Government procurement underestimated as driver of growth in the EU

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Brussels 4 May 2011: European competitiveness for innovation is falling backwards, with the US and Japan consolidating their lead, and BRIC countries quickly catching up according to EY’s Next generation innovation policy report, produced in co-operation with the Centre for European Policy Studies.

Despite the proliferation of initiatives geared towards innovation in the last decade in Europe, there seems to have been little success, and the complex nature of innovation policy is even more visible in a multi-level government such as the European Union.

The report suggests that it is now time to change the current innovation policy, potentially by encouraging public authorities who have a substantial purchasing power to use that resource to stimulate innovation. When it comes to innovation, there is less public sector procurement in Europe than in many other geographies.

Jay Nibbe, EY Markets Leader for Europe, Middle East, India and Africa, comments, “Innovation is the key to long-term growth, and in order for this to continue and for Europe to prosper, there needs to be a policy that is market driven and firmly supports an environment of innovation, and transforms these new ideas into new businesses and solutions.”

Harnessing the power of demand-side policies

The report concludes that governments can stimulate innovation by acting not only as facilitators and regulators, but also as customers in need of new products and services. By expressing their needs for innovative products and solutions, governments can become engines of new investment and of the application of innovative technological solutions. One area where public procurement can prove decisive for the future of European competitiveness is certainly eco-innovation – a green public procurement.

The EU2020 strategy and, in particular, the Innovation Union flagship initiative, contains some elements of demand-side policy, but a lot more seems to be needed to make public procurement an engine of innovation and growth. Europe should also boost public procurement of innovative solutions, in particular through pre-commercial procurement.

Public procurement in the EU represents around 19.4% (€2,200 billion) of the EU’s GDP. Public procurement is insufficiently used to stimulate innovation in Europe for several reasons. These include the wrong incentives (procurers tend to favor low-cost, low-risk solutions); lack of knowledge and capabilities of public procurers; no strategy that links public procurement with public policy objectives (e.g., health, environment, transport) and research, development and innovation R&D&I support initiatives (typically grant funded); fragmentation in demand; barriers to access to public contracts, as SMEs cannot cope with public procurement at the first stage and therefore often act as subcontractors. This hampers public authorities’ access to the innovative potential of SMEs, which play a key role in innovation.

Towards a market-driven innovation policy

The report “Next generation innovation policy – the future of EU innovation policy to support market growth” discusses how leaders can revise EU innovation policy to consider both environmental and industry needs and evolving market trends at a very early stage.

An ongoing dialogue between policy makers and industry stakeholders is needed, as well as measures to change the legal and financial conditions to make it easier for innovative companies to bring their products and solutions to the market. The EU also needs a more effective university-industry technology transfer and policies to unleash the hidden power of public-private partnerships.

It is also important to improve the governance of EU innovation and quickly identify the areas in which the fragmentation of national innovation policies is hampering EU competiveness.

Bringing Europe back on track

It is clear that there is a need for an “innovative innovation policy.” With adequate regulatory reform and simplification of investment-related legislation, these proposals show the potential to bring Europe back on track in the quest for international competitiveness. Countries such as the US and Japan are already leading the way towards these developments, and it is somewhat reassuring that the European Commission, despite its limited powers, seems to understand the imperative to move in the direction of a more coordinated, dynamic and technology-neutral innovation policy.

Nibbe concludes, “Understanding the causes of the current ‘innovation gap’ in Europe is the first step toward finding an acceptable solution. But, because markets and technologies constantly evolve, it makes little sense to look at only the economy of today. Governments also need to strengthen their engagement with and understanding of future market developments and ensure the solutions address tomorrow’s needs.

This can be achieved through continued dialogue with European companies to understand the rapid changes that are occurring in the markets of tomorrow and the competitive position that European organizations must maintain to meet future industry and consumer needs. The future of European organizations and corporations is interlinked with the ability of Europe’s policy makers to create the environment for innovation to flourish. We look forward to participating in the discussion.”

The study Next generation innovation policy – the future of EU innovation policy to support market growth is released at the EY Government & Innovation summit in Brussels on May 4.



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