Explaining the Lisbon Barometer by Paul Healy

Explaining the Lisbon Barometer

1 By David Torstensson and Dr Meir Pugatch

Executive Summary In keeping with our core mission of promoting market-oriented reform in Europe, the Stockholm Network has been keeping a close eye on the EU’s Lisbon Agenda with a series of publications aiming at giving these goals a closer look to see if they are having any success in improving Europe’s prosperity.

The first paper in the Lisbon series was published in Autumn 2007. Beyond Lisbon: Reviewing EU policies on IP, Competition and Innovation evaluated the EU’s intellectual property, competition and innovation policies by looking at four broad mechanisms the EU either used or wished to develop to set policy in the following four areas: the Lisbon Agenda's broad policy goals; the creation of a European Research Area; competition and anti-trust policy under Article 82 of the EC Treaty; and, intellectual and industrial property. Beyond Lisbon provided a holistic assessment of the EU’s achievements within these policy areas and made recommendations on how it could improve its performance and reach its stated goals. One of its key conclusions was that the Lisbon Agenda could only ever hope to succeed if it focused on a narrower, more targeted set of goals.

With the Eurozone entering a recession, the moment could hardly be more timely to examine how much progress has been made since our last report. In this new project - the Lisbon Barometer - the Stockholm Network sets out to statistically measure the specific effects of the Lisbon Agenda reform effort and to outline policy recommendations based on these measures. By using nineteen statistical categories – some used by the European Commission itself and some picked to supplement the Commission’s measures – covering both standard and less traditional areas of innovation and competition, the Barometer has been able to monitor and rank the progress of nine EU countries towards meeting the specific and general goals of the original Lisbon Agenda of 2000 and the more recent Lisbon Strategy for Growth and Jobs. These countries – Sweden, the Netherlands, Romania, Slovenia, France, Germany, Italy, Spain and the UK – were picked to provide a mixture of old and new members, as well as perceived Lisbon laggards and innovation pioneers. In many categories the performance of these countries, as well as that of the wider EU-27 community, was compared to that of the United States and Japan. While the Barometer’s overall results were perhaps no surprise – with Sweden and the Netherlands coming out on top – its most interesting finding was the degree of variation between different countries both in terms of their overall performance as well as within individual categories. For example, two countries which are performing relatively poorly when it comes to reaching the EU’s headline target of investing 3% of GDP into research and development, Germany and the UK (at 2.51% and 1.88%, respectively), are, at the same time, true world leaders within two other significant measures – patenting intensity and hi-tech exports as a percentage of all exports.

In light of this finding, this paper’s central recommendation is that the European Commission move away from viewing Lisbon I and II as a pan-European project requiring EU-wide targets and goals. Instead, the diversity, different aspirations and varying requirements of each individual Member State should be embraced. To some extent the Commission has already started to do so – last year it began to issue reports on individual Member States’ National Reform Programmes. This should continue.

With this in mind we make the following policy recommendations:

•

The European Commission should continue to move away from EU-wide goals and targets and focus more on specific national achievements, aspirations and requirements. To this end, last year’s publication of annual reports and recommendations for individual countries should be built on and expanded. This tool can be highly effective in identifying leaders and laggards as well as highlighting specific areas of national innovation policy that are in need of attention. The reports can also be used as a means of highlighting and spreading best practice from within the EU-27.

•

During its Presidency of the EU Council, Slovenia made innovation a top priority. It started the Ljubljana process, an initiative to speed up and implement the EU’s goal of realising an internal market for research and researchers – the European Research Area, first created in 2000 – and presided over the Council of Ministers’ agreement to continue cutting red tape and provide €100million in funding to support the research capacities of SMEs through the Eurostar project. While both of these goals are laudable – indeed the EU under the French Presidency should continue to make innovation a key area of focus – streamlining research processes and increasing direct research funding from the EU level does not necessarily serve the best interests of either Member States or the research community. Indeed, unnamed sources close to the Ljubljana process have actually admitted as much in recent interviews.1 A greater emphasis on national needs and capabilities should be incorporated into the Commission’s work. Individual countries are more, and less, suitable for particular strands of the knowledge-economy and this should be emphasised in the Lisbon Agenda. Specialisation and national variation should not be rejected but embraced. Increasing the share of funding coming from the Commission level at the expense of national funding risks creating even more bureaucracy and space between the researcher on the ground and the body funding the research, and should be avoided.

•

1 Science Business, ‘Irish No Vote to Hit innovation agenda’, July 2, 2008, http://bulletin.sciencebusiness.net/ebulletins/showissue.php3?page=/548/2967/11076

could focus on learning from the US’s success in transferring technology and knowledge from public research organisations to industry and could be more widely rolled out. •

There is already evidence that the EU is learning from and implementing legislation and programmes that would facilitate innovation across the EU. The recent Commission Recommendation on the management of intellectual property in knowledge transfer activities and Code of Practice for universities and other public research organisation draws heavily on the 1980 US Bayh-Dole Act, which brought with it a new approach to intellectual property deriving from federally funded research. This learning process should continue. Particular attention could be paid to other programmes in support of innovation that have been adopted – the USA’s Small Business Innovation and Research Program, for example.

These recommendations provide a platform from which the Lisbon Agenda can take the final steps away from its origins as a grand political project, to one of practical public policy with real results.

Explaining the Lisbon Barometer By David Torstensson and Dr Meir Pugatch

David Torstensson is a Senior Researcher at the Stockholm Network. Dr Meir Pugatch is Director of Research at the Stockholm Network, and a Senior Lecturer at the University of Haifa.

ÂŠ Stockholm Network 2008. The views expressed in this publication are those of the authors and do not necessarily represent the corporate view of the Stockholm Network or those of its member think tanks.

Contents From Lisbon and Back Again

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Lisbon 1

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Lisbon II

Lisbon Barometer Methodology

Lisbon Barometer Data

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Investment in R&D

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Business Environment

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Information Society

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Innovation and Exploitation

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Small and Medium Sized Enterprises

Concluding Thoughts and Policy Recommendations

From Lisbon and Back Again The Union has today set itself a new strategic goal for the next decade: to become the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion. [Original emphasis] - Lisbon European Council, 23-24 March, 2000, Presidency Conclusions -

When it was first launched, what has since become known as the Lisbon Agenda was intended to be a defining moment in the history of the European Union. Gathered for the annual spring meeting in Lisbon, Portugal, the European Council set out an economic and social vision for Europe in the 21st century. Not only did the EU Member States set themselves, and their countrymen, impressive strategic goals to be achieved within a decade but the accompanying rhetoric provided the whole project with the air of political magic. Eight years on, however, and reaching the Union’s goals has proved to be more difficult than expected. Indeed, the EU itself tacitly admitted so in March 2005 when the first incarnation of Lisbon – dubbed Lisbon I – was effectively scrapped in favour of the new, less grandiose, Lisbon II, the Strategy for Growth and Jobs.

The purpose of this paper is to outline how these various Lisbon projects have operated over the years and where the Agenda and the Strategy stand today. While Lisbon has always been rather sprawling – including traditional economic concerns and categories such as economic growth and employment, as well as more recent phenomena, like the internet and broadband technologies – there has always been a strong emphasis on innovation and competition. Accordingly, the primary focus of this paper is to evaluate the extent to which the EU is achieving its goals relating to innovation and competition.

By examining both categories identified by the European Commission itself as being of integral importance to the Lisbon Agenda and by using our own research, we can try to make sense of (i) what has been achieved, (ii) what is within reach, and (iii) what remains firmly out of reach. But before judging where Lisbon is today, it is necessary to scrutinise some of its recent history and appreciate how Lisbon has changed, as well as the ways in which it has remained the same.

Lisbon 1

The launch of the Lisbon initiative in 2000 was based on the idea that Europe’s economies needed to undergo some fundamental changes if they were to adapt and thrive in a new era of global economic competition. Globalisation was here to stay and as this process had profoundly changed the way the economic game was played, something had to be done about it. Europe needed to become more competitive, more innovative and aim for the top if it were to thrive in this new economic environment. Indeed, the situation was viewed as so serious that the Union said itself that it was

‘confronted with a quantum shift resulting from globalisation and the challenges of a new knowledgedriven economy.’2

The successful move towards a knowledge economy was to be achieved by a greater emphasis on research and development (R&D), structural economic reforms – particularly completing the internal market – and coordinating Member States’ macro-economic policies. Famously, the European Council set itself a target of reaching an annual R&D expenditure for the whole EU area – not necessarily each individual Member State – of 3% of GDP. Research and human development would be promoted by a greater effort to establish better links between research institutions across the Union and by achieving an e-Europe, primarily through increasing access to the World Wide Web and digital technologies.

Viewed as equally important as the need to reform the economy, the original Lisbon Agenda also strongly argued for maintaining and strengthening the European social model. In fact, the Council felt so concerned about the need to maintain this social aspect of Europe, that it argued that this model ‘with its developed systems of social protection, must underpin the transformation to the knowledge economy.’3 Whether the Council and its Member States put forward this argument as a political shield against potential public bitterness over the proposed economic liberalisation or whether the European Council genuinely believed that economic reform was not possible without an accompanying social plan, is debatable. But it would seem from the Growth and Jobs Strategy, adopted in 2005, and the recommendations following former Dutch Prime Minister Wim Kok’s midterm review, that the social aspects of Europe’s economic transformation have, in effect, been put on the backburner.

How was the Agenda received in 2000? The Economist described the European panache for combining economic reform with maintaining its social values as disappointing: ‘Europe will build its new economy “in a manner consistent with its values and concepts of society”, ie, slowly and late.’4 Others were similarly unconvinced. The International Herald Tribune, for instance, wrote that ‘scepticism is still in order about the [EU] leaders’ grandest goal’ of making the EU the most competitive economy and reaching a 70% employment figure by 2010.5 The IHT argued that ‘the proof of this Portuguese pudding will be in the eating.’6

But this public scepticism did not deter the leaders of Europe from heaping praise on their new project. Then Portuguese Prime Minister, Antonio Guterres, said ‘this Lisbon Strategy is going to bring about a revolution in the way we work’.7 Even Social Democrats joined in on the exaltations. 2 Lisbon European Council, 23 and 24th March, 2000 Presidency Conclusions, http://www.europarl.europa.eu/summits/lis1_en.htm 3 Ibid. 4 The Economist, ‘Europe in cyberspace’, March 30, 2000. 5 International Herald Tribune, ‘Thinking ahead/Commentary: Blair can Claim Victory at Summit’, March 28, 2000. http://www.iht.com/articles/2000/03/28/think.2.t_4.php 6 Ibid. 7 Ibid. ‘EU Sets Goal: Surpassing America in Internet Era’, March 25, 2000

German Chancellor Gerhard Schröder claimed that ‘Lisbon provides a clear signal that the countries of Europe are absolutely serious…[and] prepared to move away from the old industrial society towards a new, high-technology and communications-based one.’8

But neither the initial enthusiasm nor the first Lisbon process lasted very long. In April 2004, the then EU Commission President, Romano Prodi, set up an investigative, mid-term review of the Agenda chaired by Wim Kok. This High Level Group reported seven months later, in November, that ‘the European Union and its Member States have clearly themselves contributed to slow progress by failing to act on much of the Lisbon strategy with sufficient urgency.’ 9 This ‘disappointing delivery’ was said to be due to an ‘overloaded agenda, poor coordination and conflicting priorities.’10 The report concluded that the EU needed to re-tool its Lisbon strategy to focus on growth and employment. Social and environmental benefits would follow: ‘Europe has built a distinctive economic and social model that has combined productivity, social cohesion, and a growing commitment to environmental sustainability. The Lisbon strategy, refocused on growth and employment in the way this report suggests, offers Europe a new frontier for that economic and social model.’ [Emphasis added]11

Lisbon II

While Wim Kok’s negative appraisal was not wholly unexpected it seemed to jolt the Commission into action. In March 2005, under the new leadership of José Manuel Barroso, they officially relaunched the Agenda as the Lisbon Strategy for Growth and Jobs. By July of that year National Member State programmes and targets had been supplemented by a Community Lisbon Programme (CLP). The purpose of the CLP was described as aiming to contribute ‘to the overall economic and employment policy agenda by implementing Community policies that support and complement national policies’.12 As a result, since 2005 Lisbon is a two-pronged strategy: action at the EU level through the Community Lisbon Programme and action at the Member State level through the individual National Reform Programmes (NRPs).

The new Growth and Jobs Strategy quickly became a central part of the Barroso Commission’s own programme. Indeed, Danuta Hübner, Commissioner for Regional Policy, in an op-ed for the Financial Times in January 2005, argued that through a ‘courageous decision’ the Commission had put Lisbon ‘at the top of its agenda.’13 What, then, is Lisbon II?

Lisbon II differs from its predecessor in some important respects. Gone is the florid prose about becoming the ‘most competitive and dynamic knowledge-based economy in the world’ and the

Ibid. Report from the High Level Group chaired by Wim Kok, Facing the Challenge The Lisbon Strategy for growth and employment, November 2004, p. 6. http://ec.europa.eu/growthandjobs/pdf/kok_report_en.pdf 10 Ibid. 11 Ibid. p. 7 12 Commission Staff Working Document Community Lisbon Programme: Technical Implementation Report 2006 13 Financial Times, ‘Comment: Europe’s institutions must make Lisbon work’, January 31, 2005 9

dreams of overtaking the United States. Gone too is the focus on 2010 as a final deadline and the primacy of the social imperatives for reform.14 Instead, the Strategy is now based around 3-year reform cycles with annual Commission evaluations. On its website, the Commission describes the new Lisbon strategy as follows:

Before the 2005 relaunch, there were too many disparate targets. We now have a streamlined and simplified process with only two headline targets: total (public and private) investment of 3% of Europe’s GDP in research and development by 2010 and an employment rate (the proportion of Europe’s working age population in employment) of 70% by the same date.15

Following Kok’s recommendations, the main focus is now on economic growth and employment. Indeed, the findings of the 2006 ‘Community Lisbon Programme: Technical Implementation Report’ (a Commission staff working document) illustrate this. Out of the 97 policy actions proposed within the three key policy areas – (1) Knowledge and Innovation, (2) Attractive Place to Invest and Work, and (3) More and Better Jobs – 77 actions were proposed for areas 2 and 3, compared with only 20 for area 1.

The European Commission has recently placed an extra emphasis on its innovation and research strategy – what was supposedly at the heart of Lisbon I – as illustrated by the spring 2006 European Council’s endorsement of knowledge and innovation as one of its four priority areas. Similarly, Commission President Barroso, in the preface to the December 2007 ‘Strategic Report on the renewed Lisbon strategy for growth and jobs: launching the new cycle (2008-2010) ’, has argued that one of the new goals for the coming 3-year cycle should be introducing a new ‘fifth freedom’, the free movement of knowledge, to complement the existing four EU freedoms.16

As for actual progress achieved to date, the Commission has argued that Lisbon II has played a significant role in the recent Europe-wide economic upturn:

With the re-launch of the Lisbon Strategy in 2005, the European Union and its Member States committed themselves to a new partnership aimed at securing sustainable growth and jobs. Almost three years later, the results of this partnership are clearly visible. Economic growth has risen from 1.8% in 2005 and is expected to reach 2.9% in 2007 and 2.4% in 2008.17

Others disagree, however. Iain Begg, of the Centre for European Policy Studies, a Brussels-based think tank has recently pointed out that:

14 Lisbon European Council, 23 and 24th March, 2000 Presidency Conclusions, http://www.europarl.europa.eu/summits/lis1_en.htm 15 , Growth and Jobs, Background, ‘What are the main targets under the Growth and Jobs Strategy?’ http://ec.europa.eu/growthandjobs/faqs/background/index_en.htm 16 These are: the free movement of goods; the free movement of services and freedom of establishment; the free movement of persons; and the free movement of capital. 17 Communication from the Commission to the European Council ‘Strategic Report on the renewed Lisbon strategy for growth and jobs: launching the new cycle (2008-2010) Keeping up the pace of change’.

It is an open question whether ‘Lisbon’ can take credit for the economic improvements observed over the last year. Certainly, in some Member States, reforms undertaken in earlier years are now bearing fruit. But although the upturn in the economy appears to be macro-economically sustainable, partly because of these earlier reforms, the improvement in economic performance arguably reflects cyclical factors more than any underlying transformation based on the most recent structural reforms.18

Begg’s reasoning underlines the difficulty of evaluating the Lisbon Agenda’s performance. To begin with, the starting date for any evaluation should reflect the changed priorities of Lisbon I and II. Yet, as explained above, there are some important areas of overlap between the original goals stated in Lisbon I and what is currently being pursued under Lisbon II, particularly within the fields of innovation and competition. The following section deals with some of these issues and also explains what the Lisbon Barometer and this accompanying white paper have tried to measure, as well as why.

Iain Begg, ‘Lisbon II, Two Years on: An Assessment of the Partnership for Growth and Jobs’, Centre for European Policy Studies, p. 6-7.

Lisbon Barometer Methodology Coinciding with the spring re-launch of the Lisbon Strategy, the European Commission formulated 24 integrated guidelines for what it was hoped the strategy would achieve. These guidelines are important as they form the basis for today’s Lisbon Strategy. As the Commission puts it: Following the European Council’s decision on March 2005 to inject new impetus into the Lisbon strategy, they adopted integrated guidelines for growth and jobs on 12 April. These guidelines are the principal policy instrument for developing and implementing the renewed strategy for growth and jobs…They form the basis for member states’ national reform programmes and channel their efforts towards key priority areas. [Emphasis added]19

In the fields of R&D, innovation and competition – the heart of Lisbon I – the two main guidelines are 7 and 8. Guideline 7 confirms the original Agenda target from 2000 of achieving an investment of 3% of Europe’s GDP in R&D, as well as outlining more specific steps for Member States to take towards encouraging business R&D.20 Guideline 7 also stresses the need for improving the competitive environment for companies; more efficient public R&D expenditure, including public-privatepartnerships (PPPs) and modernising the management of universities and research institutions; encouraging more business-based R&D; and a focus on getting more students into the sciences and technical disciplines.21 Guideline 8 – promoting innovation – lists six policy areas that need to be improved in order to ‘facilitate all forms of innovation’.22 These include: improving innovation support services; the development of innovation poles and networks to build bridges between various regions in Europe; providing for better access to domestic and international finance; and ‘efficient and affordable means to enforce intellectual property rights’.23 In addition to these guidelines as well as the more general goals of Lisbon I and II, the Lisbon Barometer has also measured a number of statistics and data pertaining to what we have identified as the overall impact of the broader Strategy for Growth and Jobs.

The findings of this paper are based on the statistical analysis of the accompanying Lisbon Barometer which measures 19 separate categories, divided into 5 thematic sections. These sections are:

1) Investment in Research and Development 2) Business Environment 3) Information Society 4) Innovation and Exploitation 5) Small and Medium Sized Enterprises (SMEs)

Growth and Jobs, http://ec.europa.eu/growthandjobs/guidelines/index_en.htm#gl7 Ibid. Guideline No 7 21 Ibid. 22 Ibid. Guideline 8 23 Ibid. 20

Within these five sections the analysis ranges from staple data such as total investment in R&D and patent intensity to often overlooked statistics on, for example, value added to the economy by SMEs, and hi-tech exports as a percentage of all exports. By analysing the Barometer’s statistics, the following section seeks to provide a brief analysis of each thematic section of data and to outline what the collected statistical categories reveal about the EU’s progress towards reaching the goals of Lisbon I and II. In each section, the value and usefulness of each indicator analysed will be explained. This is not a comprehensive analysis of all EU-27 countries but a snapshot of nine EU countries – France, Germany, Italy, the Netherlands, Romania, Slovenia, Spain, Sweden and the UK – which have been picked to provide a mix of both old and new Union members, as well as perceived Lisbon frontrunners and laggards. The US and Japan have been included in most of the statistical analysis to provide a point of international comparison.

Lisbon Barometer Data 1. Investment in R&D

In 2000, the EU-27’s estimated gross domestic expenditure on R&D was 1.86%. By 2006, this figure had dropped slightly to 1.84%.24 These figures clearly suggest that five years of Lisbon 1, and three years of Lisbon II, have done little to increase the EU’s overall investment in R&D nor to help reach the headline target of 3% by 2010.

Of the nine countries analysed in the Lisbon Barometer few have shown any substantial increase in their R&D budgets; in fact most of the budgets have fallen since 2000 or they have risen by only a fairly marginal rate. For example, in the UK R&D spending has increased from 1.83% of GDP in 2000 to 1.88% in 2006; similarly in Germany there has also been a small rise from 2.45% to 2.51%. The largest jumps have taken place in Spain and Romania where the statistical increases have been over 25%: Spain went from spending 0.91% of GDP on R&D in 2000 to 1.16% in 2006, and Romania increased its spending from 0.37 to 0.46% over the same period. Out of the nine countries analysed only one, Sweden, has reached or exceeded the goal of 3% of GDP. But Sweden’s R&D expenditure seems to have little to do with the Lisbon Agenda, since R&D expenditure as a percentage of GDP for 2001 – a mere year after the launch of Lisbon I – was actually 4.25%, and by 2006, had dropped to 3.82%.

In conclusion, the EU-27’s goal of reaching 3% by 2010 seems to be pretty much out of the question, and catching up with the United States (which, as of 2006, had an expenditure of 2.68%), let alone Japan (which in 2006 easily topped 3%), will be well nigh impossible. In this respect both Lisbon I and II have failed.

Still, there are some positive aspects of the broader R&D environment in the EU. For instance, the EU countries analysed do score well in the number of companies in the global top 50 by total R&D expenditure. Together, the nine countries studied make up 34% of the companies on this list, which is just 2 percentage points below the United States and 75% more than Japan.

2. Business Environment

One of the key aims of both Lisbon I and II has been to promote a more business-friendly environment and to create an internationally competitive milieu for European companies. The accompanying Lisbon Barometer analysed four main statistical categories relating to the promotion of such an environment. However, in the most important categories analysed – number of days it takes 24 Commission’s December 2007 Annual Progress Report http://ec.europa.eu/growthandjobs/european-dimension/200712annual-progress-report/index_en.htm

to set up a business; number of procedures to set up a business; and business freedom – none of the surveyed EU countries appear to be doing consistently better than their main competitor, the United States.

For example, in the first two categories – time and number of procedures required to set up a business – the average time for setting up a business for the nine EU countries included in the barometer was 23.12 days. While this number is certainly inflated by serious laggards such as Slovenia and Spain (in which the time taken is 60 and 47 days, respectively), France, which comes the closest to the US performance of 5 days is still over 50% higher than the American number, with a total of 8 days. Similarly, when it comes to the number of procedures it takes to set up a business, only Sweden actually beats the US with 3 procedures versus 5, and Romania equals the American total of 5.

When it comes to business freedom – an economic, political and social composite measure compiled annually by the American think tank the Heritage Foundation – only one country out of the EU nine, Sweden, performs marginally better than the United States. It received a business freedom rating of 95% versus the USA’s 94.5%. On average though, the studied EU countries received a rating of 82.4%, with Spain, Italy, Romania and Slovenia pulling down the average substantially.

When it comes to fostering a positive and entrepreneurial business environment the EU countries studied – on average – seem to be failing. However, there are some, such as Sweden, France and the UK, which are doing better than others. But even these countries lag far behind the US in important categories. For example, setting up a business in both Sweden and the UK takes over three times as long as in America.

Europe’s goal of achieving a business environment that is competitive with the United States is some way off and there is considerable room for improvement.

3. Information Society

When the Lisbon Agenda was first launched in 2000, one of the major themes of the Spring Council was the global economic shift towards information technology and an internet and computer-based society. Today, the use and expansion of the internet in various settings is at the centre of the EU’s Strategy for Growth and Jobs. Indeed, guideline 9 of the Integrated Guidelines to this Strategy outlines six ways in which Member States should ‘facilitate the spread and effective use of ICT and build a fully inclusive information society’.25 These include: encouraging the increase in the public’s use of Information Communication Technology (ICT); supporting infrastructure and the development of broadband capabilities and access; and, finally, increasing the availability of e-government public services. 25

, Growth and Jobs, Guideline No. 9, http://ec.europa.eu/growthandjobs/guidelines/index_en.htm#gl7

The Barometer looks at 3 main categories – internet usage; broadband penetration; and e-government usage – covering the most significant parts of guideline 9. In these categories the statistics show a mixed picture of improvement. Some countries score more highly than others, in particular Sweden and the Netherlands do well overall for the categories analysed within ‘information society’, and other countries, like the UK and France, perform well in some categories.

With respect to internet usage, five out of nine EU countries score an average user rate of above 50%, with Sweden having the highest user rate of 75.6%. As you might expect, the newer accession states, Slovenia and Romania, have a user rate below 50%. More surprisingly, however, two of the more developed countries, France and Spain, have a usage rate of 41.4% and 33.6% respectively, which is substantially below Germany, the UK, the Netherlands and Italy.

When it comes to broadband penetration rates, the Netherlands and Sweden again led the way with 189.4 and 152.6 broadband subscribers per 1,000 inhabitants, respectively. This far outpaces the United States, which has a rate of 129, and beats Japan, which has just over 145 subscribers per 1,000 inhabitants. Notable laggards for broadband penetration are Slovenia and Romania, but even Spain, Germany and Italy, all still fall well behind the United States and Japan with between 80 and 84 subscribers per 1,000 inhabitants respectively.

With regards to e-government usage – a measure of how many individuals aged 16 to 74 have used the internet in the last three months to interact with public authorities – most of the nine countries have shown a substantial increase between 2004-2007 with the biggest jumps having taken place in France, the UK, Slovenia and Sweden. For example, Slovenia has more than doubled its usage from 13% to 30%. On average, the surveyed countries’ have an e-government usage rate of 34.2%. The only two countries which have less than a 25% usage rate are Romania and Italy. The highest rates of egovernment usage can be found in the Netherlands and Sweden, with rates of 55% and 53%, respectively.

From these statistics it would seem that achieving a European information society and economy, based on harnessing and developing the power of ICT, is more of a reality in some areas of Europe than others. While variation is to a certain degree to be expected, and a large discrepancy between accession countries and older members is also not wholly unexpected, what should alarm policymakers is the lack of progress in some of the older EU Member States. For example, both Spain and Italy lag far behind the others when it comes to both making use of e-government and broadband penetration services and, worryingly, have demonstrated little improvement between 2004 and 2007. This is especially concerning given that, in the same period, Slovenia and Romania, both accession countries, have increased their use of e-government substantially – the former more than doubling its usage rates from 13 to 30% – and Slovenia actually has a higher internet usage rate than Spain and is

quickly closing in on Italy. Therefore, while growth in ICT skills and usage across the EU does seem to be happening, it is uneven and patchy.

4. Innovation and Exploitation

Measuring innovation is a notoriously tricky enterprise: What defines it? Is it at all quantifiable? And what can governments do to encourage more of it? Yet, innovation is universally recognised by politicians, businessmen and government bureaucrats as essential to building and maintaining a strong, modern economy. The four key categories measured in the Lisbon Barometer – patenting intensity; royalties and license fees as a percentage of GDP; hi-tech exports as a percentage of all exports; and software piracy rates – were chosen to illustrate those parts of the economy in which innovation is, in our view, perhaps most easily measurable and has the greatest economic impact. Moreover, these categories all cover important elements of what defines innovation. Patent rates and intensity are a common measurement of innovation within both the general economy, as well as more specific knowledge-intensive sectors such as engineering and pharmaceutical R&D. Rates of hi-tech exports as a percentage of all exports reflect an economy’s move towards greater complexity and technological advancement in its technology sector. Finally, software piracy rates gives an indication of what levels of intellectual property protection exist, are enforced, and are being respected.

To determine patent intensity the Barometer has measured the percentage share which countries had of the total triadic patent families for 2002 and 2005. From this data there are two conclusions that can be drawn. Firstly, some countries – most notably Germany – have a relatively large share of the total percentage and are, in fact, more competitive in this regard than the United States. Germany has less than a third of the USA’s population, but more than a third of its percentage share of total triadic patents. Some of the other countries surveyed are, relative to their population and size, also doing well. For example, Sweden has almost half the share of the UK’s total but has a sixth of its population size. For others, the picture is less rosy. Spain and Italy both have very low levels of the triadic total – 0.23% and 1.63% respectively in 2002.

Secondly, most countries’ share of triadic patents – with the exception of the Netherlands and Spain – have, in fact, decreased between 2002 and 2005. It would seem that since this decrease is virtually universal – with American numbers also decreasing substantially – the cause could very well be an increase in overall global patenting activity caused by the growth of patenting in developing countries such as Brazil, China and India, and not necessarily a sharp drop in the patenting activity of each individual country. Indeed, this would seem to be supported by the simultaneous rise in patent applications by the surveyed countries to the European Patent Office (EPO). Overall, seven out of the nine European countries surveyed saw an increase in the number of patents applied for here. Japan and the United States also saw healthy increases in their applications to the EPO.

With regards to the second category, Royalties and License Fees as a Percentage of GDP, three out of the nine EU countries surveyed – Sweden, the UK and the Netherlands – had a percentage higher than the America (0.42%) and Japan (0.35%). Germany, Italy and Spain all have rates substantially lower than the US and American-beating European troika. Here too, the accession countries Slovenia and Romania are cellar-dwellers; although Slovenia’s and Spain’s percentages, 0.03% versus 0.04%, are comparable.

For the category of High Technology Exports as a Percentage of all Exports, all countries bar one, the UK, did poorly compared with the United States and Japan. In fact, the UK beats both of these two with 26.48% of its total exports being hi-tech. Overall, the countries doing well in this category are Sweden, France, the Netherlands and Germany, which all have over 12% of their exports in the hitech sector. The laggards here are Italy, Spain, Romania, and Slovenia which have no rates higher than 6.7%, with Romania scoring the lowest of 3.85%.

The final category, Software Piracy Rates – a measure of how each individual country protects intellectual property – shows two trends: first, a large discrepancy in piracy rates between Northern European countries and the Mediterranean and accession countries; and, second, the relatively higher rate of software piracy across all countries surveyed in the Barometer compared with the US and Japan which have rates of 21% and 25%, respectively. Sweden, the Netherlands, the UK and Germany all have piracy rates of between 26% and 29% whereas the accession and Southern European countries have a rate of around 45-50%, with Romania hitting 69%. This would suggest that, at least with regard to software, the IPR regimes of these countries are clearly missing something significant. Whether it is a lack of legislation, implementation of such laws or their enforcement is debatable, but it is clear that piracy levels in these countries are a real problem.

Overall, for the Innovation and Exploitation section, it would seem that many of the countries surveyed – most notably, Sweden, Germany, the Netherlands and the UK – score quite highly and are competitive with both the US and Japan. Indeed, in some categories, such as hi-tech exports and patenting intensity, these countries actually perform better than both the Americans and the Japanese. But, there are some notable laggards in the South of Europe and in the new accession countries. In some respects, and in some countries, the goals of the Lisbon Agenda are, or are close to, being reached, but any broad generalisations for this section are very difficult to make.

5. Small and Medium sized Enterprises

The final category measured by the Lisbon Barometer is that of SMEs. Small and Medium Sized Enterprises have long been a central part of the rhetoric of the Lisbon Agenda with much talk of a

European Small Business Act playing a paramount part in that effort.26 In the Strategy for Growth and Jobs, SMEs play a big part. The Commission has even described them as ‘the motor of the European economy’.27 Indeed, the European Commission seems wholeheartedly committed and determined to turn the Union into a stronghold of entrepreneurship and innovation: ‘[the] over-riding challenge for the European Union and its Member States is to create conditions in which entrepreneurs are encouraged to follow their ideas through, where the attractions and potential gains outweigh more clearly the costs and inevitable risks of starting an enterprise.’28

The Barometer measures three categories of SME activity and economic value: employment by SMEs as a percentage of total employment; the number of SMEs per 1,000 people; and, value added by SMEs compared to large enterprises. These figures present a somewhat conflicting picture of, firstly, how large a role SMEs play in the surveyed countries’ economies, and secondly, how much economic value they add compared to larger companies. For example, with regards to employment by SMEs as a percentage of total employment, Italy and Germany easily come out on top of the countries surveyed with over 70% of the population being employed by SMEs. However, when looking at value added29 to the economy compared to large enterprises, Italy’s figure is actually less than its employment percentage at 70.3 compared to 73. Compared to the UK and Sweden – where the employment of SMEs as a percentage of total employment is 39.5% and 39.3%, respectively – the value added by SMEs is greater at 56.5% for Sweden and 50.7% for the UK. Thus the Swedish and British SMEs seem to be providing much more value than their Italian counter-parts. The picture becomes even more complicated when adding in the additional factor of the number of SMEs per 1,000 people. Here, Sweden actually leads the way with 99.6 SMEs – that is almost 1 SME per every 100 citizens. As the employment percentage of SMEs for Sweden is 39.3%, these figures would seem to suggest that, firstly, relatively few people run a large number of these companies, and secondly, that most of these businesses are either one-man shows or have very few employees. It would therefore seem that the entrepreneurial spirit in Sweden is limited to a distinct minority of the population. The same is true for the UK which also has a relatively high level of SMEs per 1,000 people at 73.8, but a relatively low percentage of the total population working for SMEs at 39.5%.

Compared with the United States and Japan, again, some of the surveyed countries do comparatively well. For example, both the Americans and Japanese have distinctly lower numbers of SMEs per 1000 people at 20 and 44.7, respectively, than the surveyed nine-country average of 57.2. Indeed, the lowest rate of the surveyed EU countries, Romania at 18.1, is just a whisker below the USA’s score of 20.

The European Small Business Act was adopted on June 25 2008 and will, according to Commission President Barroso be a ‘crucial milestone in the implementation of the Lisbon Strategy for Growth and Jobs’. The act includes 10 principles that aim to make setting up and running an SME less bureaucratic. http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1003&type=HTML&aged=0&language=EN&guiLanguage=en 27 http://ec.europa.eu/growthandjobs/key/smes/index_en.htm 28 Ibid. 29 Value added is here defined by Eurostat as representing ‘the difference between the value of what is produced and intermediate consumption entering the production, less subsidies on production and costs, taxes and levies.’

In summary, figures and data on SMEs suggest that while it is difficult to quantify what actually constitutes success with regards to SMEs, progress towards reaching the broad-based goal of achieving an entrepreneurial environment where the Commission hopes the â&#x20AC;&#x2DC;attractions and potential gains outweigh more clearly the costs and inevitable risks of starting an enterpriseâ&#x20AC;&#x2122;, the results for the surveyed countries are mixed. Overall, the UK, Sweden and Italy show high levels of SME activity and impact, although Italy does not have the blossoming economy to match its high scores in all SME categories.

Concluding Thoughts and Policy Recommendations Europe is not a country, nor is the EU a federal entity. Yet, when the Lisbon Agenda was first launched in 2000 goals and targets were thought of as being European or EU-wide. As the findings of the Barometer have clearly shown, generalisations about ‘European’ achievements or failures risk distorting and even misrepresenting what is actually occurring in individual countries under the Lisbon banner. For example, on the much discussed EU-wide target of achieving an R&D expenditure of 3%, the current figure is 1.84%. And although this is indeed low, it masks the huge disparities that exist not only across the continent, but even within the surveyed group. For example, the Barometer shows how this figure varies from the survey-low of 0.46% in Romania versus a more respectable 2.12% in France.

Within the Commission this has not gone unnoticed. Since last year it has produced annual reports outlining Member States’ progress on their own National Reform Programmes. Yet, despite the move towards a greater national emphasis – and accompanying clarity in dividing reforms between National Programmes and the Community Lisbon Programme – the Commission persists in having two ‘headline targets’30 – total (public and private) investment of 3% of Europe’s GDP in R&D by 2010 and an employment rate of 70% for the working population, also by 2010. But, more likely than not, it will not meet either of these. The R&D figures are way off the mark, and as for the employment rate – an indicator that has not been measured by the Barometer – according to the Commission’s own figures this is currently at 65.5%, which is only a 3 percentage point rise over the past seven years and 2001’s 62.5%.31

So, on these two headline targets at least it is fairly safe to say that the EU is failing. But what of the 5 themes and remaining 18 statistical categories analysed in the Barometer? What type of evidence do they provide about the success or failure of Lisbon I and II?

Results are mixed and there is variation across categories, but overall the data analysed by the Barometer confirms the idea of national and geographic variation – different countries are enjoying different levels of growth and innovation in different sectors of the knowledge-based economy. Some countries thus achieve relatively low scores in some categories, but are outstanding in others. For example, Germany and the UK, which overall were ranked in the middle of the sampled countries, were both outstanding in two key categories of innovation – Germany in patent intensity and the UK in hi-tech exports. This is an important point. And it questions the basic premise of the Lisbon 30 , FAQs, Background to Lisbon Strategy for Growth and Jobs http://ec.europa.eu/growthandjobs/faqs/background/index_en.htm 31 , Growth and Jobs, Key Statistics http://ec.europa.eu/growthandjobs/key-statistics/index_en.htm

Agenda’s penchant for setting central targets aimed at achieving an EU-wide goal in employment, R&D or whatever it may be. Our Barometer shows that it is highly questionable whether the policy results of this are at all beneficial.

With this in mind we make the following policy recommendations:

•

During its Presidency of the EU Council, Slovenia has made innovation a top priority. It started the Ljubljana process, an initiative to speed up and implement the EU’s goal of realising an internal market for research and researchers – the European Research Area, first created in 2000 – and presided over the Council of Ministers’ agreement to continue cutting red tape and provide €100million in funding to support the research capacities of SMEs through the Eurostar project. While both of these goals are laudable – indeed the EU under the French Presidency should continue to make innovation a key area of focus – streamlining research processes and increasing funding from the EU level does not necessarily serve the best interests of either Member States or the research community. Indeed, unnamed sources close to the Ljubljana process have actually admitted as much recently in interviews.32A greater emphasis on national needs and capabilities should be incorporated into the Commission’s recommendations. Individual countries are more, and less, suitable for particular strands of the knowledge-economy and this should be emphasised in the Lisbon Agenda. Specialisation and national variation should not be rejected but embraced. Central funding mechanisms at the Commission level risk creating even more bureaucracy and space between the researcher on the ground and the body funding the research, and should be avoided.

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Member States and the Commission should learn from methods of innovation and knowledge transfer that have been internationally tried and tested. The EU-US Innovation Initiative, for example, has seen officials from the EU member states and the Commission visiting the US to study its knowledge transfer and innovation systems. Initiatives like these could focus on learning from the US’s success in transferring technology and knowledge from public research organisations to industry. These initiatives could be more widely rolled out.

•

There is already evidence that the EU is learning from and implementing legislation and programmes that would facilitate innovation across the EU. The recent Commission

32 Science Business, ‘Irish No Vote to Hit innovation agenda’, July 2, 2008, http://bulletin.sciencebusiness.net/ebulletins/showissue.php3?page=/548/2967/11076

Recommendation on the management of intellectual property in knowledge transfer activities and Code of Practice for universities and other public research organisation draws heavily on the 1980 US Bayh-Dole Act, which brought with it a new approach to intellectual property deriving from federally funded research. This learning process should continue. Particular attention could be paid to other programmes in support of innovation that have been adopted â&#x20AC;&#x201C; the USAâ&#x20AC;&#x2122;s Small Business Innovation and Research Program, for example.

These recommendations provide a platform from which the Lisbon Agenda can take the final steps away from its origins as a grand political project, to one of practical public policy with real results.