Innovation Strengths and Weaknesses

Transcription

1 Innovation Strengths and Weaknesses Anthony Arundel & Hugo Hollanders MERIT December 5, 2005 European Commission Enterprise Directorate-General

2 Table of Contents Executive Summary...i 1. Introduction Innovation indicators EIS results Innovation modes Innovation demand and governance Cluster Analyses Performance cluster analyses Patterns of innovation Effect of variation on EIS performance Summary Country Pages General findings Findings per country...20 Austria...21 Belgium...25 Bulgaria...30 Cyprus...33 Czech Republic...37 Denmark...42 Estonia...46 Finland...50 France...54 Germany...58 Greece...62 Hungary...67 Iceland...72 Ireland...76 Italy...80 Latvia...84 Lithuania...88 Luxembourg...92 Netherlands...99 Norway Poland Portugal Romania Slovenia Spain Sweden Switzerland Turkey United Kingdom Annex A-1. European Innovation Scoreboard 2005 Current performance Annex A-2. EIS 2005 Indicator Definitions and interpretation Annex B. Innovation demand and innovation governance Annex C. Proximity matrix Annex D. Normalized strengths and weaknesses across six composite indices

3 Executive Summary The 2005 edition of the Trend Chart Strengths and Weaknesses Report includes several new analyses that were not available in These include new composite indices for domestic innovation demand and innovation governance that supplement five indices from the 2005 EIS 1, indicators for innovation modes or how firms innovate, and two methods of identifying countries with similar innovation systems. The first method uses absolute innovation performance on seven composite indices. The second method, in contrast, looks for similar patterns of strengths and weaknesses across six of the seven indices. The country pages assemble all available Trend Chart data at the national level and provide an overview of national innovation performance, including trends over time and performance on innovation demand and governance; a discussion of the main challenges facing each country, an identification of peer countries for innovation patterns and their relevance to policy, and a short note on indicator quality concerns. The country pages provide national data in several charts and tables: a radar chart of national performance on the seven composite indices that is supplemented by a table giving national rankings compared to the other EU-25 countries, a trend graph, a graph of relative performance to the EU-25 average for each of the 26 EIS indicators, a graph for the distribution of innovation modes, and a table that includes all trend data for each EIS indicator. Country pages are provided for all EU-25 countries and for Norway, Switzerland, Iceland, Bulgaria, Romania, and Turkey. The innovation mode data untangle differences in how firms innovate, using CIS-3 data. As an example, the CIS-3 data estimate that 46% of Portuguese firms and 45% of Finnish firms have some innovate activities. The innovation mode data show that this simple indicator hides large differences in how Finnish and Portuguese firms innovate. Almost a third of Finnish firms have creative innovative activities in-house, versus only 18% of Portuguese firms. In contrast, a much higher percentage of Portuguese firms primarily innovate through diffusion processes (29% versus 13%), such as purchasing new technology or making minor modifications to their products and processes. The composite indicators for innovation demand measure business investment in and consumer willingness to purchase innovative goods and services. Domestic demand for innovation is a potentially important driver of investment in innovation by firms, although firms can also rely on foreign markets. The composite indicator for innovation governance measures the quality of government policies to support innovation and investment in the innovative provision of government services (egovernment). The demand indicator is not correlated with the Summary Innovation Index (SII) from the EIS because of marked differences between the EU-15 and the new member states. Conversely, there is a moderately positive correlation between governance and the SII. 1 The five EIS indices are for innovation drivers, knowledge creation, innovation and entrepreneurship, applications, and intellectual property. i

4 The cluster analyses for innovative performance identify four main country groups: innovative leaders, intermediate countries, trailing countries, and laggards. The trailing group can be further divided into two sub-groups. The leading countries, as in the past, include Finland and Sweden, but Denmark has now joined this group. The intermediate group includes many other countries within the EU-15, including Austria, Belgium, the Netherlands, the UK, Germany, France, and Italy. The trailing countries consist of Spain plus five new member states: Lithuania, Slovenia, the Czech Republic, Hungary, and Slovakia. Finally, the laggards include two countries from the EU-15, Portugal and Greece, and three new member states: Estonia, Latvia and Poland. The analyses of innovation patterns are based on six composite indices. The composite index for intellectual property is not included because all new member states perform very poorly on this index. The analysis excludes the effect of innovation performance in order to identify countries with similar patterns of strengths and weaknesses. For instance, one country could perform, in absolute terms, twice as well as a second country on every composite index. In this case, the better performing country might be classified as a leading country, while the other is classified as a trailing or laggard country. However, the two countries would have identical patterns of strengths and weaknesses across the six composite indices. The purpose of the pattern analyses is to identify pairs of countries with similar strengths and weaknesses but dissimilar absolute performance. This information could help the policy community in the country with poor innovation performance to find appropriate innovation programmes that meet national conditions. Countries that share similar patterns of strengths and weaknesses should share many other characteristics that could enhance the success of adopted innovation policies. Another issue of relevance to policy is if it is more important to improve areas of weakness than areas of strength. This depends on two alternative perspectives on how innovative capabilities develop. The first suggests that innovative capabilities can spill over from areas of strengths to areas of weakness. The second perspective suggests that all inputs must develop approximately equally a blockage in one field, such as poor knowledge creation or low levels of entrepreneurship, would prevent progress. Of course, both perspectives could also be true, depending on specific conditions or indicators. A test of the second option is to compare the variance of the seven composite indicators against the SII. A country with zero variance would perform identically on all seven indices. This could occur when the value of all composite indices is equal to 1 (very good performance) or zero (very poor performance). Figure E1 gives the results of the correlation between the variance and the SII for 21 countries with full data. Using a log-linear model, there is a statistically significant negative relationship, with performance on the SII declining with the amount of variance. This indicates that well-rounded and equivalent performance on all areas might increase innovative performance. Consequently, given equal costs, policy might be more effective by concentrating on improving areas of weakness than further improving areas of strength. ii

5 An evaluation of the country analyses finds several results that are applicable to more than one country. In many cases, these consist of differences between the trailing and laggard countries and the more innovative countries. Figure E1. Negative correlation between variance and EIS performance SE FI 0.60 DK DE SII 0.50 BE NL FR AT UK IT ES SI CY HU PT PL EL EE LT LV SK Variance of 7 innovation dimensions First, many of the new member states are in the performance peer group for lagging countries, partly because almost all of them have extremely low rates of patenting. The analysis of the main challenges for these countries in the country pages does not view this as an issue because low patenting rates are caused by very low investments in R&D. The challenge, over the short and medium term, is often to first focus on improving both public and private R&D expenditures. An increase in patenting should follow an increase in R&D levels. Second, the evaluation of the main challenges for the trailing and lagging countries gives close attention to the distribution of capabilities for creative innovation and innovation diffusion. A few of these countries, such as Slovenia, have the necessary foundation to develop creative innovation capabilities. Many other countries do not, and might benefit more, over the short and medium term (up to 10 years), from concentrating on developing innovation diffusion capabilities. Third, there are differences in the interpretation of indicators by country. For example, the indicator for new-to-market sales often measures creative innovation in highly innovative countries such as Finland, where the market for many firms is global. Conversely, in many of the trailing and lagging countries this indicator refers to new products introduced onto the domestic market. Many of these products could have been acquired from other firms, without any creative efforts by the firm itself. iii

6 Fourth, the optimum level of several indicators depends on national circumstances. For example, more university R&D financed by business is usually better within the intermediate and leading countries, but this indicator can have a different interpretation in the lagging countries. Some of these countries have results for this indicator that are three or four times the EU average. This is possibly excessive and is linked to extremely low levels of business R&D. This forces firms with limited innovative capabilities to contract out R&D to other organisations. In a few countries, the level of university R&D funded by business has decreased over time as business R&D levels increased, creating more in-house capabilities. Fifth, in many of the more innovative EU countries, business R&D has been declining instead of increasing, as required to meet the Barcelona objective of an average business R&D intensity of 2%. Notable declines in business R&D have occurred in Belgium, France, Germany, Ireland, the Netherlands and Sweden, while remaining stable in Finland, Italy and Luxembourg and only increasing in Austria, Denmark, and the UK. For those countries with a decline, the peak year for best performance in business R&D ranges between 1998 and 2003, but both the mode and mean are The decline in business R&D could therefore be linked to the collapse of the dotcom bubble and high technology stocks. However, the decline in business R&D could also be due to other trends, such as a shift in R&D abroad combined with a decline in national competitiveness for research, that are worth following closely over the next few years. iv

7 1. Introduction This report summarizes the innovative strengths and weaknesses of each of the 25 EU member states, the EFTA countries (Norway, Switzerland and Iceland), and Bulgaria, Romania and Turkey. Section 1 describes the methodology and choice of innovation indicators while Section 2 examines similarities and differences in the innovative performance of the EU member states. Section 4 provides the main results for each of 33 countries, including a general overview of current innovative capabilities and a brief discussion of the main challenges facing each country. The data are obtained from two sources. The main source is the 2005 European Innovation Scoreboard (EIS), which contains 26 indicators grouped into five themes. The second source is the 2004 report Exploratory Approach to Innovation Scoreboards (EXIS), which provides data for five indicators of innovation governance and four indicators for domestic demand 2 for the 25 EU member states. The EXIS data have been updated, where possible. The EXIS report also provides data on four types of innovation modes for 19 EU countries plus Norway and Iceland. The data coverage is relatively complete for 21 EU countries. Conversely, there are varying gaps in the available data for four member states (Cyprus, Ireland, Luxembourg and Malta) and for Iceland, Norway, Switzerland, Bulgaria, Romania and Turkey 3. For ease of presentation, the country pages include a radar chart that gives the thematic sub-indices for each of the five EIS themes and for the EXIS categories for innovation demand and innovation governance. The radar charts show, at a glance, the relative strengths and weaknesses of each country compared to the EU-25 average. An additional table gives the values of the indices in the radar diagrams, plus additional supporting information. A second table gives full trend data on all 26 EIS indicators by country. For ease of comparison, Annex A provides the most recent EIS results for all countries plus a definition of each indicator. Annex B both describes each innovation demand and governance indicator and gives the full results. Inter-country similarities in the pattern of strengths and weaknesses are assessed in section 2 using a series of cluster analyses. The first set of analyses groups countries based on their absolute innovation performance. The second set of analyses looks for similar patterns of innovation performance, after controlling for the effect of absolute performance. 2 For the EXIS results, see Arundel, A. and H. Hollanders, EXIS: An Exploratory Approach to Innovation Scoreboards ( 1

8 2. Innovation indicators 2.1 EIS results The EIS radar charts give national performance for three composite indices on innovation inputs (drivers, knowledge creation, innovation & entrepreneurship) and two composite indices for innovation outputs (applications and intellectual property). Each composite index is based on the average of five or six standardized indicators using the minimum-maximum performance method (see Box 1). The indicators range between a low of zero for the worst performing country to a high of 1 for the best performing country. The reader is referred to Annex A for a full definition of each indicator and to the 2005 EIS report for complete details. Briefly, the five EIS thematic indices are based on the following indicators: Innovation drivers (Innovation input): S&E graduates per 1000 population aged 20-29, share of the working-age population (25-64) with a tertiary education, broadband penetration rate, share of the working age population in life-long learning, percent of youth population (20-24) having completed at least upper secondary education. Knowledge creation (Innovation input): public R&D expenditures as a percentage of GDP, Business R&D expenditures as a percentage of GDP, share of mediumhigh and high-tech R&D as a percentage of total manufacturing R&D, share of firms receiving public funding support for innovation, share of university R&D spending funded by the business sector. Innovation and entrepreneurship (Innovation input): share of SMEs innovating inhouse, share of innovative SMEs participating in innovation cooperation, total innovation expenditures as a share of total turnover, early-stage venture capital as a share of GDP, ICT expenditures as a share of GDP, share of SMEs implementing non-technological changes. Application (Innovation output): share of total workforce employed in high tech services, share of total exports from high technology products, share of total turnover from new-to-market products, share of total turnover from new-to-firm but not-new-to-market products, share of the total workforce employed in medium-high and high technology manufacturing. Intellectual property (IP) (innovation output): The five indicators give measures of IP per million population: EPO patents, USPTO patents, triadic patent families, new community trademarks, new community designs. 3 For these countries, it is not possible to either calculate one or more of the five EIS indices or to calculate the indices for innovation governance or domestic demand. 2

9 Box 1: Min-max standardization method The summary innovation index (SII) and the sub-indices from the European Innovation Scoreboard and the innovation indices for demand and governance combine the results of indicators based on different measures. For example, some indicators are based on outcomes per million population while others use the percentage of total sales due to innovative products. In order to construct a composite index, all indicators must use the identical metric. All composite indices in this report use the minimum-maximum method. Each index is calculated in two steps. The first step determines the rescaled value for each indicator while the second step calculates the composite index: 1) y t t t ij t t j j xij Min( xj ) = Max( x ) Min( x ) t Where x ij is the value of indicator j for country i at time t and y is the rescaled value. Min equals the minimum observed value and Max equals the maximum observed value. 2) CI t i m j= 1 = m q j= 1 j q y j t ij Step 2 averages the rescaled values to produce the composite index. In most cases the weight q j given to each indicator j is identical, but matched indicators (for instance when data are available for both innovative and non-innovative firms) can be given fractional weights. 2.2 Innovation modes Innovation is a highly diverse activity. Firms can use a wide range of methods to innovate, ranging from intensive investment in in-house R&D to purchasing new production equipment or product components off-the-shelf. In each case, the capabilities required by the firm to innovate are very different. Consequently, simple aggregate indicators of the percentage of innovative firms in a particular country provide very little information of value to policy. Innovation indicators need to differentiate between styles or modes of innovation in order to provide a clear picture of the structure of innovation capabilities within individual countries. As an example, the CIS-3 data estimate that 46% of Portuguese firms and 45% of Finnish firms innovate, using the broad Oslo Manual definition of innovation activity, which covers everything from purchasing new production technology from a supplier to a billion Euro R&D project. Consequently, the estimates for Portugal and Finland for the percentage of innovative firms probably hide more than they reveal and conflict with the EIS data on the innovative capabilities of these two countries, where Finland performs much better than Portugal. Clearly, there must be large differences between Finland and Portugal in how firms innovate. 3

10 In order to provide a more detailed evaluation of the innovative capabilities of firms, the CIS-3 survey data were analysed in order to assign innovative firms to one category of non-innovators and four categories of innovative firms, based on how firms innovate, or innovation modes : strategic innovators, intermittent innovators, technology modifiers, and technology adopters: A brief description of each innovation mode is as follows: Strategic innovators: For these firms, innovation is a core component of their competitive strategy. They perform R&D on a continuous basis to develop novel product or process innovations. They are the main source of innovations that diffuse to other firms. Intermittent innovators: These firms perform R&D and develop innovations in-house when necessary or favourable, but innovation is not a core strategic activity. For some, their R&D efforts focus on adapting new technology developed by other firms to their own needs. Technology modifiers: These firms modify their existing products or processes through non-r&d based activities. Many firms in this group are essentially process innovators that innovate through production engineering. Technology adopters (21.0% of all innovative firms): These firms primarily innovate by adopting innovations developed by other firms or organisations. Innovation mode results are available for 19 of the 25 EU member states (data are not available for Cyprus, Denmark, Ireland, Malta, Poland and the UK). Full details are available in the EXIS report on the Trend Chart website 4. Figure 1 illustrates the value of the innovation mode results by highlighting the large differences in the innovative capabilities of firms in Finland and Portugal. The vertical axis gives the percentage of firms that are strategic and intermittent innovators. This encompasses firms that have the ability to develop innovations in-house through creative activities. The horizontal analysis for technology adopters and modifiers gives the percentage of firms that primarily innovate through diffusion-based innovative activities. The results show that 32% of Finnish firms have creative innovative activities in-house, versus only 18% of Portuguese firms. In contrast, a much higher percentage of Portuguese than Finnish firms primarily innovate through diffusion processes (29% versus 13%). The more detailed information by innovation mode is much more meaningful for policy purposes than a single indicators for the percentage of innovative firms

11 Figure 1. Distribution of firms by innovation mode (in percent) Strategic 25 Strategic Adopters -5 Modifiers Adopters -5 Modifiers Finland Intermittent Portugal Intermittent Notes: The central shaded area gives the EU average percentage of firms by each innovation mode. The size of the area within the blue line indicates the total percentage of innovative firms. The larger the area within the blue line, the smaller the percentage of non-innovative firms. 2.3 Innovation demand and governance The EIS and innovation mode indicators measure innovative inputs, capabilities, and outputs. The development of these factors can be influenced by framework conditions, such as the level of domestic demand for innovations and the quality of innovation governance. For instance, the willingness of firms to invest in innovations will be influenced by demand conditions for innovative products and services and by the quality of government programmes to support innovation. The indicators for demand and governance are summarized by two composite indicators that are correlated, with an R 2 value of The moderate strength of the correlation shows that although there could be a causal relationship between the two, they still measure different framework conditions for innovation. Full details on the demand and governance indicators are given in Annex B. The composite index for innovation demand is only weakly correlated with the Summary Innovation Index (SII) from the EIS (R 2 = 0.25). This is because the specific indicators for innovation demand often go in different directions for the new member states, none of which are moderately or highly innovative, compared to some of the EU-15 countries such as Sweden and Finland. For example, the highest levels of two indicators for domestic demand, Gross Fixed Capital Formation as a percentage of GDP (an indicator for business investment in innovative equipment and facilities) and the youth population share (an indicator of consumer demand for innovative products) are found among the new member states. These are indicative of 5

12 good framework conditions for future increases in the demand for innovative products. In contrast, the composite index for innovation governance is moderately correlated with the Summary Innovation Index from the EIS (R 2 = 0.59), as shown in Figure 2, based on data for 22 countries. This suggests that appropriate Government policies could play an important role in promoting private sector innovation. Figure EIS SII by the innovation governance index EIS 2005 Summary Innovation Index HU SK CZ LV DE SI LT PT PL EE BE IT ES EL UK NL FR IE SE DK AT FI Innovation governance index 3. Cluster Analyses Countries can share similar national innovation systems (NIS) due to shared historical development or comparable education systems, industrial structures, governance structures and other factors that influence innovative capabilities. An understanding of which countries share similar NIS structures can aid the search for improved innovation policy. For instance, the innovation policies of a country with a similar NIS could be more readily applicable to the national circumstances of a poor innovative performer than the policies of a country with a very different NIS. Cluster analysis is used to identify countries that share similar innovation systems. Two approaches are taken. The first method searches for similarities in absolute performance, or countries that display similar strengths and weaknesses in innovation. These analyses use the five thematic composite indices from the EIS and the two indices for innovation demand and governance. The second method searches for similarities in the pattern of strengths and weaknesses. For example, a country that performed twice as well as a second country on every composite index would have an 6

13 identical pattern of strengths and weaknesses. In order to remove the effect of absolute performance in the cluster analysis of similar patterns, the sum of performance across all composite indices is set to the same value for all countries. Both approaches have different uses for policy. All cluster analyses use the composite indices instead of the results for each of the 26 EIS indicators, the five demand indicators, and the four governance indicators, to avoid the problem of missing indicators for many countries. As an example, using each EIS indicator in the cluster analysis only gives results for 11 countries, whereas using the composite indicators provides results for up to 23 EU member states plus Bulgaria, Romania, Iceland, Norway and Switzerland 5. The results for innovation mode are also used in a separate cluster analysis. 3.1 Performance cluster analyses The performance approach to classifying countries has been used in past Trend Chart documents and consistently identifies clusters of highly innovative countries such as Sweden and Finland, poorly innovative countries such as Portugal, Greece, and many of the new member states, and several clusters for countries with intermediate innovative capabilities. As is well known, the cluster results for the intermediate countries are often sensitive to the addition or exclusion of a few indicators. Cluster results also depend on the number of countries included in the analysis, since the results are relative to the performance of other countries. Cluster analysis is a more powerful tool for identifying countries with similar performance than the EIS summary innovation index (SII) because the cluster analysis is based on more information. The summary innovation index can give two countries identical ratings even if they have diametrically different performance ratings on each of the five thematic composite indices from the EIS. In contrast, countries need similar performance levels on each of the five composite indices to be assigned to the same cluster. For this reason, the cluster analysis can also assign to the same group countries with relatively different performance on the SII. Performance cluster analyses are performed using three data sets: 1) the five EIS composite indices, 2) the five EIS indices plus the indices for innovation demand and governance, and 3) the results for innovation modes (the distribution of firms across four innovation modes plus non-innovators). The results are given in Table 1. Of note, the cluster analyses are only based on current indicators and do not incorporate trend performance. 7

14 Table 1. Cluster results for innovation performance Indicators in the cluster analysis Country Cluster characteristics 5 EIS indices 5 EIS indices + demand + governance 5 Innovation modes* Leaders DK FI SE DK FI SE FI Intermediate Trailing Laggards AT BE NL UK DE FR CZ ES IT HU SI EE EL LT LV PL PT SK AT BE NL UK DE FR IT ES LT SI CZ HU SK EE EL LV PL PT DE (AT NL SE) (BE PT) (EE FR) IT (HU LV SK) SI (CZ ES) (EL LT) *: No innovation mode data for DK, PL and UK. Countries within brackets form a sub-cluster within the specified cluster. The five innovation modes include 1) non-innovators, 2) strategic innovators, 3) intermittent innovators, 4) technology modifiers, and 5) technology adopters. Countries highlighted in similar colours always remain in the same cluster. There are few differences between the cluster results for the EIS indices and the cluster results that also include the indices for demand and governance. The clusters for the EIS are approximately ranked in order of innovative performance, with the most innovative country cluster including Sweden, Finland and Denmark, which rank in first, second, and third place on the SII. The least innovative cluster includes Estonia, Greece, Latvia, Lithuania, Poland, Portugal and Slovakia. This cluster has a wider range of rankings on the SII, from 13 th place for Estonia to 24 th place for Latvia. In the analysis including innovation governance and domestic demand, the trailing cluster as based on the EIS indices is split into two groups, moving the Czech Republic and Hungary into one group with Slovakia and Slovenia and Spain in another group with Lithuania. There are greater differences for innovation modes, which capture the distribution of innovation capabilities across firms. The characteristic of each cluster (leaders, intermediate etc) does not apply to the cluster analysis for innovation modes because there is no optimal distribution in how firms should innovate. Of particular interest are combinations of countries with poor performance on the EIS combined with countries with good performance on the EIS. For instance, Portugal and Estonia, which are among the group of laggard performers on the EIS, have similar distributions of 5 Composite indicators are calculated when results are available for at least three out of five (or four out of six) indicators in the EIS theme. 8

15 innovation modes as Sweden and France respectively. The explanation is that Portuguese and Estonian firm performance within each innovation mode is probably less than that of Belgium or France. Table 2 gives, for each cluster, the mean value of each of the five EIS and two EXIS indices, plus the average percentage of firms within each innovation mode. The cluster categories follow the results for column 2 in Table 1 and use the five EIS indices and the two EXIS indices. The best performance on each indicator is consistently found in the three leading countries, except the intermediate countries have a higher percentage of technology modifiers and the trailing group has the highest percentage of firms that do not innovate. The laggard group has the lowest performance on almost all other indicators, with the exception of innovation and entrepreneurship and governance, where the trailing countries perform slightly worse. Table 2. Mean index values for each cluster Leaders Intermediate Trailing Laggards DK FI SE BE DE FR IT NL AT UK CZ ES LT HU SI SK EE EL LV PL PT EIS indices Innovation drivers Knowledge creation Innovation & entrepreneurship Application IPR SII EXIS indices Demand Governance Innovation modes Strategic Intermittent Technology modifiers Technology adopters Non innovators Notes: Dark shading for the highest mean score, light shading for the lowest mean score. 3.2 Patterns of innovation This section identifies countries with similar patterns of innovation performance. The sum of performance across the composite indices is adjusted to equal the same value of 7 in all countries (a value of 1 for each of the seven indices) in order to exclude 9

16 absolute differences in performance between countries from the determination of the clusters. Inter-country differences are entirely due to the relative differences in strengths and weaknesses across each index. The country groupings produced by the cluster analyses for performance and the results given here for innovation patterns differ. The former classifies firms on the basis of their absolute strengths and weaknesses while this section uses relative strengths and weaknesses. As an example, the cluster analysis for performance assigns Hungary and Slovenia in the same group, whereas the cluster analyses for innovation patterns assign Hungary to the same group as Germany. Although clusters are developed using a measure of the similarity between two countries, a cluster can exclude close country pairs because the cluster assignment uses the information for all countries. Conversely, two countries within a cluster do not need to be very similar only more similar than other country pairs. The purpose of the pattern analyses is to identify countries that share similar patterns of innovation strengths and weaknesses. This information could assist the policy community in identifying better performing countries with similar patterns. Therefore, it is important to delve more deeply into the cluster results and identify countries that share very similar patterns or which are proximate to each other. The most similar or proximate countries are identified from the Euclidian distance between two countries. The Euclidian distance, in two dimensions, is equal to the length of the third side of a right triangle, or the closest distance between two countries plotted on an x and y axis. The proximity results can identify the best performing country with the most similar pattern of strengths and weaknesses. The assumption is that high proximity is partly due to similar National Systems of Innovation and to similar economic structures. Therefore, a poor innovative country could possibly benefit from evaluating the innovation policies of a better performing country with a similar pattern of strengths and weaknesses. Due to missing data, these results are not available for four of the 25 EU member states: Cyprus, Ireland, Luxembourg and Malta. Figure 3 gives a graphical plot of the proximity (Euclidian distance) between the EU countries in two dimensions, using all seven indices in the cluster analysis 6. Clusters are identified with circles. A few countries, such as Slovakia are not similar to any 6 For Figures 5 and 6 Multidimensional Scaling (MDS) is used to convert the proximity values resulting from the cluster analysis into two-dimensional graphs. The axes in both graphs as such have no direct meaning. The distances between countries in the two-dimensional space match the given similarities as measured by the proximity values as closely as possible. 10

17 other country. None of the trailing or laggard countries have a pattern of strengths and weaknesses that are proximate to that of an intermediate or leading country. Consequently, the results are not very helpful in linking poor performing with better performing countries. One of the main causes of this disappointing result is the inclusion of the index for IPR in the analysis, where all new member states perform particularly badly. Figure 3. Standardized cluster analysis using 7 indices Similarity plot of countries (5 EIS indices + demand + governance) SK 0.5 CZ LT EL PL LV EE HU IT SI FR FI NL ES BE DK SE AT UK PT -1 DE Countries highlighted with the same colour within the large cluster are within one of four sub-clusters: 1) France (F) and Spain (ES), 2) Belgium (B), Finland (FI) and the Netherlands (NL), 3) Denmark (DK), Sweden (SE) and the UK (UK), and 4) Austria (AT) and Italy (IT). The results improve when the index for intellectual property is removed, with the analyses limited to the other four EIS indices plus the indices for demand and governance, as shown in Figure 4. For example, Hungary is now in the same cluster as Germany, and Slovenia is in a cluster with most of the more innovative countries, in particular Slovenia is in one sub-cluster with Belgium. The discussion in the country pages of the nearest country in terms of the pattern of strengths and weaknesses is therefore limited to the results after excluding the IPR indicator. Annex C provides a table of the Euclidian distances for all country pairs from the non-ipr results while Annex D provides radar graphs of the pattern of relative strengths and weaknesses after excluding the performance effect. 11

18 Figure 4. Standardized cluster analysis using 6 indices Similarity plot of countries (4 EIS indices + demand + governance) 1.2 SK EL LT PL ES FR CZ SI IT DK FI NL BE SE AT UK HU DE -0.8 LV EE PT Countries highlighted with the same colour within the large cluster are within one of four sub-clusters: 1) France (F) and Spain (ES), 2) Belgium (B) and Slovenia (SI), 3) Finland (FI), Denmark (DK), Sweden (SE) and the UK, 4) Austria (AT) and Italy (IT), and 5) the Netherlands (NL). 3.3 Effect of variation on EIS performance Assume that the innovative performance of a country is based on good performance on two composite indicators (innovation drivers and knowledge creation) and poor performance on the other three (innovation and entrepreneurship, applications, and intellectual property). What would be the best policy response to further improve the country strengths, or to concentrate resources on improving the three weak areas? The optimal policy response will depend on specific national conditions that might make it much easier to improve the strengths than the weaknesses, or vice versa. In some cases building up the areas of strengths could have a positive influence on the weaknesses. For instance, investing in innovation drivers should improve applications over time. Alternatively, this might not occur, or only after a very long time, if the poor performance in innovation and entrepreneurship acts as a barrier to improvement in applications. These examples point to two opposing perspectives on how innovative capabilities develop. The first suggests that innovative capabilities can spill over from areas of strengths to areas of weakness. The second perspective suggests that all inputs must develop approximately equally a blockage in one field, such as poor knowledge 12

19 creation or low levels of entrepreneurship, would prevent progress. Of course, both perspectives could also be true, depending on specific conditions or indicators. A test of the second option is to compare the variance for the seven composite indicators (the five EIS composite indicators plus the indices for demand and governance) against the EIS summary innovation index. The variance is calculated after standardizing the results for each country so that the total value of all seven composite indicators equals 7, as in the pattern analyses in section 3.2. This removes the performance effect, whereby some countries perform better on the EIS than other countries. A country with zero variance would perform identically on each of the seven composite indicators. This could occur when all composite indices equal zero (very poor performance) or always equal to 1 (very good performance). The variance increases with the degree of difference in performance across the indices. The maximum observed variance of 0.38 is for Slovakia and the minimum observed variance of 0.02 is for Finland. Figure 5 graphs the results for these two countries. It is clear, at a glance, that the variation across the composite indices is much larger for Slovakia than for Finland. Figure 5. Relative performance for Finland and Slovakia FINLAND SLOVAKIA IPR Knowledge creation IPR Innovation drivers Knowledge creation Governance Innovation drivers Innovation & entrepreneurship Governance 0.0 Innovation & entrepreneurship Demand Application Demand Application Figure 6 gives the results of the correlation between the variance and the EIS summary innovation index for 21 countries for which results for all seven composite indices are available. Using a loglinear model, there is a statistically significant negative relationship, with performance on the EIS summary innovation index declining with the amount of variance (R 2 = 0.84, p < 0.001) 7. This indicates that well-rounded and equivalent performance on all areas might increase innovation 7 A linear model also provides a statistically significant negative relationship, but the loglinear model provides a better fit. This is partly because the variance and performance on the SII are not fully independent. As a country approaches a SII of 1, the variance must fall to zero. However, we do not think that this is a severe problem in this analysis, both because the highest SII is far from 1.0 and because it is also possible for a very poor performer to have a variance of zero. 13

20 performance. This implies that, given equal costs, Slovakian policy would be more effective in improving overall innovation performance by concentrating on improving knowledge creation and IPR output, the two weakest areas, instead of making further improvements to application, an area of relative strength. Figure 6. Negative correlation between variance and EIS performance SE FI 0.60 DK DE SII 0.50 BE NL FR AT UK IT ES SI CY HU PT PL EL EE LT LV SK Variance of 7 innovation dimensions Of note, striving for similar performance across all major areas is not always effective, as there are still large differences between some countries with similar levels of variance. For example, Spain and Germany have similar variances, but the SII for Germany is almost twice that of Spain Summary Table 3 summarizes the results of the cluster analyses. It gives peer countries for performance using 1) the 5 EIS indices and 2) the 5 EIS indices plus the indices for demand and governance. It also includes the closest countries for the pattern of innovation strengths and weaknesses, and 4) peer countries based on the cluster analysis for innovation modes. 8 Part of the difference in variances is due to the composite index for IPR, which is consistently low in the new member states. When the composite index for IPR is removed, and the SII recalculated to remove performance on the IPR indicators, the R 2 decreases to

21 Table 3. Summary by country of cluster analyses Country Cluster group (5 EIS indices) Performance Cluster group (5 EIS indices + demand + governance) Patterns 3 closest countries (4 EIS indices + demand + governance) a Cluster (5 innovation modes) b Belgium DE FR NL AT UK DE FR NL AT UK IT NL SE SI PT Czech Republic ES IT HU SI HU SK FR ES Denmark FI SE FI SE FI FR SE -- Germany BE FR NL AT UK BE FR NL AT UK IT HU Estonia EL LV LT PL PT (SK) EL LV PL PT LV FR Greece EE LV LT PL PT (SK) EE LV PL PT PL ES LT Spain CZ IT HU SI LT SI FR NL FI CZ France BE DE NL AT UK BE DE NL AT UK IT ES FI SI EE Italy CZ ES HU SI BE DE FR NL AT UK AT FI FR Latvia EE EL LT PL PT (SK) EE EL PL PT EE HU SK Lithuania EE EL LV PL PT (SK) ES SI ES EL SI EL Hungary CZ ES IT SI CZ SK DE LV SK Netherlands BE DE FR AT UK BE DE FR AT UK IT FI BE ES AT SE Austria BE DE FR NL UK BE DE FR NL UK IT FI SE IT NL SE Poland EE EL LV LT PT (SK) EE EL LV PT EL -- Portugal EE EL LV LT PL (SK) EE EL LV PL BE Slovenia CZ ES IT HU ES LT BE FR ES Slovakia (EE EL LV LT PL PT) CZ HU LV HU Finland DK SE DK SE NL BE FR Sweden DK FI DK FI UK BE FI NL UK BE DE FR NL AT BE DK FR NL AT IT SE BE DK -- a If the Euclidian distance is above 0.3 a country is not considered to be close. Portugal and Slovakia have no closest countries. b The five innovation modes include 1) non-innovators, 2) strategic innovators, 3) intermittent innovators, 4) technology modifiers, and 5) technology adopters. 15

22 4. Country Pages Where available, the country pages include all relevant information from Trend Chart on the strengths and weaknesses of each country. The pages include two Figures and one Table. These include: Figure 1 1. A radar diagram containing national performance and the EU average for the five sub-indices from the 2005 EIS and for the indices for innovation demand and governance. 2. A graph of trend performance for the 2005 EIS indicators. Outlier trends that would seriously distort the axes are not included in the graph, but are identified separately. For example, the trend chart for the Czech Republic includes the figure 31:225 under indicator 5.4. This shows that performance on this indicator is 31% that of the EU (vertical axis) and that the difference in the country trend rate minus the EU growth rate (horizontal axis) is 225 percentage points, which is off the chart. 3. A table containing the country results and the EU-25 rank for the indicators in each radar diagram plus the 2005 EIS summary innovation index (SII). This information supplements the radar diagram for national performance on the EIS. 4. Peer group countries with similar performance on the five EIS indices, the demand index, and the governance index, as identified through the cluster analyses in section The Euclidian distance for up to the three closest countries in terms of the pattern of innovation strengths and weaknesses (see section 3.2). For some countries, there is only one close country (a Euclidian distance less than 0.3), while for a few others there are no close countries.. Figure 2 6. The results for each EIS indicator, compared to the EU average. Figure 3 7. The distribution of the four innovation modes. The shaded central area gives the EU average distribution for the innovation modes. Table 1 8. Full results for each indicator between 1998 and 2004, where available, including the original value for each indicator and the index value compared to the EU mean, and the average percentage change in trend performance. The commentary for each country provides a brief overview of the strengths and weaknesses of each country, highlights a few of the main challenges, identifies peer countries for innovation patterns, and identifies indicators of possible poor quality. 16

23 For many countries, there is a break in the data series for one or more indicators. This can occur through a revision to the original survey question on which the indicator is based. Breaks in series are highlighted in bold font in Table 1. Notes on specific indicators The trend for the indicators for community designs and trademarks are rapidly increasing in many countries. This is because the option for a community design or trademark is relatively new. After a few years, new registrations should decrease to more normal levels. The indicators for patenting at both the USPTO and the EPO have declined in the past few years for many countries. This reflects a general fall in USPTO and EPO patent grants and applications. The indicator for early-stage venture capital reached a peak in 2000 or 2001 in almost all countries and has since declined precipitously. Under these conditions, good trend performance only means that the rate of decline in a specific country is slower than the EU average rate of decline. A general decline across the EU is also occurring for employment in medium-high and high tech manufacturing. 4.1 General findings Two key features of the country pages consist of an analysis of the main challenges facing each country and suggestions of where to look for solutions to address the main challenges. In terms of challenges, the peer group consists of countries with similar levels of absolute performance, as identified through the cluster analyses for performance. In respect to solutions, the peer group consists of countries that display a similar pattern of strengths and weaknesses. In a few cases, peer countries based on performance are also evaluated as a source of policies to address challenges. An evaluation of the challenges and solutions leads to the identification of several common conditions that are shared by two or more countries. The role of intellectual property Many of the new member states are in the performance peer group for lagging countries, partly because almost all of them have extremely low rates of patenting. The analysis of the main challenges for these countries does not view this as an issue because low patenting rates are caused by very low investments in R&D. The challenge, over the short and medium term, is often to first focus on improving both public and private R&D expenditures. Once this is achieved, patent rates will probably increase, given appropriate infrastructural support, such as programmes to assist firms with filing patent applications. If patent rates do not increase after a 17

24 sustained period of higher R&D expenditures, then low patent rates could develop into a main challenge, but this is not the case at this time. A long-term return for investing in innovation Although Finland and Sweden are EU innovation leaders, both countries present below average static economic performance. For example, Finland s per capita GDP is below that of the majority of countries in the intermediate innovator group. More discouragingly, its labour productivity per hour worked in 2003 was only 92.6% of the average for the EU-15. The same problems with per capita income and labour productivity apply to Sweden. However, the GDP growth rate of both countries is significantly higher than EU average (65% above EU-15 average for Finland and 20% for Sweden on average between 1996 and 2004). It can therefore be expected that the return on investment in innovation will be a long term one. Taking full advantage of this long term investment will be the key challenge for the innovation leaders. Creative innovation versus innovation diffusion As noted in section 2.2 on innovation modes, there is more than one to innovate. The EIS is intentionally designed to capture a variety of innovation activities, which range from creative innovation, often based on R&D, to innovation as a diffusion process, such as when a firm purchases advanced manufacturing technology (AMT) or invests in ICT in order to improve the efficiency of its operations. There are also many different shades of innovation in-between. Table 4 assigns relevant EIS indicators to three categories. The first contains indicators that are required for both creative innovation and diffusion, the second consists of indicators that are largely relevant to creative innovation, and the third includes indicators that are primarily important to innovation diffusion. Of note, several of the indicators for applications and IPR are not directly relevant here, since we are mostly interested in capabilities for creative innovation and innovation diffusion, rather than outputs. Table 4. EIS indicators for creative innovation and innovation diffusion Both Creative innovation Innovation diffusion 1.2 Tertiary education 1.1 S&E graduates 1.4 Lifelong learning 1.4 Broadband penetration 2.1 Public R&D 1.5 Youth education 2.4 Public funding of 2.2 Business R&D 3.3 Innovation expenditures innovation 2.5 University R&D funded by firms 2.3 Med/hi-tech manufacturing R&D 3.5 ICT expenditures 3.2 SMEs in innovation coop. 3.1 SMEs innovating in-house 3.6 Non-tech change 4.3 New-to-market sales 3.4 Early stage venture capital 4.4 New-to-firm sales 18

25 The evaluations of the main challenges for the trailing and lagging countries give close attention to the distribution of capabilities for creative innovation and innovation diffusion. A few of these countries, such as Slovenia, have the necessary foundation to develop creative innovation capabilities. Many other countries do not, and might benefit more, over the short and medium term (up to 10 years), from concentrating on developing innovation diffusion capabilities. New to market versus new to firm innovations Whether or not a specific indicator largely measures diffusion or creative innovation will depend on the national context. For example, the indicator for new-to-market sales often measures creative innovation in highly innovative countries such as Finland, where the market for many firms is global. Conversely, in many of the trailing and lagging countries this indicator refers to new products introduced onto the domestic market. Many of these products could have been acquired from other firms, without any creative efforts by the firm itself. When more is not better Innovation scoreboards assume that more of each indicator is always better. This is not, however, the case for some indicators, where the optimum level will depend on national circumstances. For example, more university R&D financed by business is usually better within the intermediate and leading countries, but this indicator can have a different interpretation in the lagging countries. Some of these countries have results for this indicator that are three or four times the EU average. This is possibly excessive and is linked to extremely low levels of business R&D. This forces firms with limited capabilities to perform creative innovation activities in-house to contract out R&D to other organisations. In a few countries, the level of university R&D funded by business has decreased over time as business R&D levels increased, creating more in-house capabilities. Trademarks is another indicator that must be interpreted cautiously, because more does not refer to the same conditions across countries. Within many of the new member states high community trademark registration reflects the activities of local affiliates registering the trademarks of their parent corporation. These trademarks have already been registered, often for years, in other more developed countries. The share of R&D performed in the medium-high and high technology sectors is also open to different interpretations. In Finland, this share is low because of high levels of R&D in low technology and medium-technology manufacturing. Since Finland already excels in high technology manufacturing R&D, this result is a sign of strength and shows the acquisition of an R&D based strategy by firms across the manufacturing sector. 19

26 Business R&D In many of the more innovative EU countries, business R&D has been declining instead of increasing, as required to meet the Barcelona objective of an average business R&D intensity of 2%. Notable declines in business R&D have occurred in Belgium, France, Germany, Ireland, the Netherlands and Sweden, while remaining stable in Finland, Italy and Luxembourg and only increasing in Austria, Denmark, and the UK. For those countries with a decline, the peak year for best performance in business R&D ranges between 1998 and 2003, but both the mode and mean are The decline in business R&D could therefore be linked to the collapse of the dotcom bubble and high technology stocks. However, the decline in business R&D could also be due to other trends, such as a shift in R&D abroad combined with a decline in national competitiveness for research, that are worth following closely over the next few years. 4.2 Findings per country 20

27 Austria Governance Demand Intellectual property AUSTRIA Innovation drivers Application Knowledge creation Innovation & entrepreneurship Country growth rate minus EU growth rate AT Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: Belgium, Netherlands, UK, Germany, France, and Italy. Most similar countries for the relative pattern of strengths and weaknesses (Euclidian distance in parentheses): Finland (0.112), Sweden (0.181), Italy (0.222). Overview Austria s overall innovation performance, based on the SII, is above average for the EU-25 but near the average when limited to the EU-15. Based on its innovation performance, its peer countries include Belgium, the Netherlands, the UK, Germany, France and Italy. With the exception of innovation governance and IPR, Austria has an evenly balanced set of strengths and weaknesses that are near or slightly above the EU average. In terms of trend performance (upper right graph), Austria is falling behind the EU trend average for the broadband penetration rate (1.3), although Austria is currently 14% above the EU average. However, Austria s trend results are generally positive, with notably below average trends for only three indicators. Austria s strength in IPR is due to good performance on EPO patents, community trademarks, and community industrial designs. Austria s best trend performance is for 21

28 community trademarks (5.4) and business R&D (2.2). Although Austria is only at the EU average trend for USPTO patents (5.2), it is an above average performer for the more economically valuable triad patents (5.3). EIS 2005 Innovation performance (relative to EU average) - AUSTRIA INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Innovation governance, demand and modes Strategic 25 Full data for innovation governance 20 and demand are available in Annex 15 A. Austria s high performance on 10 innovation governance bodes well 5 for the future and is due to Adopters 0 Modifiers consistently good performance across all four governance indicators and the best performance for the policy uptake rate (the use of innovation support programmes by eligible SMEs). The latter result is Intermittent supported by Austria s exceptional Austria: innovation mode performance on EIS indicator 2.4 (percent of firms receiving subsidies for innovation). The low rank for domestic innovation demand is due to an older population and comparatively low levels of buyer sophistication and investment in capital formation. This indicates that the markets for the innovative goods and 22

29 services of Austrian firms will increasingly depend on exports, although Austria s current export performance for high technology products is below the EU average. In terms of innovation modes (how firms innovate), 30% of Austrian firms largely innovate via diffusion (modifiers and adopters combined) and 21% are creative innovators with greater in-house innovative capabilities (strategic and intermittent innovators). Based on the rankings, Austria has the second highest percentage of firms that are technology modifiers, after Germany. Main challenges Austria s performance is weakest for innovation drivers, where it ranks 12 th, due to below average levels of tertiary education and science and engineering graduates (see Figure 2), although the trend for tertiary education over the past five years has been improving. Nevertheless, Austria could face a demographic limit on its ability to increase the supply of science and engineering graduates to meet its needs, due to the comparatively small size of its year-old cohort, which ranks 17 th in the European Union. The trends for both broadband access (1.3) and ICT investment (3.5) are below average, suggesting possible problems with the further diffusion of ICT in Austria. This would be understandable if Austria was an EU leader on both indicators in the past, with a decline due to other countries catching up. However, this is not the case, with Austria close to the EU average for ICT expenditures since Austria ranks in 4 th place for knowledge creation, but much of this is due to exceptionally good performance on one indicator: the percentage of firms that receive some public support for innovation. On the two key indicators for public and private R&D, Austria s performance is slightly above the EU average, and but it reaches only 62% of the EU average for the percentage of university R&D that is funded by business. Peer countries for innovation patterns Austria s pattern of strengths and weaknesses (see Annex B and C) most closely resembles Finland, which is one of the two innovation leaders in the EU. The main relative difference between Austria and Finland is due to Austria s better performance on innovation governance. Given the superior absolute performance of Finland on many of the indicators, Austrian policy could possibly benefit from evaluating the causes of Finland s good performance in the supply of new science and engineering graduates, an area where Austria is a weak performer while Finland is a star performer. Indicator quality concerns: Of note, there is a break in series for life long learning (1.4) between 2002 and 2003, which substantially improved Austria s relative performance to other EU countries. 23

30 AUSTRIA (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 24

31 Belgium Governance Demand BELGIUM Innovation drivers Knowledge creation Innovation & entrepreneurship Performance relative to EU Intellectual property Application Country growth rate minus EU growth rate BE Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: Austria, Netherlands, UK, Germany, France and Italy. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Sweden (0.089), Slovenia (0.091), Netherlands (0.093). Overview Belgium s overall innovation performance, based on the SII, is above the average for both the EU-25 and EU-15, ranking in 6 th place out of the 25 EU member states. Based on its innovation performance, its peer countries include the Netherlands, Austria, the UK, Germany and Italy. Belgium s strengths are in innovation drivers, knowledge creation and innovation & entrepreneurship. Its weakest performance is for innovation applications, where it ranks 13 th out of 25 EU countries. In terms of trend performance (upper right graph), Belgium is falling behind on over half of the indicators for which trend data are available, suggesting problems in the future. The greatest concern is for public R&D (2.1), business R&D (2.2), new S&E graduates (1.1), ICT expenditures (3.5), and venture capital (3.4). Although falling below the trend, the results for broadband penetration rates (1.3) and triad patents (5.3) are of less concern because Belgium performs far above the EU average for these two indicators. Belgium s best trend performance is for the share of university R&D funded by business (2.5). 25

32 Up until 2001, Belgium had rapidly increasing business expenditures on R&D. This positive trend has since been reversed, with the share of GDP due to business R&D falling from 1.6% in 2001 to 1.33% in 2003, which is only 6% above the EU average (latest available data). EIS 2005 Innovation performance (relative to EU average) - BELGIUM INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Innovation governance, demand and modes Strategic 25 Full data for innovation governance 20 and demand are available in Annex 15 A. Belgium is above the EU average for innovation demand and 5 innovation governance, but lags well behind the leading EU countries of Finland, Luxembourg and Denmark. Adopters 0 Modifiers This is due to below-average performance on capital formation and the low youth share of the population, but Belgian buyers Intermittent exhibit a high level of sophistication, Belgium: innovation mode which is also confirmed by a below average percentage of firms reporting a lack of consumer demand for innovative products. For a highly developed economy, 26

33 however, Belgium lags behind expectations for governance, with the four indicators slightly below or above the EU-25 average. In terms of innovation modes (how firms innovate), Belgium ranks comparatively better on the percentage of firms that innovate through diffusion (technology modifiers and diffusers) than on creative innovators (strategic and intermittent innovators). The good results for the share of firms that innovate via diffusion is supported by Belgium s above average results for the sales share from new-to-firm products (20% above the EU average). Belgium has the second lowest share of noninnovative firms in the EU, which shows that innovative capabilities are widely diffused. Main challenges The main challenge for Belgium is to turn its improving performance on innovation drivers, knowledge creation, and entrepreneurship into more applications, where Belgium underperforms relative to its peer group. This is primarily due to below average results on the share of exports from high technology products (only 42% of the EU-25 average) plus slightly below average performance on two of the four other indicators for applications. These results suggest that Belgium s good performance on drivers and knowledge creation is not leading to an equivalent performance in some types of innovation outputs. In this respect the post 2001 decline in business R&D and the declining trends for both EPO (5.1) and USPTO patents (5.2) are worrisome. Furthermore, the earlier growth in business R&D was less marked in the medium-high and high-tech sectors, where business R&D levels were slightly below the EU average and had not increased by very much. This suggests that a significant fraction of business R&D in Belgium is probably in ISIC sector 73 (R&D services), which includes R&D intensive firms that have yet to produce marketable products, or which perform R&D under contract or for foreign owners. This type of R&D could also be more footloose than R&D associated with manufacturing capabilities. The second challenge for Belgium is to address declining relative performance as shown by the trend results. As noted above, the trend for patents is below the EU average. The downward trend for triad patents (5.3) is of less concern at this time because it is based on well above average performance. The declining results for early stage venture capital (3.4) could also be of minor importance because venture capital was exceptionally high in 1999 and 2000, leading to a greater than average fall after the global collapse of venture capital post The relative decline in ICT expenditures (3.5) is possibly of greater concern since this is not due to previous high levels of investment. The relative decline in S&E graduates (1.1) is occurring while the absolute proportion has increased from 9.7 per 1,000 in 2000 to 11.0 per 1,000 in Peer countries for innovation patterns Belgium s relative pattern of strengths and weaknesses closely resemble those of Sweden, the Netherlands and Slovenia. The experience of the first two countries could offer lessons to Belgium for its two main weaknesses: applications and innovation governance. 27

34 Belgium could profit from closely evaluating the factors that lead to success in Governance in the Netherlands, which is a better performer than Belgium, due to a higher policy uptake rate, lower costs for establishing a business, and a better rating on innovation policy. Conversely, Belgium performs better than the Netherlands for e- Government. For applications, Belgium has a superior performance than the Netherlands, so Sweden could offer lessons in how to improve innovation applications. Indicator quality concerns: There is a high level of volatility in the indicator for lifelong learning from year to year, due to two breaks in the data series. EPO patent activity fell by 8% between 2001 and 2002, but this is unlikely to be due to a problem with the data because the fall in patenting is international and affects both EPO and USPTO patenting rates. Conversely, new community designs increased by 36.3% between 2003 and 2004, but this reflects large increases across many countries, as firms become familiar with the community design registration process. 28

35 BELGIUM (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 29

36 Bulgaria Not available 2.5 (4;506) Country growth rate minus EU growth rate Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: No data Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): No data Overview Based on the Summary Innovation Index, Bulgaria ranks in 26 th place out of 33 countries, although Bulgaria performs better than five of the EU member states. There are no data for innovation governance, innovation demand, innovation modes, and for peer group countries. Bulgaria is showing above average performance in ICT expenditures. It has average performance in tertiary education, youth education, the share of medium-high and high-tech R&D, and employment in high-tech services. Its performance on the share of business-funded university R&D is five times the EU average, but this could be because firms are incapable of performing R&D in-house. In terms of trends, there has been no improvement in public R&D. Business R&D has increased slightly to 0.1% of GDP in 2003 from 0.09% in Exports of high technology products have increased from 1.7% in 1999 to 2.9% in 2003, but are still only at 16% of the EU average. IPR rates are extremely low. Innovation governance, demand and modes: No data Main challenges As with other lagging countries, Bulgaria face multiple challenges, particularly in terms of knowledge creation, with very low business R&D, low investment in total innovation expenditures, and negligible innovation outputs. The innovation drivers, most of which cover education, are generally closer to the EU average, with the exception of very low rates of life-long learning. These characteristics suggest that innovation policy in Bulgaria needs to focus on improving the skills of the current workforce through more adult education and to substantially improve knowledge creation inputs. An increase in business R&D could depend on significant improvements to both the amount of public R&D and to the quality of public R&D, which could partly be measured through IPR. Bulgaria is also 30

37 underperforming on innovation diffusion, as shown by low sales shared for both newto-firm and new-to-market products. This could partly be due to poor demand conditions, for which there are no data for Bulgaria. EIS 2005 Innovation performance (relative to EU average) - BULGARIA INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Peer countries for innovation patterns: No data Indicator quality concerns: There are two main issues: a lack of data for many EIS indicators and other indicators for innovation governance, demand and modes; plus some volatility in a few EIS indicators: S&E graduates (1.1), the youth education attainment level (1.5), and employment in high-tech services (4.1). 31

38 BULGARIA (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 32

39 Cyprus Not available 160 Performance relative to EU (166;5) Country growth rate minus EU growth rate CY Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: No data Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): No data Overview The innovative performance of Cyprus is well below the EU average, ranking 17 th out of the 25 EU member states on the SII and 22 nd out of 33 countries. There are no data for innovation governance, innovation demand, innovation modes, and for peer group countries. Although the overall ranking of Cyprus is well below the EU average, there are a few areas of strength. Cyprus is 36% above the EU average for tertiary education (1.2), 32% above the average for the percentage of innovative firms that receive public support for innovation (2.4), and 33% above the average for community trademark applications (5.4). Cyprus is performing particularly well on innovation among SMEs (3.1 and 3.2) and for total innovation expenditures (3.3). The vast majority of trends are also above the EU average, with the exception of new S&E graduates (1.1). The trend for EPO patents is also below the average, but this trend indicator is highly volatile due to very low numbers of patent applications. Other trend indicators, while favourable, are often subject to high volatility due to the small size of the Cypriot economy, so that the activities of a few firms can cause large swings in the values of several indicators. These include the indicators for the share of medium-high and high-tech R&D (2.3), the share of university R&D financed by the business sector (2.5), exports of high technology products (4.2), employment in medium-high and high tech manufacturing, and all three patent indicators (5.1, 5.2, and 5.3). 33

40 Innovation governance, demand and modes: no data Main challenges As with other countries with well below average performance on the EIS, Cyprus faces multiple challenges, particularly in terms of knowledge creation, with exceptionally low business R&D and low investment in public R&D. This partly explains the poor performance on innovation applications. The innovation drivers, most of which cover education, are generally closer to the EU average, with the exception of very low rates of new S&E graduates. Unlike many of the new member states, participation in life-long learning is close to the EU average. These characteristics suggest that two main challenges are to reverse the negative trend and to increase the supply of S&E graduates and to substantially improve knowledge creation inputs. An increase in business R&D could depend on significant improvements to both the amount of public R&D, currently at 39% of the EU average, and in the quality of public R&D. Higher levels of public and private R&D should lead to improved performance on the patent indicators. Cyprus is also underperforming on innovation diffusion, as shown by low sales shared for both newto-firm and new-to-market products. This could partly be due to poor demand conditions, for which there are no data for Cyprus. EIS 2005 Innovation performance (relative to EU average) - CYPRUS INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Peer countries for innovation patterns: no data 34

41 Indicator quality concerns: As noted above, several of the indicators are highly volatile. There is also a break in the series for the indicator for lifelong learning (1.4) and the youth education attainment level (1.5). The indicator for total innovation expenditures appears to be unrealistically high given the exceptionally low level of investment in business R&D. 35

42 CYPRUS (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 36

43 Czech Republic Governance Demand Intellectual property CZECH REPUBLIC Innovation drivers Knowledge creation Application Innovation & entrepreneurship Performance relative to EU (225;31) Country growth rate minus EU growth rate CZ Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: Hungary, Slovakia. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): France (0.232). Overview The Czech Republic, as with many of the new member states, ranks well below the EU average on the Summary Innovation Index, with a rank of 20 th out of 25 EU member states and 25th out of 33 countries. Based on its innovation performance, its peer countries include Slovakia and Hungary. Its worst performance is on innovation drivers. As with all new member states, the Czech Republic also has a poor performance on the composite index for intellectual property. The relative strengths of the Czech Republic are in the EIS composite indicator for innovation applications and the indicator for innovation demand, both of which are slightly below the EU average. The comparatively good performance for applications is due to EU average shares of employment in high-technology services and above average shares for employment in medium-high and high technology manufacturing and in the sales share from new-to-firm products (see Figure 2). The good 37

44 performance on the latter two indicators could be the result of foreign investment and technology transfer, plus the diffusion of products onto the Czech market. This could also explain why the Czech Republic performs relatively well on applications even though its performance on innovation inputs (knowledge creation, innovation drivers and innovation & entrepreneurship) is well below the EU average. Further corroborating evidence is from the innovation mode data, where the Czech Republic ranks second in the percentage of firms that innovate through adopting new technology (see Figure 3). In respect to trends, there has been a substantial increase in new community trademarks (5.4), which is also reflected in the Czech Republic s best performance among the five IPR indicators, and in exports of high technology products (4.2). The worst trend is for venture capital (3.4), where the Czech Republic has fallen from 30% of the EU average in 2001 to 4% of the EU average in The trends for both public (2.1) and business R&D (2.2) are positive and above the EU average. The overall trend performance for the Czech Republic, however, is poor. Other than the two exceptions, all trends are either very close to the EU average or below the EU average, which suggests that it will take a long time for the Czech Republic to catch up with other countries. In comparison, most of the trends for Slovenia are above the EU average. EIS 2005 Innovation performance (relative to EU average) - CZECH REPUBLIC INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High 38

45 Innovation governance, demand and modes Full data for innovation governance and demand are available in Annex A. After innovation applications, Strategic the Czech Republic s best 10 performance is for domestic 5 demand for innovative products. Adopters 0 Mod This comparatively good performance is due to an above average youth share of the population and a low percentage of firms that report that a lack of Intermittent demand is a barrier to innovation. The Czech Republic s worst Czech: innovation mode performance among the demand indicators is for buyer sophistication. Favourable demand conditions could partly explain why the Czech Republic is close to the EU average for the new-to-firm product innovations. In contrast, the Republic s performance on innovation governance is much worse, ranking 19 th out of 22 countries. The poor performance on governance would be much worse if it weren t for one of the best results for e-government, where the Czech Republic is in 5 th place within the EU. This result, however, is difficult to match with an extremely low penetration rate for broadband internet, at 0.7%. The Czech Republic performs very badly on the policy uptake rate and the innovation policy index and is below the EU average for the cost of establishing a business. As shown by the results for innovation mode, the innovative pattern in the Czech Republic is dominated by the adoption of innovations developed by other firms. The proportion of strategic innovators is close to the EU-19 average, which indicates that the Czech Republic has a core group of highly innovative firms. This is supported by the results for business R&D, where the Czech Republic outperforms all other new member states except for Slovenia, and is equal to or outperforms several of the EU- 15, including Italy, Ireland and Spain. Main challenges The Czech republic faces three main challenges: improve educational inputs (part of innovation drivers), improve the links between business and universities, and address possible bottlenecks in financing innovation. The youth education attainment level in the Czech republic is 19% above the EU average, which bodes well for the future, but tertiary education levels are only 56% of the EU average and the supply of new S&E graduates is 52% of the EU average. The supply of S&E graduates has increased, but there is little difference relative to the EU average. The results for the percentage of the working age population with a tertiary education has increased very slowly, from 10.8% of the population in 1998 to only 12.0% in Surprisingly, this is declining relative to the EU average. Several possible explanations are worrying a decline in the quality of the education system, 39

46 an increase in the costs of tertiary education, or a net emigration of the skilled population. Public R&D has been steadily increasing since 1998 and business R&D has partly recovered from its low point in Of concern, however, is the very low percentage of university R&D funded by the business sector 1%. This suggests very low levels of public-private cooperation, possibly because Czech firms are relying on foreign partners. Although such links are extremely useful over the short term, the development of long-term capabilities could require better domestic linkages between the public and private research sectors. The supply of venture capital to fund start-up firms, many of which will be innovative, is a key indicator for innovation finance. This indicator reached 30% of the EU average in 2001 but has since declined to only 4% of the EU average. It will be important to ensure that there are other mechanisms in place to finance innovation. Peer countries for innovation patterns The Czech Republic shares some similarities to the innovation pattern of France (see Annex C), notably better innovation performance on demand and applications than for the five other composite indicators. In respect to the Czech Republic s three main challenges, France provides superior performance for S&E graduates and for early stage venture capital. Its experience in these two areas could provide opportunities for policy learning. On the third challenge France also lags behind the EU average on the share of university R&D funded by the business sector. However, France could be using other methods to encourage public-private cooperation on research that might be of interest to the Czech Republic. Indicator quality concerns: None known. 40

47 CZECH REPUBLIC (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 41

48 Denmark (76;250) Governance Demand Intellectual property DENMARK Innovation drivers Application Knowledge creation Innovation & entrepreneurship Performance relative to EU Country growth rate minus EU growth rate DK Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. No data available for Denmark for innovation modes. Peer group countries for performance: Finland and Sweden. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Finland (0.118), France (0.142), Sweden (0.167). Overview Denmark is one of the most innovative countries within the EU, as shown by third place performance on the SII out of the 25 EU member states and its 5 th place standing out of 33 countries. Its peer countries for performance include the two top EU performers of Finland and Sweden. However, its good overall performance hides large relative differences in performance, with Denmark performing well above average on the EIS for innovation drivers (3 rd out of 25 EU member states), IPR (4 th out of 25 EU member states), and applications (4 th out of 25 EU member states). Conversely, it is below the expectations of its performance peer group for knowledge creation, where it ranks 10 th. Denmark s trend performance is particularly good for venture capital (3.4) and for business R&D (2.2). The worst trend performance is for the broadband penetration rate (1.3). This is partly due to the fact that Denmark is the EU leader with a penetration rate of 15.6% in 2004, but there is still a long way to go. For instance, Denmark is far below the world leader, Korea, with a penetration rate of 24.9% in OECD. 42

49 Innovation governance, demand and modes: Full data for innovation governance and demand are available in Annex A. Denmark is a strong performer on both governance and demand. The only relative weakness for innovation governance in Denmark is for the policy uptake rate, which is only slightly above the EU average. On all other governance indicators Denmark is in the top five performers. Demand for innovative products is also high, with sophisticated buyers, high investment, and above average per capita incomes. The main weakness is demographic, with the second lowest youth share among the EU-25 member states. There are no data for Denmark for innovation modes. Main challenges Denmark is only at the EU average for two leading indicators for innovation drivers: the supply of new S&E graduates and the youth education attainment level. The former has been improving over time in absolute terms (although declining relative to the EU average). It is impossible to evaluate the trend for the latter due to a break in the data series in Improvements to the education system could be required to motivate an increase in the supply of S&E graduates and to improve youth educational attainment 10. The comparatively poor result for knowledge creation is due to the very low share of firms that report receiving direct public support for innovation and for the share of university R&D financed by firms. The former is due to the Danish system of funding innovation, which provides little in the way of direct funds to in-house R&D. However, other mechanisms are in place to support innovation and this is unlikely to be a problem. The low share of university R&D funded by businesses could require policy attention, although this result could also be due to specific features of the Danish innovation system. It is a peculiar result, given the emphasis in Danish policy in promoting cooperation. The next area of weakness, although only relative, is in innovation & entrepreneurship, due to average performance for the percentage of SMEs that innovate in-house and for ICT expenditures, and below average performance for the percentage of firms that have introduced non-technological change, such as organizational innovations. In all three cases he specifics of the Danish innovation system could explain the results. This means that in reality, Denmark might not be lagging in any meaningful sense on innovation and entrepreneurship. For instance, the low percentage of in-house innovation among SMEs could, within the Danish context, be solved through the high intensity of collaborative linkages between Danish firms. Denmark has the second highest percentage within the EU of SMEs that collaborate on innovation. The low rate of ICT expenditures and non-technological change could be explained by the high ICT investment and the introduction of organizational 10 Denmark performs in fifth place out of the EU member states on the 2001 PISA test of the mathematical abilities of 15 year olds (OECD, 2004, Learning for Tomorrow s World). This conflicts with Denmark s average performance on the education attainment indicator. One explanation could be that although only an average percentage of Danish students complete upper secondary education, those that do finish have above average capabilities. 43

50 changes by Danish firms during the 1980s and 1990s, well ahead of firms in many other countries. EIS 2005 Innovation performance (relative to EU average) - DENMARK INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Peer countries for innovation patterns The pattern of strengths and weaknesses in Denmark is most similar to Finland, followed by France and Sweden. France performs substantially better than Denmark on the percent of firms receiving public funding for innovation, but this is due to large policy differences that are unlikely to be acceptable in Denmark. A better model is the two other Scandinavian countries, particularly Sweden, which performs better than Denmark on all five knowledge creation indicators and on all five available innovation & entrepreneurship indicators (one is missing for Sweden). Indicator quality concerns: None known. 44

51 DENMARK (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 45

52 Estonia Governance Demand Intellectual property ESTONIA Innovation drivers Application Knowledge creation Innovation & entrepreneurship Performance relative to EU (434;25) Country growth rate minus EU growth rate EE Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. No data available for Denmark for innovation modes. Peer group countries for performance: Greece, Latvia, Poland, Portugal. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Latvia (0.066). Overview Estonia is a mid-ranking country on the EIS, coming 13 th out of 25 EU countries and 18 th out of 33 countries. It is one of the best performers among the ten new member states, along with Slovenia. However, the cluster analyses rank Estonia among the group of poor performing laggard countries that include Greece, Latvia, Poland and Portugal. The explanation for the anomaly between Estonia s good standing on the SII and its classification among the laggards is because Estonia s strengths are highly skewed (see upper left chart), with very good performance on innovation & entrepreneurship and good performance on innovation drivers, but poor performance on IPR, applications, and knowledge creation. The good performance on innovation drivers is partly due to high levels of tertiary education, but Estonia is lagging on both ends of the education spectrum that are essential for future improvements in its innovative capabilities: the supply of new S&E graduates, and life-long learning (vital to skill upgrading). Its good performance on innovation & entrepreneurship spans four 46

53 of the five available indicators, but there is below average performance on innovation expenditures. Estonia s weakness in knowledge creation is due to insufficient levels of business R&D. Although this increased from 0.11% in 1998 to 0.28% in 2003, it is still well below the levels observed in Slovenia at 0.90%. Public expenditures have also increased from 0.47% in 1998 to 0.53% in 2003, but are still only 80% of the EU average. As of 2000, only 2.4% of firms received public support for innovation. Poor performance on knowledge creation could be one reason why Estonia performs badly on both applications and IPR. EIS 2005 Innovation performance (relative to EU average) - ESTONIA INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Estonia has an exceptionally good trend results for community trademarks (5.4), although from a low starting level. This good performance is also a characteristic of the new member states. Fortunately, trend performance in its two weakest areas for innovation drivers S&E graduates (1.1) and lifelong learning (1.4) are both above the EU average. Unfortunately, all available trends for applications (4.1, 4.2, and 4.5) are below the EU average. Innovation demand, governance and modes Full data for innovation governance and demand are available in Annex A. Innovation demand in Estonia is well below the EU average on four of the five indicators, with only the youth share above average. In particular, for a new member 47

54 state, capital investment is lagging. In contrast, Estonia performs much better on innovation governance, ranking 13 th out of 22 countries. The better performance on innovation governance is entirely due to good results for e- government. This is supported by EU average levels of broadband penetration. Adopters Strategic Modifiers For innovation modes, Estonia has slightly more adopters than the EU average and fewer technology modifiers. Estonia Intermittent Main challenges These results suggest that Estonia has already benefited from picking the lowhanging fruits and needs to invest substantially more in developing more advanced innovative capabilities. In order to catch up with the more innovative economies, it needs to increase the share of strategic innovators, as part of a general shift to more investment in creative innovative activities, and to improve the supply of S&E graduates. The Estonian policy community is well aware of the challenges facing Estonia to shift from small-scale innovation based on technology adoption to greater investment in creative innovation. A challenge is to increase funding for R&D and collaboration. Several programs to address these issues were introduced in , but there is insufficient time to observe their effects. Peer countries for innovation patterns Estonia s relative pattern of strengths and weaknesses is only similar to Latvia none of the more innovative countries share a similar pattern. Its greatest requirement in policy terms is to improve knowledge creation. For this, it can probably draw on the assistance of Finland, with which it has long-standing close relations. Indicator quality concerns: Exports of high technology products for 2000 were 148% higher than in 1999, then fell by 32% in 2001 and continued to fall, ending in 2003 at a level below that of The results for 2000 therefore appear as an anomaly. It is not known if this is due to an error in the data or to unique conditions, such as the rapid expansion of a small number of firms followed by contraction. The latter is possible because of the small size of the Estonian economy. 48

55 ESTONIA (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 49

56 Finland Governance Demand Intellectual property FINLAND Innovation drivers Application Knowledge creation Innovation & entrepreneurship Country growth rate minus EU growth rate FI Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Denmark, Sweden. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Netherlands (0.042), Belgium (0.096), France (0.100). Overview Finland is one of the EU s two star performers on innovation, a position that it shares with Sweden. It ranks second out of the 25 EU countries and third out of 33 countries, after Switzerland and Sweden. Finland ranks among the top three countries for each of the six EIS composite indices with the exception of applications and is in 1 st place for innovation demand and innovation governance. Consequently, Finland has no readily identifiable weaknesses, with above average results for all EIS indicators and for all indicators behind the domestic demand and innovation governance indices except one: the youth share of the Finnish population is 18.6%, which is below the EU country mean of 20.7%. There is little that policy can do about this over the short term. The trend results are below the EU average for many indicators, but this is often due to Finland s good performance, as with S&E graduates (1.1), participation in life-long 50

57 learning (1.4), and EPO patents (5.1). Its trend for community trademarks (5.4) is slightly below the EU average, but this is partly due to the high uptake for trademarks by the new member states. EIS 2005 Innovation performance (relative to EU average) - FINLAND INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Innovation governance, demand and modes Full data for innovation governance and demand are available in Annex A. Finland ranks first within the EU for both innovation demand and innovation governance. It performs particularly well on all four governance indicators. The distribution of innovative capabilities among Finnish firms is strongly skewed towards creative innovation (see Figure 3), with 32% of firms either strategic or intermittent Adopters Finland Strategic 25 innovators. In contrast, only 13% of Finnish firms largely innovate through diffusion (technology modifiers and adopters) Intermittent Modifiers 51

58 Main challenges The only major weakness for Finland is that 55% of its firms do not innovate, which places it 7 th within the EU. However, the remaining 45% of Finnish firms that do innovate are concentrated among the creative innovators with Finland ranking first within the EU for both strategic and intermittent innovators. Finnish firms have largely shifted away from a focus on innovation diffusion (with a particularly low percentage of firms that only adopt innovations) and towards developing innovations partly through in-house creative activities (strategic and intermittent innovators). Finland is 1% point below the EU average for the share of total R&D accounted for by medium-high and high tech manufacturing (2.3). In Finland s case, this is a sign of strength, showing greater diversification of manufacturing R&D in low and medium technology manufacturing sectors. The low share of university R&D funded by business (94% of the EU average) also does not appear to have had any negative effects on applications or other outputs. Peer countries for innovation patterns Finland pattern of strengths and weaknesses is most similar to those of the Netherlands, Belgium and France. Indicator quality concerns: None known. The fall in EPO patents between 2001 and 2002 reflects a general decline in patenting in both the EPO and the USPTO. There is a break in the data series for life long learning in 2000 and 2003 and in the youth education attainment level in

59 FINLAND (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 53

60 France Governance Demand FRANCE Innovation drivers Knowledge creation Innovation & entrepreneurship (108;28) 60 Intellectual property Application Country growth rate minus EU growth rate FR Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Austria, Belgium, Netherlands, UK, Germany and Italy. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Spain (0.067), Finland (0.100), Slovenia (0.133). Overview France is an intermediate performing country, ranking 9 th out of the 25 EU member states on the summary innovation index. Based on performance, its peer countries include Austria, Belgium, the Netherlands, the UK, Germany and Italy. Its relative strengths are in knowledge creation, innovation drivers, and applications. Its greatest weakness is in innovation & entrepreneurship, where it ranks 11 th out of 23 countries. Its good performance on innovation drivers is due to a far above average supply of new S&E graduates. Otherwise, its performance on innovation driver indicators is slightly above the EU average or below, as with life-long learning. On knowledge creation France performs at or above the EU average, with the exception of the percentage of university R&D financed by business, which is only 44% of the EU average. Its weakness in innovation & entrepreneurship is primarily due to a low percentage of firms that introduced non-technological change, plus slightly below 54

61 average investment in ICT and an average share of SMEs that cooperate on innovation. Although France is an average performer on IPR, it has an exceptional strength in triad patents, which contrasts to near average performance in EPO and USPTO patenting. One possibility is that French firms actually better manage their patent portfolios than firms in other countries, by patenting economically valuable inventions (which tend to show up in triadic patents) and not patenting minor inventions of little value. EIS 2005 Innovation performance (relative to EU average) - FRANCE INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High The trend results are highly variable, but the majority of trends are a few percentage points below the EU average, with the worst performance for ICT expenditures. Its best trend performance is for the broadband penetration rate (1.3). Innovation governance, demand and modes Full data for innovation governance and demand are available in Annex A. France s best performance is for innovation demand, where it ranks third out of 24 countries. This is due to good performance on four of the five indicators. France is only slightly below the EU average for the fifth demand indicator, the youth share of the population. The results for governance are also good, due to an above average result for the innovation policy index and below average costs for establishing a new business. 55

62 Approximately half of France s innovative firms are creative innovators (strategic and intermittent innovators combined), while the other half are innovation diffusers (technology adopters and modifiers). France is in 4 th place out of 19 countries for the share of strategic innovators, showing a solid core of highly innovative firms that perform R&D. Adopters Strategic Modifiers Main challenges Superior performance on Intermittent innovation drivers (particularly the France: innovation mode supply of S&E graduates) is not feeding through into above average results for knowledge creation and entrepreneurship. A key bottleneck could be insufficient linkages between the public and private research systems, with France performing at only 44% of the EU average for indicator 2.5. This indicator has also been declining in absolute terms from 3.4% in 1998 to 2.9% in 2002 and in relative terms from 53% of the EU average in 1998 to 44% in A second area of concern is the low percentage of firms that have introduced nontechnological change, such as organisational or marketing changes, where France is at 52% of the EU average. There are no trend results for this indicator. The third challenge, for a relatively good-performer on innovation, is to increase the share of sales from new-to-market product sales, which is currently very close to the EU average. This could require greater efforts to improve innovation diffusion, so that innovations reach new markets throughout France. A recognised area of concern in France is patenting, with a 2002 policy push to increase patenting and create an industrial property culture. Given France s very good performance on the most valuable Triadic patents, it is not clear if this will result in better economic use of patents or simply an increase in patents with little economic value. Peer countries for innovation patterns The most similar good-performing country to France in terms of the relative distribution of strengths and weaknesses is Finland. France also shows a similar pattern to Spain and Slovenia. Areas where Finland performs much better than France, and where France could consequently learn from Finland s experience, is in life-long learning and non-technical change. Indicator quality concerns: There was a sudden increase in life-long learning rates between 2002 (2.7%) and 2003 (7.4%). This is due to a break in series. 56

63 FRANCE (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 57

64 Germany Governance Demand Intellectual property GERMANY Innovation drivers Application Knowledge creation Innovation & entrepreneurship Country growth rate minus EU growth rate DE Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Austria, Belgium, Netherlands, UK, France and Italy. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Hungary (0.188). Overview More than many other EU countries, the performance of Germany on the EIS is sensitive to the choice of indicators. For 2005 the ranking of Germany has increased to fourth place out of 25 EU member states and it is in 7 th place out of 33 countries. Germany s strengths are in knowledge creation, innovation & entrepreneurship, applications, and IPR. Surprisingly, these strengths, particularly in both classes of innovation outcomes, are built upon below average performance in innovation drivers and poor performance in innovation demand and governance. These suggest possible problems for Germany in the future, with a negative trend in both S&E graduates (1.1) and the youth education attainment level (1.5). These are both indicators where Germany is already performing below the EU average, and they could be key bottlenecks for Germany s future competitiveness on innovation. Conversely, the 58

65 trend performance for life long learning has improved, with relative performance increasing from 65% of the EU average in 2003 to 75% in Most German trends are at or below the EU average. The exceptions include outputs such as employment in high tech services (4.1), high tech exports (4.2), and employment in medium-high and high tech manufacturing (4.5), although German performance is static, with the good trend results due to falling rates for these three indicators in other EU countries. The best trend indicator for Germany is for life long learning. There is little difference with the EU average in the trends for IPR, but Germany s absolute performance on Triad patents is exceptional, at over three times the EU average. EIS 2005 Innovation performance (relative to EU average) - GERMANY INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High 59

66 Innovation governance, demand and modes Strategic Full data for innovation governance 25 and demand are available in Annex 20 A. The innovation policy index for 15 Germany is above the EU average, 10 but Germany performs below the 5 EU average on the three other governance indicators. Germany s performance for e-government and the cost of establishing a business are well below that of Germany s Adopters 0 Modifiers peers. Domestic demand for innovative products is also below average, but to date the strong export orientation of the German Intermittent Germany: innovation mode economy has meant that this has not created much of a problem. It might in the future, particularly since a solution to Germany s stubbornly high unemployment rate over the past decade will probably require a means to overcome chronically weak domestic consumer demand. Germany has the lowest percentage within the EU of non-innovative firms, partly because it has the highest percentage of technology modifiers. Germany performs well in the share of strategic and intermittent innovative firms. Main challenges Germany performs well above the EU average for knowledge creation, innovation and entrepreneurship, applications, and IPR. However, all three are dependent in the future on innovation drivers, primarily education, where Germany lags notably behind its peer countries for performance. Its performance on the supply of S&E graduates and lifelong learning are well below expectations, although the trend results for the latter have begun to improve. There has been a correction in the decline of S&E graduates after 2001, but Germany is still falling behind the EU average. The youth education level for Germany is also below expectations, at 95% of the EU average. For a highly innovative country, Germany also underperforms on innovation governance, due to above average costs of establishing a business. Combined with poor performance on venture capital, this could impede the creation of new start-ups and high technology spin-offs. Peer countries for innovation patterns The only country that shows a similar pattern of strengths and weaknesses is Hungary. None of the countries with better performance or even Finland and Sweden show a similar pattern. There are no easy choices of countries that the German policy community might wish to investigate to improve its poor performance in innovation drivers and for governance. Sweden could offer the best alternative, due to a similar strength in manufacturing sectors that depend on engineering. Sweden performs exceptionally well in life long learning and in venture capital, two of Germany s main challenges. 60

67 Indicator quality concerns: None known. GERMANY (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 61

68 Greece Governance Demand Intellectual property GREECE Innovation drivers Application Knowledge creation Innovation & entrepreneurship Performance relative to EU Country growth rate minus EU growth rate EL Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Estonia, Latvia, Poland, and Portugal. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Poland (0.164), Spain (0.298). Overview Greece s economic strategy appears to have little if anything to do with innovation. It ranks 23 rd out of 25 EU countries on the summary innovation index and in 29 th place out of 33 countries. It ranks 23 out of 25 countries for innovation applications, a crucial output measure. Its peer countries include Estonia, Latvia, Poland and Portugal, but it is the second worst performer in this group. The trends for two key indicators for future innovation, ICT investment (3.5) and public R&D expenditures (2.1), are negative and business R&D is static at a very low level of 0.20% of GDP. Greece ranks 13 th in the share of both strategic and intermittent innovators, indicating that the business sector is largely unable to innovate creatively, with best performance (9 th place) for firms that only innovate through adopting technology developed by other firms. 62

69 Nevertheless, Greece s overall bleak performance masks several strengths, due to large variations in performance in individual indicators (see Figure 2). For instance, although broadband penetration rates in Greece are essentially in their infancy, performance on youth education and tertiary education are near the EU average. In knowledge creation, Greece is slightly above the EU average for the percentage of university R&D funded by business, although this could be a reflection of the low ability of Greek firms to innovate in-house, forcing them to contract out innovation projects. Among the innovation & entrepreneurship indicators, Greece performs well below the EU average for venture capital, well above the EU average for nontechnical change, and near the average for innovation expenditures and ICT investment. The results for applications are consistently miserable, with the exception of new-tofirm product sales, which is a bit better. However, this reflects the most basic form of innovation through adoption. EIS 2005 Innovation performance (relative to EU average) - GREECE INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High 63

70 Innovation governance, demand and modes Strategic Full data for innovation governance 25 and demand are available in Annex 20 A. The results for innovation 15 demand show the highest 10 percentage of firms that find a lack 5 of customer responsiveness to be a barrier to innovating. This could create a serious barrier for Greek firms. Otherwise, Greece has the highest level in the EU of capital investment, although this could be an anomaly linked to the 2004 Adopters 0 Intermittent Modifiers Olympics. In terms of governance, Greece performs well below Greece: innovation mode average in the cost of establishing a business, but it performs above the EU average for e-government (although how these services reach the public is hard to imagine, with almost no broadband available) and in the policy uptake rate. Main challenges Greece has had innovation policies in place for two decades, without much success. One possibility is that Greece s policies are misguided and focused on a pattern of innovation that does not suit its own strengths and weaknesses. Successful innovation systems can develop through creative innovation (as in Finland), innovation diffusion (as in Belgium), or through a balance of both approaches (as in France). Three important prerequisites for developing innovative capabilities and applications through creative innovation are to improve education levels, particularly the supply of S&E graduates, business R&D, and venture capital. Innovation diffusion will also require good education levels, particularly for tertiary education and lifelong learning, but it could also depend more on cooperation, nontechnical change, and domestic demand. Greece s current capabilities imply that it is a long way from developing creative innovative capabilities. Its performance on business R&D is dismal, at 16% of the EU average and it is at 32% of the EU average for early stage venture capital. Conversely, Greece is performing better on some of the innovation diffusion indicators. For instance, it is close to the average for the share of university R&D funded by business, at 69% of the average for the share of SMEs involved in innovation cooperation, tertiary education levels are at 94% of the EU average, and Greece is 39% above the EU average for the share of firms that have introduced nontechnical change. It performs near the EU average on domestic innovation demand (although this could be due to unique conditions, as discussed above). Greece also performs much better on new-to-firm product sales than on new-to-market product sales, which shows a strong emphasis on innovation diffusion. 64

71 These differences between creative and diffusion innovation performance suggest that Greece might have more success over the short to medium term (up to 10 years) in developing innovation diffusion. In this respect, Greece faces several bottlenecks. The rate of lifelong learning, at 39% of the EU average, must be improved so that older workers are better able to use adopted technology. More emphasis should be given to improve tertiary education, where Greece has been falling behind the EU average since Innovation policy could also support more collaboration between firms or with manufacturing extension services. A concerted effort to improve broadband penetration rates could also create efficiencies in many diffusion-based marketing systems. Peer countries for innovation patterns The pattern of strengths and weaknesses for Greece is not closely similar to that of any better performing country: the most comparable pattern is with Poland. Greece may be better positioned to learn from some of its peer countries that are making rapid progress, such as Slovenia or Hungary. Hungary could be the better model of the two because current indicators and trends suggest that Hungary is following a diffusion model of innovation whereas Slovenia is pursuing a transition to creative innovation. Indicator quality concerns: There is a sudden increase in life-long learning between 2002 and 2003 that is due to a break in series. 65

72 GREECE (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 66

73 Hungary Governance Demand Intellectual property HUNGARY Innovation drivers Application Knowledge creation Innovation & entrepreneurship Performance relative to EU (13;183) Country growth rate minus EU growth rate HU Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Czech Republic and Slovakia. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Germany (0.188). Overview Hungary ranks 15 th on the summary innovation index out of the 25 EU countries and 20 th out of 33 countries. Its peer countries for performance include Slovakia and the Czech Republic. Its weakest performance is on innovation drivers and IPR, while its best performance is on knowledge creation. Poor performance on innovation drivers is due to low levels of S&E graduates, broadband penetration, and lifelong learning. The indicators for knowledge creation are mostly near the EU average, with the exception of much better performance on the percentage of university R&D funded by business (a similar characteristic of many of the new member states) and very low performance on Business R&D. On applications, Hungary performs above average on employment in medium-high and high tech manufacturing and in high tech exports, both linked to foreign investment. Conversely, Hungary underperforms in the percentage of new-tomarket and new-to-firm sales from innovative products. 67

74 Both public and business R&D have been increasing at a rate above the EU average, but at 0.36% of GDP, business R&D is still very low. The worst trend performance is for venture capital (3.4) and ICT investment (3.5). The best performance is for new community trademarks (5.4) and the percentage of university R&D funded by the business sector (2.5). Hungary also has good trend performance for several of the patent indicators, including triad patents (5.3) and EPO patents (5.1). EIS 2005 Innovation performance (relative to EU average) - HUNGARY INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High 68

75 Innovation governance, demand and modes Strategic 25 Full data for innovation governance and demand are available in Annex A. Hungary ranks near the bottom for both innovation demand and innovation governance. The poor demand conditions could help Adopters 0 explain the low percentage of sales from innovative products the index for buyer sophistication ranks last within the EU, although few firms report a lack of customer responsiveness to innovations as a problem. Hungary s performance Intermittent Hungary: innovation mode on innovation governance is due to a low score on e-government and on the cost of establishing a business. Modifiers By innovation mode, Hungary s firms are almost evenly distributed between creative innovation and an emphasis on innovation through diffusion activities, but the percent of firms in each category is well below the EU average, with 77% of firms not reporting any innovative activity. Main challenges As with its peer countries for performance, Hungary is more successful in innovation diffusion than in creative innovation, possibly due to the activities of foreign firms in bringing new technology and business practices to Hungary. The main challenges, therefore, consist of reducing some of the bottlenecks for innovation diffusion. These include low rates of lifelong learning (46% of the EU average), below average total innovation expenditures (20% of the EU average), and low levels of sales from new to firm and new-to-market product innovations (30% and 18% of the EU average, respectively). Similar to Slovenia, Hungary also has built the basic foundation for pursuing creative innovation. Its levels of public R&D are only slightly below the EU average. The main challenges are to increase the supply of new S&E graduates (currently 39% of the EU average) and to continue to support increasing levels of business R&D, which have grown from 0.26% of GDP in 1998 to 0.36% in Early stage venture capital, which could play an important role in encouraging spin-offs from foreign affiliates, also needs to be increased from its current very low level of 6% of the EU average. Peer countries for innovation patterns In terms of strengths and weaknesses, Hungary is similar to Germany. Hungary may be able to learn from Germany s superior performance in business R&D, total innovation expenditures, and new-to-market and new-to-firm sales. Indicator quality concerns: There are sudden changes in the values of three indicators that could either be due to small samples producing volatile results, or a 69

76 break in the data series. The results for life-long learning increased sharply in 2003, followed by a decrease. The youth attainment level declined by more than expected between 2003 and 2004, and the percentage of university R&D financed by the business sector more than doubled between 2001 and 2003, possibly due to a change in policy or to a change in definition. 70

77 HUNGARY (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 71

78 Iceland Not available Country growth rate minus EU growth rate Percent strategic innovators 4 Percent intermittent innovators 10 Percent technology modifiers 7 Percent technology adopters 34 Percent non-innovative firms 45 Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: No data Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): No data Overview Iceland s overall innovation performance, based on the SII, is above the average, ranking in 13 th place out of 33 countries. The country has above average performance in all three categories of innovation inputs but below average performance in both output categories. The below average IPR performance is due to having only a small share of R&D intensive companies and a predominance of technology adopters among its innovative firms. Out of all countries for which data are available for innovation modes, Iceland ranks first in the share of firms that primarily innovate via diffusion processes (technology modifiers and adopters). The trend results for Iceland are excellent, with all but one indicator, new triad patents (5.3) at or above the EU trend average. Trend growth is particularly good for business R&D (2.2), the share of university R&D financed by the business sector (2.5), exports of high technology products (4.2), although from a very low base, and employment in medium-high and high tech manufacturing (4.5), again from a very low base. Since 2001, R&D expenditures have exceeded the Lisbon goal of 3% of GDP. This is partly due to a high level of R&D intensive services due to investment in biotechnology. 72

79 EIS 2005 Innovation performance (relative to EU average) - ICELAND INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Innovation governance, demand and modes Full data for innovation governance and demand are available in Annex A. At this time, there are no data for innovation governance and demand. The innovation mode of Icelandic firms is strongly skewed in favour of innovation diffusion, as noted above. There is a small but active share of strategic innovators, accounting for 4% of Icelandic firms. Adopters Iceland Strategic Intermittent Modifiers Main challenges Iceland is a small economy that is investing heavily in biotechnology and in the hydrogen economy. The former is largely funded from external sources and partly explains Iceland s excellent performance on R&D. However, the main challenge, in order to compete in these two highly advanced sectors, is to increase the supply of new S&E graduates (currently at 81% of the EU average) and to improve youth education attainment levels (70% of the EU average). Otherwise, future success in 73

80 these two areas will depend on a successful policy to attract highly-skilled immigrants. Peer countries for innovation patterns No data at this time. Indicator quality concerns: The new-to-firm and new-to-market sales shares are surprisingly low for a developed economy with a high standard of living. 74

81 ICELAND (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 75

82 Ireland Not available (22;263) Country growth rate minus EU growth rate IE Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: No data Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): No data Overview Ireland s overall innovation performance, based on the SII, results in an 11 th place rank out of 25 EU member states and 15 th out of 33 countries. There are no data for peer countries. However, with data missing for all 7 CIS based indicators, this average performance should be interpreted with caution. Ireland mixes above average and below average performance in many of the indicator groups. Ireland s best performance is for applications, where it ranks first out of 25 countries. However, three indicators in this category are missing for Ireland. Its good performance is consequently due to high tech export shares that are 68% above the EU average. Ireland performs well on the innovation drivers, ranking in 8 th place. This is due to excellent performance on the supply of new S&E graduates and above average results for tertiary education (27% above the EU average) and for youth educational attainment (11% above the EU average). The broadband penetration rate, in contrast, is only 22% of the EU average, but increasing at over three times the EU average trend (1.3). Performance on IPR is generally near half the EU average, with the exception of community trademarks. Trend performance is split almost evenly between below-average and above average trends. The trend results for IPR are consistently above average while applications are consistently below average trends. Most worryingly, business R&D shows both an 76

83 absolute and relative decline over time, falling from 0.90% of GDP in 1998 to 0.77% in This decline is not matched by an increase in public R&D, which has grown only modestly, from 0.35% of GDP in 1998 to 0.40% in EIS 2005 Innovation performance (relative to EU average) - IRELAND INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Innovation governance, demand and modes Full data for innovation governance and demand are available in Annex A. Ireland ranks in 5 th place for both innovation governance and demand. The results for demand are due to a high youth share, which is partly offset by an above average percentage of firms that report a lack of customer demand for innovative products. Ireland performs consistently above average on all four governance indicators. Main challenges Ireland must make the transition from an economy where foreign investment played a large role, particularly in the ICT sector in order to serve the EU market, to an economy based on innovation. Many indicators point to serious difficulties in making this transition. The share of exports from high technology products has fallen by 25% between 2001 and The consistent decline in business R&D is a major challenge, particularly since the share of university R&D funded by the business sector has also declined both in absolute terms and in relative terms from 103% of the EU average in 1999 to 57% of the average in Venture capital supply has also fallen from 136% of the EU average in 2000 to 92% of the average in These developments suggest that Ireland could be entering a difficult transition phase towards developing domestic R&D and innovation capabilities. 77

84 A second challenge is to increase the broadband penetration rate, which is far below the average for other wealthy economies. The low rates of broadband penetration could act as a barrier to the establishment of innovative capacity in Ireland. Indicator quality concerns: A large number of indicators are missing for Ireland (all CIS indicators except innovation expenditures which seem to be too low), plus the results for the share of medium-high tech R&D out of all manufacturing R&D are out of date, referring to

85 IRELAND (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 79

86 Italy Governance Demand Intellectual property ITALY Innovation drivers Application Knowledge creation Innovation & entrepreneurship Country growth rate minus EU growth rate IT Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Austria, Belgium, Netherlands, UK, Germany and France. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Austria (0.222), Finland (0.236), France (0.286). Overview Italy is one of the poorest performing countries out of the original EU-15, but its relative position has improved with the addition of the 10 new member states, ranking in 12 th position on the summary innovation index out of the 25 EU member states and in 17 th place out of 33 countries. Its peer group for performance includes the intermediate group of countries, although Italy ranks last in this group. It is particularly weak in innovation drivers (ranking 21 st out of 25 countries) and for innovation & entrepreneurship (20 th ). As shown in Figure 2, poor performance on innovation drivers is due to low performance on tertiary education and lifelong learning. There is also a poor supply of new S&E graduates (1.1), although the trend is positive, increasing from 55% of the EU average in 1999 to 65% in The increase in broadband penetration rates (1.3) is also above the EU average, indicating that Italy might catch up to the EU average in a few years. The causes of Italy s below 80

87 average performance on innovation & entrepreneurship is due to very low levels of innovation cooperation among SMEs (23% of the EU average), a collapse in venture capital supply (20% of the EU average), and slightly below average levels of investment in ICT. EIS 2005 Innovation performance (relative to EU average) - ITALY INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Italy s best performance is for knowledge creation and applications. The former is due to a well above average percentage of firms that receive public funding for innovation, which is a lagging indicator that could lead to improved results in the future. Both public and business expenditures in R&D have also been growing since 1998, albeit too slowly. In terms of applications, Italy performs well above the EU average for the sales of new-to-market products and close to the average for new-tofirm-products. This could reflect innovation methods that are not adequately covered by R&D indicators or reflect the adoption of technology developed by other firms. For instance, Italy performs relatively better on the percentage of firms that are intermittent innovators (8 th ) and technology modifiers (7 th ) than on the two extremes of strategic, R&D-based innovators (10 th ) and technology adopters (16 th ). The good results for sales from new-to-market innovation could be capturing either innovation developed to create product differentiation or incremental innovation that is built on engineering rather than R&D. 81

88 Innovation governance, demand and modes Full data for innovation governance and demand are available in Annex A. Italy s is a mid-rank performer on both domestic demand and innovation governance. Most of these indicators are either slightly below or above the EU average, with no notable strengths or weaknesses. Adopters Strategic Italy: innovation mode Main challenges The Italian policy community has understood the severity of Italy s problems for over a decade particularly low investment in education and public and business R&D, but progress has been very slow or non-existent. Italy continues to under perform on every education indicator, with performance 65% of the EU average for the supply of S&E graduates, 53% of the average for tertiary education, and 69% of the average for lifelong learning. The trend results for tertiary education show only a very small increase. Participation in life-long learning has increased, due to a break in series in Many indicators point to a continued drift away from creative innovation activities. Business R&D is only 44% of the EU average, even though Italy has one of the highest percentages of firms that report receiving some public assistance for innovation. Public R&D has increased slightly and in 2002 exceeded business R&D expenditures, but public investment is at only 88% of the EU average and cannot make up for the decline in business R&D. As noted above, the supply of venture capital has collapsed and ICT expenditures have barely changed in absolute terms since With one exception, all IPR indicators are below average, and are not likely to improve without a turn around in investment in creative innovation. The exception is the number of community design innovations, where Italy is 54% above the EU average. Peer countries for innovation patterns Italy s closest country for innovation patterns is Austria. It also shares some similarities with France and Finland, but is probably closest to France, since both France and Italy have relatively large shares of firms that are intermittent innovators and technology modifiers. France performs better than Italy on many indicators where Italy is seriously behind the EU average: the supply of S&E graduates, tertiary education, lifelong learning, business expenditures on R&D, the share of SMEs involved in innovation cooperation, and early stage venture capital. Indicator quality concerns: For a long time, there has been concern that Italy s good performance on the new-to-market and new-to-firm sales share is due to less innovative innovations than in other countries such as Germany, which is 1% below the EU average for new-to-market sales, compared to Italy which is 77% above the Intermittent Modifiers 82

89 EU average. The results for innovation mode suggest that this concern could be valid, with the differences in the type of innovations partly explaining the results. There are no other known problems with the data. ITALY (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 83

90 Latvia Governance Demand LATVIA Innovation drivers Knowledge creation Innovation & entrepreneurship Intellectual property Application Country growth rate minus EU growth rate LV Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Estonia, Greece, Poland and Portugal. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Estonia (0.066). Overview Latvia ranks 24 th out of 25 EU countries on its overall innovation performance, based on the SII, and is in 30 th place out of 33 countries. Based on its innovation performance, its peer countries include Estonia, Greece, Poland, Portugal, although Latvia ranks last. As shown in the upper left chart, Latvia has a highly skewed distribution of strengths and weaknesses. Its only relative strength is for innovation & entrepreneurship, where it ranks 13 th out of 23 countries, and for innovation drivers, where it ranks 16 th. It comes close to the bottom for innovation outcomes, ranking 24 th for applications and in last place for IPR. Its performance on innovation demand and governance is also very poor, in contrast to several new member states, such as its neighbour Lithuania, who benefits from high levels of domestic demand for innovative products. 84

91 Fortunately, most of the trend indicators for Latvia are above the EU average, with the notable exceptions of public R&D (2.1), USPTO patents (5.2) and ICT expenditures (3.5). The latter is of concern because ICT investment is essential across the economy, whereas USPTO patents are not expected until a later stage of development. Trend results for performance on the share of university R&D funded by business (2.5) are not given because of high volatility for this indicator in Latvia, but the percentage has increased markedly in the last year. This is not a positive sign, since the results for this indicator are possibly excessive and more a sign of severe weaknesses in the ability of Latvian firms to innovate in-house, with business R&D expenditures only 11% of the EU average. A major weakness is that public R&D expenditures have been steadily falling from already very low levels of 0.32% in 1998 to 0.25% in EIS 2005 Innovation performance (relative to EU average) - LATVIA INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High The trend for education indicators is generally positive, but only slightly above the EU average. The best consistent trend performance is for applications, with increases in employment in high tech services, high tech exports, and employment in mediumhigh and high-tech manufacturing. All three improvements could be due to foreign investment. Innovation governance, demand and modes Full data for innovation governance and demand are available in Annex A. At 81%, Latvia has the highest share of non-innovative firms in the EU, but the firms that do 85

92 innovate show some capabilities, with relatively better performance for intermittent innovators and technology adopters. Strategic Main challenges Latvia adopted a National Programme on Innovation in 2003, which could improve performance in the future. Latvia should be capable of solving some of the immediate problems that are under state control, such as a below average supply of S&E graduates (several programmes are in place), and poor innovation governance. Adopters Latvia Intermittent Modifiers Compared to several other lagging countries, Latvia performs reasonably well on innovation drivers, but it needs to invest in education to improve trend performance, which is largely static. Such investment will be essential for both a policy to support innovation diffusion or creative innovation. Latvia faces serious challenges to build up a creative innovation capacity, with far below average levels of business R&D and public R&D. Although business R&D is increasing, as noted above, the rate of increase is too slow to result in a notable change, even over the medium term of 10 years. Consequently, there is likely to be no improvement in IPR for a long time. Latvia could be better off to adopt policies to encourage innovation diffusion. As a start, it already performs near the EU average for lifelong learning and non-technical change. But, it should improve broadband access, public funding of innovation (particularly for technology adoption and upgrading), and the share of SMEs that collaborate on innovation. Peer countries for innovation patterns None of the better performing countries share a similar distribution of strengths and weaknesses as Latvia. However, Estonia shares a similar pattern and also performs much better in innovation drivers, an area which is strongly influenced by government policy. Latvia could possibly learn from the experience of its neighbour. Indicator quality concerns: The sudden decline in the share of university R&D funded by business between 2000 and 2001, and a sudden increase between 2002 and 2003, could be due to a change in policy or a change in data series. No other data quality problems are visible. 86

93 LATVIA (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 87

94 Lithuania Governance Demand Intellectual property LITHUANIA Innovation drivers Application Knowledge creation Innovation & entrepreneurship Country growth rate minus EU growth rate LT Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Spain and Slovenia. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Spain (0.300), Greece (0.306), Slovenia (0.330). Overview Lithuania ranks 19 th out of 25 EU countries and in 24 th place out of 33 countries. Its peer countries for performance include Spain and Slovakia. Its average performance masks large differences by category. It performs slightly above the EU average for innovation drivers, due to good performance on all education indicators except for life-long learning, and it has relative strengths in innovation & entrepreneurship, where it ranks 16 th. Lithuania suffers from extremely low levels of business R&D, which is partly compensated by excessive levels of university R&D funded by business (at 235% the EU average). Performance on patenting is near the bottom, but as with other new member states IPR is linked to knowledge creation, where Lithuania s performance is below average. 88

95 Trend results are generally favourable, except for ICT investment (3.5) and employment in high tech services (4.1). Since 2001, performance in the percentage of the population with a tertiary education has increased gradually to 23.2% in 2003, which is above the EU average. Business R&D expenditures have been growing rapidly from close to zero in 1998, but are still only 11% of the EU average in Public R&D expenditures have increased from a low of 0.46% in 2000 to 0.54% in 2003, to finish at the same level as in EIS 2005 Innovation performance (relative to EU average) - LITHUANIA INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High The emphasis at this stage in transition to a developed economy is on innovation diffusion, through technology modification and adoption. This is visible in the results for innovation mode, where 11% of firms innovate through adoption, putting Lithuania in 6 th place. In terms of strategic R&D based innovation, Lithuania ranks last out of 19 countries. 89

96 Innovation governance, demand and modes Full data for innovation governance and demand are available in Annex A. Lithuania has an above average Strategic performance on innovation 10 demand, ranking in 7 th place, even with per capita incomes less than half the EU average. The good performance is due to high levels of capital investment, an above average youth share, near average buyer sophistication, and a below average share of firms who state Adopters 5 0 Intermittent Modifiers that a lack of demand is a barrier to Lithuania: innovation mode innovation. Lithuania under performs on governance due to a poor policy uptake rate and a poor innovation policy index. Main challenges The main challenge for Lithuania is whether or not to strongly encourage innovation diffusion or to encourage both creative innovation and innovation diffusion. The educational performance of Latvia leaves both options open, although a decision to support creative innovation would require an improvement in the supply of S&E graduates and a massive increase in business R&D. Neither of the trends for these two indicators are stable and positive, suggesting that there is no in-built momentum for improvements over time. A concerted policy effort to improve both would therefore be required in order to develop creative innovation capabilities. The Government introduced a long-term R&D strategy in 2003 that will partly replace core funding for R&D by the public sector with competitive bidding. This might improve the quality of research and provide spillovers into the private sector. The alternative is to stress innovation diffusion. Several indicators are positive, including close to average levels of ICT investment and total innovation expenditures, and above average performance on several education indicators. The greatest current weaknesses are in cooperation by SMEs and in broadband penetration rates. Peer countries for innovation patterns Lithuania s peer group countries for innovation patterns include Spain and Slovenia. Slovenia is developing creative innovation capabilities and could offer advice in this area, if this is the direction where Lithuania would like to go. Slovenia performs much better than Lithuania on lifelong learning, public and business R&D, broadband penetration, and non-technical change. Indicator quality concerns: As with other new member states, the IPR data for patents are volatile as they are based on very few patents. For this reason, the positive trend for triadic patents (5.3) is unreliable. 90

97 LITHUANIA (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 91

98 Luxembourg Not available Country growth rate minus EU growth rate LU Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: No data Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): No data Overview Luxembourg ranks 14 th out of the 33 countries and 10 th out of the 25 EU countries. Some of the results need to be treated cautiously because of missing data for knowledge creation and innovation & entrepreneurship. Luxembourg s best performance is in IPR, which could be linked to above average performance in business R&D. Its performance in applications ranges from very poor for new-tomarket product sales and for employment in medium-high and high tech manufacturing to far above the EU average for high tech exports. The latter is difficult to understand, given low employment in the relevant sector. Many of the trend indicators are missing, but Luxembourg s trend performance on most available indicators is at or below the EU average. The exceptions are a rapid increase in the broadband penetration rate (1.3) and high tech exports (4.2). 92

99 EIS 2005 Innovation performance (relative to EU average) - LUXEMBOURG INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Innovation governance, demand and modes Full data for innovation governance and demand are available in Annex A. There are no data for governance, but Luxembourg ranks second out of 24 countries for innovation demand. This is partly due to Luxembourg s high per capita GDP and an above average level for buyer sophistication. On innovation modes, Luxembourg ranks second in the share of intermittent innovators and technology modifiers. This shows a shift from simple diffusion to some creative innovation capabilities. Adopters Strategic Intermittent Luxembourg: innovation mode Modifiers 93

100 Main challenges The two main challenges are poor performance on education and on public R&D. For an advanced economy, Luxembourg has a lower than expected performance in tertiary education and lifelong learning. The exceptionally low score for the supply of S&E graduates (18% of the EU average) is probably due to the fact that Luxembourg lacked a university until recently, with most citizens receiving a tertiary education abroad. Public R&D expenditures are very low, at only 29% of the EU average. Peer countries for innovation patterns: No data Indicator quality concerns: There are several concerns with the data from Luxembourg that are partly due to several unique features, such as a poorly developed tertiary education system, and the fact that it serves as the head office for many EU firms. The former probably explains poor performance on S&E graduates while the latter could explain the excellent performance on all IPR indicators, which conflicts with the low share of employment in medium high and high tech manufacturing. Head office firms could receive the patent assignment for inventions developed outside Luxembourg. The high level of high tech exports could also be due to Luxembourg serving as an entrepot location for high-value airfreight. 94

101 LUXEMBOURG (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 95

102 Malta Not available Performance relative to EU (78;115) Country growth rate minus EU growth rate MT Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: No data Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): No data Overview Malta ranks last on the summary innovation index for the 25 EU countries and in 31 st place out of 33 countries. Its best performance is in innovation and entrepreneurship and in applications. The latter is largely due to high-tech exports, which is an anomaly due to one firm within a very small economy. Business R&D is close to non-existent and public R&D is only 28% of the EU average. The good performance for innovation and entrepreneurship is from high total innovation expenditures, most likely capital investment. Innovation governance, demand and modes: No data Main challenges As the smallest economy in the EU, Malta s innovation performance can depend on only one or two firms. This probably explains good performance on innovation expenditures, high technology exports, and ICT expenditures. The challenge for Malta is to create the background conditions for a more broadly based innovation performance, including higher levels of adoption of new technology. Education is a primary key here, with a primary goal of improving all education indicators, which are approximately 50% of the EU average. 96

103 Peer countries for innovation patterns: No data Indicator quality concerns: With the exception of high tech exports, which are based on the activities of very few firms, there are no problems with the available indicators. EIS 2005 Innovation performance (relative to EU average) - MALTA INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High 97

104 MALTA (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 98

105 Netherlands Governance Demand Intellectual property NETHERLANDS Innovation drivers Application Knowledge creation Innovation & entrepreneurship Country growth rate minus EU growth rate NL Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Austria, Belgium, UK, Germany, France and Italy. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Finland (0.042), Belgium (0.093), Spain (0.112). Overview The Netherlands is an above average performer on the EIS, ranking 8 th on the summary innovation index out of the EU 25 countries and 11 th out of 33 countries. Its peer countries for performance include Belgium, Austria, the UK, France and Italy. However, for several years the trends have been negative and worrying. A concerted policy effort to increase the supply of new S&E graduates appears to be succeeding, with the rate increasing from 6 per thousand in 1998 to 7.3 per thousand in However, this is not enough and the Netherlands performance on this indicator is still only 60% of the EU average. The Netherlands performs near or well above the average for the other innovation driver indicators. It ranks second within the EU in broadband penetration rates (third in the world after Korea, based on the most recent data). For a highly developed economy, however, its performance on youth education is below expectations, at only 97% of the EU average. In contrast, both Austria and 99

106 Belgium, similar sized economies within its peer group, perform above the EU average on this indicator. EIS 2005 Innovation performance (relative to EU average) - NETHERLANDS INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High The Netherlands best performance is for innovation drivers, IPR, and knowledge creation. Good performance for drivers is due to above average performance on broadband penetration rates, life long learning, and tertiary education. The results for knowledge creation are due to a high percentage of firms that receive public funding for innovation. In contrast, business R&D expenditures are only at 80% of the EU average and have declined from a high of 1.14% in 1999 to 1.01% in 2003, most likely due to the collapse of the dot-com bubble and the off-shoring of R&D by a few major Dutch firms. Another strength is in IPR, due to excellent performance for triadic patents. However, many of these could be due to inventions by the foreign affiliates of Dutch firms, but with the patent owner registered in the Netherlands. This would overstate Dutch innovative capabilities. The trend performance for many of the indicators is near or below the EU average. The worst trend performance is for broadband penetration rates, but this is due to its lead position within Europe. Of greater concern is the declining trend for both public (2.1) and private R&D (2.2). The best trend performance is for EPO patents and community trademarks. 100

107 Innovation governance, demand, and modes Strategic 25 Full data for innovation governance and demand are available in Annex A. The Netherlands ranks 10 th on domestic demand for innovation and 7 th on innovation governance. The results for demand are pulled down because of very low levels of Adopters Modifiers gross fixed capital formation, possibly in response to the economic problems in the Netherlands since Conversely, very few firms in the Intermittent Netherlands report a lack of Netherlands: innovation mode customer responsiveness to be a barrier to innovation and buyer sophistication is above the EU average. On innovation governance, both policy indicators are above the EU average and the costs of establishing a business are low. The main drag on Dutch performance on governance is due to below average performance on e-government. The results for innovation modes show a shift from simple technology adoption towards more developed in-house capabilities, with the Netherlands ranking in 4 th or 5 th place for strategic and intermittent innovators and for technology modifiers. Main challenges Difficult economic conditions since 2001 have created problems for dealing with the well-known weaknesses of the Dutch innovation system, which includes many trends running below the EU average. The Netherlands greatest weakness is in applications, primarily due to poor results on new-to-firm sales share (37% of the EU average) and low levels of employment in medium-high and high tech manufacturing. The latter has been falling slightly faster than in other EU countries, but this is partly due to a shift in the Netherlands economic structure to services. High tech service employment is 15% above the EU average, but has been hit by unfavourable economic conditions in the Netherlands since 2000, when high tech service employment was 34% above the EU average. Exports of high technology products have also been declining. An improvement in applications will require more investment in knowledge creation and in innovation drivers. The most serious challenge is to improve business R&D. There is some sign of a turn around, with business R&D increasing from 0.98% of GDP in 2002 to 1.01% in Public R&D has also declined since 1998, but is already equal to about 75% of private R&D. Any improvements in business R&D will probably require a long-term strategy to nurture the capabilities of smaller firms, since several of the large Dutch multinationals are pursuing a strategy of developing R&D centres outside of the Netherlands. This could be essential to the future competitiveness of these firms and consequently it could be counter productive to encourage these firms to perform more R&D within the Netherlands. 101

108 The second challenge is to improve the supply of S&E graduates and improve the youth education attainment level. On the other innovation drivers, the Netherlands is performing very well. Improvements in the supply of S&E personnel, over the short term, could require an increase in the immigration of highly-skilled individuals. Peer countries for innovation patterns The Netherlands pattern of strengths and weaknesses is very close to that of Belgium and Finland. The Netherlands might be able to learn from Belgium s notably better performance for new S&E graduates and for business R&D (although the latter has also been in decline in Belgium since 2001). Indicator quality concerns: The good results for patenting might not reflect inventive activity within the Netherlands as more than one-third of all EPO patent applications are made by one multinational with many research centres outside of the Netherlands. The patents from these foreign research units are frequently assigned to the Dutch head office. 102

109 NETHERLANDS (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 103

110 Norway Not available Country growth rate minus EU growth rate Percent strategic innovators 5 Percent intermittent innovators 12 Percent technology modifiers 15 Percent technology adopters 4 Percent non-innovative firms 64 Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: No data Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): No data Overview Norway ranks 16 th on the SII out of 33 countries. This is below the EU average and well below that of the other Scandinavian countries. Its worst performance is for applications, particularly the share of high tech exports (21% of the EU average) and new-to-market product sales (34% of the EU average). Overall, Norway shows poor performance in 9 indicators and a strong performance in 7 indicators. Norway s best performance is for innovation drivers, with all but the supply of new S&E graduates above the EU average. Most of the indicators for knowledge creation are slightly below the EU average. Performance in both innovation & entrepreneurship and IPR is mixed, with good results for some indicators and poor results on others. 104

111 Innovation governance, demand, and modes: Full data for innovation governance and demand are available in Annex A. Most innovative Norwegian firms have mid-range innovative capabilities, with 12% of firms being intermittent innovators and 15% technology modifiers. Only 5% are strategic innovators. Adopters Strategic Modifiers Main challenges Norway is a highly developed country, as shown by excellent Intermittent performance on innovation drivers, with one of the world s highest per Norway: innovation mode capita GDP. It has been very successful in maximizing the innovative capabilities of several key industrial sectors, including oil and gas, shipbuilding, forestry, and food products. However, these are traditionally low or medium technology sectors where a large fraction of innovation occurs through acquiring new technology from other firms or from investment in ICT. In this respect the low performance on total innovation expenditures, where Norway performs at 65% of the EU average, is puzzling. If accurate, this suggests under investment at the time the data were collected. ICT expenditures are also slightly below the EU average. A second challenge is the low levels of business R&D (87% of the EU average), which could be linked to under performance on the sales share of new-to-market products and below average performance in IPR. However, this could be due to Norway s industrial structure. A full evaluation of whether or not R&D spending levels are appropriate would require sector level data. It is possible that Norway performs very well in those sectors that dominate its economy. A third challenge is a below average supply of new S&E graduates, although there are signs of improvement, with the rate increasing from 7.2 per 1000 in 1999 to 9.3 per thousand in Further improvement here could be valuable for the development of innovation in all sectors. 105

112 EIS 2005 Innovation performance (relative to EU average) - NORWAY INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Peer countries for innovation modes: No data so far. Indicator quality concerns: The high tech exports indicator (the share of all exports from high technology products) penalizes Norway because of very high levels of energy exports. Consequently, this indicator is not an appropriate measure of Norway s innovative capabilities. 106

113 NORWAY (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 107

114 Poland Governance Demand Intellectual property POLAND Innovation drivers Application Knowledge creation Innovation & entrepreneurship Country growth rate minus EU growth rate PL Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: Estonia, Greece, Poland and Portugal. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Greece (0.174). Overview Poland ranks 27 th out of 33 countries on the SII and 21st out of the 25 EU member states. Poland exceeds the EU average for four indicators: the youth education attainment level (1.5), where Poland is 17% above the EU average, total innovation expenditures (50% above the EU average), ICT expenditures (14% above the EU average), and new-to-firm product sales (42% above the EU average). All are indicators for future success on adopting new technology. By category, Poland s best performance is for innovation and entrepreneurship and for innovation drivers. The supply of new S&E graduates has been growing consistently since 1998 and the trend is above the EU average. The share of the population with a tertiary education is currently 71% of the EU average but the trend is also favourable. Conditions for knowledge creation, in contrast, are worsening, particularly due to a decline in business R&D, from 0.28% of GDP in 1998 to 0.16% in 2003, although this marks a recovery from a low of 0.13% in Public R&D expenditures have changed little and were 0.43% of GDP in The share of university R&D funded by the business sector has also declined, indicating that firms have not turned to outsourcing research to make up for declining R&D expenditures. Partly due to very low levels of R&D, Poland ranks near the bottom in the EU in IPR. 108

115 Innovation governance, demand and modes: Poland ranks 14 th on innovation governance and 17 th on innovation demand. Performance on governance is pulled down by a low score on the innovation policy index. Poland scores above the EU average for e-government, but as with several other new member states, the very low rates of broadband access must make it difficult for Polish citizens to take advantage of on-line government services. Innovation demand suffers from below average buyer sophistication. Main challenges As in several other new member states, the main challenge for Poland is to build up capabilities in innovation diffusion, since there is very little that can be done over the short term to develop capabilities in creative innovation. In respect to diffusion, the trends for skills are favourable, total innovation expenditures are well above the EU average, and ICT expenditures are above the EU average. A possible bottleneck is the low percentage of SMEs that collaborate on innovation and the low share of university R&D funded by businesses. The latter could indicate that firms have very few opportunities to outsource necessary research within Poland. EIS 2005 Innovation performance (relative to EU average) - POLAND INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Peer countries for innovation patterns The Polish pattern of strengths and weaknesses is very close to that Greece. Since Greece is the EU s third worst performer on the SII, there is probably little that Poland can learn from it. 109

116 Indicator quality concerns: There is a larger than expected increase in the share of the population with a tertiary education between 2002 and It is not known if this reflects a large increase in tertiary enrolment in the preceding years or a change in the definition. 110

117 POLAND (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 111

118 Portugal PORTUGAL Governance Demand Innovation drivers Knowledge creation Innovation & entrepreneurship Performance relative to EU Intellectual property Application Country growth rate minus EU growth rate PT Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Estonia, Greece, Latvia and Poland. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): none. Overview Portugal s overall innovation performance, based on the SII, is below the average for both the EU-25 and EU-15, ranking in 23 rd place out of 33 countries and in 18 th place out of 25 EU member states. Based on its innovation performance, its peer countries include Estonia, Greece, Latvia and Poland. Portugal s performance is generally below average on all categories with the exception of innovation & entrepreneurship, where it ranks 7 th out of 23 countries, due to above average results for five of the six indicators in this category. Portugal s worst performance is in innovation drivers, due to well-below average performance on the four education indicators, although the trends for all of them are consistently positive. The results for applications are skewed, with good performance on new-to-market and new-to-firm sales of innovative products, but very poor performance on the three other indicators (less than 50% of the EU average). 112

119 With three exceptions, Portugal s trend performance is above the EU average. Of greatest concern is the decline in public R&D expenditures (2.1) from 0.58% in 2001 to 0.52% in In contrast to a fall in venture capital in almost all EU countries, the supply of venture capital in Portugal increased in absolute terms between the late 1990s and EIS 2005 Innovation performance (relative to EU average) - PORTUGAL INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Portugal s good performance on new-to-firm and new-to-market product sales is probably due to firms acquiring innovations developed outside Portugal and introducing them onto the Portuguese market. This thesis is supported by the high percentage of Portuguese firms that are technology modifiers and adopters (see Figure 3) and the low share that are capable of developing innovations in-house (strategic and intermittent innovators combined). 113

120 Innovation governance, demand and modes Strategic Full data for innovation governance 25 and demand are available in Annex 20 A. Similar to Estonia and Latvia, 15 Portugal has poor performance on 10 both innovation demand and 5 innovation governance, in contrast Adopters 0 Modifiers to many of the other new member states, which have comparatively good performance on innovation demand. This is due to consistently below average performance on all five of the demand indicators, Intermittent which results in Portugal placing Portugal: innovation mode last out of 24 countries for demand. In particular, Portugal has the third highest share of firms that report a lack of customer responsiveness as a barrier to innovation. Similarly, Portugal performs below the EU average on all four of the innovation governance indicators and ranks 15 th out of 22 EU countries. Main challenges Portugal s main weaknesses are in innovation drivers, knowledge creation (with no improvement in public R&D), and in applications. Little is expected at this time for patenting, which depends on marked improvements in knowledge creation, particularly business R&D, which is only 21% of the EU average. As with many of the new member states, Portugal s innovation system performs much better on innovation diffusion than on innovation creation. This is shown by comparatively better performance on broadband penetration rates, the percentage of SMEs that cooperate on innovation, high levels of ICT investment and total innovation expenditures (39% above the EU average), and an above average share of SMEs that have introduced non-technical changes such as organisational innovations. The main challenges for developing innovation diffusion capabilities is the poor performance on innovation demand and poor performance on education. All education indicators are below expectations, ranging from 48% of the EU average for lifelong learning to 67% of the average for the supply of new S&E graduates. All have been improving, albeit slowly for the share of the working-age population with a tertiary education. The largest bottleneck for a country such as Portugal, which needs to rapidly improve skills in order to support the diffusion of new technology, is the poor performance on lifelong learning and the youth education attainment level. Portugal could also develop greater capacities in knowledge creation. Portugal is 56% above the EU average for the share of firms receiving funding for innovation. This could currently be directed towards engineering projects or technology adoption, since performance on other knowledge creation indicators for the business sector is very poor. Major challenges for developing knowledge creation include improving business R&D, which accounts for only 0.26% of GDP, and reversing the very low 114

121 percentage of university R&D funded by business (1.5% of GDP, or only 18% of the EU average). Public R&D expenditures are twice as high as business R&D. Portugal needs to be able to leverage this spending to create spill-overs into the private sector, either through encouraging spin-offs or through improved linkages between firms and the publicly-funded research system. The good performance on venture capital is an asset in this respect that needs to be maintained. Peer countries for innovation patterns No other countries share a similar pattern of strengths and weaknesses with Portugal. Indicator quality concerns: The indicators for the share of sales from innovative products (4.3 and 4.4) are probably measuring innovation diffusion rather than creative innovation (as in Finland) or product differentiation and engineering improvements (as in Italy). This is expected at this stage in Portugal s economic development. Innovation expenditures (3.3) are comparatively high in Portugal compared to very low levels of business R&D and below average rates of capital investment. CIS Light results for Portugal have not been used as the Portuguese results also include enterprises with 5-9 employees, which make them incomparable with other countries. The relative comparisons with the EU average are thus based on CIS 3 data. 115

122 PORTUGAL (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 116

123 Romania Not available Country growth rate minus EU growth rate Percent strategic innovators 3 Percent intermittent innovators 8 Percent technology modifiers 4 Percent technology adopters 2 Percent non-innovative firms 83 Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: No data Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): No data Overview Romania ranks second to last on the SII out of 33 countries. Its worst performance is for IPR, with almost no USPTO patents and zero Triad patents. It performs very poorly on innovation drivers, knowledge creation and poorly on innovation & entrepreneurship and applications. Only two indicators are above the EU average: the percentage of SMEs that have introduced non-technical change and the new-to-market product sales. Success on these two indicators is probably due to very poor initial conditions. Romania s best performance is for innovation drivers, where the supply of new S&E graduates has doubled between 1998 and There was a slight fall in the proportion of the population with a tertiary education between 2002 and 2003, which could be due to emigration. One discouraging sign is a gradual decline in the youth education attainment level, although 98% of the EU average in Public R&D expenditures have increased from 0.11% of GDP in 1998 to 0.16% of GDP in 2003, but conversely business R&D has more than wiped out any gains, declining from 0.38% of GDP in 1998 to 0.24% in Innovation governance, demand and modes: There are no data for Romania for innovation governance and demand. On innovation modes, 83% of Romanian firms do not innovate, which is the highest share out of 19 EU and 4 non-eu countries. Surprisingly, given the poor conditions for knowledge creation and business R&D, 11% of Romanian firms report creative innovation activities (strategic and 117

124 intermittent innovators combined) than the 6% that report innovation based on diffusion (technology modifiers and adopters). This suggests possible problems in the interpretation of the CIS questions. EIS 2005 Innovation performance (relative to EU average) - ROMANIA INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Main challenges Romania faces serious challenges in building a national innovation system. It performs very poorly on innovation creation indicators, which is not surprising or particularly serious at this time, but its performance on innovation diffusion is also poor. A major challenge is to substantially improve lifelong learning in order to create the necessary skills within the workforce for adopting new technologies. A second challenge is to substantially increase ICT expenditures, which only accounted for 1.5% of GDP in Other requirements include improving the share of SMEs that cooperate on innovation projects and the percentage of firms that receive support for innovation projects. Peer countries for innovation patterns: No data Indicator quality concerns: None known. 118

125 ROMANIA (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 119

126 Slovakia Governance Demand Intellectual property SLOVAKIA Innovation drivers Application Knowledge creation Innovation & entrepreneurship Performance relative to EU Country growth rate minus EU growth rate SK Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Czech Republic and Hungary. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): none. Overview Slovakia ranks in 22 nd place on the summary innovation index for the EU countries and 28 th out of all 33 countries. Its peer group for performance includes Hungary and the Czech Republic. Within the EU, it ranks next to last on knowledge creation and last for innovation and entrepreneurship. It performs slightly better on innovation drivers, due to an above average performance on youth education, and substantially better for applications. The latter is explained by above average performance on newto-market sales of innovative products and employment in medium-high and high tech manufacturing. In addition to very low scores on all IPR indicators, including community trademarks and industrial design, Slovakia has exceptionally low scores (6% or less of the EU average) for the broadband penetration rate, the share of university R&D financed by business, and venture capital. Positive trends include an increase in employment in medium-high and high tech manufacturing (4.5) which is due to foreign investment in the automotive sector, the 120

127 supply of S&E graduates (1.1), tertiary education (1.2), and a recovery in public expenditures on R&D (2.1), although this has still not reached the level in 1998, and in absolute terms public R&D is very low, at 0.24% of GDP. The positive trend for triad patents (5.3) is based on very few patents. Several of the negative trends are worrisome, such as the large decline in business R&D (2.2) from 0.52% of GDP in 1998 to 0.23% in It is not clear why the share of university R&D funded by business has fallen from 0.9% in 1999 to zero percent in ICT expenditures (3.5) have also fallen. EIS 2005 Innovation performance (relative to EU average) - SLOVAKIA INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Innovation governance, demand and modes Full data for innovation governance and demand are available in Annex A. Slovakia s best performance is for domestic innovation demand, where it ranks 9 th out of 24 countries, due to the highest youth share in the EU and above average capital investment. It performs second to last on innovation governance. At 80%, it has a very high share of firms that do not innovate. Of those that do, only 3% are strategic innovators based on R&D. Slightly over half of the innovative firms innovate through diffusion (technology adopters and modifiers). 121

128 Main challenges Slovakia has been pursuing a policy of encouraging foreign investment that has not led to any detectable benefits so far in innovation capabilities within Slovakia, with most benefits through innovation diffusion. Adopters Strategic As with many of its peer countries for innovation performance, Slovakia s performance on creative innovation is very poor and has Intermittent been declining over time, with a fall in business R&D from 0.52% Slovakia of GDP in 1998 to 0.31% in As noted above, only 3% of Slovakian firms are strategic innovators with in-house innovative capabilities. Public R&D has recovered slightly from a low of 0.21% in 2001 to 0.26% in 2003, but is still very low. The one bright spot is an increase in the supply of new S&E graduates, from 51% of the EU average in 1999 to 68% of the average in Over the short to medium term, the main challenge for Slovakia is to develop its capabilities to innovate via diffusion. It can build on several favourable indicators, including good performance on the youth education attainment level (19% above the EU average), high total innovation expenditures (60% above the EU average), moderate performance on ICT expenditures (5% below the EU average) and sales of new-to-market products (over twice the EU average). There are three main bottlenecks for further developing innovation diffusion. This will require an increase in tertiary education levels (a slow process) from 58% of the EU average and particularly an improvement in life-long learning, which will be essential for retraining current employees to use new technologies. The third challenge is to improve the share of SMEs that collaborate on innovation (currently only 33% of the EU average) and linkages between the public and private research sectors, as proxied by the share of university R&D financed by the business sector. The long-term challenge is to develop more advanced capabilities within Slovakia and turn around the continuing decline in business R&D. Peer countries for innovation patterns No other countries share a similar pattern of strengths and weaknesses as Slovakia. An alternative is to turn to its peer countries on performance to identify methods of overcoming its three main challenges. Hungary does substantially better on the percentage of SMEs that collaborate on innovation. Neither Hungary nor the Czech Republic have good performance on tertiary education and lifelong learning, with the Czech Republic performing only slightly better than Slovakia on lifelong learning Modifiers 122

129 Indicator quality concerns: The decline in the youth education attainment indicator between 2003 and 2004 is greater than expected for this indicator. The share of business funding of university R&D is also effectively zero. This is only likely to happen with a change in definitions or policy. 123

130 SLOVAKIA (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 124

131 Slovenia Governance Demand Intellectual property SLOVENIA Innovation drivers Application Knowledge creation Innovation & entrepreneurship Performance relative to EU (44;91) Country growth rate minus EU growth rate SI Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Spain and Lithuania. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Belgium (0.091), France (0.133), Spain (0.154). Overview Slovenia s ranks 14 th out of the EU 24 member states and 19 th out of 33 countries. Its peer group based on performance includes Spain and Lithuania. Slovenia is the second-best performers among the ten new member states, after Estonia, partly because its performance is relatively well-balanced, with no major discrepancies on the different innovation categories, with the exception of IPR. This partly explains why Slovenia s pattern of strengths and weaknesses is similar to that of two more innovative countries (Belgium and France), providing opportunities for policy learning. With improvements in several crucial areas and a good foundation in drivers and knowledge creation, Slovenia should be capable of rapid improvements in the future. 125

132 Slovenia s best performance is for innovation drivers and on knowledge creation. The former is due to extensive retraining through life-long learning and above average results for youth education. Broadband penetration rates, while only 50% of the EU average, are also much higher than in many new member states. Both current and trend performance on IPR are above the average for the new member states and are less variable than in several of its peer countries. EIS 2005 Innovation performance (relative to EU average) - SLOVENIA INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Innovation governance, demand and modes Full data for innovation governance and demand are available in Annex A. Slovenia s performance on innovation governance is below expectations and is due to below average results for e-government, the innovation policy index, and above average costs for establishing a new business. It is near the average for innovation demand. Only 21% of Slovenian firms innovate, but the innovators are heavily skewed towards creative innovation: 16% of Slovenian firms are either strategic or intermittent innovators. Main challenges Slovenia is one of the few new member states with a solid basis for developing both capabilities in creative innovation and in innovation diffusion. Unusually, for a new member state, Slovenia has a higher percentage of firms that are creative innovators (strategic and intermittent innovators) than firms that primarily innovate via diffusion (modifiers and adopters). This is clearly due to its relatively good performance on 126

133 business R&D, at 0.90% of GDP in 2003 (71% of the EU average), which has also increased substantially from 0.72% in Public R&D investments have declined slightly, from 0.67% in 1998 to 0.63% in 2003, but are only 9% below the EU average. Adopters Strategic Modifiers There are several challenges for building a national innovation system based on creative innovation. First, the supply of Intermittent S&E graduates fell between 2002 Slovenia and 2003 (71% of the EU average), although it is still slightly above the levels of the previous years. The supply needs to increase substantially. The share of the population with a tertiary education (1.2) has been increasing steadily and at a rate above the EU average. A concerted push is also needed to increase broadband penetration rates and it may be worthwhile to improve public R&D spending. The decline in the share of university R&D financed by business, from 77% above the EU average in 1998 to 37% above the average in 2003, might be due to the rapid increase in business R&D, with an increase in in-firm capabilities replacing the need to contract out research. In respect to innovation diffusion, Slovenia has excellent performance on lifelong learning, the youth educational attainment level is 17% above the EU average, and the share of SMEs that collaborate on innovation is only 24% below the EU average. The main bottleneck could be below average levels of ICT investment (83% of the EU average with no sign of improvement) and notably below average levels of total innovation expenditures (61% of the EU average). Peer countries for innovation patterns Slovenia shares a similar pattern of strengths and weaknesses with Belgium, France and Spain. Belgium has far superior performance for the broadband penetration rate and has a higher ICT investment rate than Slovenia. Belgium also performs very well on total innovation expenditures. Of perhaps greater interest to Slovenia, Belgium has one of the fastest increases in business R&D over the past five years, although there has been a recent decline. Indicator quality concerns: The results for the questions on new-to-market and newto-firm sales of innovative products are more similar to the innovative economies in Europe than to Slovenia s performance peers. This might reflect a perception among Slovenian managers that innovation should be measured through creative activities rather than diffusion. This could also bias downwards the share of firms that report innovating through technology modification and adoption, which are surprisingly low in Slovenia. 127

134 SLOVENIA (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 128

135 Spain Governance Demand Intellectual property SPAIN Innovation drivers Application Knowledge creation Innovation & entrepreneurship Performance relative to EU Country growth rate minus EU growth rate ES Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Lithuania and Slovenia. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): France (0.067), Netherlands (0.112), Finland (0.118). Overview Spain ranks 16 th on the summary innovation index for the EU 25 member states and 21 st out of the 33 countries. Its peer group based on performance includes Lithuania and Slovenia. Spain has a relatively well-balanced performance on each innovation category, with the exception of much weaker performance on innovation & entrepreneurship, where it ranks 22 nd out of 23 countries. This poor showing is due to a low percentage of SMEs involved in innovation cooperation, below average rates of total expenditures on innovation, and low supplies of venture capital. An improvement in performance on innovation drivers will require a large increase in lifelong learning, but the trend is favourable. Spain s relatively good performance on knowledge creation, where it ranks 14 th out of 25 member states, is due to the activities of the public sector (an above average percentage of firms receive government support for innovation). The business sector 129

136 lags behind, as shown by business R&D expenditures that are 45% of the EU average and low rates of patenting that are below 20% of the EU average. The trend rate for both public and business R&D is above the EU average. The majority of trends are at or above the EU average. The most serious trend weaknesses are for ICT investment (3.5) and youth education (1.5). The best strengths are for both public (2.1) and business R&D (2.2) and for USPTO (5.2) and triad patents (5.3). EIS 2005 Innovation performance (relative to EU average) - SPAIN INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High 130

137 Innovation governance, demand and modes Strategic 25 Full data for innovation governance 20 and demand are available in Annex A. Spain is a mid range performer on both innovation demand and governance. A main weakness on the latter is poorer than expected Adopters Modifiers performance on e-government, which is failing to take advantage of a broadband penetration rate (1.3) that is close to the EU average and increasing at near average trend rates. Intermittent Spain: innovation mode An above average share of Spanish firms innovate (45%), but innovative capabilities are strongest for technology adoption, which accounts for almost half of Spanish innovative firms and ranks Spain in 1 st place for this indicator. In contrast, Spain performs poorly on the percentage of firms with creative innovative activities (strategic and intermittent innovators). Main challenges Spain has the foundation in place for strengthening both innovation diffusion and creative innovation, due to relatively good performance for innovation drivers and applications. The main challenge facing innovation diffusion is to improve the poor results for lifelong learning, where Spain is at only 52% of the EU average, to increase the percentage of SMEs involved in innovation collaboration (38% of the EU average), and to increase total innovation expenditures (69% of the EU average). ICT investment is also 17% below the EU average. Spanish policy recognizes the need for more investment in ICT and has established several relevant initiatives, including the Digital Cities program. The major challenge for building capabilities in creative innovation lies in the low levels of business R&D, currently at 45% of the EU average, although improving, and to substantially increase the share of firms with higher-end innovation capabilities. For instance, only 2% of Spanish firms are strategic innovators and only 6% are intermittent innovators. This places Spain 17 th out of 19 EU member states. Almost 9% of firms report some public assistance for innovation, which is close to the EU average, and could cover almost all of Spain s population of strategic and intermittent innovators. The challenge is to improve the innovative capabilities of Spain s technology adopters and modifiers. Peer countries for innovation patterns The pattern of strengths and weaknesses in Spain are very similar to that of France. Spain could possibly learn from French policies to encourage collaboration among SMEs and to support venture capital. 131

138 Indicator quality concerns: The youth educational attainment indicator has been falling steadily from 66.2% in 2000 to 61.8% in This is unusual and not supported by the steady increase in the share of the population with a tertiary education. One option is that improving employment conditions has led to an increase in early school leavers. 132

139 SPAIN (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 133

140 Sweden SWEDEN 450 Innovation drivers Governance Demand Intellectual property Application Knowledge creation Innovation & entrepreneurship Country growth rate minus EU growth rate SE Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Percent strategic innovators Percent intermittent innovators Percent technology modifiers Percent technology adopters Percent non-innovative firms Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Denmark and Finland. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): UK (0.064), Belgium (0.089), Finland (0.124). Overview With Finland, Sweden is an innovative leader within the EU, ranking first among the EU countries and out of the 33 countries. Its peer group is limited to Finland and Denmark. Sweden has above average performance on all EIS indicators and on the indicators for innovation demand and governance. It ranks in 1 st place for innovation & entrepreneurship and IPR and in 2 nd place for the three other EIS indices. For individual indicators, Sweden only ranks below the EU average for the share of university R&D financed by business and in high-technology exports as a percentage of total exports. 134

141 EIS 2005 Innovation performance (relative to EU average) - SWEDEN INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Many of the trend results for Sweden are below the EU average, but this is usually from a starting point well above the average, as with the patent indicators (5.1 and 5.3). Its worst trend performance is for broadband penetration rates, but this is primarily due to faster catch up rates in several other countries. ICT expenditures have fallen from a high in 2002, but this could reflect overinvestment before and during the dot-com bubble, rather than a serious lack of investment today. Sweden continues to pull ahead of the EU trend for public R&D, but business R&D declined between 2001 and 2003, although still over double the EU average. 135

142 Innovation governance, demand and modes Full data for innovation governance and demand are available in Annex A. Sweden ranks 4 th for innovation governance and 6 th for domestic innovation demand. As the Swedish economy has long been export oriented, low domestic demand is unlikely to be a problem, except for below average levels of capital investment. For innovation governance, Sweden is in first place for e-government (narrowly passing Finland) and has one of the lowest costs for establishing a new Adopters Strategic Sweden: innovation mode business. Sweden ranks 2 nd after Finland in the share of firms that are strategic innovators. Main challenges As with Finland, Sweden could be over investing in innovation, since its per capita GDP is less than would be expected. Its main challenge is to extract higher living standards out of its large investments in innovation. This could require improvements to innovation applications, particularly to high-tech services, although Sweden is already 52% above the EU average. Sweden also has below average exports of high technology products that reflects its industry structure and which would take a long time to change. Peer countries for innovation patterns The pattern of strengths and weaknesses in Sweden are very similar to that of the UK, Belgium and Finland, but with a few exceptions, Sweden outperforms both Belgium and the UK on each EIS indicator. Finland offers better opportunities for policy learning, with better performance on S&E graduates, the share of the population with a tertiary education, and innovation collaboration among SMEs. Indicator quality concerns: Three CIS indicators are missing due to concerns by Statistics Sweden over their reliability: new-to-market and new-to-firm product sales under applications, and innovation expenditures under innovation & entrepreneurship Intermittent Modifiers 136

143 SWEDEN (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 137

144 Switzerland Not available Country growth rate minus EU growth rate Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: No data Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): No data Overview Switzerland ranks in second place out of the 33 countries. No results are available for the peer group based on performance but it is likely to be similar to Finland and Sweden. The country s strong overall performance is particularly due to a far above average performance in IPR. This reflects the importance of two sectors with high patenting rates in Switzerland s industrial structure: pharmaceuticals and precision instruments. Innovation governance, demand and modes: No data at this time. Main challenges Switzerland does have a few weaknesses, but it is not clear if any of them present a challenge to innovation policy. The share of new S&E graduates is only 63% of the EU average but Switzerland can rely on immigration of highly-skilled workers, particularly for its pharmaceutical sector. The share of enterprises receiving public funding for innovation is below the EU average. However, this does not appear to create problems, as shown by above average performance on many firm level indicators, such as business R&D expenditures, the share of SMEs innovating inhouse, and the share of SMEs involved in innovation cooperation. Peer countries for innovation patterns: No data Indicator quality concerns: Data for new-to-market sales are not used as the Swiss innovation survey asks companies only for new-to-world market sales. 138

145 EIS 2005 Innovation performance (relative to EU average) - SWITZERLAND INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High 139

146 SWITZERLAND (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 140

147 Turkey Not available 2.5 (8;334) 120 Performance relative to EU Country growth rate minus EU growth rate Note: A rank of 1 equals best performance. The shaded centre of the upper left hand figure indicates the average performance for the EU. Peer group countries for performance: No data Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): No data Very poor data availability for Turkey prevents the computation of a reliable SII, the determination of a peer group for performance, results for innovation governance, demand and modes, and the identification of countries with a similar pattern of strengths and weaknesses. Main challenges Given data limitations, it is impossible to assess Turkey s main challenges, other than a few brief comments. Turkey lags far behind the EU average on education, broadband penetration rates, public and business R&D, and ICT expenditures. The trend results show improvements for tertiary education and for public R&D expenditures (currently 69% of the EU average), but no improvements for business R&D and large declines in ICT expenditures and exports of high technology products. 141

148 EIS 2005 Innovation performance (relative to EU average) - TURKEY INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Indicator quality concerns: The share of university R&D funded by the business sector could be incorrect. 142

149 TURKEY (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 143

150 United Kingdom Governance Demand Intellectual property UNITED KINGDOM Innovation drivers Application Knowledge creation Innovation & entrepreneurship Country growth rate minus EU growth rate UK Value Rank Out of no. EU countries 2005 EIS Summary Innovation Index (SII) EIS Composite Index for Innovation drivers EIS Composite Index for Knowledge creation EIS Composite Index for Innovation & entrepreneurship EIS Composite Index for Applications EIS Composite Index for Intellectual Property Index for domestic innovation demand Index for innovation governance Notes: A rank of 1 equals best performance. Best performance for the percentage of non-innovative firms is for the lowest percentage of non-innovative firms. Peer group countries for performance: Austria, Belgium, Netherlands, Germany, France and Italy. Most similar countries for the pattern of strengths and weaknesses (Euclidian distance in parentheses): Sweden (0.064), Belgium (0.150), Denmark (0.181). The UK ranks 7 th on the summary innovation index out of the EU 25 member states and it is in 10 th place out of the 33 countries. Its peer group based on performance includes Belgium, the Netherlands, Austria, France and Italy. The UK s good standing is due to excellent performance on several education indicators and mid-range performance in several other categories. Good performance for innovation drivers is due to well above average results for S&E graduates and lifelong learning. In contrast, the youth education level is at the EU average. The UK performs near average on many other indicators. Its worst performance is for the share of firms that receive public funding for innovation (46% of the EU average), but this could partly be due to the relevant CIS question excluding tax incentives, which UK policy favours, and relying entirely on direct support, which UK policy intentionally discourages. In addition, the UK performs at only 33% of the EU average for new-to-market product sales. The UK performs well above the EU average for venture capital, total innovation expenditures, ICT expenditures, employment in high technology services, and in triadic patents. 144

151 The UK s trend strengths are for broadband penetration rates (1.3) and venture capital (3.4). The latter has declined by half since 2001, but the amount of decline is less than in other EU countries. Innovation governance, demand and modes Full data for innovation governance and demand are available in Annex A. The UK is surprisingly weak on innovation demand, which is almost entirely due to very low levels of capital investment and a high percentage of firms that report a lack of customer responsiveness as a barrier to innovation. The UK performs in 8 th place for innovation governance. This is entirely due to a low score for e-government. There are no data for the UK for innovation modes. EIS 2005 Innovation performance (relative to EU average) - UNITED KINGDOM INNOVATION DRIVERS S&E graduates Tertiary education Broadband penetration Lifelong learning Youth education KNOWLEDGE CREATION Public R&D exp Business R&D exp Med/hi-tech manuf R&D Public funding innovation Univ R&D financed by bus ENTREPRENEURSHIP SMEs innovating in-house % all SMEs collab. on innovation Innovation expenditures Early stage venture capital ICT expenditures Non-tech change APPLICATION Employm hi-tech services Hi-tech exports New-to-mark product sales New-to-firm product sales Employm med/hi-tech manuf INTELLECTUAL PROPERTY EPO patents USPTO patents Triad patents Community Trademarks Community Designs Low Medium-low Average Medium-high High Main challenges Given the strong policy push in the UK to increase private funding of university research, the continual decline of university R&D funded by firms, from 7.3% in 1999 to 5.6% in 2003, is a major failure of UK innovation policy. This decline is probably contributing to the crisis in the public research sector, due to inadequate public funding and the assumption that the gap would be covered by private sources. The UK performs below average on this indicator and its trend performance has been strongly below the EU average trend, declining from 14% above the EU average in 1999 to 11% below the EU average in

152 The UK faces major challenges for knowledge creation that include not only inadequate public R&D (although recently improving) but also a level of business R&D that is below many of its peer performance countries. However, business R&D has improved between 2002 and 2003, from 1.25% of GDP to 1.3% of GDP. The slow improvement in the R&D base could be a cause of the negative trends for high tech exports and employment in medium-high and high-tech manufacturing, both of which have been declining faster than the EU average. The results for high tech exports are volatile, showing a sudden drop between 2002 and 2003 from 25.5% to 21.0%, which could be due to the heavy reliance on aerospace exports, in addition to pharmaceuticals. The second challenge for the UK is to improve the innovative capabilities of its SMEs. A below average percentage innovate in-house or are involved in innovation cooperation. Peer countries for innovation patterns The pattern of relative strengths and weaknesses within the UK are similar to that of Sweden, one of the leading EU countries. Sweden performs much better than the UK for knowledge creation and for innovation cooperation, but it is unlikely that the UK will adopt relevant Swedish policies, due to a marked difference in approaches to the role of government (more investment in R&D in Sweden) on the one hand, or differences in the willingness of firms to cooperate on the other hand. Indicator quality concerns: The drop in high tech exports could reflect volatility in key exports (aerospace or pharmaceuticals). The sales share from new-to-market products is also unusually low at 2.0%, compared to rates in the UK peer countries, such as 3.8% in the Netherlands, 7.6% in Austria, 5.1% in Belgium, 5.8% in France and 4.5% in Germany. As noted above, the results for the share of firms receiving public support might not be comparable with countries that provide direct support. 146

153 UNITED KINGDOM (2003) (2004) 2005 Relative to EU Trend Trend EU SII relative to EU rank INPUT - Innovation drivers 1.1 S&E graduates relative to EU Population with tertiary education relative to EU Broadband penetration rate relative to EU Participation in life-long learning relative to EU Youth education attainment level relative to EU INPUT - Knowledge creation 2.1 Public R&D expenditures relative to EU Business R&D expenditures relative to EU Share of med-high/high-tech R&D relative to EU Enterprises receiving public funding Business financed university R&D relative to EU INPUT - Innovation & entrepreneurship 3.1 SMEs innovating in-house Innovative SMEs co-operating with others Innovation expenditures Early-stage venture capital relative to EU ICT expenditures relative to EU SMEs using non-technological change OUTPUT - Application 4.1 Employment in high-tech services relative to EU Exports of high technology products relative to EU Sales new-to-market products Sales new-to-firm not new-to-market products Med-hi/high-tech manufacturing employment relative to EU OUTPUT - Intellectual property 5.1 New EPO patents relative to EU New USPTO patents relative to EU New Triad patents relative to EU New community trademarks relative to EU New community designs relative to EU Bold: break in series / 2000 data for CIS indicators refers to CIS 3 survey / 2002 data refer to estimates based on CIS Light data 147

154 Annex A-1. European Innovation Scoreboard 2005 Current performance 148

155 Annex A-1. European Innovation Scoreboard 2005 Current performance (continued) 149