Europe’s tech weakness downplays its global role

  • Mihai Turcanu & Petr Boháček
  • 5.2.2018 13:26

Scientific progress and technological innovation have always been fundamental prerequisites for economic and military advancement of world powers. When it comes to defence, the EU is being held back by technological weakness as its tech industry is falling further against, not only American, but also East-Asian competitors.

Industrial Revolutions, with their characteristic technological development, brought about immense wealth and military might that first allowed Britain, and then unified Germany, to assume the world’s leading military power role. Such shifts illustrate just how critical technological advancement is to maintain competitiveness in the international arena. The digital revolution that began sometime between 1950-1970 in the US, was the result of defence-related research. No doubt, a technological gap between Europe and the US existed since the beginning. While the US GDP was roughly half that of the whole world, half of Europe held back its full potential by Soviet-styled centralised economies, and the other half was heavily dependent on the US in many terms for its WW2 reconstruction and growth. The lag persisted and after the end of the Cold War contemporary observers noted that the weakness of European ICT producers was the cause of a weak growth productivity rate of just 0.7 % annually, compared to 1,4 % in the US. Since the early 2000’s, data showed that closing this gap would be problematic, as it became evident that the technological stagnation was not solely due to fewer resources available for research and development (R&D). In percentage of GDP spent on R&D, a handful of European countries were not far behind the US, which meant these resources were often used less efficiently than across the Ocean.  

The same problem persists today, even though R&D spending in the EU has reached an average 2.03 % of the bloc’s GDP in 2016, compared to the 1.76 % in 2006. In this regard, the EU is surpassed, however, by its biggest technological competitors: US  (2.8 %), China (2.1 %), as well as South Korea and Japan.

In real terms (billions of $, PPP), it is estimated that the EU spending on R&D in 2015 was about $346 bn, behind those of the US ($463 bn), and China ($377bn).

In spite of the increase in European R&D spending, the gap with the US only grew wider. The EU also started to lose ground against China and other competitors in this race. For instance, patent applications according to the World Intellectual Property Organisation, 38 % of the patents in 2015 were filed in China. The US came in second at 20.4 %, while the European Patent Office’s share was only 5.5 %. In 2016, the ICT field patent filings were dominated categorically by the US and East Asian nations.

The lack of a sustainable EU strategy for R&D and an overall inefficiency are evident when we look at the way in which EU businesses are faring in using the opportunities offered by the Internet and new generation technologies. Out of the top thirty most valuable dot-com companies - i.e. using the Internet to conduct their businesses -  only four are European, and none in the first 14. The Fortune magazine depicts a similar picture in its unicorn startups list.  A British study of 2015 concluded that the accumulated value of European unicorn companies was approximately $120bn. For comparison, Amazon has a market capitalization of $634bn. Furthermore, the EU’s digital sector is about to be severely affected by Brexit, as the UK is hosting nearly $50 billion-worth of high-value tech companies, such as ASOS, Global Switch, or Delivero. Above 30 % of the EU’s tech business founders are UK-based, and the country is ranking 8th in the World Economic Forum’s Global Competitiveness Report 2017-18, in terms of “technological readiness and the sophistication of its business sector”.

Similarly, based on revenue and market capitalization reports we know that there are no EU firms among the world’s top fifteen ICT companies like Apple, Google, Microsoft, Sony, Samsung, Foxconn, Dell or Intel. Europeans are accustomed to smartphones, laptops, tablets, but also SSDs, CPUs, and microprocessors, not manufactured in Europe. Software-wise, only the German SAP and Spanish Amadeus manage to have a share in the market otherwise categorically dominated by American companies such as Microsoft, Symantec, Oracle, and Vmware. China’s Tenacet, Baidu or Alibaba are thought of as growing rivals to the US' Google or Amazon, while communication platform Weibo has trumped Twitter by monthly users.

China’s growth and its problematisation

The EU is increasingly losing ground not only against the US but also against China, who up until recently was an insignificant player in the high-tech sphere. China is excelling not only in producing sophisticated hardware, but also, behind the Great Chinese Firewall, its giant internet companies are thriving, setting worldwide trends, and have an enormous fluidising impact in the current digital era.

 

China’s economic and security policy has long been based on foreign technology acquisition.

 

These developments are the result of China’s economic and security policy, which has long been based on foreign technology acquisition through various means to overcome its massive underdevelopment stemming from the 19th century humiliation period or crippling Maoist cultural revolution. The 1986 government program, called 863, aimed at bringing foreign tech companies into joint ventures with semi-state Chinese enterprises to capture desired know-how. Chinese cyber espionage targeting Western private tech companies, taking advantage of the US private sector not designed as critical national infrastructure and without mandated security standards, has been described as the greatest transfer of wealth in history that saved Beijing 25 years of research and has cost the U.S. an estimated 1 % of GDP in 2010. China now accumulated enough know-how to continue to overcome the West in technological superiority. Unlike open European or American markets, foreign companies are not allowed to invest in more than sixty strategic sectors, including energy, telecommunication or media. This protectionism plays into Western disadvantages, which is something Donald Trump continues to rally against. This clearly will carry military and geopolitical implications.

Underlying causes of the EU tech lag

Pointing out the underlying causes of these negatives for EU trends are complicated. One is that the EU is still very heterogeneous. Looking again at the R&D spendings, on one end we have Finland, who spends 3.2 % of its GDP, the majority of money coming from businesses. On the other end, there is Romania spending below $1.6 bn, or just 0.4 % of its GDP, most of which is given by the government. The language barrier is still there, dividing the EU into national markets. Inflexible labour regulations  (like those in France, or Germany) are scaring away the venture capitalists in Europe, a quarter of whom are American and many are Asian. Another thing to dwell upon would be that American observers believe that while science in Europe is strong, there is also a culture favouring theoretical and laboratory work over engineering. Further, the US spends 32 % more than the EU per student engaged in secondary education, and 2.6 times more for university enrolled students. Overall, however, the EU has more science and engineering graduates than the US – 1,097,000 in 2015, against 742,000 in the US in 2014, but behind China who had 1.65 million, also in 2014. This could be an indicator that, despite impressive statistics, the EU-level educational strategies, as well as impressive and well-funded research and innovation programs, such as Horizon2020, might be falling short of their goals.  This has already happened in the past with the previous big 10-year program for funded educational and research initiatives – Lisbon 2010.

 

Europe needs to reconsider its attitude towards defence research and innovation.

 

As demonstrated by the American experience, there is a lot of potential for innovation in the defence related research. DARPA, RAND and other US military think-tanks drove military technology development in the US and set the basis for Silicon Valley and the entire digital industry. In Israel -  the world leader in R&D spending with 4.25 % of its GDP -  the military, scientific and technological growth and development trickle into its innovative economy where big IT, software and other digital companies build upon its military. Europe needs to reconsider its attitude towards defence research and innovation as a way to boost its failing tech industry. Such initiatives as the European Defence Action Plan (EDAP) built on the European Defence Fund and the European Defence Agency (EDA) are only pointing towards the right direction. The EDF will grant defence research projects up to a €90-million by 2020, followed by an additional €500 million. Its capability window, or the European Defence Industrial Development Programme, will grant €5bn annually from 2020 for joint European defence projects. It is a good chunk, compared to the €35bn invested by all EU member states excluding the UK, but it still does not reduce the gap in R&D spending with China nor the US.

Massive technology investment needed

The EU falling further behind, in terms of technological advancement, is a barrier to its aspirations to become a global power. The revenue that the American and Asian tech giants are making in Europe cements their role as tech world leaders and strengthens their defence capabilities. It creates a security vulnerability for Europe through dependency on foreign tech in critical infrastructure and military. There is a reason why the US banned government agencies to buy anything from Huawei, a Chinese network firm. Internet unicorns or companies with disruptive innovative technologies reshuffle entire markets, industries and societies but Europe has no say in this - leaving its defence capacity and resilience behind. Moreover, the EU must keep pace with the technological developments out of which some have or will have dual-use capacity. In spite of the EU for the first time articulating the main goal of its foreign policy as achieving a “strategic autonomy” (whatever that might mean), there is no “autonomy” without technology. With authoritative China inching up to the US as the technological superpower, leaving the EU behind, coordinated, EU-wide and massive investments into technology is a prerequisite for the EU’s global role and strategic autonomy.

About author: Mihai Turcanu & Petr Boháček

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