Europe risks never being able to close its research gap with the United States if it cannot increase R&D investment in the services sector, according to a new study published by the Centre for European Policy Studies (CEPS).

The study by European Investment Bank economist Kristian Uppenberg finds Europe's failure to achieve the Lisbon summit goal to raise investment in R&D to 3 percent of GDP by the end of this decade is due to a lower intensity of R&D in just a fraction of the business and services sectors. But while much attention has been given to Europe's lower levels of spending in the area of information and communication technologies, the real long-term challenge could be in services. "Data covering the services sector is far from complete. But it appears that if Europe cannot close its R&D gap with the U.S. in services, the overall R&D gap is likely to widen rather than narrow as the share of services in total value added grows," said Uppenberg.

Uppenberg also argues Europe must not neglect large companies and competitive clusters when seeking to close the gap. Drawing on OECD data, his study shows that the share of small and medium sized companies (SMEs) in total business R&D spending tends to be relatively small (less than one-fifth of the total) in countries with high aggregate R&D intensities. This group includes the U.S., Japan, Germany, the UK, France, Italy, Sweden, and Finland. This suggests that a substantial part of the solution to Europe's low overall R&D intensity is for large firms to spend more on R&D. Public support aimed at spreading R&D evenly across all of Europe's regions or to create innovative centres where none existed before may thus be economically wasteful.

On balance, the decomposition of R&D investments in Europe points to the need to respect the forces of market-driven innovation when designing public policy. If Europe is to succeed in raising its overall R&D intensity towards the levels seen in the U.S. and Japan, it will need to accept that large firms and existing innovative clusters will play a leading role in this expansion, even as public policies continue to support innovation in financially constrained SMEs and the knowledge economy of less developed regions.

Commenting on the study, European Investment Bank President Philippe Maystadt said: "I am pleased that the Bank is contributing to the debate about European competitiveness ahead of the spring European Council. We are all understandably preoccupied at the moment with short-term measures to boost aggregate demand and to keep the economic wheels turning. But this study reminds us that Europe's growth difficulties did not start with the current crisis and that we should not lose sight of our long-term challenges."