House of Lords - The Effectiveness of EU Research and Innovation Proposals

The Effectiveness of EU Research and Innovation Proposals - European Union Committee Contents

CHAPTER 2: Impact of the Economic Crisis

14. It is not surprising that the global economic crisis has had an adverse effect on the research environment in Europe. As one witness observed, R&I is very often one of the first things to suffer in commercial and national budget cutbacks.[15]

15. The crisis has affected Member States in different ways, and their reactions have differed as a result. The European Commission pointed out that most Member States have practised 'smart fiscal consolidation' and protected their education, research and innovation budgets while making cuts elsewhere. However, in 11 Member States the public budget for research and development has grown less than GDP since the beginning of the crisis and in a few countries, such as Spain and Portugal, it has decreased.[16] In the UK, there remains a great deal of public support for R&I, and many witnesses praised the Government's policy of ring-fencing the £4.6 billion science budget.[17] There have, however, been financial constraints. One witness, Chemistry Innovation Limited, which operates the UK's Chemistry Innovation Knowledge Transfer Network,[18] pointed to a much stronger emphasis by the Government on science and technology with a clear potential for commercial impact as opposed to funding for 'blue skies' research.[19]

16. The economic crisis has also accentuated the different starting points of Member States and their outlook on how the EU can best support R&I. Dr Galsworthy and Professor McKee, scientists who have researched the nature and effectiveness of EU-funded research, identified a gap in participation in EU funded research programmes between the older Member States in Western Europe (the EU-12), and the newest Member States which joined in and after 2004 (the EU-15).[20] They suggested that salary differences are a major contributing factor and argued that researchers in the EU-15 should be paid the same salary as those in the EU-12 to reverse the competitive disadvantage they perceive is suffered by researchers in those countries.[21]

17. The Rt Hon David Willetts MP, Minister for Universities and Science, and Malcolm Harbour MEP, Chair of the European Parliament Internal Market and Consumer Protection Committee (IMCO), said that other sources of EU funding, for example structural funds, could be used to correct imbalances between Member State research capacity and competitiveness. They suggested that this would reduce the impact on the EU's commitment to promoting "excellent science"[22] as will be discussed in Chapter 4.[23]

Private sector reaction

18. The economic crisis has impacted on the private sector in different ways. Chemistry Innovation Limited believed that the current financial climate has caused some small businesses to focus more on their existing operations and survival, rather than looking to new technologies requiring reinvestment. Despite cost-cutting and reorganisation, larger enterprises and high technology SMEs have continued to concentrate on innovation, and have the capacity to engage with EU-funded strategies.[24] On the other hand, Pfizer, a global pharmaceutical company, pointed out that it is revenue from sales which determines its ability to spend money on R&I, and the economic crisis is negatively affecting both.[25]

19. ADS, a trade organisation for the UK aerospace, defence, security and space industries, stated that where larger companies do make cuts, these are felt by SMEs in the supply chains, who find it increasingly difficult to raise risk finance (typically through bank loans) which would be a source of research investment.[26]

The EU's international competitiveness

20. Many witnesses emphasised that R&I is increasingly a global undertaking, and that individual Member States and the EU must be able to cooperate and compete in the global environment. Fast growing economies like China, Brazil or India are rapidly increasing their R&I capacities.[27] According to the Government report Innovation and Research Strategy for Growth,[28] published in December 2011, China is set to become the second largest recipient of foreign direct investment in the world and is already the second largest investor in research and development after the US. High-technology manufacturing now represents 30 per cent of the total manufacturing trade in BRIICS countries[29], compared to 25 per cent for the OECD[30] area. The Government also provided evidence that licensing and patent revenues from overseas investors are three times higher in the US than in Europe. Therefore, while remaining a top player in terms of knowledge production and scientific excellence, Europe is losing ground with regard to the exploitation of research results.[31]

21. In response to this apparent loss of competitiveness, the European Commission stated that the completion of the European Research Area[32] would create a knowledge market comparable in size to the US and China. It added that in 2011, the total business expenditure on research and development at EU level amounted to 1.27 per cent of GDP, compared to 1.18 per cent in 2007. The EU Innovation Scoreboard in 2011 showed that the EU had closed almost half of the innovation gap between itself, the US and Japan, expanded its lead over Canada, and remained stable with Australia.[33] While this increase in total business expenditure is welcome, the Commission acknowledges that the EU needs to improve when it comes to using the outputs of research for generating economic growth. The Commission stated that there is too much fragmentation and duplication of effort, and that there are barriers which need to be overcome in order to remedy the situation.[34]

22. The Alliance for European Diabetes Research (EURADIA) stated that reduced spending in research contributes to a 'brain drain', where researchers move to other regions and countries with superior funding prospects. They argued that this can result in a deficit of researchers and trained professionals when the economy recovers, which in turn can cause a time lag between the generation of research outputs and their translation into innovations and products.[35]

23. The Commission said that, if reduced public spending on R&I in some Member States is not compensated for by increased levels of private investment, the innovation performance of these countries could be hollowed out, endangering their future competitiveness and resulting in lower economic growth and lower tax revenues in the long term.[36] Research Councils UK (RCUK) and EADS, the parent company of Airbus and Cassadian, said that care should be taken to ensure that EU activities are not seen as a way to replace decreasing national activities within Member States, but should provide clear 'EU added value'.[37] Large companies warned about neglecting emphasis on international levels of excellence and settling for an EU average when allocating research funding, as will be discussed in Chapter 4.[38]

24. If the EU budget changes, R&I stakeholders have to prioritise their activities accordingly. However, the grand challenges facing Europe are long-term in nature and some of the EU targets for tackling the challenges mirror this, such as the Flightpath 2050 work programme.[39] Airbus believed that if the R&I to tackle these grand challenges and reach these targets does not begin now, or is postponed or terminated, the targets will not be reached.[40]

25. The Commission pointed out that, since the EU is a single market and trading bloc of 500 million citizens, improving the R&I environment goes hand in hand with making the internal market more innovation friendly. It gave the example of its Communication on the Single Market Act II in 2012,[41] which included proposals for a unitary patent, modernised EU procurement rules and a European passport for venture capital funds—all of which are yet to be put into effect.[42] The Association of Medical Research Charities (AMRC), a membership organisation of the leading medical and health charities funding research in the UK and overseas, said that it is not just R&I-specific legislation that has an impact on the EU's competitiveness in this area. Instead, they suggested that all legislation needs to be considered, such as the impact of data protection regulations on the UK's ability to access NHS patient data for medical research.[43]

Horizon 2020 Budget

26. The evidence we received was almost unanimous that, if the budget for Horizon 2020 within the MFF is not increased, it should at least be maintained at the level agreed at the 7-8 February 2013 Council meeting.[44]

27. Most Member States face budgetary constraints. Many areas of the private sector are also under pressure. This may well inhibit funding for the R&I that is needed for sustained economic growth. Although EU-level funding only accounts for a small proportion of overall spending on R&I across the EU, its effect can be multiplied if the EU-level funding programmes are effective at leveraging greater investment from the private sector. There is therefore a clear case for prioritising funding for Horizon 2020 to build a platform for economic growth and to put the EU in a strong position in a hypercompetitive globalised world.

28. We urge the European Council and the European Parliament to increase the budget for the Horizon 2020 programme within the Multiannual Financial Framework (MFF) in order for the EU to remain internationally competitive in R&I. If this is not possible, the budget for Horizon 2020 should at least be maintained at the level agreed at the 7-8 February 2013 Council meeting.

15 Alliance for European Diabetes Research (EURADIA) Back

16 European Commission Back

17 European Molecular Biology Laboratory-European Bioinformatics Institute (EMBL-EBI); Association of the British Pharmaceutical Industry (ABPI); The Russell Group of Universities Back

18 There are 15 Knowledge Transfer Networks in the UK designed to stimulate innovation in key technology sectors. Back

19 Blue skies research refers to flexible, curiosity driven research for which the real world applications are not immediately apparent; The Association for Independent Research and Technology Organisations (AIRTO); Chemistry Innovation Limited. Back

20 This is evidenced by the list of winners of European Research Council (ERC) grants, the majority of whom are based in institutions in Western Europe. Back

21 Dr Galsworthy and Professor McKee Back

22 COM(2011) 811 final Back

23 QQ 12-13; Q 69 Back

24 Chemistry Innovation Limited Back

25 Q 50 (Pfizer) Back

26 ADS Back