R&D investments key to productivity, report shows

Investments in research and development (R&D) contribute significantly to increases in productivity, according to the Commission’s latest Competitiveness Report.

The report reveals that in 2006, the EU’s GDP grew by 3%, its highest increase since 2000. This improvement was due to an increase in productivity (the increase of GDP per employee) and
employment growth. Furthermore, most new EU Member States, as well as countries with a relatively low GDP per capita, are catching up with their higher-performing neighbours.

From a sectoral standpoint, the strongest growth was found in industries with a strong information and communication technologies (ICT) component, such as communication equipment, office
machinery and computers.

‘These are very encouraging results, which tell us that the reforms under the revised Lisbon strategy for growth and jobs are starting to bear fruit,’ said Commission Vice-President Günter
Verheugen. ‘European industries have managed to maintain their positions on global markets, contrary to American and Japanese producers. Now the challenge is to push forward our reform agenda.’

The report identifies the key drivers which contribute most to productivity. ‘Increased investment in R&D can significantly increase productivity growth, especially if the elements of the
knowledge triangle, R&D, innovation and education and training, are well integrated, including as concerns the provision of scientific personnel,’ the report reads.

According to the Commission, reaching the target of investing 3% of GDP in R&D would lead to increases in both productivity and income. So far just two Member States (Sweden and Finland)
have met this target, and an additional eight are due to meet it by 2010.

‘I’m still concerned about the spending on research and development, particularly in the private sector. There is a clear need to step it up,’ commented Commissioner Verheugen.

The report also highlights the importance of ICT investments, which bring ‘high returns in terms of productivity gains when accompanied by appropriate organisational changes and investments in
skills’.

Other important drivers of productivity identified by the Commission include stimulating entrepreneurship by making it easier to set up companies and improving conditions for small and
medium-sized enterprises (SMEs), and reinforcing better regulation practices and cutting red tape.

Looking to the future, the report considers the role that new and emerging technologies could play in boosting the economy.

‘It is not clear to which extent the emerging technologies (electromechanical microsystems, advanced materials, bio and nanotechnologies) will realise their perceived potential, although it
must be understood that their potential is very significant and could make a major contribution to productivity growth and innovation over the next decades,’ the report states. ‘It is, however,
likely that managing knowledge will become more important and the successful business models of the future will be those that perform better in this respect.’

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