption, suggesting that government efforts are better targeted at improving the performance of ports and critical infrastructure more broadly, rather than implementing protectionist measures.

A popular thesis in policy circles is that there is an “investment gap” that Europe needs to fill to face the great challenges of our times, such as the digital and green transitions. However, the notion of the “investment gap” used by policymakers is often vague and therefore it risks legitimate a wasteful allocation of public resources.

EU firms should be able to satisfy a large share of the increases in defence expenditure that are required immediately to support Ukraine and also those in the medium and longer-term

This policy brief highlights that while the green subsidies provided by the Inflation Reduction Act of the United States are homogeneous across beneficiaries, the subsidies associated with the Green Deal industrial plan are highly fragmented across European member States. We quantify the extent of resource misallocation due to this subsidy dispersion by using the model of Hsieh and Klenow (2009), calibrated on the EU electricity-producing industry. We compare both the actual allocation of subsidies, and a policy of subsidies coordinated at the EU level, to a hypothetical frictionless benchmark with no subsidies. We find that moving to coordinated subsidies can increase productivity by more than 30% with respect to the uncoordinated scenario, substantially reduce the productivity gap with the United States, and generate gains worth up to 6% of the EU value-added in the industries considered. Policy recommendations include greater EU-level coordination to minimize misallocation and enhance productivity. 

In this Working Document, we do not try to provide an overall evaluation of the IRA or its cost-effectiveness with regard to addressing climate change and US emissions. Rather, we investigate its impact on the US market and on EU export opportunities, concentrating on the material content of the IRA – not its intention.

We identify specific industrial products that are projected to be in high demand in the EU and can be realistically produced given North African countries’ existing capabilities. Specializing in these products, North African countries can diversify their export basket, which has been shown to correlate positively with economic development.