The EU’s innovation policy only fools itself

For the last decade, the EU has been putting in place a rich and diverse array of innovation policies. Almost every month there is a new programme to encourage industry clusters, technology transfers, collaborative research projects, entrepreneurship, venture funding, and the like. If these kinds of policies were all it took to successfully promote innovation, the EU would be the world’s innovation leader. But true success requires a culture and regulatory environment that embraces the disruptive innovation which leads to new technologies and business models that displace or reorder existing markets and industries.

Unfortunately, Europe is decidedly ambiguous if not outright hostile toward disruptive innovation. The prevailing sentiment seems to be that innovation must be shaped, limited and ultimately made to fit into Europe’s existing economic and political frameworks. At the core of this resistance is the fact that the EU remains committed to the so-called “precautionary principle”, which holds that if an action or policy may carry a risk of harming the public or the environment, then those proposing the action must bear the burden of proving it will not. As such, Europe’s regulatory approach is distinctly biased against innovation. Genetically-improved crops must be limited because it is assumed they will put farmers out of work by boosting agricultural productivity. Internet platforms must face special regulation for they may take a share of the market away from traditional industries like publishers and taxi companies. Instead of supporting such innovative disruptions, European policymakers tend to stick to the safer political ground of being “pro-innovation” by encouraging scientific discovery.

The result is that the EU has fallen behind the world’s innovation pacesetters. The OECD has found that while Europe and the United States have similar ‘rates of innovation’, the US does a much better job in quickly allocating capital and labour to the most promising innovative concepts and start-up businesses, so it spawns more winners. With a regulatory system grounded in the precautionary principle, it is harder for innovators in Europe to quickly grab a market share early in their innovation process. By the time they wend their way through Europe’s regulatory thicket, if they ever do, they often find that competitors operating in nations committed to an alternative “innovation principle” have established unassailable head starts. The all-too-common response from European policymakers is then to look for ways to slow down these innovative leaders by imposing restrictive regulations on them.

While this approach to innovation may have worked decades ago, it fails today. As I wrote in my 2012 book, Innovation Economics, this is because more and more nations are engaged in an intense global competition to win in innovation-based industries. Moreover, many of them copy the proactive innovation policy programmes of the European Commission but do not copy the precautionary principle. The state of global innovation competition today is so fierce that if a region is not embracing the innovation principle, no amount of Horizon 2020 programmes will be enough to make it an innovation leader.

Replacing the precautionary principle with the innovation principle will not happen overnight, as the former sustains political support from powerful incumbent industries, and also because of the deeply-held cultural attitudes about risk. But the European Commission can take a concrete step toward the innovation principle by establishing a new “Office of Innovation Review” within the recently created Regulatory Scrutiny Board. The Board’s task is to examine and issue opinions on all the Commission’s draft impact assessments and evaluate existing legislation. But it does not have the specific mandate to review regulations and laws through an “innovation-promotion” lens. To remedy this, the Office of Innovation Review would have some authority to push Commission Directorates-General to act in a manner that either affirmatively promotes innovation or regulates in a manner least damaging to innovation. It would also be tasked with championing disruptive innovation within the Commission and pushing back against the desire to pre-emptively regulate emerging technologies and business models.

If EU policymakers are truly committed to making the EU the world’s innovation leader, they will need to adopt the innovation principle and recognise that innovation success can only come by embracing disruptive innovation.