Reports

Encouraging innovation has long been a priority for European policymakers, with the implicit aim of reaching the technology frontier represented by the US. This goal has not been achieved. The Innovation Scoreboards regularly published by the European Commission have consistently found that the EU lags behind the US on many indicators. The most recent Scoreboards indicates that the transatlantic gap has widened. 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. The disappointing European performance might surprise the reader, given that government support for research and development (R&D) has grown gradually over the last two decades and is now at about the same level as in the US (around 0.7% of GDP). It is in the private sector where one finds a large quantitative difference between the US and EU. Business expenditure on R&D (BERD) in the EU, at 1.2% of GDP, represents about half that of the US (2.3% of GDP). Moreover, European business R&D is concentrated in mid-tech sectors, like the automotive industry. These sectors compete by applying the latest technological advances to production, but they do not require the same R&D intensity or offer the same growth potential as high-tech industries that produce the newest technologies. The main reason for US private R&D being twice that of Europe is therefore the much higher weight of high-tech industries in the US. European specialisation in mid-tech, the ‘middle technology trap’, has persisted for two decades. The largest EU companies in terms of R&D expenditures are almost invariably car producers, whereas in the US car producers, which were important 20 years ago, have been supplanted by software companies. The EU’s comparative advantage in cars is worrisome, as despite its massive investment in R&D, the EU automotive industry now risks being leapfrogged by US producers and increasingly by Chinese ones. Foreign producers can build on their leadership in electric and autonomous-driving technologies.

This report outlines actionable policy recommendations to stimulate innovation in the digital market by enhancing the clarity, effectiveness, and coherence of EU regulations.  A competitive and innovative digital ecosystem within the EU hinges on the effective implementation of regulations that encourages the growth of a competitive and innovative digital ecosystem by prioritizing investment in local startups, improving access to funding, and supporting the scaling up of EU digital businesses. Tailored and straightforward regulations, coupled with robust implementation, are essential to achieving these objectives. Strengthening awareness of digital rules among SMEs and other business partners of digital platforms is equally crucial to enhancing compliance and fostering a deeper understanding of the new regulatory landscape. The recommendations target three critical areas. First, they aim to enhance market contestability by curbing the dominance of large technological companies and fostering innovation through improvements to the Digital Markets Act (DMA). Second, they address anti-competitive practices in mergers and acquisitions (M&A) by strengthening oversight and integrating innovation-focused considerations. Third, they promote the adoption of decentralized technologies, such as distributed ledger technologies (DLTs), to create a more diversified and resilient technological ecosystem. Overlapping regulations and jurisdictions currently increase compliance costs and uncertainty, undermining competition and innovation. To mitigate these challenges, the report advocates for a unified and streamlined European regulatory framework that clarifies and consolidates fragmented regulations, ensures consistent enforcement, and adapts existing rules to the evolving dynamics of digital markets. Through these measures, the EU can position itself as a global leader in digital regulation while fostering a dynamic and competitive digital economy.  Although each chapter needs to be read in its entirety to appreciate the motivations and nuances of the policy recommendations offered, to facilitate access and to encourage readership, we present here our three main policy proposals. These three proposals will be declined and detailed through the chapters, based on their specific content.