Industrial innovation has always been key in the European Union (EU) to achieving competitive sustainability. Its role has become even more crucial in the context of COVID-19 recovery plans, the implementation of the twin green and digital transition, and the global sustainability agenda.1 Investments in research and development (R&D) by private sector companies drive industrial innovation. An analysis of differences in R&D intensity across world regions and their development over time is therefore of particular relevance.
We examine the trends of the EU’s overall corporate R&D intensity relative to competing economies. Our findings reveal that the R&D intensity gap has changed over the last decade, and we explore to what extent the EU economy’s sectoral composition compared with that of its main competitors, the United States and China, has influenced this change. Our analysis covers 10 years (2012–2021) and is based on company data that is freely accessible on the EU Industrial R&D Investment Scoreboard website.2
Evolution of industrial R&D investment
EU companies3 are responsible for 20 per cent of current world industrial investment in R&D (figure below). The EU has ranked second among the top world regions for private sector R&D investment over the last 10 years, a period in which global industrial R&D investment grew by 68 per cent.
The trend in the share of private R&D investment in our sample shows that China’s growth has come at the expense of both Japan (China surpassed Japan in 2020) and the EU. If the current trend continues in coming years, China’s share of private R&D investment could surpass that of the EU in the next 3 to 4 years. China’s spectacular growth in the last 10 years does not, however, threaten the United States’ lead in private sector R&D investment.
Structural changes and specialization of R&D investment by companies
The sectoral changes in R&D investment by companies in the EU, the United States and China between 2012 and 2021—and the resulting specialization—are presented in the next figures.
The share of R&D investment by EU companies in automobiles and automotive parts—an industry the EU spearheaded in 2021—as well as in pharma and biotech and software and computer services increased. Together, these three industries represent 55 per cent of total EU private sector R&D investment in 2021. The share of R&D investment by companies in other industries in the EU decreased or remained unchanged.
U.S. companies increased their already high share of R&D investment in software and computer services (nearly doubling this share between 2012 and 2021) and in pharma and biotech, with a focus on technology hardware and equipment. Taken together, these three industries accounted for 78 per cent of total private R&D investment in the United States in 2021.
The share of R&D investment by Chinese companies from 2012 to 2021 changed considerably in several industries, reflecting the Chinese economy’s rapid transformation. In 2021, the bulk of private R&D investment in China targeted ICT-related industries (36 per cent), which, together with construction and materials, represented 49 per cent of total Chinese private R&D investment.
R&D intensity gap of EU companies
Despite EU companies’ solid performance in R&D investment, the gap in R&D intensity (R&D investment-to-sales ratio) relative to their non-EU counterparts has not decreased (see figure below). The R&D intensity gap between the EU and U.S. has grown gradually over the past 10 years. The United States’ lead in private R&D investment, China’s rise and the EU’s declining R&D intensity are reflected in the trend of the EU’s R&D intensity gap vis-à-vis the United States and China. At the same time, the R&D intensity gap between the EU and China—a surplus from the EU perspective—shrank considerably between 2012 and 2021.
Reasons for the EU’s R&D intensity gap
When we break down the R&D intensity gap between ‘structural’ and ‘intrinsic’4 components (figure below), we find that the structural component drives the divergence in the EU-U.S. R&D intensity gap. The same applies to the R&D intensity gap between the EU and China, with China surpassing the EU in terms of the structural component. What explains the gap increase between the U.S. and the EU and the decrease relative to China is not how many individual EU firms invest in R&D relative to U.S. or Chinese competitors, but the EU economy’s structure compared with that of the United States and China.
A decomposition analysis shows that four industries with high R&D intensity (technology hardware and equipment, software and computer services, pharma and biotech, and health care equipment and services) account for the bulk of the EU’s negative structural R&D intensity gap. On the other hand, the EU’s automobile and parts industry (the biggest R&D investor in the EU) offsets this negative structural effect.
The next figure shows that the presence of Chinese firms among the top 2 500 R&D investors worldwide has grown considerably and consistently over the last 10 years. This increase is partially due to better data coverage of Asian (especially Chinese) companies in recent years, but mostly arises from the organic growth of companies investing in R&D in China.
This growth mainly comes at the expense of Japan and the EU, which have both seen a substantial decrease in the number of companies investing enough to top the rankings.
In absolute terms, the number of EU companies among the top 2 500 R&D investors worldwide fell from 519 to 401 between 2012 and 2021, from 796 to 779 for U.S. companies, and from 480 to 293 for Japanese companies. By contrast, the number of Chinese firms among the top 2 500 R&D investors jumped from 176 to 597 over the same period.
Evidence indicates that this gap is primarily attributable to structural factors. These, in turn, are linked to specific industries and implies that there is a much smaller number of leading innovative companies in key high-tech industries in the EU compared with the United State and China. This is particularly the case for ICT industries – EU companies invest much less R&D in ICT industries than their counterparts (e.g. 4.7 times less in ‘technology hardware and equipment’ and 10.6 times less in ‘software and computer services’ than U.S. companies). This finding must be taken into consideration when devising policies that address the digital component of the twin transition.
On the other hand, if we look at the green component of the twin transition, companies included in the EU R&D Scoreboard play a pivotal role. They account for 70 per cent of IP55 patent families in ‘climate change mitigation or adaptation technologies’ filed in the period 2016–2018 (EC-JRC & OECD report, 2021)6. The relative majority of inventors of these patents are located in Japan (figure below). The EU represents one-fifth of the total, slightly ahead of the United States.7
Empirical evidence on R&D investment trends over a 10-year period reveals that the EU’s private sector has generally continued to invest strongly in traditional medium-tech industries, but is losing ground in some of them. Conversely, competing economies are investing much more heavily in newer high-tech industries, maintaining or even increasing their R&D intensity over the last decade. In fact, the EU only has a small number of global players in key high R&D-intensive industries, such as biotechnology and ICT.
This implies a lower overall EU share of net sales and R&D investment in high R&D-intensive industries compared with the full sample (all industries). Consequently, there is a lower impact on the aggregate result (all industries) for EU R&D intensity. The monitoring of industrial trends and competitiveness provides key indicators for policy analysis.8
While the EU is losing ground compared with the United States and China in terms of private R&D investment in ICT, it is ahead of its counterparts in the production of green patents such as those related to climate change technologies.
Policymakers seeking to bridge the EU R&D intensity gap should not only consider horizontal policy options across all industry and firm typologies. Tailored policies should be implemented to foster the speed of structural (sectoral) change towards more R&D-intensive industries, including some emerging ones, for example, artificial intelligence or renewable energy. This will foster the creation and growth of involvement of more firms in these industries. This is crucial for the successful twin transition and for archiving technological sovereignty in key industries.
From a global research and innovation (R&I) competitiveness perspective, the EU’s overarching policy challenge is, firstly, to prevent further structural erosion of its position (especially in key industries such as ICT and health, which was further exacerbated by the COVID-19 crisis, leading to increased demand for R&I-based solutions). Secondly, the transformation of the EU’s R&I automobile stronghold, which has also been challenged by the COVID-19 crisis due to the reduction in travel and the longer term sustainability requirements, must be tackled.
Disclaimer: The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of the European Commission.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
- The relevance of industrial innovation in contributing to these broad transitions and sustainability objectives are reflected in the European Commission’s Communication ‘Annual Sustainable Growth Strategy 2021’ (European Commission, 2021). https://eur-lex.europa.eu/legal-content/en/TXT/?qid=1600708827568&uri=CELEX:52020DC0575
- In this article, we always refer to EU-27. Historical data are adjusted accordingly.
- The difference in R&D intensity between two economies can be attributable to either the difference in structure (i.e. the majority of firms in one economy operate in industries characterized by higher/lower R&D intensity compared with those in the other economy) or to inherent higher/lower R&D intensity of firms in one economy compared to another (regardless of the economy’s sectoral composition). The literature describes the first reason as the structural effect and the second as the intrinsic effect. The overall difference in R&D intensity can be broken down in line with these two effects.
- IP5 is a forum of the five largest intellectual property offices in the world: the U.S. Patent and Trademark Office (USPTO), the European Patent Office (EPO), Japan Patent Office (JPO), the Korean Intellectual Property Office (KIPO), and the National Intellectual Property Administration (CNIPA) in China.
- EC-JRC & OECD (2021). “World Corporate Top R&D investors: Paving the way for climate neutrality”. Report EUR 30884 EN, Publications Office of the European Union, Luxembourg. ISBN 978-92-76-43373-6, doi:10.2760/49552, JRC126788.
- For more details on the EU‘s position on green invention, see Chapter 4 in Grassano, N., Hernandez Guevara, H., Tuebke, A., Amoroso, S., Dosso, M., Georgakaki, A. and Pasimeni, F., The 2020 EU Industrial R&D Investment Scoreboard, EUR 30519 EN, Publications Office of the European Union, Luxembourg, 2020, ISBN 978-92-76-27418-6, doi:10.2760/203793, JRC123317. For more details on patenting trends in climate change mitigation technologies, see Chapter 4 in Grassano, N., Hernandez Guevara, H., Fako, P., Tübke, A., Amoroso, S., Georgakaki, A., Napolitano, L., Pasimeni, F., Rentocchini, F., Compaño, R., Fatica, S. and Panzica, R. The 2021 EU Industrial R&D Investment Scoreboard, EUR 30902 EN, Publications Office of the European Union, Luxembourg, 2022, ISBN 978-92-76-44399-5, doi:10.2760/559391, JRC127360.
- For example, the Annual Single Market Report’s set of key performance indicators (KPIs) to support innovation - COM(2021) 350 final).