Europe may be known as the Old World, but these days it deserves credit for much that is new. As the continent continues to be transformed by the expansion of the European Union and rising competition from China and India, it is harnessing its longstanding tradition of creativity to sharpen its economic edge.
"Europe has to be committed to innovation," says John Bessant, professor of innovation and technology management at Imperial College London. "If you think of the numbers, we've got to be a knowledge economy or we're in trouble."
The resulting flowering of fresh ideas isn't limited to technology and the hard sciences. To be sure, countries such as Israel and Denmark are pushing the envelope in pharmaceuticals, France is overflowing with Web startups, and even tiny Estonia—with its policies promoting universal access to the Internet—has cultivated a booming information economy that bred Web phone-calling phenomenon Skype. But don't leave out Spain, whose chefs have revolutionized contemporary cuisine; Italy, which continues to pioneer apparel and furniture design; or the financial innovations of Britain and Switzerland.
Germany—No. 2 in Innovation
In the 2007 Global Innovation Index, a ranking of 107 countries by French business school INSEAD, Europe scored half the top 10 spots and 12 of the top 20 (including No. 18-ranked Israel, which we include in this report because it's closer to Europe than to Asia). Sure, the U.S. placed first, by a wide margin. But Germany came in second thanks to its engineering prowess, which has kept it the world's largest exporter despite the mighty euro. Britain ranked third, due to the financial firepower of London and the fertile ideas flowing from the Oxford to Cambridge Arc, the world's second-largest destination for venture-capital investment after the Silicon Valley.
European governments are making efforts to propel innovation on the continent by creating competitive clusters—areas with businesses, research centers, and educational institutions centered around a specific sector. Since 2005, France has founded 71 such clusters in places like Lyon, Toulouse, and Grenoble that specialize in industries such as health care, aeronautics, and microelectronics, and has funded them with €1.5 billion ($2.35 billion) since 2006. In 2003, regional development agencies in Britain founded the Oxford to Cambridge Arc initiative with the aim of building the premier knowledge-based regional economy in Europe. The area has become a center of Britain's high-tech manufacturing and research industries.
The development of such hot spots not only has spurred the growth of "creative classes," a notion popularized by author Richard Florida, (BusinessWeek.com, 4/10/08) but also has made competition more local, pitting cities against each other in a struggle to earn recognition and corporate investment. "Each region says, 'We've got the motor sport cluster,'" Bessant says. "It's become an article of policy faith."
Overhaul of Public Sector Needed
Some leaders are skeptical of these contrived innovation centers, arguing that they're not deep enough or sufficiently financed to bring about significant change. "I'm not against clusters, but they are not a panacea to Europe's problems," says Ann Mettler, executive director and founder of the Lisbon Council, a Brussels-based think tank, who argues for broader reforms of labor and tax laws.
While no specific formula can determine how to maximize European potential, two areas that could use an overhaul are the public and research sectors, Mettler says. The public sector accounts for more than 40% of gross domestic product in some countries, and is typically slow to change. Meanwhile, Europe continues to lose researchers to the U.S. due to a seniority system that evaluates them according to their age rather than their performance. Europe also continues to spend less of its GDP on R&D overall—though some argue that the productivity of innovation is more important than total spending.
But in light of heightening competition from the East and a potent currency, Europe will be forced to sink or swim. "If you don't innovate, you'll become a commodity," says David Robertson, a professor of innovation and technology management at IMD business school in Lausanne, Switzerland. "And if you become a commodity, you'll lose."
Check out our slide show for a look at innovation hot spots in 10 European countries.