In the aftermath of the pandemic, the European Union (EU) is drawing the first lessons from the crisis. «Strengthening the economic resilience of the European Union (...) and policy autonomy for key technologies and value chains are strategic priorities 1 ». The draft Multiannual Financial Framework (2021-2027) 2 and the European Commission’s «Next Generation EU» recovery plan3 are sized accordingly. The challenge is crucial: to accelerate the transformation of the European economy in response to societal and environmental challenges. The trajectory is clear: to resolutely engage in the transition towards a green, sustainable and digital Europe.
The deployment and scaling up of breakthrough innovations and enabling technologies (cloud, Internet of Things, robotics) are necessary to achieve these ambitious objectives. We mean disruptive innovation, i.e. the deploy- ment of new technologies whose building blocks will feed a continuous cycle of innovations for the creation of future markets. The immense technological needs call for the broadest possible partnerships at national and international level between data scientists, researchers, academics, small and large enter- prises to accelerate the innovation cycle. The pandemic is putting its growth strategy to the test: companies’ cash flow has deteriorated, competition has been distorted by the massive capital injections by some Member States for restructuring and rescuing companies, the Internal Market is fragmented from a regulation and taxation perspective, etc. In this context, how can the EU do more and better with less?
In the global race for innovation, the EU needs to catch up (1). The new indus- trial strategy makes it possible to redefine a level playing field, provided that it benefits both businesses and the public sector (2). We will therefore examine the public policy levers that make it possible to close the innovation gap, the key to European strategic autonomy (3).
The Europe 2020 strategy had set the objective of «improving the conditions for innovation, research and development» through «combined public and private investment in R&D to 3% of GDP by 2020 4 «. This target has not been met.
The EU has achieved a low share of global investment in software and IT services («8% of the world total, well below the 11% for Chinese companies and far behind the 77% of US companies in 20185»).
Moreover, the EU has invested less than its competitors in the field of Artificial Intelligence (AI), which is problematic at the dawn of the next re- volution of the Internet of Things. According to the European Commission’s White Paper on Artificial Intelligence, «Some 3.2 billion euros have been in- vested in AI in Europe in 2016, against approximately 12.1 billion euros in North America and 6.5 billion euros in Asia. Europe therefore needs to significantly increase its investment levels.».
On top of that, it should be noted that private sector funding of R&D (corporate venture and venture capital) in Europe is lower compared to other regions of the world. The higher the share of private sector funding of R&D, the more likely it is to generate innovations under conditions close to those of the market. According to the European Commission, however, private sector R&D funding is only 55.3% of total R&D in Europe compared with 78% in Japan, 74.7% in China and 64.2% in the United States6. At the dawn of the next industrial revolution of the Internet of Things, European companies are therefore fragile in the face of very strong global competitive pressure. The development of innovative business models based on the collection and processing of per- sonal data («If it’s free, you’re the product») has enabled some online platforms to gradually acquire considerable market power as a result of «winner takes all market» and network effects. In a snowball effect, these innovative companies developed new services and then implemented «feudal» strategies to exploit their market power.
Today, these companies have considerable financial resources and invest massively in R&D. In the European Commission’s Scoreboard of the 2,500 companies with the highest R&D investment worldwide in 2018 and 2019, the top 10, top 50 and top 100 companies account for 15%, 40% and 52% of the total investment respectively.
The next industrial revolution of the Internet of Things is a major turning point for Europe. Indeed, in the Internet of Things the production of industrial data will migrate from the cloud to the edge. Thanks to the competitiveness of its industries, Europe produces a significant share of this industrial data (40%). European companies are also well positioned to operate data management platforms as close as possible to production sites and meet all the technical prerequisites (security, latency, robustness). However, the industries in which the European Union has a strategic position are undergoing a digital transformation. It is therefore crucial for Europe to further invest in emerging technologies and infrastructures as well as in digital competences like data literacy to capture the value of the data and prevent possible «commoditization» of its industries (in the automotive sector for example).
To win the global race for innovation, Europe must take account of strong constraints: disruptive, high-risk, high-impact innovations require long development cycles and massive funding.
These initial constraints explain the choices made in the new industrial strategy for Europe. Firstly, the Commission has made provision for massive financing of breakthrough innovations by the European Innovation Council (EIC) pilot scheme - in co-investment with companies - in the form of grants, mixed financing (grant and equity) or even in the form of direct, long-term participation by the EIC in start ups and SMEs (creation of the EIC Fund on 23 June 2020). Most interestingly, «the EIC Fund fills the funding gap at the start-up stage where the EU venture capital market underperforms compared to the global venture capitalmarket 10 «. The InvestEU investment fund also includes a window for strategic investments in R&D and digitalization
Secondly, the development of data spaces, access to which is conditional on compliance with a legal corpus that is particularly protective of the fundamental rights and freedoms of individuals (RGPD12) and strict regulations13in the field of security and cybersecurity , is intended to promote access and re-use of data for the development of innovative offers, particularly by SMEs. The choice of an infrastructure and open standards aim to promote the interoperability of solutions and the reversibility of data.
Thirdly, investment is being channeled towards a few key technologies that guarantee Europe’s strategic autonomy and resilience: artificial intelligence, quantum technologies, cloud computing, cybersecurity, high-performance computing...
The success of the strategy requires the definition of adequate incentives for companies. Indeed, the value of data is not reduced to the cost of acquiring and processing it. Companies’ business strategies are based on the value of data. The lack of adequate incentives would lead to a loss of attractiveness of the EU for consumers and businesses. It is therefore essential that the definition of these incentives is done in a dialogue between business and the regulator.
Defence plays a driving role in the industrial deployment of breakthrough innovations thanks to the combination of «planned innovation» (long and very long term programmes) and « open innovation» (capturing civilian innovation from the most innovative SMEs and VSEs). The recovery of innovative technological bricks by the private sector makes it possible to accelerate the innovation cycle in a continuous flow.
Dual innovation has a knock-on effect in other sectors, as we saw again du- ring the pandemic crisis in France. The Defence Innovation Agency (Ministry of the Armed Forces) has demonstrated Defence’s pivotal role in technological innovation in the fight against COVID. Following the call for projects launched by the Defence Innovation Agency for innovative R&D solutions, nearly forty innovative R&D solutions from civilian SMEs were captured in record time. The Agency’s agility and ability to federate the industrial and research fabric, both civilian and military, made a powerful contribution to the national effort. The scaling of projects, according to their purpose, will not necessarily be the responsibility of the Ministry of the Armed Forces.
Likewise, the long-term investments made by Defence in long-term programs have spin-offs for all the other sectors, even if the level of requirements is not the same. For example, in the field of artificial intelligence if « the uses of AI for the Ministry of the Armed Forces present (...) characteristics and requirements that are not necessarily those of « the uses developed at this stage for the commercial sector (...). These challenges are similar to those that will be faced by all critical systems that incorporate AI, whether they are autonomous vehicles or power Moreover, European defence programmes (which require the participation of at least three legal entities established in three Member States or associated countries within a consortium) enable innovative companies to exploit economies of scale for industry and Defence Innovation Agency, Ministry of the Armed Forces, «Imagining Beyond», Defence Innovation Policy distribution systems.».
Moreover, European defence programmes (which require the participation of at least three legal entities established in three Member States or associated countries within a consortium) enable innovative companies to exploit econo- mies of scale for industry and production in the internal Market.
These economies of scale have been estimated at between 25 and 100 billion euros. Thus, the calls for projects selected by the European Commission (DG DEFIS) involve 24 Member States for the Defence industrial programme EDIDP (European defence industrial development programme) and 22 Member States for the PADR programme (R&D precursor programme).
The European Commission’s equally innovative approach to encouraging disruptive contributions obtaining disruptive proposals via less detailed calls for proposals and enhanced participation of SMES should be highlighted. 40% of the beneficiaries of the European Defence Fund pilot scheme are SMEs, compared with 25% in the Horizon Europe R&D programme.
The participation of SMEs is encouraged trought eligibity conditions and the awarding of bonuses. Under the EDIDP regulation , this bonus is even higher in the case of a cross-border SME (located in a Member State other than that of the non- SME entities in the consortium). The emergence of industrial leaders, at the heart of the new industrial strategy, will probably also involve the consolidation of a number of SMEs at European level.
European defence programmes are catalyst for innovation for the whole economy at European level. Increasing Defence funding in the next Multiannual Financial Framework is therefore a strategic priority.
The effectiveness of competition policy is indisputable in view of the in- crease in consumer purchasing power, the quality and diversity of offers. Over the period 2000- 2015, «prices in the United States have risen by 15% more than in Europe, but wages by only 7%. The price/wage margin has fallen by about 8% in Europe compared to the United States. For a worker at the median wage, this represents an 8% increase in purchasing power. «. However, the increase in consumer purchasing power has had the corollary of a gradual reduction in margins for companies, which is unfavourable to corporate R&D investment.
However, the end of the crisis and the recovery require an acceleration of innovation and an increase in R&D spending. A shift in competition policy is necessary to allow for structuring concentrations, massive economies of scale and improved margins, which are a pre-requisite for innovation.
The Commission’s Horizontal Merger Guidelines state that « effective competition may be significantly impeded by a merger between two important innovators ». The competitive analysis of a merger and the efficiencies claimed by the parties requires a careful case-by- case examination of the conditions of competition.
Yet, the Dow/ DuPont case appears to mark a radical change in the examination of the impact of mergers on innovation. In this case, the Commission did not focus on specific product overlaps as it traditionally did. It examined the impact on innovation «as a whole20». The Commission found that Dow and DuPont would be likely to reduce their R&D budgets after the merger, which would inevitably lead to a reduction in the number and/or quality of new products brought to market.
The burden of proving the efficiencies of a merger rests on the merging parties. In very fast- moving markets, it is logical that DG Competition, which does not have all the information at its disposal, should be particularly rigorous in examining the efficiencies claimed by the parties. In practice, the burden and standard of proof on merging parties to establish efficiencies is so high that the Commission nearly never accepts efficiency claims, even when considering static cost reductions.
The use of artificial intelligence by DG Competition for the purposes of its analysis may reduce this asymmetry of information and promote a more refined understanding of market dynamics. Thanks to AI, competition agencies could understand how firms are using data, what their machine learning and AI algorithms are doing. To this end, the Competition and Markets Authority, the forerunner on the subject, has set up a data unit under the leadership of a Chief Data and Digital Insights Officer.
Indeed, thanks to AI, « competition policy could [also] help to detect weak signals of disruption, on the basis of which targeted action plans could be identified and deployed 21».
Competition policy has a crucial role to play as a vehicle for enhanced industrial policy.
Almost 50 years after the adoption of the first public procurement directive, the Internal Market for public procurement still does not exist. Contracts are national or local (see the « French administration millefeuille »). The EU has adopted a new package of directives in 2014, with the aim of simplifying procedures, taking greater account of social and environemental aspect and encouraging SMEs to participate in public procurement. However, innovative public procurement is still insufficiently used by public purchasers, both for reasons of legal certainty and for «cultural» reasons. The broad definition of innovation in the OECD Oslo Manual is far from being an obstacle. The cluster of indices of the observatoire In France gives public purchasers a certain flexibility, precisely to facilitate the development of these markets. However, in the absence of a specific incentive from the public authorities, the public purchaser has no interest in assuming the risks inherent in managing innovation.
The pandemic crisis has called for massive state intervention. The issue of protecting strategic assets, the possible relocation of all or part of certain critical industries on national territory, the definition of actions to make Europe the most advanced economic region in terms of green technologies are the subject of strategic planning at the level of the Member States and the European Commission.
In order to develop innovative public procurement, public authorities should support the professionalisation of public agents and define incentives. This professionalisation requires the training of a European and national elite experienced in orchestrating and leading open innovation ecosystems, such as the program managers of the European Innovation Council (pilot).
Secondly, public authorities must drive a new innovation dynamic. The logic of experimentation, pilot projects or derogatory frameworks, which hinder the scaling up of innovative solutions, must be overcome, especially in sectors where the technology is mature (in health and transport for example).
Last but not least, public purchasers must take into account the value of innovation (instead of costs) when awarding a public contract. This requires an imperative and experimental process in which the patient/user/end-user place a leading role in order to achieve the best possible outcome. The improvement of the quality of bids should be encouraged through sourcing (calls for proposals, request for information ...). In an eco- systemic approach, the pilot of the European Innovation Council (Directorate General for R&D) even goes so far as to organise direct contacts between public purchasers, VSEs and SMEs and co-creation sessions between public purchasers and innovators. The collaboration of all parties can go as far as the implementation of design thinking (functional definition of needs in a co-creation process between the public purchaser and the supplier).
Should there be a European preference for public procurement? This would require an amendment to the European treaties which prohibit the principle of non-discrimination. Domestic law in France would also have to be amended. The immense technological needs, the interconnectivity of economies and the development of global value chains call for the development of international trade and the opening in principle of public procurement markets, except in the case of non-reciprocal access.
As the latest figures from the European Innovation Council’s pilot project highlight, the EU has a very significant potential for innovation, which is still under-exploited.
How can the EU do more and better with less? The EU must avoid a piecemeal approach. Our first proposal is to strengthen European Defence through e-Defence programmes, vectors of technological innovation that benefit the whole economy. Within the framework of the discussions on the adoption of the Multiannual Financial Framework, it is now up to the European Parliament to bring forward an ambitious project for the EU to achieve strategic autonomy through an increase in the resources of the European Defence Fund.
Secondly, a shift in competition policy is necessary to allow for structuring concentrations, massive economies of scale and improved margins, a factor of innovation.
Thirdly, public procurement must be used not for strictly transactional purposes but as a strategic tool to support innovation
These conditions are the prerequisite for the EU to be able to accelerate the transition towards a green, digital and resilient Europe.
[1] The draft budget foresees €94.4 billion for the Horizon Europe Research and Development programme and €9.4 billion for the new EU4Health programme.
[2] In the InvestEU programme, the Commission targets in particular support for Research, Innovation and Digitalisation (€10 billion), SMEs (€10 billion) and European strategic investments (€31 billion).
[3] European Commission, Communication «Europe 2020 - A strategy for smart, sustainable and inclusive growth», COM (2010) 2020, 3 March 2010
[4] European Commission, working document, impact assessment, accompanying document Proposal for a Regulation establishing the InvestEU programme, 6 June 2018.[2] European Policy Strategy Center : «EU Industrial Policy After Siemens-Alstom: Finding a new balance betweenopenness and protection», 18 March 2019.
[5] European Commission, White Paper on Artificial Intelligence, COM(2020) 65 final, 19 February 2020[2] Sébastien Soriano, President of the Autorité de régulation des communications électro- niques et des postes: «Il est temps de renverser les seigneurs de l’Internet féodal,» Le Monde, July 5, 2017.[3] European Commission, The 2019 EU industrial R&D investment scoreboard, 19 December 2019.
[6] European Commission, White Paper on Artificial Intelligence, COM(2020) 65 final, 19 February 2020.
[7] Sébastien Soriano, President of the Autorité de régulation des communications électroniques et des postes: «Il est temps de renverser les seigneurs de l’Internet féodal,» Le Monde, July 5, 2017.
[10] https://ec.europa.eu/info/news official-entity-european-innovation-council-equity-fund-high-impact- innovation-2020-jun-22_en
[11] https://ec.europa.eu/commission/priorities/jobs-growth-and-investment/ investment-plan-europe- juncker-plan/whats-next-investeu-programme-2021-2027_en
[12] General Data Protection Regulation, (EU) 2016/679[4] Regulation of 17 April 2019 on ENISA (European Union Cybersecurity Agency) and Information and Communication Technologies Cybersecurity Certification.
[13] Regulation of 17 April 2019 on ENISA (European Union Cybersecurity Agency) and Information and Communication Technologies Cybersecurity Certification.
[14] Defence Innovation Agency. Ministry of the armed Forces « imagining beyond ». Defence Innovation Policy Paper, 2019.
[15] Data sources : EDA Website ; PADR Facsheets-Results of the call ; PADR 2017-2019, European Commision, 15.06.2020
[16] Thierry Breton, Rethinking our security: towards Europe’s strategic autonomy, 25 June 2020.
[17] Regulation (EU) 2018/10921
[18] Gutiérrez G. et T. Philippon, « How EU Markets Became More Competitive Than US Markets : A Study of Institutional Drift », NBER Working Paper, n° 24700, juin 2018.
[19] Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, OJ C 31, 5.2.2004[3] CASE M.7932 – Dow/ DuPont, 27 March 2017
[20] CASE M.7932 – Dow/DuPont, 27 March 2017.
[21] Report by Philippe Tibi «Financing the Fourth Industrial Revolution - Lifting the Bolt on the Financing of Technology Companies» - July 2019.
[22] The main EU directives setting the framework for public procurement are the Public Procurement Directive 2014/24/EU and the Utilities Directive 2014/25/EU on contracts awarded by entities operating in the water, energy, transport and postal services sectors.
[23] Ministry of Economy and Finance, Economic Observatory of Public Procurement, Practical Guide to Innovative Public Procurement, May 2019.
[24] European Commission « EIC Pathfinder (bottom-up call) receives 902 submitted applications - the largest ever response to the programme », 9 June 2020.
