Europe: Towards A Knowledge-Intensive Economy?

While the European economies are amongst the most prosperous and innovative in the world, development in the region has stalled during recent time. A report by Eurostat shows that nearly a third (30.7 per cent) of global economic output was produced in the EU-28 countries as late as 2003. Ten years later, this share had dropped to less than a quarter of global output (23.7 per cent). Though the shift is partially explained by the catching up of developing economies, it also reflects stagnating growth in the European Union. During this period the EU-28 countries had lower growth rate than all but one of the non-European G20 countries.1 It is evident that Europe needs growth-inducing reforms.

The European Commission’s long-term strategy to boost economic development points out that “’business as usual’ would consign [Europe] to a gradual decline, to the second rank of the new global order. This is Europe’s moment of truth. It is the time to be bold and ambitious”. In order to achieve smart, sustainable and inclusive growth, the commission points out the importance of “strengthening knowledge and innovation as drivers of our future growth”. The Commission’s annual growth strategy for 2016 builds upon this theme by stressing the need to promote innovation and entrepreneurship:

Nearly a third of global economic output was produced in the EU-28 countries as late as 2003. Ten years later, this share had dropped to less than a quarter of global output […] It is evident that Europe needs growth-inducing reforms.

Promoting innovation and entrepreneurship, and thereby shifting towards a higher knowledge intensity in the economy, is vital due to changes in the global marketplace. The slow pace of economic development in Europe reflects a shift in the global business landscape. Merely a few decades ago, European firms had strong global positions in manufacturing, information and communication technologies (ICT) and other advanced services. Today a new generation of successful firms, from developing countries such as China and India, have taken up the competition with European businesses. Competition from firms in other developed economies, such as the US, Canada, South Korea and Australia, is also increasing. While Europe in the long run benefits greatly from globalization and trade, it is evident that some European enterprises are struggling to succeed in the global marketplace.

Examples are not difficult to find. Nokia, the leading tech company that recently played a key role for overall development in Finland and had a significant share of the world’s mobile phone market, has rapidly fallen behind and no longer manufactures phones. Well-known European car brands such as Jaguar, Land Rover, Saab and Volvo have been bought by Chinese and Indian investors. Chinese networking and telecommunications equipment company Huawei has recently reached twice as high global sales as its European competitor Ericsson, and more than four times as high as its other European competitor Nokia. Chinese household appliances manufacturer Midea has recently made a bid for German robot maker Kuba. Forbes describes this move as a way of acquiring the latest technologies for full automation of industries.

These examples are reflected in international enterprise statistics. As shown in the images below, European firms made up 34 per cent of Forbes 500 fortune companies. Ten years later, the number of European firms on this list of globally leading enterprises had shrunk to 28 per cent. The majority of the leading global firms are now found in China and other Asian economies.

Location of Forbes Fortune 500 countries in 2005

Graph 1

Location of Forbes Fortune 500 countries in 2015

Graph 2

Previously, European businesses could stay ahead by having access to physical capital investments that eluded firms in many other parts of the world, and act in a business environment superior to much of the world. To a large extent, these advantages have already spread to competing nations. Instead, European businesses have to rely on the competitive advantage which is becoming increasingly important in the modern business environment: immaterial investments

The old world order, in which the know-how, technologies and capital for competitive businesses to grow was restricted to Europe, the US and a few other developed economies is gone. Competition from China, India, Brazil, Vietnam, Iran and other upstart economies is already strong and will most likely grow in the years to come. The big question is how European businesses can continue to maintain a leading position in this new environment. Previously, European businesses could stay ahead by having access to physical capital investments that eluded firms in many other parts of the world, and act in a business environment superior to much of the world. To a large extent, these advantages have already spread to competing firms in other parts of the world. Instead, European businesses have to rely on the competitive advantage which is becoming increasingly important in the modern business environment: immaterial values, which create intellectual properties.

As the global economy becomes increasingly knowledge-intensive, much of the development of manufacturing businesses, ICT businesses and modern service businesses occurs through investments in immaterial rather than material assets. These immaterial assets take the form of technologies, patents, know-how, design rights, program code, digital media content and trademarks. The immaterial assets, which are the result of intellectual creation rather than physical creation, are protected by intellectual property rights (IPR).

IPR is becoming increasingly important for modern economies due to two long-term factors: firstly, that businesses that work with intellectual creation are becoming an ever larger part of the overall economy and secondly that intellectual value creation is becoming ever more important for firms in general. The first trend is exemplified by that software firms form a larger part of the overall business sector than in previous decades. The second trend is exemplified by that software is increasingly important not only to software firms, but also a range of other industries, such as manufacturing. This observation is also relevant for other forms of intellectual values, such as arts/graphics, music/film and design. Many firms for example today produce film not only for advertisement, but also for communication with stakeholders within and outside the organization (employees, investors, business partners) as well as for expressing long-term commitment to values such as environmental protection and socially sustainable growth.

The upcoming series of article are based on a detailed analysis of the European business sector. It is found that already today more than half of value added and four out of ten jobs are found in businesses that are IPR-intensive, that is to say, strongly reliant on IPR. IPR-intensive businesses play a key role in a wide range of fields of economic activities, including manufacturing, media, ICT, retail and professional services. Another finding is that IPR-intensive businesses are of significant importance not only for some, but all European Union member states.

Save

1

Leave Comment

  1. […] the economy. In modern knowledge based economies, such as the member states of the European Union, immaterial value creation is important for many businesses. For example, businesses in various field find it useful to invest […]

Comment on this article