The European Union lacks a powerful technology sector at a time when the United States and China are forging ahead in areas such as artificial intelligence (AI), robotics and facial recognition. The ICT industry, which is the EU's Achilles heel, has a rising share of the value-added in the development of green technologies while biotechnology is expanding its role in the development of new drugs, e.g., via genetic engineering used in a large number of drugs, including vaccines.
Western Europe (including UK) is now the largest market for electric vehicles in the world, with sales of hybrid and plug-in vehicles overtaking China’s by 90,000 units in 2020, for a total of 1.33m cars sold. Led by Germany, the automotive sector secured a record €60bn in investments in 2019, for electric vehicle (EV) and battery development, mainly as a result of Volkswagen’s push into emissions-free cars, according to data compiled by Brussels-based non-profit Transport and Environment. VW expects to have 30 EV models by 2025.
American and Chinese companies lead the world in research and development (R&D) investment in ICT (both manufacturing, which typically includes services in modern times, such as in microchips, and services) and health (pharmaceuticals, biotech and medical devices) while the automotive sector is the most important sector in the European Union (the data in the European Commission's chart above are exaggerated for tax avoidance purposes in respect of Ireland; UK; The Netherlands and Luxembourg. This means that the US has even a more dominant position than the chart above portrays).
In the ranking of the top 2,500 R&D investing companies worldwide, published by the European Commission in December 2020, companies in the European Union (EU27) increased investment by 5.6% in 2019 but American firms spent 10.8% more while China's investments grew by 21%.
Amazon would likely be No. 1 rather than Alphabet (owner of Google) if it had been included. It reported ‘technology & content’ at $36bn (€32bn) in 2019 and it has been excluded.
The United States (after adjustments, excluding Amazon) accounted for 42% of the total of €904bn R&D expenditure that represented 90% of world spending in 2019. East Asia was at 32%; EU27 20% and Rest of World was 6%.
The top four sectors account for 77% of the total global R&D: ICT producers account for 23%; health industries 20.5%; ICT services 16.9%, and the automotive industry (16.3%). The R&D growth rates of these sectors in 2019 ranged from ICT services at 19.8% to health at 10%, ICT producers at 8.0%, and the automotive industry at 2.2%.
Ireland has 4 firms in the Scoreboard: Kerry Group (food) at rank 457 and Glanbia (food) at rank 2,467. The other 2 are AIB Bank and Bank of Ireland (24 of the 28 "Irish" firms in the chart above are mainly US firms* that are Irish for tax purposes and I added them to the US total.)
By comparison, Denmark has 32 firms in the rankings while the third and fourth-biggest EU economies by GDP, Italy and Spain, have unimpressive totals of 24 and 14 respectively.
There are only 10 countries in the EU that matter with Germany accounting for 50% of EU expenditure of €175bn (I have reduced the total by €14bn to account for the Irish and Dutch domiciled US firms.)
Just 4 EU countries — Germany, France, The Netherlands* (I cut the Dutch total to €15bn - see below) and Sweden — account for 83% of EU business R&D expenditures.
As for Europe as a whole, the UK* is second in the rankings with 121 firms (although its spending of €32bn is partly a sham) while Switzerland is the best small country with 58 firms led by Roche and Novartis (top pharma firms in Europe) and Nestlé (the world's biggest food company).
Putin's Russia has one entry among the 2,500.
Taiwan with a population of 24m had 88 firms. Isreal with a population of 9m had 22 while India's 29 firms compare with China's 536.
*See below on phantom R&D
Mere 1.5% of Irish firms in rankings invest R&D in Ireland
Researchers at the Joint Research Centre (JRC) of the European Commission say that "Irish companies" invest only 1.5% of their R&D investments in Ireland.
The researchers say that countries like Germany, France, Sweden, the UK, and particularly The Netherlands and Ireland have a negative difference between R&D invested according to the location of the HQ and R&D performed in the country according to the location of inventors.
German firms invest 77% of R&D investment in the domestic market; the rate in the UK is 25.5% and 32% for Dutch companies "and a mere 1.5% for Irish companies in Ireland."
There can be genuine R&D investments in other countries but Ireland and The Netherlands do host many foreign firms seeking lower taxes, that are mainly American.
The UK, the former EU member, is also is flattered by what is American R&D.
In 2014 Mylan, the American generic drugs company became Dutch. Its CEO Heather Bresch commented to The New York Times, “You know what makes me want to cry? I think whoever the next Facebook is, why would you ever start that company here in the United States?”
Mylan’s effective US tax rate had been only 16.2% in 2013, 20% in 2012 and 17.7% in 2011.
In 2019 after a merger with a Pfizer unit, Bresch was crying all the way to the bank as she stepped down with a bonanza of $30m.
Her father Joe Manchin, is a Democratic senator from West Virginia.
The EU's digital challenges
The population of the EU27 is 448m compares with 328m in the United States.
A May 2020 article from McKinsey, the Amerian consultancy, noted that a lot of good ideas that originated in Europe, in areas such as big data, robotics, and artificial intelligence (AI), for example, are often not scaled at all or adopted and brought to market by foreign investors. "That can reduce the impact and return of the inventions or take them out of the region, which can work against the kind of regional growth Europe will need in the wake of the pandemic. And generally, European academic institutions are more successful in research than they are in application and monetization."
McKinsey also noted that "no European company established in the past 30 years has yet joined the ranks of the world’s top 100 companies by market capitalization, compared with three in China and seven in the United States. SAP, established in 1972, was the last European entrant to the global top 100, and all top 100 European companies are more than 30 years old."
While the top five sectors in terms of R&D invested in the 2,500 R&D Scoreboard are the same as in 2014: (1.”Pharmaceuticals & Biotechnology”, 2.”Automobiles & Parts”, 3.”Technology Hardware & Equipment”, 4.”Software & Computer Services”, 5.”Electronic & Electrical Equipment”), in 2019 ”Software & Computer Services” was second, ”Technology Hardware & Equipment” third and ”Automobiles & Parts” fourth.
Among the top 250 spenders or 10% of the sample in 2019, there are 31 "Software & Computer Services” firms: the US has 20; Japan 4; China 3; and EU27 4 firms (France 2; Germany 1 and Spain 1).
Spotify, the Swedish music streaming service which pays its corporate tax in Luxembourg, is at the 254 rank.
From 2017 to 2019, there were about twice as many venture capitalists in the United States as there were in Europe. Total venture capital in Europe rose from $18bn to about $40bn compared with $86bn rising to $116bn in the United States.
However, Britain has typically headed VC investment in the EU and the EU27 total in 2019 was $27bn. US investors accounted for half the total of $13bn invested.
In effect, VC investments in the US were over 4 times the level in the EU. Germany raised $7bn and France 5bn.
By the second quarter of 2018, Chinese startups accounted for 47% of the world’s venture capital funding, overtaking the United States for the first time. However in 2019 partly because of tensions with the US, the investment level fell to $33bn. The Financial Times reported last year that "data from business information provider ITjuzi, 336 start-ups in the country were forced to cease operations over the course of last year, having collectively raised Rmb17.4bn ($2.5bn) from investors. Among them were companies valued individually at more than $1bn (known as unicorns.)"
In Jan 2021 there were an estimated 532 unicorn startups in the world: 258 in the US; 124 China; 35 in the EU27 — Germany 15, France 8, Sweden 3, The Netherlands 3, Spain 2, Estonia 1, Belgium 1, Luxembourg 1 and Ireland 1 (Workhuman) — 27 India; 26 UK; 11 South Korea;9 Brazil 9; 8 Isreal; 5 Japan 5; 5 Indonesia 5; and 24 Others.
The United States and Singapore have come in first and second, respectively, in the 2020 IMD World Digital Competitiveness Ranking, an analysis of how economies employ digital technologies, which could help predict their ability to weather the pandemic. IMD is a Swiss business school.
The ranking from the IMD World Competitiveness Center (WCC) positioned Denmark in third place and Sweden in fourth. The Netherlands is at the seventh rank and Finland is at tenth.
“The flexibility and adaptability of both individuals and the private sector may also be a large part of the puzzle for countries trying to rebuild their economies from COVID’s battering,” added Christos Cabolis, Chief Economist of the IMD World Competitiveness Center.
Together with Switzerland, the EU countries are acknowledged as world-class knowledge economies.
Fraunhofer-Gesellschaft is the leading organisation for applied research in Europe. Its research activities are conducted by 74 institutes and research institutions at locations throughout Germany.
Fraunhofer has had a key role in past decades in developing German manufacturing but it can also be deployed in ICT services.
The European Union in January 2021 approved a plan that includes giving state aid to Tesla, BMW and others to support the production of electric vehicle batteries, helping the bloc to cut imports and compete with industry leader China.
As part of the European Digital Strategy, the European Commission has proposed two legislative initiatives: The Digital Services Act and the Digital Markets Act.
EIT Digital aims to strengthen Europe’s position in the digital world and drive forward Europe’s digital transformation by delivering innovative digital technology to European markets by offering technology, education, and support to entrepreneurs in the digital sector.
EIT which stands for the European Institute of Innovation & Technology, is an independent body of the European Union to deliver innovation across Europe. EIT Digital is part of EIT and is part of EIT that aims to promote digital innovation.
Related
The 2020 EU Industrial R&D Investment Scoreboard
Chips down for EU as Asia seizes microchip advantage — Part 1
McKinsey: Reviving innovation in Europe
