N

Reinhilde VeugelersProf @KULeuven Bruegel Senior Fellow

Unlocking

the full value of new ICT

technologies

to drive economic growth in

Europe

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Europe’s ICT growth problem diagnosed

There are three basic channels through which ICT can impact economic growth

A. Through the investment in ICT capital by the business sector;

B. Through productivity improvements resulting from ICT investments in ICT-using sectors;

C. Through the contribution of ICT-producing sectors (equipment and services).

The lagging performance of ICT as a driver for growth in Europe is evident in each of these three channels.

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Table 1: The contribution of ICT to productivity growth in the EU versus US;

95-01 01-07 EU-9 Gap with US

(=100) EU-9 Gap with US

(=100) AAGR of real value added per hour worked- Overall Economy

1.8% 70% 1.5% 66%

Contribution to labour productivity growth from ICT capital (AAGR)-Overall Economy

0.6% 55% 0.2% 57%

AAGR of real value added per hour worked- ICT goods producing sectors

4.0% 24% 6% 41%

AAGR of real value added per hour worked-Telecom 9.5% 253% 4.8% 81% Contribution to labour productivity growth from ICT capital (AAGR)-Telecom

2.6% 65% 0.7% 260%

AAGR of real value added per hour worked- ICT using service sector: Financial & Business Services

1.7% 55% 1.8% 75%

Contribution to labour productivity growth from ICT capital (AAGR)-Financial & Business Services

0.9% 55% 0.4% 62%

AAGR of real value added per hour worked- ICT using service sector: Trade

2.2% 35% 1.6% 62%

Contribution to labour productivity growth fr om ICT capital (AAGR)-Trade

0.5% 67% 0.3% 50%

Source: On the basis of EIB, Strauss & Samkharadze (2011), ICT capital and productivity growth , EIB papers, 16, 2, pp 8-30.

Note: Data are based on EUKLEMS; EU-9 includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, and Spain. ICT goods producing sector is NACE 30 -33 (Electr(on)ics and Optical Equipment) ; Telecom includes Nace 64 (Post & Telecom) ; Trade includes wholesale & retail (Nace 51 -52), Financial and Business services (excl real estate) is Nace 71-74.

Europe’s ICT growth problem diagnosed

A

C

B

B

C

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EU vs US ICT R&D performance

  EU USR&D-to-Sales ratio (RDI); all sectors 2.8% 4.6%

RDI; non-ICT sectors 2.5% 3.4%RDI; ICT sectors 5.3% 8.7%

Share ICT in total sales 11.2% 22.0%Share ICT in total R&D 21.5% 41.5%

RDI ICT old 5.2% 6.2%RDI ICT young 5.9% 11.8%

Share of young firms in ICT nr firms 54% 71%Share of young firms in ICT sales 20% 45%Share of young firms in ICT R&D 22% 60%

Source: Own calculations on the basis of Veugelers & Cincera (2011),

which uses EC-IPTS Scoreboard data on the world largest R&D investors for 2007. Young firms are born after 1975.

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What if scenarios on EU’s ICT R&D performance

What if EU’s RDI in ICT would be

EU’s RDI ICT gap relative to US (=100) would be

EU’s overall RDI would be

EU’s overall RDI gap relative to US (=100) would be

Everything remains the same 5.3 61 2.80 61 EU’s ICT sector would have the same RDI performance and same weight in the overall economy as US

8.7 100 3.85 84

EU’s ICT sector would have the same age composition and same young firms’ RDI as US

8.2 94 3.12 68

Source: Own calculations on the basis of Veugelers & Cincera (2011),

which uses EC-IPTS Scoreboard data on the world largest R&D investors for 2007. Young firms are born after 1975.

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The layered structure of the post-Internet ICT ecosystem

  Layer I Layer II Layer III  Telecom

Equipment, Semiconductors, Computer, Electronic Equipment

Telecom Operators

Internet; Software providers

Share of total ICT revenues 44% 33% 23%World Revenues CAGR 2006-2011 6.9% 6.9% 7.7%Share of Region in World Revenues Asia>US>EU

62% 31% 7%EU≥US>Asia36% 36% 28%

US>EU27>Asia68% 17% 15%

Capex/revenues 5% 17% 5%RDI 7.2% 1.6% 14.1%% Young firms in world leading innovators 56% 30% 88%RDI Young 7.4% 1.0% 14.1%RDI Old 7.1% 1.7% 13.8%

Source: For R&D, data are based on the EC-IPTS Scoreboard firms from ICT;

Calculations on the basis of Veugelers (2011); For revenues and capital expenditures, data source is France Telecom (SG, Industrial Economics) March 2013;

Data are based on largest listed ICT firms covering about 70% of the ICT sector.

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Europe’s R&D performance in ICT by Layer

Layer I Layer II Layer III EU US EU US EU US RDI of Region in Layer 12% 9% 1.5% 0.8% 16% 14% Share of Layer in Region’s total R&D

70% 70% 18% 1% 12% 28%

Share of Layer in Region’s total Sales

31% 70% 64% 12% 4% 18%

What if EU’s

RDI in ICT would be

EU’s RDI ICT gap relative to US (=100) would be

EU’s overall RDI would be

EU’s overall RDI gap relative to US (=100) would be

O. Everything remains the same 5.3 61 2.80 61 1. EU’s ICT sector would have the same layer composition as US

11.5 128 3.48 75

The EU ICT landscape -

Europe’s strong position is in the layer of telecom services, which is the “oldest” and least R&D intensive layer.

In the layer of platform, content and application providers, the EU is weakly present. This layer has the highest R&D intensity, this is also where the growth is and it is the “youngest” layer.

Europe’s struggling R&D position in the ICT eco-system is therefore related to its sectoral and age composition and its failure to redirect towards new ICT sectors.

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Europe in the post Internet ICT Eco-system

• Compatibility and (inter and intra) platform competition are important determinants of the size of the potential value added and who appropriates this value

As Europe lacks players that can become dominant platform leaders, it has a strong incentive to push for open and compatible models, as these will be more beneficial for both European customers and European firms developing applications within the platforms.

• Two-sided network effects create a big barrier to entry for new entrants. Nevertheless, new entrants carrying radical innovations can quickly surpass existing entry barriers. This contestability feature of new ICT markets constantly challenges incumbent positions.Policy makers should appreciate the dynamics of the ICT ecosystem which is highly non-linear, with high velocity, systemic interdependencies and path dependencies, fluid boundaries, actors entering, specializing, exiting, refocusing and constantly innovating.

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Why are European firms less present as leading innovators in new ICT markets?

Veugelers (2011), New ICT markets, Bruegel Policy Contribution, provides an analysis of these conditions for a selection of new ICT markets

Web2.0, Videogames, Displays, RFID, Automotive Embedded Software and Semiconductor design

There is no clear evidence that Europe’s R&D infrastructure is inadequate and would be a barrier to innovation and market development.

The problems are typically identified elsewhere, namely further down the commercialisation path.

The lack of a large integrated digital market in Europe and weaker capabilities to commercialize technological innovations is an impediment present in all new ICT markets considered.

The current fragmentation in the EU public sector procurement practice is in all new ICT markets distinguished as an important barrier.

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IP Issues

IPR regimes which are not clear, open and affordable, impede particularly young firms.

• Trademarks are perceived to be working very well for all industries considered both in Europe and the US.

• The use of copyright laws and patents to protect software is of very limited effectiveness, as software can be easily imitated with a different programming language.

– Rules and regulations vary significantly across countries

• Data privacy laws are known to be much more stringent amongst EU countries than in the US, where the soft regulation environment is sometimes taken as a competitive advantage for new services.

Overall, there is vast room for IP policy improvement in Europe, particularly towards the homogenization of IP policy tools across countries.

Without jeopardizing the quality of examination, European regulators & enforcers should be much more open towards new technologies

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Access to finance

Financial constraints are a main barrier for the development and growth of new innovation-based ICT markets, especially for young firms with

radical growth projects who want to scale up to world class leadership.

For firms in new ICT sectors, access to public funding (subsidies) is not viewed as a critical constraint (Veugelers (2011).

The segment of the capital market most adept to fund the these projects is the private venture capital market.

There are much higher volumes of venture capital that go into financing IT ventures in the US than in Europe (a higher number of realized deals, a much bigger deal size).

Public intervention should leverage the European private VC markets reducing fragmentation

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EU ICT and innovation policy agenda

The “Europe2020” strategy and its “Innovation Union” and “Digital Agenda for Europe” flagship initiatives.

The EU’s ICT policy has traditionally placed a strong emphasis on infrastructure building and ensuring consumer’s access to currently available technologies at short-run competitive prices.

On ICT innovation the attention has been mostly given to public R&D funding via FP instruments.

Does policy place enough emphasis on shaping the conditions for European firms to innovate and grow into world leading positions in

new ICT markets?

Veugelers (2011), New ICT markets, Bruegel Policy Contribution, provides an analysis of these conditions for a selection of new ICT markets

Web2.0, Videogames, Displays, RFID, Automotive Embedded Software and Semiconductor design

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A.5 Implications for EU innovation policy design

Do the Europe 2020 Flagships provide the right policy agenda for new ICT markets?

• Strengthening the research base with the FP instrument remains an important component in the Innovation Union Flagship and also particularly for ICT in the Digital Agenda Flagship. But it is no longer an exclusive focus. Policy attention has shifted to building framework conditions for innovation and growth.

This is an important and much needed shift in European policy making as the analysis has shown the critical deficiencies in the commercialisation path in new ICT sectors in Europe. – The Digital Agenda focuses on the digital single market, interoperability and

open standards and availability of (broadband) infrastructure.

Is it enough?

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Implications for EU innovation policy design

Public procurement in those sectors where the public actors can act as pivotal users (e-government, e-health, e-education…). – When done at an EU integrated scale, risks and resources can be pooled across a larger

public market.

To improve the availability of specialised ICT skills, furthering the European integration of Higher Education

EU competition policy: an assessment of dynamic efficiency effects and openness of technology markets shaping the future working of innovative markets should be much higher on their radar.

Standards and regulations:

If and when governments intervene on standards and regulations, they should be designed with a technology neutral and open perspective, which will allow new innovators to continue to compete.

A close monitoring of emerging innovative markets

Thank you for your attention !

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