Innovation also depicts more than one Europe

They say that, when observed from the space during the night, the area between the UK and the north of Italy shines with particular intensity within Europe, as so they do the economies of those regions (Doll et al., 2004). Before the coronavirus outbreak, the European Commission captured the light of regional economies in a picture that we know as the Regional Innovation Scoreboard, as part of its strategy to provide increased visibility to regional policy. This index shows which are most innovative regions in Europe according to some objective indicators, such as patents, scientific publications or R&D related product’s sales. Overall, data backs theoretical hypothesis posed by literature (Cooke, 2001). In fact, innovation hubs emerge around knowledge-based and technology-intensive industrial sectors (clusters, agglomeration and network effects) and top academic institutions (spillovers), since both are capable to channel high concentrations of human capital.

Regional differences

According to the in-depth analysis published by the European Commission, most innovative regions usually locate in countries that also stand out. However, as it is common when zooming the perspective from countries to regions, there are large within-country differences. Therefore, it is possible to find outlier regions. For instance, Prague (Czechia), Crete (Greece) and Friuli-Venezia Giulia (Italy) are considered pockets of excellence. On the contrary, the east of Germany and the north of Sweden, even if located in very innovative countries, show a poor performance.

The largest shares of R&D investment and employment in Europe are concentrated in just twenty-seven European regions (Eurostat, 2019). However, regarding results, a certain degree of regional convergence can be appreciated during recent years, since intermediate-level territories have outperformed top-ranked regions. In contrast, regions that in 2011 already registered the poorest results, continue lagging behind. Additionally, even if capitals usually take the lead within countries, there are no few cases in which peripheral regions hold this position, such as the Basque Country in Spain or Utrecht in the Netherlands.

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The interactive chart that follows shows how the race for the pole position of most (and least) innovative regions in Europe has evolved. As it can be observed, Switzerland is the uncontested winner of this competition. On the contrary, Romanian, Hungarian and some Polish regions represent the tail end of the ranking. They follow some Spanish regions, where the innovation performance is almost as bad as in those Eastern European regions. In order to have a clearer picture, focused on the European Union, we suggest you to deactivate non member-states in the chart (Switzerland, together with Serbia, Norway and the UK).

Investment helps… a lot

When we only look at expenditure indicators, we observe a high correlation between regions that invest the most (2017) and those with the best results (2019). Moreover, the top 25 of both rankings mostly include the same regions. At this point, it is relevant to take two elements into account. First, the disaggregation level of the data for some countries is different in both databases. For instance, regional-level innovation results are available for Swiss cantons, but there is no regional data when it comes to R&D expenditure. Also, countries such as Belgium, offer figures of provincial investment (NUTS-2), but regional results (NUTS-1). And second, R&D investment is one of the variables included in the index calculated to elaborate the Regional Innovation Scoreboard. This means that there could be some degree of endogeneity on this relationship. Although we take these concerns into consideration, it is sensible to think that investment helps fostering regional innovation.

Two interesting insights can be reached by crossing both databases. On the one hand, there are regions that reach the best R&D results without devoting very high levels of investment. In some cases, the innovation effort of this group of regions does not even reach the 2% of the GDP. The Dutch province of Utrecht is a good example of this phenomenon. The high effectiveness of R&D investment in this case could be explained by the knowledge spillover hypothesis. In fact, this province is home of the most important university in the Netherlands, which is also among the best ranked institutions at the EU. The large endowment of high-skilled human capital at the province, together with the close relationship between university and innovation firms could be the factors maximizing the returns from R&D investment. On the other hand, capitals achieve better results than peripheral regions even when they do not employ as much R&D investment intensity. Capitals usually represent the largest urban agglomerations, both in demographic and economic terms, and thus, they benefit from economies of scale and network effects (Neumark and Simpson, 2014).

How about Spain?

The state of innovation in Spain is profoundly negative, and even the best performers (the Basque Country, Navarre and Catalonia), do not stand out at the European context. Precisely, the former, followed by Murcia, Cantabria and the Valencian Community, is the region that registered the largest improvement between 2011 and 2019. In contrast, the situation of innovation in Extremadura and Castilla-La Mancha is getting worse and worse. However, there are some good news for Spain. For instance, La Rioja is the European region with the highest number of trademark registration applications (relative to its GDP), linked to the agri-food industry. Balearic Islands and Valencia are in the top-ten too. Finally, the Basque Country and Navarre are among the twenty European regions with the highest share of young-adult population with tertiary education, which provides them with promising opportunities for the future.

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With regards to obstacles, besides the lack of R&D investment (none reached the 2% of GDP in 2017), Spanish regions suffer the burden of the small size of their firms. According to European Commission’s indicators, Spanish SMEs, which are overrepresented in its corporate sector in comparison to other European countries, innovate too little. Consequently, helping SMEs to develop in this area, could bring very positive results.

The role of the European Union

Precisely, this latter aim, helping SMEs to innovate and sell R&D outcomes, is the objective of Cosme, a programme launched by the European Commission. This policy is complemented with funding opportunities such as Horizon2020 funds. Beyond SMEs, Von der Leyer’s cabinet reaffirmed the role of innovation as an anchor of its strategy on the transition towards a digital and greener economy.

Although EU objectives for the current Multiannual Financial Framework (MFF) set the goal of R&D investment on the 3% of EU GDP, figures in 2017 were closer to the 2%. Objectives were asymmetrical for member states (between the 0.5% for Cyprus and the 4% for Finland and Sweden), but not for regions. In order to correct this situation, European regional policy supported by the new MFF could focus on the competitiveness principle at the cost of the convergence principle. According to García and Murillo (2016), this has been a consistent trend during the last two decades.

Paradoxically, Covid-19 crisis could play a role in favour of European R&D objectives. In fact, when only some months ago member states were negotiating the size of the budgetary reduction derived from Brexit, these days the European Council has on the table an European Commission’s proposal that includes 500.000 M€ transfers targeted to member states virulently hit by the pandemic. A share of these transfers could be partially funded by common debt, which was an inconceivable possibility in the recent past. Of course, this is yet a proposal, but if passed without becoming disfigured, could not only relieve economic consequences derived from the Covid-19, but could also alleviate the poor state of R&D in many European regions.

Finally, the role of regional innovation is also intertwined with recent tensions between EU members on competition policy. As shown by the data, it is frequent for most innovative regions to focus their efforts around large firms, usually sector leaders. This is the case for the car industry in German regions of Braunschweig (Wolkswagen) and Stuttgart (Mercedes-Benz and Porsche), the aerospace and aeronautical industries in the French region of Midi-Pyrénées (Airbus) or the pharmaceutical industry in the Belgian Wallon Brabant. Adding this to previously described obstacles that SMEs face, there would be reasons for those supporting the creation of European business giants. This strategy that Internal Market Commissioner refuses to denominate as “champion’s policy”, was backed by the Franco-German axis and rejected by Spain. However, it could be getting materialized de facto as a secondary effect of the flexibilization of state aid restrictions, set in order to avoid corporates’ bankruptcies due to the pandemic.

As it also happens in other fields, regarding innovation there are also more than one Europe. On the one hand, there is a Europe of shining regions, where days are enlightened by knowledge and by lights during nights. On the other hand, there is another Europe that continues immersed in darkness. As Moretti (2012) defended, the real challenge is not on improving public investment on R&D, but on settling new innovation clusters in regions where now these hubs are non-existent, on consolidating them and making them capable to attract private funding. Hence, reaching such a goal requires gathering and engaging all levels of governments, universities and companies.

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