Communication from the Commission to the European Council (Informal meeting in Lahti – Finland, 20 October 2006) an innovation-friendly, modern Europe
Date: 2006-10-12
Institutions: European Commission
Subjects: European Union, economic and social cohesion, economic growth, globalisation, innovation, research policy, sustainable development

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 12.10.2006 
COM(2006) 589 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN COUNCIL 
(INFORMAL MEETING IN LAHTI – FINLAND, 20 October 2006) 

An innovation-friendly, modern Europe 

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I. 

INTRODUCTION 

The world has become a more intensely competitive environment in a relatively short period 
of  time  as  more  and  more  countries  have  entered  the  global  market  place.  Meeting  at 
Hampton Court last October, Heads of State and Government recognised that to be successful 
in a global economy and achieve the rates of growth necessary to sustain our living standards, 
Europe must do more to harness its creative power and ability to convert knowledge into high 
quality products, services and new business models for which there is strong global demand. 
Progress  on  innovation  will  be  central  to  the  success  of  the  renewed  Lisbon  Strategy  for 
Growth and Jobs. 

Europe has a proud tradition of inventing solutions that have improved people’s lives all over 
the world: from life-saving medicines to advanced mobile telecommunications. Innovation is 
key  to  tackling  the  main  challenges  we  face  now,  such  as  climate  change,  detection  and 
prevention of diseases, congestion, insecurity, and social exclusion. 

The Commission has already presented an overall framework designed to foster innovation in 
Europe and a 10 point action plan1 to foster innovation which was recently discussed by the 
Competitiveness Council. This paper focuses on a small number of specific issues which have 
a  European  dimension  and  which,  if  strongly  supported  by  the  Heads  of  State  and 
Government, have the potential to produce very significant benefits (in a relatively short time-
scale).  

II. 

WHERE DOES EUROPE STAND? 

The innovation performance of the EU as a whole is still lagging behind its main competitors, 
even though some Member States' economies are amongst the most innovative in the world. 
China and India, who have long challenged us in the traditional labour-intensive sectors, are 
now taking huge steps forward in innovation and technology. Economic reforms are turning 
them  and  other  emerging  economies  into  serious  global  competitors  across  a  wide  range  of 
high growth sectors. Many emerging economies are taking a strategic approach to innovation, 
investing  heavily  in  their  high-tech  infrastructure  and  producing  large  numbers  of  talented, 
highly educated workers.  

Europe  and  its  Member  States  possess  many  innovation  assets.  But  we  also  suffer  from  a 
number of paradoxes: 

•  we invent but frequently do not convert our inventions into new products, jobs and patents; 

•  there  are  many  small,  highly  innovative  start-ups  but  they  do  not  easily  grow  into  big, 

globally successful companies; 

•  in  certain  sectors,  such  as  telecommunications,  the  adoption  of  (ICT)  innovations  has 
resulted  in  important  productivity  gains,  but  in  others,  such  as  financial  services  and 
distributive trades, this has failed to happen. 

1 

"Putting  knowledge  into  practice:  a  broad-based  innovation  strategy  for  the  EU"  -  COM(2006)  502, 
13.9.2006. 

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There are a number of innovation drivers at work: 

First of all, providing high-quality education is critical in preparing our citizens to meet the 
challenges of globalisation. Ultimately, if companies cannot find enough people with the right 
skills in Europe, they will look elsewhere to invest. The average EU adult is significantly less 
educated  than  adults  in  other  industrialised  countries2.  We  also  invest  considerably  less  in 
higher education than many of our competitors.  

In  the  past,  the  skills  people  learned  remained  valid  for  decades.  Now,  people  need  to 
constantly  update  and  renew  their  skills  but  we  are  still  not  doing  enough  to  stimulate 
continuous education and retraining programmes. 

The EU, like many other parts of the world, will experience large demographic changes as the 
baby boom generation ages. Between now and 2030, the working age population will fall by 
6.8%. This will exacerbate skilled worker shortages. In many Member States, there is already 
a  shortage  of  highly  skilled  staff,  particularly  researchers  and  science  and  engineering 
graduates, who are the foundation of technology advancement.  

Demographic  change  will  have  wider  implications  for  Europe.  Less  than  twenty  years  from 
now  about  half  of  Europe’s  population  will  be  over  50  years  old  compared  to  only  one  in 
three  today;  fewer  younger  people  will  inevitably  affect  society's  ability  to  reform  and 
innovate.  

But  perhaps  the  greatest  challenge  to  our  education  systems  is  organisational.  Europe's 
education system remains fragmented; universities do not co-operate with each other as much 
as they should. In the US and Japan, many successful innovations have emerged from close 
collaboration between academia and business. Europe has joined this game rather late and has 
a lot of catching up to do. 

Another  handicap  to  greater  innovation  is  that  Europe's  R&D  investments  are  much  lower 
than  those  of  other  industrialised  countries.  If  Member  States'  commitments  are  realised, 
Europe’s  R&D  expenditure  is  expected  to  reach  2.6%  of  GDP  by  20103,  from  the  current 
level of 1.9%. But achieving this implies considerable efforts at both national and EU levels, 
notably to make Europe more attractive to R&D investment. The research investment deficit 
in Europe arises mainly from much lower R&D investments by the private sector, which in 
turn reflects less favourable framework conditions and a concern about profitability.  

Finally,  in  many  areas,  there  are  still  obstacles  hindering  economic  dynamism.  Many 
companies face access barriers in specific markets, scarcity of venture capital and bottlenecks 
in our regulatory framework or red tape which impede innovation and hinder the diffusion of 
ideas.  In  addition,  outdated  structures  and  customs  make  it  more  difficult  to  adapt  to  rapid 
change.  

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For  example,  in  2005,  only  22.8%  of  the  EU  working  age  population  (25-64)  had  attained  tertiary 
education compared to 39% in the US and 37% in Japan (sources: Eurostat, OECD). 
The overall EU R&D target for 2010 is 3% (of which 2% by the private and 1% by the public sector). 

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III. 

THE KEYS TO UNLOCKING EUROPE’S INNOVATION POTENTIAL 

While  technological  innovation  is  important,  there  is  at  least  as  much  scope  for  non-
technological innovation, for example through changes in business models, better design and 
process  organisation.  In  fact,  organisational  change  is  usually  needed  to  get  the  best  out  of 
technological advances. 

Action in the following areas would significantly boost Europe's innovative capacity: 

1) 

Establishing European leadership in future strategic technologies 

To  date,  Europe  continues  to  suffer  from  a  dispersion  of  limited  resources4.  The  European 
Technology  Platforms  (ETPs)  are  an  excellent  instrument  for  greater  collaboration  and  the 
achievement  of  critical  mass.  They  bring  together  a  wide  range  of  public  and  private 
stakeholders  to  define  and  implement  long-term  research  and  technology  agendas.  They 
address  from  an  early  stage  the  framework  conditions  for  bringing  results  of  R&D  work 
successfully  onto  the  market.  A  strong  commitment  from  national  and  regional  public 
authorities to help ETPs to realise their goals would boost their prospects of success. 

Some  ETPs  have  achieved  such  a  scale  and  scope  that  achieving  their  key  objectives  now 
requires  the  setting  up  of  dedicated  public-private  partnerships  –  i.e.  the  creation  of  "Joint 
Technology Initiatives" (JTIs) – which will lead to higher and more stable commitments for 
research investment over the longer term. 

Promising areas where the launch of JTIs is envisaged: 
- Hydrogen and Fuel Cells 
- Nanoelectronics 
- Innovative Medicines 
- Embedded Computing Systems 
- Aeronautics and air transport ("Clean Sky") 
- Global Monitoring for Environment and Security (GMES) 

European  industry  stands  ready  to  invest  considerable  sums  of  money  in  these  initiatives 
provided  their  investments  are  matched  by  EU  funding  (through  the  7th  Framework 
individual  Member  States'  contributions.  Launching 
Programme),  complemented  by 
ambitious  public-private  partnerships  on  solid  economic  and  governance  foundations  is  an 
opportunity  we  cannot  afford  to  miss  if  we  want  to  establish  European  leadership  in  the 
technologies of tomorrow. The European Institute for Technology could build on initiatives in 
these and other promising fields. 

The Commission will include, in its Progress Report on the Growth and Jobs Strategy due for 
the end of this year, a road map for the early launch of the most mature JTIs.  

2) 

Forging much stronger links between universities, research and business 

In the past, universities would develop new knowledge and, when it was mature, it might be 
picked up by business for commercial application. Far too much knowledge remains locked 
up in universities and the development of new knowledge takes too little account of the needs 
of  business.  This  innovation  model  is  out  of  date.  Today,  innovation  is  build  around 

4 

The Innovation Policy Trend Chart lists 1 340 innovation support schemes in use in 28 countries. 

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knowledge networks which, by sharing, developing and accumulating knowledge, facilitate a 
rapid development of products and services out of new ideas.  

Such  cooperation  between  universities,  large  and  small  companies,  research  and  knowledge 
transfer  institutes,  investors  or  even  associations  of  users  and  consumers  is  best  realised 
within clusters – geographically delimited areas which allow for a direct interaction between 
existing  stakeholders  and  which  also  attract  new  ones.  In  fact,  there  is  strong  and  growing 
evidence that companies co-operating in clusters are amongst the most innovative in Europe5. 
Cluster  policy  has  therefore  become  an  important  element  of  Member  States'  innovation 
strategies and should be encouraged further. 

Member  States  and  universities  can  do  much  themselves  -  and  are  already  doing  -  to  foster 
closer co-operation. But significant benefits can be reaped if we manage better to exploit the 
knowledge  and  capabilities  available  across  the  EU.  The  proposal  to  create  a  European 
Institute  of  Technology  (EIT)  presents  an  innovative  model  for  strong  cooperation  between 
universities,  research  centres  and  the  business  community.  The  EIT  will  contribute  to 
improving the competitiveness base of the Member States by involving partner organisations 
in  integrated  innovation,  research  and  education  activities  at  the  highest  international 
standards. The EIT will help to pool Europe's resources, mobilise private sector funding for 
cutting edge research, attract the best researchers from all over the world, stimulate spin-offs 
of  innovative  SMEs,  and  in  so  doing  could  become  a  symbol  of  Europe's  ability  to  work 
together and innovate. 

3) 

Improving the framework conditions 

Turning  knowledge  into  successful  commercial  applications  does  not  depend  on  luck. 
Investing  in  R&D  alone  does  not  suffice.  There  are  a  number  of  general  as  well  as  sector-
specific  framework  conditions  that,  if  present,  significantly  improve  the  environment  for 
innovation and the chances to achieve commercial rewards. After having set a common target 
for  R&D  spending,  Europe  must  now  focus  on  getting  the  most  out  of  this  investment  by 
creating the right framework conditions. 

General framework conditions 

A genuinely integrated Single Market 

A  pre-requisite  for  more  innovation  is  effective  competition  and  a  fully-functioning  single 
market  which  offers  sufficient  scale  to  help  large  companies  and  many  SMEs  to  compete 
globally.  

Financing innovation 

It is obviously vital that individuals with good ideas can find the financing to get their ideas 
off  the  ground.  This  has  never  been  easy  but  for  early  stage  financing  it  has  become  more 
difficult in recent years. Venture capital funds have become less interested in very small scale 
investments.  This  has  created  what  many  call  the  equity  gap.  As  a  result,  many  promising 
ideas  do  not  get  off  the  ground.  Further,  far  too  many  fast-growing  SMES  have  to  look 
elsewhere (to America) to find the capital they need. 

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Cf. Innobarometer 2006 – www.europa-innova.org 

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There  are  no  magical  solutions  to  solving  this  problem.  Some  Member  States  have  offered 
fiscal incentives to so-called "business angels" willing to invest in small, high risk, start-ups. 
The  exchange  of  good  practice  will  be  encouraged  and  other  public  policy  angles  explored 
which could possibly be brought to bear on this problem. 

An intellectual property policy for the 21st century 

Once  an  idea  is  mature,  it  is  important  for  the  owner  to  secure  legally  the  rights  to  its  use. 
Intellectual  property  rights  (IPRs)  is  typically  the  core  asset  of  many  companies  and  the 
source of their competitive advantage. 

Whilst  views  may  differ  on  the  design  of  the  most  effective  framework,  most  agree  that 
Europe's current industrial and intellectual property rights regime has failed to keep pace with 
fast (single) market integration, rapid technological change and changing business methods. 

Europe urgently needs a clear and coherent legal framework for IPR protection fit for purpose 
in the 21st century – one which embodies the following principles:  

•  high-quality:  IPRs  should  be  based  on  tough  examination  standards  for  novelty  and 
inventive step. A low-quality patent system is a source of legal uncertainty and litigation; 

•  affordable: affordable patent procedures, that balance cost with quality and legal certainty, 

are a priority, especially for SMEs;  

•  convergence: common interpretation of laws and unified court proceedings enhance legal 

certainty and significantly reduce costs; 

•  balance: between rewarding valuable creations and ensuring that ideas can circulate easily 

in Europe’s dynamic information society.  

The  adoption  of  a  cost-effective  Community  Patent  is  the  most  important  step.  In  the 
meantime,  in  order  to  lift  a  significant  barrier  to  innovation,  the  Member  States  and  the 
Commission should together make the existing patent system more efficient by improving the 
means for litigation through a Community instrument. The European Council should indicate 
that  breaking  the  logjam  in  this  area  is  a  high  priority  and  task  the  Council  and  the 
Commission to come forward with solutions within a time frame which it could set. Beyond 
this, the Commission has embarked on a wide-ranging review of IPR policy as a whole, and 
will  propose  concrete  steps  towards  a  modern  and  affordable  framework  before  the  2007 
Spring European Council. 

Faster setting of open and interoperable standards 

Even  as  ideas  are  leading  to  commercial  products,  it  is  important  that  European  standards 
emerge to guarantee that a product can be put on the market and work smoothly with other 
applications. 

Standards can determine the success or failure of new technologies. Without the single GSM 
standard  agreed  in  1987,  and  deriving  from  EU-funded  R&D,  Europe  would  not  have 
achieved its global leadership position in mobile communications.  

However,  for  fast-moving  markets  such  as  high-technology  products,  our  standard-setting 
process  has  become  too  slow  –  and  increasingly  standards  are  set  outside  Europe  in  ad  hoc 

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bodies,  where  European  companies  have  only  limited  influence.  In  response  to  this, 
standardisation  bodies  have  introduced  new,  less  formal  ways  of  working  which  allow 
agreements to be reached more quickly but which have, as in the recent case of mobile TV 
standards,  led  to  the  setting  of  multiple,  non-interoperable  standards.  This  means  no  single 
market can develop with all the ensuing costs for users and producers of devices and services.  

This situation cannot be allowed to continue. The Commission will urgently consult industry 
and make proposals which will allow standards to be developed quickly enough to cope with 
very short innovation cycles whilst ensuring full inter-operability. 

Sector-specific conditions 

Whilst  improving  the  general  framework  conditions  will  help  all  companies  to  innovate, 
global success also depends on creating the right conditions in specific sectors.  

The current tendency for technologies to go wireless will accelerate. Without a real common 
European  approach  to  manage  spectrum  the  development  of  these  technologies  will  be 
hampered. As far as renewable fuels are concerned, another promising technology, solutions 
will  need  to  be  found  to  resolve  infrastructure  and  distribution  constraints.  These  are 
examples where the right public policy decisions can give European industry a decisive head 
start. 

In other areas, such as resource-efficiency and eco-innovation, the role of governments is to 
provide  legal  predictability  to  enable  companies  to  plan  their  investments.  They  can  set  an 
example by ensuring that their public buildings meet the highest standards. Instead of buying 
standard products off the shelf, they can make smart use of their large procurement budgets 
by requesting innovative solutions. In so doing, they can create the necessary demand for the 
development  of,  for  example,  more  energy-efficient  buses  or  highly  sophisticated  waste 
treatment facilities.  

In sectors such as health and education where the government itself is a major actor, there is 
significant  scope  for  using  its  funding  or  organisational  prerogatives  to  promote  innovative 
applications that increase quality and efficiency of the services. More generally, governments 
can positively influence innovation by modernising their public administrations, particularly 
through e-government applications. 

Within  its  initiative  to  promote  the  emergence  of  lead  markets,  the  Commission  will 
undertake  a  sector-by-sector  analysis  –  drawing  on  outside  expertise  –  in  areas  which  hold 
potential  for  creating  demand  for  new  innovative  products  and  services.  This  analysis  will 
identify  obstacles  that  need  to  be  removed  and  will  assess  how  best  to  use  public  policy 
instruments  so  that  promising  applications,  across  cutting  edge  as  well  as  more  traditional 
sectors; can get to the market and grow into global success stories. 

IV. 

CONCLUSION 

There are many facets to promoting innovation. The success of some countries and regions in 
creating  a  genuinely  favourable  environment  to  innovation  is  largely  due  to  a  conscious 
political decision to take a strategic approach to innovation, by focusing policy on a key set of 
framework  conditions  and  ensuring  that  its  implementation  is  a  matter  followed  up  at  the 
highest political level. 

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The  Lahti  informal  European  Council  offers  Europe’s  leaders  the  opportunity  to  give  clear 
guidance  in  concrete  areas  which  can  boost  innovation  in  Europe,  thus  contributing  to  the 
goals set by the renewed Lisbon strategy for growth and jobs. There is no need to create new 
structures. Making sure that progress on these measures proceeds rapidly should be monitored 
within the context of the Lisbon strategy at future Spring European Council meetings. 

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