Four ways Europe can become a global innovation leader

At a time when economic growth in Europe is showing signs of faltering, digitalization and artificial intelligence (AI) technologies have the potential to deliver a breakthrough in productivity. If European companies were to develop and diffuse AI according to the continent’s current assets and relative position in digital techology in the world, a forthcoming report by McKinsey & Company estimates that Europe could add €2.7 trillion to its economic output by 2030.

Closing the gap with the US in the adoption of AI could add another €900 billion to Europe’s GDP by 2030, bringing the total to about €3.6 trillion. In a world where digitalization leads to hyper-competition and superstar companies, there is no time to lose. Yet for now, Europe is lagging behind both the US and China. The best way to catch up will be to scale up by building a new European model for innovation.

Recent research by the McKinsey Global Institute found that Europe is only capturing two-thirds of the digital potential of the US, a gap that has remained constant since 2016 primarily because of a lower level of technology diffusion and use of digital technology. Europe’s total research and development (R&D) spending has stagnated at around 2% of GDP despite major stimuli provided by the EU’s public funding programmes. The same holds for private Information and Communications Technology (ICT) investment.

For example, Europe attracted only 11% of venture capital and corporate investment in AI in 2016, compared to 50% in the US, with the balance of 39% going mostly to China. Since then, the balance may have been shifting yet more towards China, with Europe stagnating. While it is commonly said that Europe is lacking investment funding in early cycles of technology deployment, it also must cope with fragmentation and underdeveloped technology ecosystems more broadly, including in digital platforms, in data availability and access, and in the integration of digital innovation in engineering technologies across industries.

Europe also has many strengths to build on. Its start-up scene is increasingly vibrant; the number of technology IPOs with a market capitalization below $1 billion increased by 120% during the past five years. Europe is possibly the largest digital single market in terms of value, and it is the largest one in terms of the number of researchers. While Europe does not lead in integrating new technologies, it remains close to the US. It does lead in smart robotics and in technologies that will begin to define new and complex manufacturing supply and production chains.

How can Europe catch up and even regain a lead? Certainly, Europe can leverage the mobility of its AI talent as some cities in Europe including Berlin, Paris and Amsterdam emerge as AI hubs. Similarly, it can build upon the European Union’s ambitious Horizon 2020 programme and numerous national attempts to kickstart digital innovation or technology-specific strategies in countries such as Germany, France and the United Kingdom. We see four ways for Europe to construct a new innovation model and address its lack of scale in digitalization and AI:

1. Leverage industrial assets: Funding digital platforms and technologies for strategic European industries

Europe’s large base of established companies and a network of successful SMEs resembles a sleeping giant that needs to wake up to the full force of digitalization. Europe underperforms in diffusion and the use of digital, performing at a level that is at about two-thirds that of the US.

Europe can build on its existing assets and fund national industrial strategies to digitalize and integrate at scale, for example through digital platforms that enable more cross-sector and cross-company collaboration. The focus could be on core industries with high potential, including basic and advanced manufacturing, pharmaceuticals, healthcare and wholesale trade.

2. Change data dynamics: Leading on governance for data access and trust

European companies have built comparatively small repositories of data, platforms and customer networks than their non-European counterparts. As large global platforms are now beginning to integrate stakeholders and data across industrial boundaries, value chains and geographies, the resulting dynamic could leave European companies at a competitive disadvantage.

Europe could open its large vaults of government-owned non-personal and anonymized data for research, while creating new governance rules that give citizens more control over their data - even as more companies gain access to them. Transparency and cybersecurity have become key concerns for citizens. Europe can foster secure platforms that make transparent which data are shared and when, and that allow citizens to change access rights for data sets.

3. Boost talent: Competing with digital skills and diversity

The world’s superstar internet giants like Google (Alphabet), Amazon, Facebook, Microsoft, Netflix and Apple are able to foster innovative creation and adoption through intangibles such as knowledge, skills and entrepreneurial culture, along with data, platforms and capital for R&D and mergers and acquisistions (M&A) at unprecedented scale. Together, they have made more than 60 acquisitions in Europe between 2011 and 2017, with 10 alone in 2017. They are able to pay significantly higher salaries than the market average, for example 1.5 times the market average for software engineers in London. Some companies are using M&A to recruit top talent for sums that typically work out to $5 million to $10 million per person.

Europe could continue to build on its strong education systems, while also attracting international talent through its comparative advantages in diversity and quality of life and by improving remuneration options. To tap existing talent pools, Europe could encourage female talent in technology and entrepreneurship and leverage new technologies to upskill and reskill its population

4. Create demand at scale: Leveraging public-sector leadership in procurement and standardisation

Europe’s large public sector is often regarded as an inhibitor rather than a driver of innovation. However, it can play a primary role in the adoption of innovative technologies: European public procurement for public services and products amounts to 14% of its GDP annually, equal to about €2 trillion. Government procurement can create large and stable demand long before a commercial market is possible, encouraging innovative companies to bid on requests for proposals and heavily investing in digital technologies such as cloud computing and blockchain to scale up demand.

Europe should maximize public procurement as an innovation driver, establish common digital government standards for public services, and thus enable more innovation in government technology.

A new model of innovation for Europe - moving from words to action

These four pathways should come in addition to tackling the fundamental building blocks of Europe`s innovation ecosystem. Together, they form a new European model of innovation.

The time is ripe for a new model for innovation: a new European Commission will set a new agenda for a European Union that may look very different than before. To move from words to action, three concrete initiatives could be launched in 2019:

- A Women Entrepreneurship Network to increase the diversity of talent through coaching and mentoring

- A Centre for the Fourth Industrial Revolution for Europe to drive public-sector digitalization, standardisation and data access

- A European sovereign wealth fund for innovation to scale investments.

In the meantime, please join the discussion on shaping Europe’s role in global innovation online under the hashtag #InnovateEurope.

The report, Innovate Europe: Competing for Global Innovation Leadership, is available here.