The research and innovation divide in the EU and its economic consequences

AuthorAndrés Rodríguez-Pose, London School of Economics
1. The policy challenge
One of the main aims of the European Union is
to enhance the competitiveness of all European
economic actors in what has become an
increasingly integrated world. Given Europe’s
history, economic structure and social model,
there is a consensus that this cannot be
achieved by cutting costs and reducing workers’
rights. If Europe is to keep and improve its place
in the world, a dif‌ferent route is required. And
this route needs to rely on inventiveness and
creativity, rather than cheap labour. For the EU,
increasing competitiveness and preserving the
European social model entails moving up the
technological and innovation scale (EU, 2014).
To achieve this goal, both individual European
countries and the EU as a whole have put
research and innovation (R&I) policy at the
heart of their innovation ef‌forts. Innovation
policies in Europe – both at the national and
European-wide scale – have, to a greater
or lesser extent, remained anchored in the
belief that more investment in research and
development (R&D) leads to greater innovation
and that innovation triggers economic growth.
Consequently, a considerable – and, until the
beginning of the crisis, growing – amount of
resources has been devoted to R&D across
Europe. Most of this ef‌fort has been aimed at
achieving a quantitative target: securing an
R&D investment of 3 % of GDP, of which two
thirds are expected to be accomplished by the
private sector. The 3 % of GDP target ref‌lects
not just a belief in the benef‌its of greater R&D
This contribution looks at the economic
consequences of the R&I divide across EU
regions and highlights the policy challenge
they represent. It reviews the theoretical
factors behind current levels of territorial
polarisation, maps the current state of this
divide, and presents an econometric approach
to identifying the ef‌fects.
The core of the argument is that research
and development (R&D) investment alone
does not trigger the same returns on
investment everywhere because of several
factors. These are linked to the cost of
technology accessibility in dif‌ferent places,
the distance to the technological frontier,
positive externalities from larger and denser
regions, the quality of local institutions, and
hampered knowledge sharing.
Many of these factors disadvantage the less-
developed regions in their ef‌forts to broaden
their innovation capacities with the aim of
unleashing greater economic activity and
growth. Nevertheless, most of the R&D growth
in less-developed regions has been in the
higher education sector, which has led to a
substantial improvement in scientif‌ic output.
The chapter discusses how to improve the
ef‌f‌iciency of investment in R&I systems and
strengthen innovation-driven economic growth.
In its conclusions, it not only diagnoses
the situation but also suggests elements
of innovation policy for less-developed
regions. These aim to close the innovation
divide between more- and less-developed
areas in the EU while increasing the EU’s
competitiveness through a stronger role for
innovation as a trigger of economic dynamism.
investment but is also a political response to
the perception that the EU as a whole has
been falling behind its main competitors in
innovative capacity. For most of the 1990s and
2000s, investment in R&D in the EU languished
at levels slightly below 2 % of GDP. Japan
(generally over 3 %) and the US (just short of
3 %) have been pulling ahead. At the same
time, emerging countries, such as South Korea
and, more recently, China have caught up and
surpassed the EU in terms of relative R&D
investment (Dosi et al., 2006; Crescenzi et al.,
2007). Hence, geopolitics and the fear of being
le behind has contributed to setting the 3 % of
GDP objective as one of the main pillars of, f‌irst,
the Lisbon Strategy and, later, the Europe 2020
Strategy (Uppenberg, 2009). High hopes have
been put on the economic impact of achieving
such an objective: the Europe 2020 Flagship
Initiative estimated the benef‌its of reaching an
investment in R&D of 3 % of GDP by 2020 at
3.7 million additional jobs and an annual GDP
increase of EUR 800 billion by 2025 (EU, 2014).
Nevertheless, the adequacy of such
a quantitative target has been questioned from
almost the very beginning (e.g. Kok, 2004; Van
Pottelsberghe de la Potterie, 2008). The target
has also proved elusive (Van Pottelsberghe de
la Potterie, 2008). Europe as a whole has not
only failed to come close to it but has also been
incapable of keeping up with the R&D drive
of its competitors – from the United States
to Japan, South Korea or China (Dosi et al.,
2006; Crescenzi et al., 2007, 2013). Over the
last 20 years, competitor countries have either
consistently invested more in R&D (e.g. Japan,
South Korea and the United States) or, as in the
case of China and South Korea, increased their
innovation ef‌forts to a far greater extent than
the EU as a whole.
In addition, the overall pursuit of R&D and
innovation at the European level has not been
without victims. Investment in R&D, despite
some geographical catching up, has not become
much more territorially even than three decades
ago. In the name of excellence, scarce public
and private R&D resources have become highly
concentrated, both within countries and across
the EU. This is an outcome of targeting R&D
towards those economic agents considered
to have the greatest capacity to generate new
products and processes. The problem is that
the most innovative actors are geographically
concentrated in specif‌ic countries and in specif‌ic
cities and regions within these countries (Usai,
2011). Core countries and core urban regions host
and attract a disproportionate share of innovative
f‌irms and research centres and, consequently,
scientists. The shi from an ‘old’ to a ‘new’ digital
economy – or from Industry 2.0 to Industry 4.0
(Schwab, 2017) – further fuels the clustering of
research activities into large agglomerations and
the redesign of global innovation value chains to
the benef‌it of core areas (Brun et al., 2019). In
these core and innovation-prone environments,
positive externalities from the agglomeration
of R&I activities arise (Audretsch and Feldman,
1996; Rodríguez-Pose, 1999). This widens the
innovation divide as the dominant conviction is
that – following the endogenous growth theory
(Romer, 1986; Lucas, 1988) – increasing returns
on investment in R&D will mainly happen in
innovation-prone areas. From this perspective, if
Europe is to remain innovative and competitive,
the R&D ef‌fort should be concentrated in
those regions where the greatest returns can
be achieved.
Yet, conscious of the growing innovation divide,
the EU and European countries have tried for
years to prevent the scientif‌ic and knowledge
gap between R&D rich and poor countries,
cities and regions from growing. The public
sector has deliberately channelled public R&D
into universities and public research centres in
some of the less-well-of‌f areas with the aim of
bringing them closer to the technological and
innovation frontiers and triggering the conditions
for innovation to take hold. In 2016, or the
most recent year for which data are available,

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