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# 52013DC0624

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Measuring innovation output in Europe: towards a new indicator /\* COM/2013/0624 final \*/**

  

COMMUNICATION FROM THE COMMISSION TO
THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

Measuring innovation output in Europe: towards a new indicator

(Text with EEA relevance)

1.           Introduction

This Communication presents an indicator to measure performance in innovation
output. The rigorous measurement of the impact of
innovation policies is key for evidence-based policy-making. Moreover, it bolsters
the legitimacy of public action and the use of public funds.

Europe is today a knowledge
centre of global importance. However, despite its world-class science base and
technology leadership in strategic sectors, efforts are needed to improve innovation performance at the EU and national level with better framework conditions, notably for fast-growing
firms in innovative sectors.

The proposed
indicator will support policy-makers in establishing new or reinforced actions to remove
bottlenecks that prevent innovators from translating
ideas into products and services that can be successful on the market. Improved performance will contribute to smart growth, in line with Europe 2020 and its Innovation
Union flagship initiative.[1]

The proposed
indicator complements the Innovation Union Scoreboard (IUS),[2] and its Summary Innovation
Index (SII), which assess how the various strengths and weaknesses of Member States and the EU determine their overall performance, against a broad set of 24 innovation
indicators, including inputs, throughputs and outputs. In addition, the
Innovation Union Competitiveness Report, also analyses innovation performance every
two years.

The indicator
in this Communication zooms in exclusively on innovation output and monitors a reduced
set of dimensions, including the contribution to job creation of fast-growing
firms. Given its complementarity with the IUS, it is planned that the results of
the proposed indicator are published simultaneously with those of the IUS.

The European Council gave the Commission the
mandate to develop an indicator in the context of Europe 2020 to complement the
R&D intensity target,[3] taking into account the Innovation Union request that the Commission "launch
the necessary work for the development of a new indicator measuring the share
of fast-growing innovative companies in the economy". In March 2013, the Heads of State and Government requested a
discussion on innovation in October 2013, calling on the Commission to deliver the
indicator.[4]

To advise the
Commission on its formulation, a High-Level Panel of leading innovators and
economists was set up in 2010.[5] It prompted the Commission to engage in data collections on fast-growing
firms in innovative sectors, carried out by Eurostat. In parallel, cooperation was
undertaken with the OECD to develop sectoral innovation coefficients. Discussions
with Member States on the scope and definition of the indicator took place in workshops,
in October and December 2012, and in July 2013.

This Communication
introduces the indicator (section 2), the criteria and
data for its development (section 3), and the robustness analysis carried out (section
4). It is accompanied by a Staff Working Document.

2.           Measuring innovation
output

Innovation output is wide-ranging and
differs from sector to sector. Measuring it entails quantifying the extent to
which ideas for new products and services, stemming from innovative sectors,
carry an economic added value and are capable of reaching the market.

Therefore, it can be captured by more than
one measure. After exploring a broad set of options, the Commission opted for four
IUS indicators, grouped into three components (patents, employment in
knowledge-intensive activities (KIA), and competitiveness of
knowledge-intensive goods and services), and a new measure of employment in fast-growing
firms of innovative sectors.[6]

The
patents component takes into account inventions that exploit the knowledge
generated by investing in R&D and innovation, and which can be transformed
into successful technologies. Similarly, the indicators of the intensity of employment
of skilled labour, in KIA and in fast-growing firms, provide an indication of
the orientation of the economy towards the production of goods and services
with innovation added value. Finally, the trade flows associated with those commodities
measure their capacity to reach global markets.[7]

2.1.        The components of the innovation
indicator

The first component is technological innovation, measured by
patents, as a crucial output of the R&D and
innovation process, showing the ability of an economy
to transform knowledge into technology. Therefore,
policies improving the intellectual property rights (IPR) system and making it
less costly benefit businesses deriving growth from own innovations. Measures
such as the professionalization of access to IPR portfolios and tax reductions on
patent profits can be instrumental for innovative business dynamics.[8]

The chosen component, IUS indicator 2.3.1, uses the number of patent
applications per billion GDP. The numerator is the number of applications filed
in international phase, which name the European Patent Office (EPO) as
designated office under the Patent Cooperation Treaty (PCT). The denominator is
GDP in Euro-based purchasing power parities. An intrinsic bias in favour of countries
relying more on international patents than on national ones might occur. Alternative
statistics such as triadic patents from the OECD Patent Database were thus tested.

The second component focuses on how a
highly skilled labour force feeds into the economic structure of a
country. Investing in people is a challenge for Europe, as education and training
provide workers with the skills for generating innovations. This component captures
the structural orientation of a country towards knowledge-intensive activities
(KIA), by measuring the people it employs in KIA in business industries, where
at least one third of the employees have a higher education degree, as a
proportion of the total number of employees in that country. It is the IUS indicator
3.2.1.

The third component is the competitiveness
of knowledge-intensive goods and services. In a well-functioning economy, it
reflects its ability, resulting from innovation, to export innovative products
and to participate in global value chains. Competitiveness-enhancing measures
and innovation strategies are mutually reinforcing for the growth of employment,
export shares and turnover at the firm level. The component aggregates in equal
weights the contribution of the trade balance of high-tech and medium-tech
products to the total trade balance, and knowledge-intensive services as a
share of the total services exports, IUS indicators 3.2.2 and 3.2.3.

Finally, the
last component measures the employment in fast-growing firms of innovative
sectors. Fostering the development of those firms is an integral part of
modern research and innovation policy. Studies show that growth depends to a
crucial extent upon fast-growing firms, which generate a disproportionally
large share of jobs and can contribute
to increased innovation investments during economic downturns.[9] Therefore, some
Member States strongly support easier access to finance for fast-growing firms,
including for innovative projects and for risk capital at seed, start-up and
early-growth stages.

Sector-specific innovation coefficients, reflecting the degree of sectoral
innovativeness, built on scores accounting for the share of tertiary-educated
persons (the KIA score) and for how firms therein identify themselves as being
innovative (the CIS score), serve as a proxy for distinguishing innovative
enterprises. The employment data is from ad hoc business register collections
carried out by Eurostat in 2011 and 2012. Fast-growing firms are those with 10
or more employees and an average employee growth of more than 10% per year, over
3 years. This component is proposed to fill in the placeholder (3.1.3 'High-growth
innovative firms') in the IUS, reserved for an indicator reflecting the
contribution to market dynamics of fast-growing firms, as foreseen by the
Innovation Union. It could thus be the 25th Scoreboard indicator.

2.2.        Country performance

Figure 1 shows the innovation indicator scores
in 2010 and 2011, for Member States and international partners. The average refers
to EU27, as the IUS 2013 was published prior to Croatia's accession. Improved
time series, based on longer observation periods and further aligned reference
years, are essential and will become available in the medium term.

An illustration of the results and their
policy implications is provided in Box 1 of the Staff Working Document, focusing
on four countries: Sweden (top performer), France (good performer), Italy (medium-level performer), and Bulgaria (low performer).[10]
Radar charts displaying the results for all components and countries are included
therein. Comprehensive country assessment profiles will accompany those results.

Figure 1. The composite indicator measuring
innovation output

Countries’
scores for 2011 (red bars) and 2010 (crosses), EU average set to 100 in 2010

In 2011, the
components reflect the situation in 2009 (PCT), 2010 (DYN) or 2011 (KIA, COMP)

In 2010, they
are based on 2008 (PCT), 2009 (DYN) or 2010 (KIA, COMP) data

Source: European Commission.

Overall,
in 2011 six categories of performers are identified according to the country
scores. Sweden, Germany, Ireland and Luxembourg are “top performers”, with
scores of over 120 and high values in all four components. These are followed
by Denmark, Finland, and the UK, which appear as “very good performers”, with
scores of between 110 and 120. France, Belgium and the Netherlands are “good performers” with indicator values of between 100 and 110, followed closely by
a group of “medium-level performers”, including Austria, Hungary, Slovenia, Italy, and Cyprus, in the score range of 90 to 100. “Medium-low performers”, with
values of between 80 and 90, include the Czech Republic, Spain, Estonia, Greece, Malta, Romania, and Slovakia. Finally, the countries with scores of less
than 80 are considered “low performers”. These include Poland, Croatia, Portugal and Latvia, and Lithuania and Bulgaria, both of which have particularly low
scores close to 65, equal to around half of the top score.

3.           The selection criteria

International quality standards by Eurostat, the OECD and the IMF were
taken as a reference when
constructing the indicator.

3.1.        The
four principles applied

Based on Eurostat's conceptual framework,
four principles were applied.

(1)
Policy relevance.
Focus was set on a simple and intuitive interpretation, with sizeable and
direct links to measured facts. The indicator permits
monitoring dimensions such as IPR conditions, the upgrading of the skills demanded
by the market in knowledge-intensive and innovative sectors, the creation of a breeding
ground for trade in knowledge-intensive commodities, and framework conditions
for fast-growing firms.

(2)
Data quality. The
availability of timely, representative and validated time series, and the exploitation
of all available sources, was deemed essential.

(3)
International availability and cross-country
comparability. The aim was to set the basis for an indicator
suitable for meaningful cross-country comparisons and benchmarking.

(4)
Robustness. Composite indicators are used worldwide by a large number of actors,
including international organisations. Their construction requires such state-of-the-art validation and robustness analyses[11] that
the picture produced enables benchmarking and meets policy needs.

Because of data limitations, criteria 2 and
3 could only be met partially at this stage, and remain areas for future
analysis. The indicator relies on imputations for missing values and
international comparability, carried out in the fourth indicator component for four
Member States and international partners and tested for robustness.

3.2.        Areas for future analyses

In order to refine the indicator and bring it to its full potential,
four areas were identified.

First, ensuring the improvement of data on fast-growing
firms in innovative sectors, in coverage and regular production, with a
mandatory request for collection as part of the amended Commission Regulation implementing
the European Parliament and Council Regulation on Structural Business
Statistics, which will cover the financial sector. Financial services are excluded
at this stage but they are relevant, given their pervasive function and impact on
the economy. The production of these data will also improve the alignment of the
reference years of the indicator.

Second, analysing how the data defining the innovation coefficients can
be improved to ensure larger sets of observations across sectors and over time,
and how variations in intensities across countries can be best captured. This
includes sensitivity analysis on the coefficients using new data from the biennial
CIS and the annual Labour Force Survey (LFS).

Third, examining whether and how: the data on the competitiveness of
knowledge-intensive goods and services could be improved; the skills component
could be refined to capture best the contribution of education, exploring its links
with the indicator performance; other statistics of the market success of
innovations could be considered.

Finally, enlarging its international dimension, through a wider
collection of data on fast-growing firms and joint work with the OECD on the international
coverage of the innovation coefficients, using comparable surveys in third
countries.

4.           Robustness analysis

Monitoring innovation raises challenges
related to the quality of data and their combination into a single measure. The
conceptual and statistical coherence of the indicator and the impact of its modelling
assumptions were thus assessed in an iterative process:

(1)
Candidate indicators were selected for their
relevance to innovation policy, on the basis of literature review, expert
opinion, country coverage, and timeliness.

(2)
The most recently released data were used, with at
least a 93% availability in the two years across the components.

(3)
The indicator was built with a balanced
structure, insofar as its four components were given equal relevance, choosing their
nominal weights as scaling coefficients in a similar approach to that of leading
international indices such as the Global Innovation Index and the Environmental
Performance Index.

(4)
Finally, country scores and ranks were evaluated
to verify their consistency with current evidence, research or prevailing
theory.

The modelling assumptions were tested for imputation
of missing data, aggregation formulae, alternative variants for all components,
and weighting. Confidence intervals for the rankings were calculated, as was the
distance to the efficient frontier.

5.           Conclusions

In response to the European Council, this Communication presents an
indicator of innovation output, building on the Commission’s efforts to improve the quality of its
evidence in support of policy-making and to assess the impact of innovation.

By zooming in
on innovation output, the indicator complements the Innovation Union Scoreboard
and its Summary Innovation Index.

In line with Europe 2020 and its Innovation Union flagship initiative,
the indicator will support policy-makers
in creating an innovation-friendly environment.

It was developed using international quality standards and state-of-the-art statistical analyses. Nonetheless, the Commission identified four
areas to bring it to its full potential, including widening
its international comparability, improving its data on
fast-growing firms, and analysing how the innovation
coefficient datasets could be improved.

The indicator is a composite index, quantifying
four dimensions of innovation output: patents, skills, trade
in knowledge-intensive goods and services, and employment in fast-growing firms.
The Staff Working Document illustrates its results and policy implications.

[1]               "Europe 2020 Flagship
Initiative Innovation Union", COM(2010) 546 final, of 6 October 2010.

[2]               http://ec.europa.eu/enterprise/policies/innovation/files/ius-2013\_en-pdf.

[3]               Conclusions of 4/2/2011 (Council doc. EUCO 2/1/11 REV1)
and 1-2/3/2012 (EUCO 4/2/12 REV2).

[4]               The European Council noted "a debate next year
on the Europe 2020 Strategy" and called for "preparatory work to be
conducted giving priority to: (…) (b) innovation (October 2013)", looking
forward to "the presentation by the Commission of (…) its communication on
the 'State of the Innovation Union 2012', including the single innovation
indicator, in time for its discussions.", Council doc. EUCO 23/13.

[5]               Report of the High Level Panel on the Measurement of Innovation,
A. Mas-Colell (Chair), September 2010.

[6]               The formula representing the indicator is included in
equation 1 of the Staff Working Document.

[7]               The possibility of using any of the four additional indicators
of the output type in the IUS was examined.

[8]               “State of the Innovation Union 2012: Accelerating
Change”, COM(2013)
149 final, 21 March 2013.

[9]               OECD (2010), "High-growth Enterprises: What
Governments Can Do to Make a Difference". Archibugi, D et al. (2013)
"Economic crisis and innovation: is destruction prevailing over
accumulation?" Research Policy 42, 2.

[10]             Indications of the performance of international
partners, e.g. US, with respect to the EU, are also provided.

[11]             See: http://composite-indicators.jrc.ec.europa.eu/

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