Threats against Innovation-Based Growth in the EU

This chapter has shown that for the EU to maintain its competitiveness and growth, extraordinary measures are required regarding innovation and technology development. I have identified four important areas in which measures are necessary: public financing of R&D performed in the business sector, public financing of business innovation, IPR and university R&D. To solve the problems related to underinvestment in R&D due to spillover effects, governments can finance business R&D. This support should be designed according to the following guidelines. Public financiers should offer a combination of direct and indirect R&D support to the business sector. Direct R&D support should be offered in sectors with qualities in the public interest (environment, energy and defence). The projects should partly be financed by the private sector to indicate to government which projects are commercially promising. Tax incentives should be increase-based to avoid deadweight losses, and they should be linked to the expenditure side of the firms to maximize the number of firms that can utilize this type of support. Patent and innovation boxes should be removed. They are expensive and no evidence exists that they stimulate more R&D or innovation in the host countries. A government should finance approximately 10 per cent of total business R&D. Today, most EU countries are below this level. Thus, increasing public R&D support in the business sector is still possible without risking serious crowding-out effects. To solve the problems associated with incomplete capital markets for risky projects, governments can assist by financing small, innovative firms and stimulating individuals to act as business angels in several ways. GVC funds should focus on early phases. Co-financing from private investors should be required. The purpose of co-financing is partly to utilize market signals about which projects are commercially promising and partly to activate private capital in early phases. Alternatively, a hybrid VC fund can be created that is financed by both government and private investors (often with each contributing 50 per cent). The fund is then administered by the private investors. The purpose is to stimulate private investors to supply capital by adjusting the risk-return ratio in favour of the private investors. This method is recommended when an economy lacks PVC firms. To prevent both these fund types from investing in late phases, a ceiling amount per portfolio firm can be established, for example a maximum of 1 million euros. Governments could offer tax deductions to individuals investing in non-listed firms. Investments up to a specific amount should be deductible against taxable income. Capital income could be excluded from taxation if the portfolio investments are kept for a specific period or if the profit is reinvested in other non-listed firms. A final complementary method in the seed phase is government offering inventors/entrepreneurs soft innovation loans that are written off if the project fails. Because the design of patent rights and copyrights is regulated by international agreements, individual countries have difficulty deviating from those IPR rules. However, some problems need to be corrected. The European patent system is fragmented and costly. The new unitary patent is a step in the right direction. All litigation will be processed in one court, and the costs for patenting will be significantly reduced. The length of copyright (70 years after the death of the artist) should be shortened considerably. This long protection results in higher consumer prices, fewer product alternatives and hampers the improvement of existing works while offering only small incentives for new creation. High litigation costs mean that small firms and inventors seldom can protect their IPR. Some form of public guarantee is desired. Piracy and its diffusion has increased alongside globalization, digitalization and the innovation of the internet. Countries that do not enforce the international agreements regarding IPR need to face more sanctions. More cooperation between custom authorities and other authorities is also needed. Also in the future, the main functions of universities should be, firstly, to produce basic research results and new research methods that are spread freely and, secondly, to educate a pool of scientists and students who can then be employed in R&D. However, both efficiency in R&D and the probability of creating innovations (from university R&D) could be increased in the following ways. Public research grants to the universities should be exposed to competition to increase R&D productivity, create internationally competitive universities and direct R&D to sectors that serve the public interest. Scientists require greater ability to move across borders and between the academy and the business sector. This is possible through mobile research grants. The ownership of research results should be shared between scientists and their university. This will give both parties an incentive to commercialize the R&D results.