Need for Structural Change

By | September 17, 2013

Europe needs to restructure its economy to be more flexible and better adapted to the multipolar economy that is emerging from the crisis. This requires Europe to adapt to broad societal challenges and to position itself vis-à-vis new technological models and new growth markets. In other words, we need to increase our capacity to channel knowledge, creativity and technology into innovative, internationally competitive products and services that respond to societal needs.

Overall, the European economy has a lower level of knowledge intensity than the economy of the United States, although it is catching up slightly. As in the United States, the proportion of manufacturing sectors in the overall economy has decreased (leftward move in the graph), with the exception of the construction sector before the bursting of the property bubble in 2008. In the period 1995-2008, the EU did achieve a slight R&D-driven upgrade in many manufacturing sectors, including the more strategic high-tech and medium-high-tech sectors (in red). However, momentum was lost in important sectors such as electricity and water, electrical machinery, and office, accounting and computing machinery.

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The United States is encountering similar structural challenges to the EU with relatively modest knowledge-driven structural changes, a reduction in the economic weight of the manufacturing industry and a dominant construction sector. In fact, the way in which the manufacturing sectors in the two blocs evolved over the 13-year period before the economic crisis is surprisingly similar. The trend was different in only a few sectors. In the EU, the motor vehicle, pulp and paper, and rubber and plastics sectors have upgraded more than in the United States, while the United States economy has seen more of an upgrade in ICT and health-related sectors such as office, accounting and computing machinery, medical precision and optical instruments and the larger radio, TV and communication equipment sector.

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Each individual country profile tells a different story as regards industrial upgrading and structural change. However, one striking finding in this country-based report is that Europe’s economic landscape is developing much more than commonly perceived. The challenge is to develop strategies and policies to guide this change in a direction that will create good quality and sustainable jobs over time and across Europe. Some countries have achieved a knowledge upgrade in traditional sectors such as wood, basic metals and textiles.

R&D intensity in the high-tech and medium-high-tech sectors has not increased in all countries, although it has done in the most dynamic countries of the last decade. There are also interesting trends of new (or renewed) industries growing in value added and in knowledge intensity. This has been the case primarily in the recycling, electrical machinery and publishing and printing industries. The construction sector has been dominant in most European countries and the level of R&D intensity in that sector went up in many of these countries (albeit from relatively low levels) in the period up to the economic crisis.

Member States with the highest performing research and innovation systems, backed up by considerable and growing investment, have not only high but increasing levels of knowledge intensity in their economies (see also the previous overview table on R&I performance). However, some of these countries are being tested by the speed of economic globalisation and their competitiveness is falling in relation to high-tech and medium-tech goods. This illustrates that there is no guarantee that currently held competitive advantages will last. For this reason, even the best performing Member States may need to pursue an ambitious policy to increase their R&D intensity further and to improve even more the effectiveness of their R&I systems.

The country profiles also illustrate the catching-up process that has taken place over the last decade. Countries in eastern and southern Europe have in general a lower knowledge-intensity in their economies, but they have almost all managed to work towards structural change, as is evidenced by rising levels of international competitiveness in high-tech and medium-tech goods. The few exceptions are correlated with very low R&D intensities and mediocre performance in science and technology. Innovation-driven structural change must be analysed at sector and industry level and linked to strategic technological capacity and to areas where there is growing global demand. Adapting the dynamics of business and innovation to growing markets in the post-crisis period will have an impact on technological development, given the crucial role of technologies in both product and process innovation.

Incremental innovation is likely to happen inside each area of technology. However, more radical innovation can be expected when different technologies converge, for example in the area of clean energy technologies, renewables as strategic raw materials, technologies addressing water scarcity, mobility technologies and ICT for sustainable and smart cities. There is thus a strong need to review policies and framework conditions to ensure that they are oriented to these types of technologies and the ways in which they converge.