Demand Side Innovation

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Innovation: The Demand Side

New ways to create markets and jobs in Europe

Connecting buyers and sellers of emerging technologies www.sciencebusiness.net


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This report was written by Senior Editor Nuala Moran, Editor Richard L. Hudson, Managing Editor Peter Wrobel and

Correspondent Lori Valigra. It was designed by Peter Ramsey, o Designfavour,

and printed by Holbrooks Printers Ltd., Portsmouth, UK

Science|Business

A news service connecting buyers and sellers of emerging technologies

Science|Business is a product o Science Business Publishing Ltd., a company registered in England, No. 5100435,

at 66 Northwood Way, Northwood, Middlesex, HA6 1RB, United Kingdom

Executive Summary 1

Introductory Letters 2

What is demand-side innovation? 4

Role models from around the world 6

Solutions for Europe, 1: Lead markets 9

Solutions for Europe, 2: A new 1992 programme 12

Solutions for Europe, 3: Invent the market friendly University 15

Solutions for Europe, 4: Create Free Innovation Zones 17

Delegates to the roundtable 20

Science|BusinessPub

lishingLtd2007

The Science|Business Roundtable

Innovation: The Demand Side

On 8 December 2006 in Paris, the Science|Business news service organised a unique debate

among a dozen leaders in European industry, policy and academia.

The Roundtable discussion, hosted by Microsoft, focused on an important new trend in

Europe Demand-side innovation policy, to foster the growth of high-tech markets and thereby

create more jobs and prosperity. This report explores the trend, and draws upon the views of

the Roundtable participants.


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A undamental shit in European innovation policyis under discussion in Brussels a shit that could,

in the long run, improve the climate or technology

businesses and enhance the continents economic

perormance. It is to examine that potential change,

and to encourage it, that Science|Business presents

this special report.

The theory is simple. In the past, most innovationpolicy in Europe ocused on the supply o researchersand innovations: so much money got pumped into somany labs to produce a desired eect or instance, astronger telecoms industry, more technology jobs, orgreater R&D collaboration across Europe.

But the new approach turns that thinking on its head.Government initiatives, rather than ocused solely onthe money, looking at a broader set o instruments regulations, laws and policy directions that couldhelp spur more demand or high-technology products.For instance, revoke regulations that ragment marketsand suppress demand. Coordinate government policiesto drag new products and services rom suppliers, smalland large, restructure universities so academics thinkmore about what industry and consumers want. In short,

do less spending and more generating o wealth.

Thats the theory. The practice is complicated and itsar rom certain that this tentative new course in policywill survive. It began with the publication in January2006 o an expert report on innovation policy to theEuropean Commission. Its now cropping up in variousCommission statements and background papers, undervarious names: lead markets, technology pull, and (ourown avourite) demand-side policy.

Its against this backdrop that Science|Business organised

a unique roundtable discussion, hosted by Microsot, toexplore these policies urther. A dozen leaders in Europeanbusiness, policy and academia gathered in Paris on8 December 2006 to debate innovation policy.

Recommendations

Create lead markets. Europes great successescame where it applied public and private energiesto create new markets: GSM mobile phones anduel-ecient automobiles come to mind. Adopt thesame approach now, in a ew sectors where Europehas special opportunities, including low-carbontechnologies, patient data-systems, and healthcareor the aged. Coordinate public procurement,standards-setting, deregulation and nancialincentives to spur innovation in these sectors.

Launch a new 1992 programmeto openragmented markets. Somewhere along the roadto enlargement, the European Union aced strongbarriers to trade and growth. The market orintellectual property is splintered by language andcourt jurisdiction; uniy. The market or proessionals doctors, lawyers, engineers, and others at the hearto the so-called Knowledge Economy is ragmentedby national employment, pension and proessional-standards rules; uniy. The market or seed andventure capital, the lieblood o new tech and bio

companies, is ractured by contradictory tax regimesand regulatory requirements; uniy.

Invent the market-riendly university. Europesuniversity system is struggling and needs reorm.Concentrate resources on a ew great institutions,rather than many mediocre ones. Reorm tenure rulesthat discourage risky industrial work. Find new ways toconnect business buyers to academic researchers tointegrate market demand into the research agenda.

Create Free Innovation Zones. I Europe cantagree on economy-wide reorms, start with a ewspecic sectors and projects. In hot new areas like

low-carbon research, create a new legal status orqualiying ventures that grants them exemptionsrom growth-hobbling rules. Grant them tax breaksto attract investors, fexible employment contractsto lower their costs, access to a special EU und toderay their IP-protection costs.

There are many other recommendations in this report.Some are the suggestions o our Roundtable guests,and we credit them accordingly. Some are our own ideasat Science|Business; and we do not wish to imply thatour guests necessarily endorse them. As in any debate,

the Paris Roundtable aired many conficting views. Thepurpose o this report is to explore this exciting new trendin policy, and we wish to thank our guests or their creativityand help in preparing it. We also welcome comment romyou. Email us at [email protected].

Executive Summary

The views expressed in this report, except where specically indicated by quotation o the roundtable participants, are solely the responsibility o Science|Business.

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Europe isnt innovating enough.

Its share o international patents has dropped in fve

years just under 30 per cent rom 35 per cent, losing

ground especially to Asia.1 European companies

earn hal as much rom intellectual property as

American competitors. 2 Europes long-standing

trade defcit in technology is widening. And its

scientists are punching below their weight: while

Europeans publish more research than anyone else,

their papers are cited less oten a measure o their

low scientifc impact.3

So what is to be done? So ar, the European politicalrefex has been to ocus on the money: or instance,the dispiriting act that the European Union spends only1.9 per cent o its gross domestic product on researchand development, compared with 2.7 per cent or theUS and 3.1 per cent in Japan. The natural response:spend more. Thus it is that EU leaders set a target oraising their R&D spending to 3 per cent, as part o theso-Lisbon Agenda to make Europe the most dynamic,competitive knowledge-based economy in the worldby the end o this decade. Thus it is, likewise, that the

European Parliament in November 2006 approved a 40per cent jump in EU spending on R&D subsidies, as parto its 54 billion, seven-year Framework Programme.

The implicit ocus o such policies is supply o money,labs, researchers, discoveries and patents. More moneybuys more ideas. Somehow, they will translate into more

sales, jobs and economic growth. Such has been theguiding principle o EU and most European national policy or a generation.

But a growing number o policy thinkers, in Brusselsand beyond, say its time or a change. People quiteoten equate innovation with R&D; but while R&D is animportant element, it is not the same thing, says EskoAho, president o Finlands state innovation und, Sitra,and ormer prime minister. Thats why the 3 per cent[Lisbon target or R&D spending] is misleading. I dontthink Lisbon will work. We need something similar to the

Single Market project in the eld o innovation.

The groundwork is now starting to be laid or that kind ogrand, transormative programme (the Single Market Actset the EU on a renzy o productive deregulation rom1987 to 1992). But the new policy approach, rather thanworking on the start o the innovation chain, acts at the end in the marketplace. Rather than supplying raw materialsand hoping they will spontaneously react, the new policyinstruments aim to activate the right supply o newproducts and services through creating market demand.

The specic means are varied. One is the lead marketsconcept advanced by Aho and three other expertsin a special report to the Commission in January2006.4 Under this approach, European leaders wouldcoordinate regulation, government procurement,standards and other instruments to spur market demandin strategic sectors. That could mean zero-emission

What is Demand-Side Innovation?

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0.0%

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2002 2003 2004 2005 2006estimate

US

Japan

Europe

Korea

China

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Share o international patent applications, among leading countries

The global patent race


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technologies to make public and private buildingscarbon-neutral and energy-ecient. It could mean, orhealthcare and social services, new medical devices andservices to maintain the quality o lie o Europes agingpopulation. The aim: to replicate the stunning success adecade or two ago o Europes mobile phone industry,with its now-ubiquitous GSM system.

Another means: remove regulatory or scal barriers thatkeep Europes tech markets ragmented, small or slow toadapt. This includes reorming intellectual property law, sothat European inventors no longer have to spend three to

20 times as much or patent protection as do Americans.It includes increasing mobility o workers, pensions andproessional certications, so that a pan-European marketor doctors, lawyers and other knowledge workers canemerge. And it includes harmonising tax and nancial-market regulation, to enable deeper, broader markets orearly-stage investment in tech companies particularlyyoung start-ups.

There are other ideas on the table. Broaden the policyocus beyond hard bio and tech industries, and lookto ways to spur demand or technology in Europes

vibrant creative, nancial and retail industries. Reormuniversity management and tenure systems, so thatacademic researchers think more about what industryand consumers need. All these ideas have the sametheme: ocus on the buyers o innovation, rather thanthe sellers.

O course, its easy to talk, dicult to act. Since theAho report, the European Commission has said it willincorporate lead market pilots in its new FrameworkProgramme in 2007. It is trying once again to reormpatent law. In late 2006, it renewed its advocacy obroad changes in regulation and taxation to improve theoverall environment or innovation. Academic reorm hasbecome very real in a ew countries: notably, Germanysdecision to improve research by designating its threebest universities as Centres o Excellence with greaterunding and prestige. And industry is taking up the cry:the EU ICT Task Force, a tech-industry committee setup to advise the Commission, recently urged severalreorms that incorporate demand-side ideas.5

Its too early to know whether lasting change will ollow.Certainly, the signs in early 2007 arent auspicious: aterthe spotlight that the Finns put on innovation policy

during their presidency o the EU, the Germans in early2007 presented an agenda that relegates the topic tothe back burner. And the Commission, with FrameworkProgramme 7 now approved, will doubtless be tempted

to devote most o its time in 2007 to spending the moneyrather than reorming the markets.

Still, Europe has many strengths to build on,; andinnovation policy is generally a hot political issue thesedays. Innovation is a sexy topic, says Pavel Telicka,co-ounder o BXL Consulting and a ormer Czechcommissioner to the European Union. Everyone istalking about it. But is the thinking about it sexy? We willmove much more rapidly i we can make the politiciansunderstand what will come out o innovation.

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Innovation is a sexy topic. Everyoneis talking about it. But is the thinking

about it sexy? We will move much morerapidly if we can make the politicians

understand what will come out ofinnovation.- Pavel Telickav


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By any other name

Innovation is hot. In business, everybody claims to have it. In policy, everybody wants it. And absolutelyeverybody is talking about it.

In act, media archives show that, over the past20 years, use o the term has soared 20-old in the major English-language business media. Indeed, asthe accompanying chart shows, the requency o usage is a remarkably aithul proxy or the ups anddowns o the Nasdaq tech-stock index.

But what is innovation? For some, it is the cutting edge o research, rare and valuable. For others, it justmeans new: an innovative new hair dye, a shade dierent rom what went beore. At this end o thespectrum, innovation is merely a branch o marketing. One ot-quoted denition: research is turning moneyinto knowledge, while innovation is turning knowledge into money.

The Innovation IndexNumber of articles in major, English-language business media containing the

word "innovation"

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1000

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Europe in the rear-view mirror

So how soon will the US have to check its rear-viewmirror or competition in demand-side innovation?Some US analysts ear Europe, especially the UKand Germany, may be rst to try to pull into thepassing lane. But those countries will need a systemo innovation that goes beyond allocating moregovernment unds: it has to include governmentregulations that oster entrepreneurship andcollaboration. Innovation is a system with manycomponents, says Audretsch. I there is a deciency,

you have to address it to get a balance.

Its not enough to have technology or capital, saysHoward Anderson, senior lecturer at MITs SloanSchool o Management, and a venture capitalist. Youneed a breed o samurai who are entrepreneurial to pullit together.

Audretsch sees innovation as three main concentriccircles, each o which must interact with the others.At the core are universities conducting undamentalresearch. The next ring is applied research such asbusiness schools and bioinormatics. The third ringis what he calls the spillover mechanisms, such astechnology licensing oces and research parks thatget science out o the university and commercialised.Theres also a more recent outside ring, the absorptivecapacity mechanisms that actively pull researchand knowledge out o the university. This involvescompanies such as Intel and other large corporations

locating sites near universities to tap into the innovationsthey believe their customers will want. These centreso innovation excellence, starting with basic universityresearch at their heart, have drawn in government,venture capital and corporate money.


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Japan when money isnt enough

In the 1970s and 1980s Japan was synonymous withinnovation. Then ollowed the catastrophic propertycrash and the collapse o the banking system in theearly 1990s; and overnight Japan lost its technologyedge, too.

Today, Japan is still the third-highest spenderon R&D in the OECD area. But the benets donot appear to be commensurate with the level o

investment, according to an OECD report.6

At the height o its technological prowess Japan wasoten criticised or being imitative rather innovative.Back then this seemed like irrelevant sour grapes,given the commercial success o the countrysleading companies. But now the OECD report saysthe act that Japans innovation system remainslargely input-driven and ocused on incrementalinnovation based on closed and stable corporate andemployment systems puts it at a disadvantage.

The authors argue this approach is less appropriatein the current global environment that avours risk-taking and a more open system relying on externallinks. To improve the system, a broad-based strategyis needed, including a reorm o product and labourmarkets to strengthen competition and mobility,enhance international R&D links and improve theenvironment or new business. The prescriptionsounds ready-made or Europe, too.

Rx: Think globally

Nick Butler, director o the Centre or Energy PolicyStudies, University o Cambridge:

The most important thing about innovation inEurope would be to drop the word Europe. Thescale of innovation that is needed in most sectorsis not bounded by Europe, either in the sources

of the innovation or its application Do it throughbusiness working globally the role of governmentis to provide the background and framework inwhich business can do it.

One example o linkages across all the circles isStanord Universitys Biodesign Network, whichocuses on technology transer by providing education,advocacy and mentoring to students and aculty whowant to commercialise their healthcare innovations.The network also provides connections to biomedicalproessionals such as investors, equipment makers andattorneys who specialise in new venture ormation.

Lester agrees with Audretsch in saying innovation ispart o a system. Money is a necessary condition,but you cant do it all with money, he says. The

government is unding one-third o the total R&D in theUnited States, but the rest is rom the private sector.So this [innovation] is not a problem to be solved bygovernment unding alone.

He adds, There is an eort to include withingovernment resource-allocation decisions moreconsideration o demand-side actors that may aectthe rate and direction o innovation. Probably the rstthing to be said when it comes to government policy isthe Hippocratic Oath rst, Do no harm.


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The latest buzzword among Brussels technocrats is

lead markets. And its going to be put into action,

on an experimental basis, in 2007.

The phrase comes rom a report, chaired by ormerFinnish Prime Minister Esko Aho, to the EuropeanCommission. The idea is simple. Aho believes Europekeeps up with the US in creating knowledge; but itlags in nurturing early markets or the products o thisknowledge. An example: the pharmaceutical industry,where the European market is ragmented by bordersand rules. Not long ago about hal o pharmaceutical

R&D was carried out in Europe; now the gure is belowa third, with the prospect that more and more researchwill shit to the US and Asia. The reason isnt lack oknowledge; its in the dierences between the US andEuropean pharmaceutical markets.

But it neednt be this way. In act, Europe has inthe past beaten the US at market-creation: its GSMstandard or interoperability o mobile phone networks,established rst at home in the 1980s, has spreadacross most o the world and in its wake, Europesmobile-phone industry has thrived. The lead market

concept would apply many o the old GSM tricksto new elds. These include coordinating commontechnical architectures or standards, removingunnecessary regulatory barriers to expansion, using

government procurement to jump-start the market, andostering a consumer culture that more highly prizesnew technologies and ideas.

Its an attractive idea, but there are many questionsstill to be answered. How will the lead marketsprojects be selected? How do you avoid speciying aparticular, and possibly wrong, technology? How doyou maintain market reedom, and diversity? On thelast point, the problem isnt just allowing ree accessor very small companies though thats important,too. Theres a vast middle ground. Most o the growth

happens beyond SMEs, says Martin Schoeller,chairman o German engineering rm SchoellerIndustries and president o Europes 500, a growth-company organisation. The young entrepreneur who ismultiplying his own concept is the real job creator.

Is the lead market something we want to be doing?asks Soumitra Dutta, dean o external relations atFrench business school INSEAD. The history ogovernments picking winners is not really something tobe proud o. He suggests what you might call a liteversion: It might be better to think o lead markets as

areas where we think we can be globally competitive,and can make lie easier or current players in industryby removing obstacles.

Solution 1 Lead markets: Creating demand for new technologies

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The ScienceBusiness Approach: Solutions for Europe

I propose a bet on climate change.Drive market creation through pushing

forward a global agenda; and drive R&D,venture funds and business funds aroundthat one single area. Simon Zadek

As the European population ages, healthcareexpenditures will climb

A market opportunity: The rising cost of healthcare

Source: European Policy Centre, 2001

Country Spending on healthcare as a

percentage o GDP2000 2050

BE 5.3 6.6DK 5.1 5.8DE 5.7 7.1EL 4.8 6.5ES 5 6.7FR 6.2 7.4IE 5.9 8.2IT 4.9 6.4NL 4.7 5.7 AT 5.1 6.8PT 5.4 6.2FI 4.6 5.8SE 6 7UK 4.6 5.6EU 5.3 6.6


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Herewith, some o the concrete possibilities:

Lead Market: Healthcare

Europe is aging. By 2050, the EU orecasts, there willbe just two workers per pensioner, compared withour workers today. Its a rightening prospect, or theelderly who must survive it as well as or the young whomust pay or it.

But every cloud has a silver (haired) lining. Lookedat rom the perspective o demand-led innovation,

the medical and social needs o older people presenta huge market and opportunity to pull through newproducts and services in a range o dierent sectors.But how to capture this market to drive innovation?Because they are publicly unded and risk-averse,many o Europes healthcare agencies are notoriouslyslow to innovate.

A key example is in the ailure to adopt inormationand communication technology. Our experience o,and interactions with, every private-sector company rom banks and insurance companies to retailersand hoteliers has been transormed over the past 10

years by the movement o inormation technology romthe back to the ront oce, and rom there onto theInternet. But most healthcare systems barely have theirproperty management or catering computerised, letalone their ront-end interactions with patients.

As a start, one lead-markets project could be creatinga single, European-wide ramework or electronicpatient records. While many national systems areunder development, they wont at present interconnect.Imagine i they could, through a common, continent-wide architecture and harmonised regulation. National

health authorities would save money, througheconomies o scale. Suppliers would prosper, throughrising sales volumes. Healthcare would improve, withhospital emergency rooms able to access patientrecords more quickly, and health researchers moreeasily able to conduct demographic studies.

Lead Market: Climate control

One o the rst pilot projects in lead markets, theEuropean Commission has said, will be what it callszero-emission buildings.

By this, it means using tax policy, public procurementand regulation to pull through a range o newtechnologies to save energy and cut carbon emissionsrom buildings. Its a daunting task, requiring newmaterials, heating systems, renewable energysources and environmental controls. Already, the UK

government has taken an early step by decreeing thathouses meeting its low-carbon standards can be soldwithout stamp duty the tax usually levied on homesales in Britain.

But thats just one example o the opportunities orEurope to lead in climate-control markets, as a warmingworld is orced to think greener.

I propose a bet on climate change, says SimonZadek, CEO o the Institute or AccountAbility, acorporate-responsibility think-tank in London. Drivemarket creation through pushing orward a globalagenda; and drive R&D, venture unds and businessunds around that one single area.

Every product, every business, every sector will beaected by climate change and the recongurationo energy systems. Whether we talk about Kyoto ormany other possible standards, Europe is in a positionto advance standards globally, in a way that it hasdone in other areas, in ways that advantage businesscommunities that are energy-ecient.

Nick Butler, director o the Centre or Energy Policy

Studies at the University o Cambridge (and ormerstrategy chie or British Petroleum), agrees. An areawhere Europe should be leading and not just watchingis the combination o climate change and the transitionto a new, more local, more green orm o energy base.What would be necessary or Europe to be a leader inthat area, with all the benets?


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A European success story: biosimilars

In normal circumstances, pharmaceutical andbiotech companies in Europe nd themselves ata disadvantage compared with the US. Despitethe loty ideals and practical eorts o EMEA, theEuropean drugs regulator, the market remainsragmented both in terms o the rules andconditions that govern drug development and thepost-registration hurdles that must be jumped to

agree reimbursement.But in one shining area o healthcare, Europe hasoutpaced the US in creating a new sector: biosimilars.These are bio-engineered copies o original biological(protein) drugs that are coming o patent. EMEA haspoured great eort into devising a pan-Europeanramework or approving them.

The ramework recognises that, unlike small-molecule drugs (whats mostly inside your medicinecabinet), the properties o high-tech biologicals areas intimately tied to their manuacturing process

as they are to their chemical composition. This isacknowledged by substituting the term biosimilaror biogeneric

This did not happen overnight but ater a ve-yearconsultation period Europe opened the foodgatesto generic biopharmaceuticals in January 2006,agreeing that the human growth hormoneOmnitrope, manuactured by Germanys SandozGmbH, is equivalent in quality, saety and ecacy,to the original registered product. Following on

rom this decision EMEA was expecting eightapplications to register biogenerics in 2006.Biopharmaceuticals with global sales o more than$10 billion per annum will come o patent by 2007,and the move is also expected to contribute to costsavings in health care.

The move by EMEA let its US counterpart, theFood and Drug Administration, trailing, thoughollowing the Democrats electoral successes inNovember 2006, there is renewed pressure or an

approval route or biogenerics..

The US pioneers o the biotech industryhave ought hard against the approval obiogenerics both in the US and Europe, claimingbiopharmaceuticals cannot be copied in the sameway as chemical drugs.

It was only by conceding exact copies areimpossible and making this explicit by ditching theterm biogeneric in avour o biosimilar that EMEAwas able to make progress.

While the requirements or registering a biosimilarare more complex and costly than or conventionalgeneric medicines, they are not as exacting as theroute to market or the original product.

Having taken a lead over the US in ramingthe regulatory ramework and granting the rstapprovals, it is now open to the EU to capitalise onthe market thus cutting its own healthcare costs,and giving European rms a competitive edge.

Web. 2.0:The essence of demand-driven innovation

YouTube, MySpace those are some o the hottestproperties on the Internet these days. Theyresecond-generation Web services, oten called Web.2.0, that the users themselves dene: uploadingtheir videos, news, opinions or anything else theyeel compelled to share with the wider world.

They may also be the working denition o demand-

side innovation, with much o the services andsotware spurred rom the ground up by customersrather than suppliers. Its made or entrepreneurs,says David Audretsch, director o the Institute orDevelopment Strategies at Indiana University inBloomington, Indiana.

Generation Y preers the entrepreneurial liestyle,he says. These are people who deal with the entireworld, where they see these opportunities and arentaraid to make them happen.

Some o the technologies under the umbrella oWeb 2.0 open up a wide set o possibilities to createmany-to-many conversations between developersand designers on the one hand and users on theother, says Richard Lester, ounding director o theIndustrial Perormance Center at the Massachusetts

Institute o Technology.They create the possibility o enhancing thepotential or interpretative innovation, which iswhat happens when developers and producersenter into the lie o consumers, he says.


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Solution 2 Launch a New 1992 programme: Revitalise efforts to

open Europes markets

From 1987 to 1992, the European Union pushed

through a radical reorm programme. Its Single

European Act, authorizing the eort, tore down

hundreds o regulatory and trade barriers that

ragmented the continents markets and stunted

economic growth. By the end o it all, the legal

and regulatory scene had been set or a decade o

prosperity and European expansion.

But there was one problem, which persists today: thenew ree-trade regime applies mainly to products, notservices to things, not people. The Commission tried

to remedy that ault with its Services Directive in 2006 but the result was a watered-down aair. It excludedmany knowledge workers, the heart o the serviceeconomy. A doctor, lawyer or proessor in Germany stillcant easily move across the border to work in France.Does it matter? Indeed it does. The services sectorgenerates almost 70 per cent o Europes GDP, butaccounts or only 20 per cent o intra-European trade.

To unleash a new cycle o prosperity, whats neededis a renewed push by the politicians to remove tradebarriers in services.

The Single Market is still not there, says Aho. Weneed to have some kind o new 1992 programme.We have to set new targets and to move on. It isimpossible to imagine that we can reach the goalswe set ourselves in Lisbon and Barcelona withoutmoving rom the old, resource-based economy to theknowledge-based economy.

What would a new 1992 campaign look like?

Labour mobility

To understand the political problems, look no urtherthan the recent uss over allowing workers rom thenewer EU states to nd jobs in the longer-standingmember countries. Only the UK and Ireland allowedopen access to citizens o the states that joined theEU in May 2004. Satisyingly, the economies o bothcountries are now acknowledged to have benetedas a result, providing a potent example o why Europeneeds to deregulate its labour markets. But imaginehow much greater the economic impact might have

been i most o those East-to-West migrants had beenbiologists, sotware engineers or amily doctors, ratherthan shop assistants, labourers and other lower-skilledworkers. Yet, i youre a proessional today, how do youtranser your pension rom one country to another?How does a Polish doctor get certied to practisemedicine in Italy? How can a Spanish proessor moveto a Swedish university, without losing tenure and pay?The answer or now: its possible, but dicult. To beeconomically meaningul, it must become easy.

Financial markets

Its hard or European tech entrepreneurs to nd capital in act, per unit o GDP, there is about one-third asmuch early-stage investment money sloshing aroundEurope as in the US. One reason is taxation: in mostEuropean countries, its high meaning anybody whohas a lot o money is tempted to invest it in low-taxplaces like the US. Another reason is the ragmentationo Europes capital markets. Because the rules andexpectations are dierent, a seed investor in onecountry rarely ventures into another. That means a ew

countries chiefy Britain, Ireland, Sweden and Finland have become islands o vibrant tech investment;entrepreneurs in most other EU nations languish incapital-starved penury. Ending these cross-borderdierences would increase market eciency bydeepening liquidity, lowering transaction costs, andmaking it possible to compare nancial products romone country to another. All these benets would be oparticular importance to small, high-tech start-ups.


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Intellectual property

In Europe, patenting is a luxury o the rich. I you wantto protect your intellectual property across the EU, youcan start in Munich at the European Patent Oce butthen you have to translate the application into as manylanguages as countries or which you seek protection.You also pay extra or each country added. And what iyou run into a legal ght aterwards? You could end upbattling it in several courts at once, in several languages,across the continent. It is a system only a lawyer couldlove and so ar, all eorts by the European Commission

to reorm it have been blocked by protectionist ornationalistic power plays in one country or another (mostoten, France). The rst step to a borderless technologymarket should be patent reorm.

At present, says Schoeller o Europes 500, it can cost150,000 to le a patent across the EU, due to thehigh translation and administrative costs; thats at least20 times as high as in the US. The European patentshould work legally and cost-wise like in the US: onepatent, one language, one court. All existing patentoces could become branch oces o the European

patent organisation and could be scaled downeventually, but the number o patents might grow byactor o three like in the US or Japan.

One idea is or the EU to develop or divert money to aund that any entrepreneur with a good idea and solidbusiness plan could access to register a patent. Theund should also be used to allow entrepreneurs todeend their patents against the so-called patent trollsor others who inringe their ideas anywhere in the EU.

Other markets

Home heating, uel supply, healthcare a range o othermarkets remain splintered in Europe by border andregulation. In the end, the consumer pays. Says Butlero Cambridge: Where we are behind in Europe is insimplicity o regulation or consumers, so that there wouldbe a real single market regulated across Europe or newproducts, rather than national boundaries that createludicrous complexity and a business or lawyers.

Can a new 1992 programme gain political steam?

Perhaps, but one problem is the common politicalimpulse to compromise away progress wheneveropposition arises. As Bernard Damiens, chairmano PostEurop, the European post-oce association,says: You cannot compromise on a vision. I you lookat businesses, they are driven by vision, and they aredriven by one man, who has his vision, chooses hispeople and drives his business, and all the rest ollows.What do we do with Europe? Absolutely not that. Wesee governments compromising all the time. Europe asan institution has to unction dierently. Excellence iswhat counts.

The European patent should worklegally and cost-wise like in the US:one patent, one language, one court. Martin Schoeller.


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The problem of venture capital

Over the years, Jean-Bernard Schmidt has built oneo the worlds most successul technology investmentrms. He and colleagues at Sonnova Partners,with bases in both Paris and San Francisco, did itin part by working both sides o the Atlantic anintercontinental approach to venture capital now

emulated by others. But now hes worried aboutthe uture o his industry in part because o thegrowth o so-called private equity and hedge unds,investment vehicles that take a more opportunistic(and oten contrarian) view o global nancial markets.

I am concerned that venture capital activity is in theprocess o being squeezed out in the private equityenvironment. Financial institutions are investingprimarily into hedge unds and LBOs (leveraged buy-outs) that provide short-term liquidity and returns.Those nancial institutions that are normally longterm-oriented have been pouring resources intoshort-term allocations week to week or hedgeunds, by the year or LBOs.

Venture capital is going down. I we dont addressthe way our nancial institutions invest, i we dontsend the right messages, we are not going to salvagethe situation.

First we must recognise the problem. Second,we need a series o (tax and regulatory) measures.Money is not lacking. Money is overabundant, innancial institutions, in pension unds, in stockmarkets everywhere except in technologicalcompanies, just because it takes too much time tobuild a technology company.

I ear that i this trend continues, within the next twoyears venture capital in Europe and in the US will nolonger be an asset class.

You cannot compromise on a visionWhat

do we do with Europe? We see governmentscompromising all the time. Europe as aninstitution has to function differently. Excellence iswhat counts. Bernard Damiens

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Solution 3 Invent the market-friendly university

Universities should be the engine rooms o the

knowledge economy. But or many in Europe their

archaic structures, rigid tenure rules and anti-

commercial attitudes make them unsuited to the role.

Look at the numbers. Europes universities producetonnes o paper 46 per cent o all published scienticresearch; but they earn only 32 per cent o citationsrom colleagues around the world. And Europe(including Switzerland) is home to only nine o the top 50universities in the world. The nancial results are worse:compared with US competitors, the tech-transer oces

o European universities le 17 per cent as many patentsand earn 5 per cent as much licence income.9

One important problem is academic attitude which isinsulated rom the pressures and realities o the greatereconomy. Says Deborah Leary, ounder and directoro UK sotware start-up Forensic Pathways Ltd.: Onthe ground, businesses are using universities more or

the research and development part o innovation. Butthey are becoming increasingly rustrated because theacademic institutions do not realise how quickly we haveto move. Were not waiting or perection. We dont needa product to be perect beore it gets out to market.Sometimes we just need to get it out to market.

Ramon Oll, CEO and chairman o Epson Europe,agrees: When I was a telecommunications student 90per cent o the students wanted to be entrepreneurs.Today, in the same university, just 15 per cent want to

be entrepreneurs. The rest want to go to the businessschool, just because they can get a better salary. Inmy country, Spain, or many years entrepreneurs werelooked on as people who avoid paying tax.

We have brilliant people, but brilliant people who arevery badly paid. And we will continue to be badly paiduntil we generate the right social climate.

% of world

scientific publications

% of citations

% of top 50 universities

EU research: Quantity, not quality

ROW

USA

EU46%

33%

25%

43%

32%

74%

18%

8%

21%

Sources: Unesco, Shanghai JT


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Another problem is the ideology o education. Fordecades, in most European countries the prevailingpolicy has been to sprinkle unding across allinstitutions, as an instrument o regional development.The idea that one university is better than another and thus should get more o the money was heresy.That has hurt research.

Says INSEADs Dutta: The place where we areprobably the weakest in education is at the high end,in the graduate schools. It is very dicult to identiy

European schools that come up to the same standardas MIT and Stanord, or example. We need to ocuson building these high-end institutions. Doing this willintroduce an element o elitism, because you needsome ocus on the best.

The good news is that theres a lot o change aoot now.On elitism: Germany in 2006 broke with decades o

policy and designated just three o its universities to gettop unding under its new Excellence university-undingprogramme. On enterprise: Imperial College London in2006 rattled the academic tea cups by seceding rom theUniversity o London and foating its tech-transer oceon the stock exchange, raising 26 million.

But more change is needed. In the end, Europe mustinvent the market-riendly university, an institutionwith the management and desire to work withindustry. Innovation cannot be a bolt-on to existingstructures, driven solely by the technology transer

oce; it requires an outward-acing, business-riendly,proessional and systematic approach. This calls orroot and branch reorms.

And reorm starts at the top. Says ormer Czechcommissioner Telicka: Proessors should not berunning universities. There should be a manager runningthe university.

Experiments on campusBritain has been leading the way in experiments inuniversity reorm. It starts rom the strongest base inEurope, with our o the worlds top-50 universities.But its less-amous universities have been just asinnovative.

Keele

The University o Keele, in Staordshire, has used areorganisation to make its research more relevant andmarket-driven.

It reormed all its separate departments acrossarts, humanities, science and medicine intoseven multidisciplinary research institutes. Ratherthan being under the ownership o an individualscientist, all grant money is applied or, anddisbursed by, a specialist team o administratorsat the core o each institute. Meanwhile, theuniversitys teaching responsibilities have beenparcelled into 13 teaching schools.

The approach combines carrot and stick. All staactive in research are members o an institute and

get a proportionate reduction in their teaching duties,while those who are not remain in their departmentsand carry on teaching.

Says the vice chancellor o the university, Janet Finch:This is about ensuring all research is managed andsupported properly. We have dedicated administrative

sta who submit grant applications and manage theunding and dedicated research leadership.

Hertordshire

At the University o Hertordshire, Vice ChancellorTim Wilson believes universities need to becomebusiness-acing and develop more eectiverelationships with industry.

Research clearly has a role to play in innovation butits not the whole story, he says. We can have thebest researchers in the world, but i we do not havean innovation culture, then we will ail to reap the

economic benets rom our ideas.

Wilson claims that Hertordshire has created arevolving door, with business, academics andstudents constantly exchanging ideas, and constantlymoving between the business workplace and theuniversities. A oundation or this was the mergero the university with one o the countys leadingbusiness organisations, Exemplas. This has creatednew connections between thousands o businessesand the university.

Surveys carried out by the university show an

increase in satisaction rom business clients. Atthe same time there has been increase in appliedresearch carried out by the university; a growthin proessional development programmes; morestudents working in business as part o their studies;and an increase in graduate employment skills.

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Solution 4 Create Free Innovation Zones: a way to foster

technology clusters

What does it take to get some action? In Brussels,

the technocrats so ar are thinking big: big budgets,

big directives, big political fghts that may, in the end,

accomplish nothing. Heres an alternative approach:

start small and build on successes.

First, success: despite the macroeconomic problems,there is no shortage o bright spots across Europe. Itis very important to celebrate our successes whilstpinpointing and addressing our weaknesses, saysINSEADs Dutta. Im sometimes put o by negativesentiment, and I think that is something that has to be

changed. A lot is going wrong. But a lot is going right,and we need to ocus on that.

Second, start small. Pick some specialized technologyclusters and give them special regulatory status or,more properly, de-regulatory status. These couldbe based on the model o Free Trade Zones or FreeEconomic Zones used elsewhere in the world: ports,cities or regions that have special low taris, regulatoryast-tracks and investment incentives. Apply that to thetechnology world, to nurture specic, narrow sectorso emerging technology across Europe, or clusters o

technology centred on specic universities. Call them,in the words o Microsots Courtois, ree innovationzones FIZs.

Heres how it would work, according to suggestions rompanelists at the roundtable:

Step 1) Designate a specic sector or region or specialtreatment as a Free Innovation Zone. This couldbe a particular emerging technology: in theenergy eld, or instance, hydrogen uel cellR&D, low-carbon oce-building technology ornew car-engine designs a eld in which Europehas great technology already in the works,and a strong possibility or global success.Alternatively, it could be a specic region, a

cluster o business, investors and researcherscentred around a strong university lab.

Step 2) Review regulations that get in the way o that

sector or region growing aster or considerrule-changes that could speed its growth (suchas, in the eld o low-carbon technologies, theUK governments exemption o carbon-neutralhomes rom stamp duty).

Step 3) Provide a mechanism or inventors in the zone toget help with patent protection. This could be aspecial und to deray the costs o application.

Step 4) Provide tax incentives or investors andbusinesses to get more deeply involved with

researchers in the zone.

Step 5) Set a special regime or labour mobility in thezone. This could mean suspending the normaltenure or pay rules that deter many academicsrom working with industry. It could mean aspecial visa system, so bright engineers orscientists rom other countries even romIndia or China can participate in the zone,

contributing their talents.

We have brilliant people, but brilliant

people who are very badly paid. Andwe will continue to be badly paid untilwe generate the right social climate. Ramon Oll


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The political innovation in Free Innovation Zones issimple: in emerging tech sectors or hot little clusters,there are ew entrenched interests and a greaterwillingness to try new things. Though politicians maydeadlock over major, macroeconomic proposals, theyreunlikely to encounter much opposition to such narrow,specic pilots. Result: action now, rather than years later and in sectors or regions that are most important orthe uture.

The way Pat Cox, ormer president o the EuropeanParliament, sees it is that i the FIZ is a sector it would

get round one o the most common road blocks toEuropean action: the inevitable regional disagreementsover where in Europe any new EU institution or projectshould be based. The FIZ should not be somewhere inparticular. The tax incentive is or the activity, and it willbe wherever the ability is there to deliver. It is not a state-or territory-specic break; its a process-specic break todo with the ecosystem that delivers the outcome.

You dont turn it into a pork-barrel market or politicians.I you detach it rom a specic territory, its politicalpossibility is stronger.

O course, the concept o Free Innovation Zones alsots well with the lead markets notions o Aho. Bothare ways to ocus regulatory, scal and administrativeattention on important new technologies that peopleneed and want now to connect technology demandwith supply. And in the end, both require political will.

Will it take a crisis to change?

The most dramatic technology-based economicdevelopment stories in Europe are two smallcountries: Ireland and Finland. Both went througheconomic nightmares 15 to 20 years ago and bothemerged with vibrant knowledge-based economiesthat are role models or the EU and elsewhere.

The tale o the Celtic tiger is well known. But in thecase o Finland, it aced crisis at the beginning o

the 1990s, when the collapse o the Soviet Unionlet it with an economy contracting at 7 per cent ayear. That provided the political impetus or change,says Aho, the then prime minister.

It raised spending on R&D, rom 1 per cent o GDPin 1980 to 3.5 per cent today second highest inthe world, ater Israel. It created new, ecient stateinstitutions to channel the money. It let the old pulpand paper industry wither naturally, rather than tryingto prop it up. It liberalised its telecommunicationsmarket despite opposition rom the then-head oNokia. Its universities changed gear, to serve theemerging high-tech industry. It joined the EU in

1995, and the euro zone at launch.

Says Cox, an Irishman: Finland and Ireland sharedone big thing in common: a moment o rupture withthe past that had such a proound psychologicalimpact that people were willing to risk changebecause the status quo was not an option. Withoutrupture the scale and quality o what is needed is inmy view not politically possible.


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The place where we are probably the weakestin education is at the high end, in the graduate

schoolsWe need to focus on building thesehigh-end institutions. Doing this will introduce anelement of elitism, because you need some focuson the best. Soumitra Dutta

Finland and Ireland shared one bigthing in common: a moment of rupture

with the past that had such a profoundpsychological impact that people werewilling to risk change because the statusquo was not an option.

Pat Cox

Businesses are becoming increasinglyfrustrated because the academic

institutions do not realise how quicklywe have to move. Were not waiting forperfection. We dont need a product tobe perfect before it gets out to market.Sometimes we just need to get it out to

market. Deborah Leary


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Delegates to the Roundtable

On 8 December 2006, a dozen leaders in European business, policy,

and academia met in Paris to debate innovation policy. Their comments

contributed to the preparation o this special report.

Esko Aho

President, Sitra The Finnish Innovation Fund.

Born in 1954, Esko Aho has had a long and distinguished career serving Finnish society. He held the posto Prime Minister o Finland rom 1991 to 1995. He was appointed President o the Finnish National Fund

or Research and Development since 1 July 2004. Most recently, he chaired a group o experts on Europeaninnovation policy, which submitted its report to the European Commission in January 2006.

Nick Butler

Director, Centre or Energy Policy Studies, University o Cambridge

Nick Butler became head o the Cambridge energy-policy institute in January 2007, ater many years at BPPLC. At the company, he was most recently Group Vice President o Strategy and Policy Development. He

is also chairman o the Centre or European Reorm, and holds a variety o positions with academic andcharitable organizations around the world. He has published books and articles on international issues,including most recently a paper, written with CBI Director Richard Lambert, on the uture o Europeanuniversities.

Jean-Philippe Courtois

President, Microsot International

Jean-Philippe Courtois leads sales, marketing and services or all regions outside the US and Canada,including Europe, the Middle East and Arica (EMEA); Japan; China; the Asia Pacic region; Latin America;and emerging markets. He also shares responsibility or Microsot Corp.s worldwide public sector team,directing the companys engagement with governments around the globe.


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Ramon Oll

CEO and Chairman, Epson Europe

Ramon Oll was born in 1950 in Barcelona, Spain, and graduated as an engineer in telecommunications romthe Ramon Llull University o Barcelona. He is a member o the Advisory Board o European Association orInternational Education, o the International Advisory Board o ESADE Business School, and the board oRamon Llull University o Barcelona and President o EPSON Foundation.

Jean-Bernard Schmidt

Chairman & Managing Partner, Sofnnova Partners

Jean-Bernard Schmidt is a past and current board member o many technology companies in the United

States and France. Between 1998 and 2001, he was a board member o AFIC, the French Venture CapitalAssociation. He is also a past Chairman and member o the Board o the European Private Equity and VentureCapital Association.

Martin A. Schoeller

Chairman, Schoeller Industries, and President, Europes 500

Since 2004 Martin Schoeller has been President o Europes 500 Entrepreneurs or Growth. In 1982, jointlywith his brother, he took over the amily-owned engineering oce Schoeller International and expanded it intoan innovative and growing industries and service group, a market leader in several sectors o packaging andlogistics. He also initiated and is Member o the Board o Trustees o Stitung Initiative Mehrweg, and holdsvarious Supervisory Board positions.


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Pavel Telicka

Co-ounder and Director, BXL Consulting

Pavel Telicka graduated rom the Faculty o Law at the Charles University in Prague. The Chie Negotiator orthe Czech accession to the EU, he was later promoted to First Deputy Minister and appointed State Secretaryor European Aairs. From February 2004 to November 2004 he was an EU Commissioner co-responsible orthe portolio o health and consumer protection.

Simon Zadek

CEO, the Institute o Social and Ethical AccountAbility

Simon Zadek is a Senior Fellow at Harvard Universitys Kennedy School o Government, and a ProessorExtraordinaire at the University o South Aricas Centre or Corporate Citizenship. A member o variousadvisory boards and o the Clinton-Dalberg Task Force programme, he was named one o the WorldEconomic Forums Global Leaders or Tomorrow in 2003.

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1 World Intellectual Property Organization. Exceptional growthrom North East Asia in record year or international patent

flings. February 2007. http//www.wipo.int/edocs/prdocs/en2006/wipo_pr_2006_436.html

2 European frms earn rom patent royalties the equivalento 3.1 per cent o R&D spending, compared to 6.7 percent or American companies, according to the OECDScience, Technology and Industry Outlook 2006.

3 Unesco Science Report 2005. Paris: Unesco Publishing.www.unesco.org/publishing

4 Aho, Esko, Joze Cornu, Luke Georghiu and Antoni Subir,Creating an innovative Europe. January 2006. http://ec.europa.eu/invest-in-research/pd/download_en/aho_report.pd

5 EU ICT Task Force. Fostering the Competitiveness oEuropes ICT Industry. November 2006. http://ec.europa.eu/enterprise/ict/policy/doc/ictt_report.pd

6 Jones, Randall S. and Tadashi Yokoyama. UpgradingJapans innovation system to sustain economic

growth. OECD Economics Dept. Working Paper 527.29 November 2006. http://www.olis.oecd.org/olis/2006doc.ns/43bb6130e5e86e5c12569a005d004c/3eb7cd258c561174c125723d00320121/$FILE/JT03218797.PDF

7 European Commission. Five ways to deuse thedemographic time bomb. Doc. Re: IP/06/1359,12 October 2006. http://www.europa.eu/rapid/pressReleasesAction.do?reerence=IP/06/1359&ormat=HTML&aged=0&language=EN&guiLanguage=en

8 European Investment Fund. Technology TranserAccelerator (TTA), Final Report. September 2005. http://www.ei.org/attachments/pub_corporate/TTA_FinalReport__Sept-Oct2005.pd

9 European Investment Fund. Technology TranserAccelerator (TTA), Final Report. September 2005. http://www.ei.org/attachments/pub_corporate/TTA_FinalReport__Sept-Oct2005.pd

REFERENCES:

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