Five ways for Europe to regain its innovative edge
The continent can achieve the scale it needs to close the innovation gap by defining its own innovation model rather than by playing by everyone else’s rules, writes Jacques Bughin.
Europe has a wealth of research talent including 5.7 million software developers, more than in the United States, yet the world’s leading digital platforms are US and Chinese, not European.
It has pockets of strength in industrial R&D, especially in the automotive industry, yet it risks falling behind in frontier technologies including artificial intelligence and synthetic biology, which look set to power the next wave of economic growth.
The continent has some impressive digital leaders including Spotify, yet its share of superstar firms globally-that is, companies in the top 10 percent of economic profit globally, has fallen by half over the past two decades (Exhibit 1).
Europe, in short, is no longer at the forefront of global innovation, as it long used to be. It has a harder time than the United States in translating promising ideas into billion-dollar “unicorns.” European business executives are less sure about their innovative potential than their US counterparts, our surveys suggest. Above all, the continent is held back by fragmentation and a lack of scale.
How can Europe catch up and regain its competitive edge?
Together with colleagues at the McKinsey Global Institute, I have just published a discussion paper, Innovation in Europe: Changing the game to regain a competitive edge, that identifies five ways in which Europe could build on its strengths to achieve scale. While the five represent just a few of the policy options that are possible, they share one core idea, namely that the continent can close the innovation gap by defining its own innovation model rather than by playing by everyone else’s rules.
1. Europe can benefit from its industrial scale
Europe’s long-standing position as an industry powerhouse is a core strength on which the continent can build. It already has scale in some areas, especially in the automotive sector (Exhibit 2). A key pathway towards greater innovation lies in its ability to leverage that scale. In some sectors, this is already happening. For example, telecom operators, vendors, car and truck manufacturers, and suppliers are currently combining their research efforts to achieve more scale in customer and data access for the automotive industry.
2. Europe can use its public-sector procurement scale to propel innovation
A second critical pathway is to focus investment on spurring innovation. The public sector has a potentially big role to play here: across European countries, the public sector currently spends about €2 trillion on procurement annually. It could direct more of that towards innovative initiatives. An important first step would be to switch to e-government services. Some countries, notably Estonia, have done this effectively. The European Union, including DGCONNECT, the directorate-general for communications networks, content, and technology, has already put in motion a number of promising initiatives, including the €100 billion Horizon Europe initiative, which seeks to spur innovation among small and medium-size companies via digital hubs, among other programs.
3. Europe can rethink data and user access and standards
The 2018 General Data Privacy Regulation (GDPR) put Europe on the map in terms of data governance and privacy protection. The European Union can build on this More too could be done to consolidate Europe’s position as a leading global actor in data governance. For example, it could aim to enable secure access for innovators to data pools they do not own and create scale around common standards. One area could be transportation, with a view to innovating around the concept of smart cities. Healthcare could be another sector, with the aim of producing tangible benefits such as increased drug effectiveness.
4. Europe can compensate for its fragmentation with openness and connectedness
Europe could emphasize openness and connectedness as an alternative to scale, including by altering high-skill immigration flows and connecting local ecosystems. Some networks, such as Innovate UK and Cap Digital in France, are already demonstrating the value of strong ecosystems. Creating better pathways for high-skill professionals from other countries and changing taxation on stock options would make the continent more attractive to international talent.
5. Europe can leverage the scale of global firms to its benefit
Finally, Europe could leverage the scale of global firms that have set up operations in Europe to the continent’s benefit. For example, if Chinese and US firms were encouraged to bring more R&D to Europe, the continent as a whole could benefit.
These pathways are just five examples among many. Innovation drives economic growth and is thus critical to Europe’s future. Business leaders and policy makers across the continent will need to rally behind initiatives that put the continent back in the global race-and at scale.
Read more: Innovation in Europe: Changing the game to regain a competitive edge
Originally published by Jacques Bughin on LinkedIn at https://www.linkedin.com.
