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Businesses in the European Union lag U.S. businesses not just in the amount they invest in R&D, but also in their capabilities to transform these investments into productivity gains. A collaborative economic research paper by four European economists finds that between 2004 and 2012, U.S. businesses realized three-times more productivity growth than EU businesses for a one percent increase in business R&D investment.
Because high-tech firms spearhead economic growth, it should be of even more concern that when the economists isolated only high-tech firms, those in the EU also lag significantly behind those in the U.S. when it comes to their innovation capabilities. The authors estimate that a 1 percent increase in R&D investment gives U.S. high-tech firms 2.5 times more productivity growth than EU high-tech firms.
This should alarm European policymakers who have prioritized increasing R&D expenditures without also prioritizing the capabilities of EU firms to translate R&D investments into productivity gains. To understand how the EU can tap more readily into information and communications technologies to escape from their current sluggish economic performance, see ITIF’s 2014 report “Raising European Productivity Growth Through ICT.”