London - To get an idea of the economic mountain eurozone
strugglers Greece and Portugal have to climb, consider this: per million
inhabitants, they each filed fewer than eight applications with the European
Patent Office in 2010.
Germany, with the advantages of scale that go with a
population eight times bigger, lodged 335 patent applications per million
residents. But the Czech Republic, of a similar size to Greece and Portugal,
managed 16. Much-smaller Ireland boasted 112, according to calculations based
on data on the EPO website.
Figures on research and development are a little better.
Greece spends just 0.6% of gross domestic product (GDP) on
research and development, the same as in 1999. Portugal's R&D rose to 1.66%
of GDP in 2009 from 0.69% a decade earlier but still lags the Organisation for
Economic Cooperation and Development average, which rose over the same period
to 2.33% from 2.16%.
Innovation matters because it is a key driver of
competitiveness, allowing firms to win greater market share and feeding through
into greater productivity.
Patent filings and R&D expenditure are only a rough
proxy for a country's innovative capacity, but Peter Droell, head of policy
development and industrial innovation at the European Commission, said there
was a strikingly strong correlation between R&D spending in the European
Union in the period 2004-2009 and economic growth in 2011.
"Member states which invested in research and
innovation have been stronger in the crisis and are exiting faster,"
Droell said in London last week at the launch of the conclusions of an EU
project on financing innovation and growth.
As such, the figures illustrate the longer-term growth
challenges confronting Greece and Portugal: whether they succeed in boosting
productivity, now just 65% and 77% respectively of the European Union average,
according to Rabobank, will largely determine whether they close the
competitiveness gap with Germany and other stronger eurozone members.
That is the root cause of markets' scepticism about the
ability of peripheral eurozone countries to grow quickly enough to sustain
their huge debt loads.
Difficulty in keeping up
Greece and Portugal are not the only innovation laggards.
Worryingly, Italy and Spain both spend less than Portugal on R&D and trail
Ireland badly on patent filings, at 67 and 31 per million inhabitants
respectively.
True, some experts argue that the effective deployment of
technology, in conjunction with policies that promote competition, are far more
important for productivity and innovation than R&D spending itself.
Why, they ask, hasn't Europe spawned a company like Google
or Facebook or Amazon?
Professor Nicholas Crafts, director of the Research Centre
on Competitive Advantage in the Global Economy at the University of Warwick in
England, notes that for the typical European country 90% of the R&D that
contributes to productivity growth is conducted abroad.
Andrew Wyckoff, director of science, technology and industry
at the Organisation for Economic Cooperation and Development (OECD), an
intergovernmental think-tank in Paris, agrees that innovation depends on much
more than R&D.
It also requires things such as software, human capital,
intellectual property and organisational know-how at company level.
Unfortunately, countries on the periphery of the eurozone
are also not doing a great job measured according to these "intangible assets".
As Wyckoff put it: "They have difficulty sustaining their efforts in this
area."
In a detailed study of the innovation potential in the three
eurozone countries that have had to accept an international bailout, Deutsche
Bank researchers Antje Stobbe and Peter Pawlicki ranked their prospects in the
same order as the bond market does: Ireland scores best, followed by Portugal.
Greece brings up the rear.
Headwinds
Ireland spends below the EU average on R&D but is well
positioned because of its high-tech strengths in information technology,
medical technology and pharmaceuticals, buttressed by strong links between
companies and academic institutions, Deutsche said.
Innovation in Portugal is stifled by low skills. It is near
the top of the league in the number of doctoral graduates, but poor tertiary
and secondary education acts as a barrier to the production of high value goods
and services. Employment in knowledge-intensive sectors is far below the EU
average.
David Haugh, head of the OECD's Portugal desk, agreed that
education shortcomings, though being addressed, were one reason why Portugal
had been unable to adapt quickly when traditional industries such as textiles
ran into stiff competition from Eastern Europe, China and north Africa.
Poorly trained workers find it harder to switch industries
and jobs and redirecting the education system could take decades to bear fruit.
No wonder that Portugal has logged annual growth of less than 1% in the past
decade.
"Portugal is moving in the right direction, but it's
got a lot of things it needs to do on the structural reform side," Haugh
said. "Some of them will pay off in the short run; in the long run, we see
reforms in education as perhaps having the largest payoff."
Unlike Portugal, the environment for innovation in Greece
has improved only slightly in recent years, Deutsche said. There are too few
innovation and research projects worthy of being funded, and the education
system is not imparting the right skills and qualifications.
"There is little potential to leverage the development
of fast-growing industries with high productivity levels," Stobbe and
Pawlicki said.
What is to be done?
Waugh stressed the importance of a supportive business
environment and said exposing companies to greater competition would spur them
to innovate to stay in business.
His OECD colleague Wyckoff said Europe needs to attain scale
by removing the barriers to cross-border collaboration in science and
innovation.
Deutsche's researchers highlighted the urgency for companies
in traditional industries in Greece and Portugal such as tourism and textiles
to embrace a culture of innovation.
In the short run, with the crisis countries desperate for
growth, foreign direct investment could play a key role in helping both
countries to attract modern technology and management methods.
"But to do so the underlying business conditions will
have to be overhauled: a comprehensive economic strategy has to include a
modernisation of the public sector and the implementation of structural
reforms," Stobbe and Pawlicki concluded.