Framework conditions

• Author: Ana Correia, Roberto Martino and Julien Ravet
• Pages: 511-569

511

CHAPTER 8

FRAMEWORK

CONDITIONS

KEY FIGURES

8x

more venture capital

funds raised in the US

than in the EU

22 %

share of public sources

in total venture capital

funds in the EU in 2018

2.5 x

higher institutional performance of the top 10 % of

regions than the bottom 10 %

512

What can we learn?

 The top-performing EU Member States

have a very ef‌f‌icient product and labour

market although on average the EU lags

behind the United States and Japan on

these aspects.

 Institutional quality is high in the core of

the EU and in capitals, with a high degree

of regional variation and heterogeneity

within and across countries.

 Europe is rich in ideas and talent

but lower access to risk capital is

constraining scaling-up. In the United

States, eight times more venture capital

funds are raised for innovation.

 The public sector has been an important

actor in the recovery of venture capital

in the EU.

 When it comes to R&I-related activities,

three main barriers to the internal

market can be identif‌ied, namely limited

knowledge circulation, limited innovation

dif‌fusion, and gaps in the quality and

ef‌f‌iciency of R&I systems.

 There is a positive correlation between

countries’ regulatory quality and

innovation performance. However, China

does not follow this pattern, showing strong

R&I performance but a very low score in

terms of regulatory quality.

What does it mean for policy?

 These results call for policies ensuring

ef‌f‌icient framework conditions and

improving institutional quality across

and within Member States, in particular

peripheral economies in the south and east.

 Foster the access to risk capital and

other alternative sources of f‌inancing

to improve the scaling-up performance of

European innovative companies.

 Europe needs a f‌it-for-purpose and

forward-looking regulatory framework

encouraging innovation to support

social, economic and environmental

transitions.

 Completing the Single Market for

research, education and innovation

can foster knowledge dif‌fusion across the

continent.

513

CHAPTER 8

Investing in innovation activities is a risky

process characterised by high uncertainty

concerning the returns and their

appropriability. Because of this, and the related

dif‌f‌iculties in getting access to appropriate

sources of f‌inance, private investment in R&D

and innovation tends to be lower than what would

be socially desirable. Such underinvestment has

been investigated by analysts and policymakers

as it brings a social loss due to missed positive

spillovers from R&I activities in terms of both

technological opportunities and economic

impacts (Arrow, 1962; David et al., 2000). On the

one hand, such a ‘market failure’ justif‌ies direct

public support for business R&D and innovative

activities in order to increase investment and the

associated benef‌its for society as a whole. On

the other hand, this suggests that the overall

framework conditions in which companies

operate are fundamental as they set business

incentives and shape the innovation capacity

of economies.

‘Good’ framework conditions positively

af‌fect business-investment decisions, ease

access to markets for new and innovative

companies, and contribute to reallocating

resources towards more productive

and innovative activities. This chapter

investigates how f‌it-for-purpose framework

conditions are in Europe and peer economies,

along several dimensions: i) the ef‌f‌iciency of

product markets and the functioning of the

labour market; ii) the availability of sources

of f‌inance for innovative investments; iii) the

quality of the institutional frameworks; and

iv) the regulatory framework for innovation.

These factors contribute to determining the

opportunities and costs businesses face

when operating in a market and, as such,

1 See https://www.doingbusiness.org/en/methodology and the methodological Annex for more details.

af‌fect their decisions. In particular, a higher

number of bureaucratic and oen redundant

requirements (red tape) to engage in economic

activities and exchanges pose additional, oen

unnecessary, burdens on companies. These are

normally known as transaction costs and act

as a deterrent to f‌irms’ investment and growth

prospects as they af‌fect business activities

in terms of both time and monetary costs.

Therefore, while they hinder investment and

economic performance horizontally across

sectors, their impact is specif‌ically relevant for

companies in the domain of R&I, characterised

by higher risk and uncertainty over the

outcomes.

Framework conditions for engaging in

business activities in the EU have been

improving over the last decade and

a positive trend can be observed in most

Member States. Europe has made substantial

progress in improving the conditions for

f‌irms to operate in the markets, reducing

bureaucratic requirements and other costs

related to running a business. This trend is

shown in Figure 8-1 which plots the ease of

doing business indicator produced by the World

Bank for 2010 and 2019. It is an encompassing

index summarising information drawn from

10 indicators describing how easy it is to start

a business or leave the market, dealing with

bureaucratic procedures, getting credit and

going through legal procedures1. An overall

improvement for the EU has been driven by

increases in the index for the Member States

with the lowest values in 2010, suggesting

that an upward convergence trend is in place.

The reforms implemented by Member States

and the deepening of the Single Market have

been two key driving factors.