The Commission’s innovation confusion

Unless the European Commission changes its attitude, the innovation gap between Europe and the US will likely increase, and it could be overtaken soon by China, with dire consequences for living standards, warns Philip Stevens.

Philip Stevens is director of Geneva Network, a UK-based research organisation focusing on innovation, trade and health policy.

The European Commission knows that innovation is a major driver of economic growth, responsible for around 50% of US annual GDP growth, for example.

Accordingly, boosting European innovation has long been a preoccupation of the Commission. First, the 2002 Lisbon Strategy aimed to make the EU the most competitive knowledge-based economy in the world. More recently, the Innovation Union initiative has attempted to raise R&D spending levels to the highest in the world.

These are laudable efforts. They recognise that Europe will lose its competitive edge and slip down global prosperity rankings if it does not nurture valuable innovative industries – life sciences, biopharmaceuticals, information technology, chemicals and entertainment.

Despite these high profile initiatives, the EU is losing the global innovation race. The Lisbon Strategy target of Europe spending 3% of GDP on R&D by 2010 fell flat; it’s now at 2%, 0.5% less than the US and 1.5% less than Japan.

While US start-ups routinely grow to scale, Europe is populated by a creaking hinterland of ageing, less nimble R&D companies. China is catching up quickly, with an innovation performance growth rate five times that of the EU.

On current trends, Europe will soon be an innovation backwater. High skilled jobs and vital foreign direct investment will go elsewhere. Living standards will slowly decline as the economic action takes place in more dynamic world regions.

You might expect the Commission to be urgently doing all it can to make the European policy environment the most innovation-friendly in the world.

But, some of its recent policy proposals take the continent in precisely the wrong direction.

New rules around intellectual property rights, crucial for mobilising large amounts of R&D investment capital, ring alarm bells. Intellectual property rights are particularly important for the biotech and life sciences sectors: drug development costs are high (€1.13bn to €2.44bn, according to various studies) and so is the failure rate of research projects.

EU nations clearly benefit from advanced and sophisticated national IP environments and laws as members of various international IP treaties and Commission frameworks.

But intellectual property rights are easily diluted or eroded. In April, the European Parliament adopted the Commission’s new “Single Market Strategy” (SMS), an attempt to modernise and upgrade single market rules to boost growth.

Included in the plan is a review of EU intellectual property rights. Here, the Commission seems to have been lobbied by vested interests that gain from weaker IPRs, notably the generic pharmaceutical manufacturing industry.

A proposed reform mentioned in the SMS threatens an important form of EU intellectual property right called a “Supplementary Protection Certificate” (SPCs). These certificates allow patent protection for medicines to be extended for up to five years, to compensate for the patent term lost by the mandatory process of regulatory review.

The SMS proposal would allow the generic manufacture of patented drugs in Europe if they are covered by an SPC and then exported to a country with no such legislation.

The Commission used numbers from a generic industry economic study to justify its new rule, claiming the export waiver will create 8,900 new European jobs and 35,560 new indirect jobs in generic drug manufacturing.

Such prioritisation of low-value manufacturing is at odds with the EU executive’s real need to drive innovation. Generic drug manufacturing is a business of razor-thin margins; it adds little overall economic value.

More damaging is the potential of the rules to destroy jobs in the innovative sector. A more recent analysis shows that the move will likely destroy 2,400 European jobs in innovative biopharma companies – precisely the kind of jobs the Commission is trying to nurture. It also found that it would have a “statistically insignificant” on job creation in the generic sector.

If Europe is to close the innovation gap with the US and other countries, it has to encourage its private sector to invest far more in R&D. Tampering with intellectual property rights achieves the opposite and hints to investors that European policymakers are not their allies.

Added to this are other European failings on IPRs. The politically motivated antitrust inquiries by the Commission into patenting by Google and Apple, and its pharmaceutical sector inquiry of 2009, are viewed by many as potentially damaging to the patent system.

This should not be seen as a counsel of despair. The opportunity is there for Europe to eclipse the US, which has also become slightly more ambivalent towards protecting IPRs.

Recent US court decisions have made it more difficult for innovators to secure certain kinds of biotech patent, for instance. The new administration may yet turn out to be hostile to the industry as it seeks to reduce healthcare costs.

But to realise its ambition to become the world’s preeminent knowledge economy, the Commission must look seriously at the signals it is sending to investors. It must ensure its IPR system remains the best in the world, and not get blown further off course.