In today’s technology-driven world, innovation is a key driver of economic growth. Although Europe has long been recognized for its intellectual capital and innovative potential, most contemporary tech giants originate from the United States or China, with startups often choosing to scale up in these countries. As outlined in the Draghi Report, structural and regulatory challenges continue to hinder the European Union’s competitiveness in this sector. Voices from across the tech industry are increasingly advocating for policy reforms and enhanced support mechanisms. This article analyzes the EU’s current status in technology and innovation and explores strategic goals for strengthening its global position in the years ahead.
The strength of European Business is strongly tied to its greatest advantage: the single market, which benefits many parts of the European economy. In her speech at the EPP Congress in April, European Commission President Ursula von der Leyen addressed this European core strength and called out to improve the EU’s take on the Single Market: “[…] the vitality of the Single Market is held back by too many national barriers, fragmentation and bureaucracy.” Digital startups face over 270 regulators when scaling up, a fragmented setup that explains the EU’s weak position on innovation, von der Leyen states and adds: “If we remove all trade obstacles inside our Union, we could boost our GDP by as much as 10%.”
For years, the EU’s spending on Research and Development (R&D) has been hovering around 2% of the GDP. According to Eurostat data for 2023, the figure stands at 2.22%, which translates to approximately €381 billion. More than half of it was spent in the business sector. In comparison to countries such as China, Japan, South Korea, and the US, the EU’s expenditure on R&D has seen limited growth.
Funding Gaps and Lack of Initiative
The 2024 EconPol Policy Report from the German ifo institute explains that while the EU is lagging behind other countries in the GDP expenditure on R&D, it is not the amount of money itself that is lacking, but the “lower engagement in R&D by the business sector”. This is also reflected in the data illustrated by Eurostat. In 2020, the business expenditure on R&D accounted for 1.2% of the EU’s GDP, while US expenditure was double that. Analyzing data from the EU Industrial R&D scoreboard, the authors could identify different sectors’ spending. Accordingly, the EU is lacking in R&D spending in high-tech industries, such as software and computer services. Instead, the largest part of EU business R&D spending is located in the automotive sector, which is a mid-tech sector. The data also shows that the US and EU expenditure on high- and mid-tech industries was similar until 2013, but this has changed significantly. With the US having many more high-tech industries nowadays, spending has also increased accordingly, whereas the same cannot be said about the EU. Although the composition of spending in different sectors explains the R&D difference only to a certain extent, it is also true that the US spends more in each sector, the report explains.
Furthermore, the report identifies a similar situation in patent activity, a “key measure for innovation output”. Patent filings from the EU accounted for 17% of the total 270,000 applications in 2022, while the US had 21%. A closer look reveals that, once again, a larger share of the patents belonged to the transport or automotive industry. While 48% of all transport sector patents came from the EU, in the computer and digital sector, only 21% originated from the EU, while 55% came from the US and 24% from Japan. The data show that the European market lacks concentration in the high-tech sector, which is problematic due to the inherent character of this sector, where only a few dominant companies emerge. In the mid-tech sector, particularly in the automotive industry, where the EU has traditionally remained strong, it is losing dominance and advantages to the US and Chinese markets. The authors note that this sector has less profit margin than the high-tech sector, which could result in the EU missing a considerable opportunity to reinvest and foster a strong high-tech sector.
The disadvantage of this situation has only increased with the current political situation in the US and the ongoing dominance and dependency of the EU market on the high-tech companies from the US. While Europe is currently improving its status quo in technology and innovation, by inviting endangered US scholars and offering a liberal space for research and development, the R&D budget and infrastructure gaps will remain obstacles even if these scholars find a home in Europe. The EconPol Policy report and data from Eurostat both show that most of the R&D budget in Europe is allocated at the national level, with the Horizon Europe 2021 – 2027 program being the only major pan-European budget, totaling €95.5 billion and encompassing a broad range of target sectors. Sweden had the highest R&D intensity in Europe, with 3.57% of its GDP spent on R&D, followed by Belgium (3,32%) and Austria (3.29%). These three countries lead the board in terms of the highest R&D intensity in 2023. Germany follows in fourth place with 3.11%, and then Finland with 3.09%. On a national level, European countries are on par with other international competitors, but as a Union, they lack uniform goals and priorities for innovation in the high-tech sector. The above-mentioned data also show that, although most of the EU R&D expenditure is spent in the business sector, it does not translate into successful innovations comparable to those in the US or China. For one, we have the missing business sector initiative to fund young startups and innovative ideas, and we also have the issue of translating research into practical business applications. It stands out that Europeans are more risk-averse than their competitors and that we specialize in sectors that are less profitable and have less potential for technological innovation. In terms of venture capital (VC), we are missing the scale of the US and Chinese funds. Without a comparable fund increase, venture capital will struggle to manage the investment needed to close the steadily increasing gap. A report from the International Monetary Fund (IMF) further highlights this gap concise: “VC investments in the EU averaged 0.3 percent of GDP per year over the last decade, less than one-third of the US average, with US VC funds raising $800 billion more than EU VC funds to invest in innovative startups.“. The report highlights that VCs are not just about money but also about networks, collaboration, and resource allocation, including knowledge. It also explains how the European banking system is inherently unable to efficiently invest in startups that operate in an environment of risks and rapid development.
Europe’s Strategy for Growth
Fragmentation in priorities and policies is a significant issue among the member countries of the European Union, resulting in a complex market for companies to grow and scale up. The geographical and political fragmentation influences the EU’s innovative potential and is further constrained by some systemic barriers. In the Horizon Europe program, the European Innovation Council (EIC) is mainly responsible for targeting innovation and is intended to “scale up potential that is too risky for private investors”. 70% of their budget is targeted at SMEs (Small and Medium-sized Enterprises). Situated in the third pillar of Horizon Europe, which focuses on innovation in Europe and has a total budget of €13.6 billion, the EIC has a budget of €3.5 billion and is intended to attract co-investment from the private sector, with a total of €2.6 billion attracted since 2020. Their current portfolio contains 256 companies from various sectors that have been invested in. Overall, this budget is much smaller than that of the US Advanced Research Projects Agency (ARPA), from which the EIC was inspired in its creation. Despite the closeness to the ARPA approach, the EconPol Policy report identifies that EIC invests in projects on a much higher maturity level than its US counterparts. The projects that have just proven their “proof-of-concept” and are in their emerging and further proof phase would profit more from investment than mature projects, which might attract private investment much more easily. ARPA invests in these early projects, allowing private capital to focus on mature projects; the EIC follows this approach on a much smaller scale. Looking at the EIC budget, the authors analyze that even less than half of the EIC budget (€470 million) is intended for these early TRL (Technological Readiness Level) projects, while the ARPA’s budget exceeded $7 billion. Overall, the analysis suggests that EIC supports mature SMEs much more strongly than young startups.
“[…] it seems clear that the EIC aims more at remedying capital market imperfections than encouraging breakthrough innovation. This is also reflected in the key performance indicators set by the EIC Board, which are mostly related to investment performance, rather than innovation.”, the report adds.
The current EIC Impact Report 2025 includes additional analysis on innovation, but the focus remains on the investment effort from the EIC and its partners. Visible in multiple figures of this report is the dominance of projects or companies situated in the medical technology sector, which prevail in the highest rank in terms of the number of projects supported as well as the amount of investment. High-tech sectors, such as quantum technology, advanced computing, semiconductors, AI, and Information and Communication Technology (ICT), appear stronger in numbers, but the investment of these companies by the EIC fund is positioned lower than that of, for example, medical technology. Looking at the overall investment (EIC + partners) since 2019 in these sectors, the medical tech sector is still leading (over €2 billion), followed by health biotechnology with almost € 1.5 billion and then followed by other high-tech sectors like Quantum, Advanced Computing & Semiconductors, which had an investment of about €1.4 billion and AI, Data & ICT with an investment of about €1.3 billion.
For contemporary technologies like AI, Data & ICT to be so low on the investment scale is a major issue, especially considering their profitability and potential for technological development. As AI technology continues to develop at a rapid pace, changing the world faster than policies can adapt to, Europe is forced to keep pace. With the wide range of applications of AI technology, including education, engineering, software development, and social services, it has become the most prominent technological advancements of our time. Companies like OpenAI are gaining dominance, and the EU must support similar European companies to a greater extent. At the same time, it will remain critical to invest in high-tech sectors such as quantum, semiconductors, software, and many others to support the development of AI technology.
On the other hand, the EU has already realized these deficits and implemented stronger policies and engagement. Just some days ago, the EU Commission published the “EU Startup and Scaleup Strategy”, leading with the words: “It is time for Europe to become a startup powerhouse. Our competitiveness and ultimately prosperity depend on it.“
This initiative reports that the EU is home to 35,000 early-stage companies and 3,400 growth-stage companies. It clearly states the goal to simplify regulation and introduce “regulatory sandboxes”. The budget for the EIC is also expected to reach up to €20 billion in 2027. The Commission explains openly that startups struggle to scale up in the EU, with many deciding to relocate. In fact, 30% of European unicorn companies relocated outside the EU from 2008 to 2021. Altogether, only 8% of the global scaleups are based in Europe, it adds. The strategy aims to increase EU attractiveness by improving conditions, supporting scaleups, and reducing reasons for relocation. Legislative, policy and financial measures are to follow. The greatest action reported here is a proposal of a “European 28th regime” and its “single set of rules for companies”, which aims to dispel the EU’s fragmented legal environment and thus enable a rapid scaling up.
Call for Change
The current geopolitical situation has created opportunities and reminded us all of our dependence on the US. Due to Trump policies and his antagonistic stance on Europe, but also the fear of war, European mindsets are accepting the harsh truth of European dependency in many sectors. The call for change is underway, and Europe must seize this opportunity to reassess its approach to regulations, the financing system and technological priorities. The European challenge, however, is much greater than just catching up to its competitors; it’s also about maintaining its European and democratic character as a social market economy, which prioritizes people’s interests and respects national and pan-European identities. It is quite apparent that Europe is competing against two states that have a significantly different understanding of these matters, which presents its own set of challenges. It is also important to remember that the European Union is a group of very individual countries with their own interests and needs.
To sum up, while national level R&D expenditure is at a competitive level, the priorities and EU settings are currently not aligned to close the gap with the US, China or South Korea. Business scaling up is hindered by the fragmented market regulations and a lack of stable financing support. Europeans are generally more risk-averse, and the capital market is less willing and less able to support innovative ideas.
In total, the European Union is in dire need of a directional change and needs to prioritize high-tech sectors in the EU-level R&D strategy, while also helping to translate research into business and securing funds for advanced research. The business sector’s involvement is lagging behind that of other international markets, but it has high potential to grow with attractive catalysts, such as supportive regulations and incentives. Furthermore, the EU Single Market requires further improvements and a commitment from EU members to form a consensus on uniform regulations. The EU needs to encourage more public-private collaborations in breakthrough technologies and innovations. Lastly, it direly needs to strengthen the capital market and de-risk early-stage innovation in order to increase business sector initiative and more successful startups.
The recently published communication from the EU Commission is taking large steps towards this goal. EU Commissioner Von der Leyen’s policy goals have once more underlined the EU’s innovation priority for the upcoming years. However, time is running out, as European excellence in high-tech is more in demand in a growing environment of economic and political struggles with long-standing trading partners, such as the US. This is highly problematic as even high-tech companies like Meta, Alphabet, Amazon, Tesla, and Apple are being influenced by the Trump administration. With Europe lacking a dominant high-tech company like these big five, the public and business sectors will stay dependent on foreign tech services. This is not only an issue of political influence but of economic and technological dependency and its consequences. The European Union needs to promote the idea of European-led tech companies, particularly in fields such as AI, semiconductors, quantum technology, digital media, and data. This is not merely about winning the technology race – it is about securing Europe’s rightful place in it. The potential is here.
