Knowledge is capital for Europe’s future

Europe’s strength is its skilled workforce and professional expertise. To ensure its future as a major economy, Europe needs to combine entrepreneurship with an increased focus on knowledge capital, write Nima Sanandaji and Per Strömbäck.

Dr Nima Sanandaji is the president of the European Centre for Entrepreneurship and Policy Reform. He has written over twenty books about public policy issues. Per Strömbäck is the editor of Netopia.eu – forum for the digital society. He is the author of “21 Digital Myths – Reality Distortion Antidote” (8tto 2016) and the author of one book and editor of two anthologies on digital society.

While European economies are among the most prosperous and innovative in the world, Europe urgently needs growth-inducing reforms. A key aspect in doing this is promoting the value creation that accounts for a significant share of the Union’s economy.

If the European business sector does not become more competitive on the global stage by boosting knowledge-based value creation, there is a risk that it will continue to stagnate as the rest of the world grows.

Recent data shows that the eurozone growth rate is at its lowest recorded rate for 21 months. The downturn is worrying, given that the Union’s long term growth rate has been below the global average for many years. The EU nations have gone from producing nearly a third of world output in the early years of the 21^st century, to below one quarter of world output today.

The slow pace of economic development in Europe reflects a shift in the global business landscape. Just a few decades ago, European firms held strong global positions in manufacturing, ICT and other advanced services. Today, a new generation of successful firms from developing countries such as China and India have gone into competition against European businesses. While Europe clearly benefits from globalisation and trade overall, it is evident that some European enterprises are struggling to succeed in the global marketplace.

Examples are not difficult to find. Nokia, the leading tech company that played a key role in developing the Finnish economy in recent decades had a significant share of the world’s mobile phone market. But it has rapidly fallen behind and no longer manufactures phones at all.

Well-known European car brands such as Jaguar, Land Rover, Saab and Volvo have been bought by Chinese and Indian investors. Chinese networking and telecommunications equipment company Huawei has recently reached global sales figures twice as high as its European competitor Ericsson, and more than four times as high as its other European competitor Nokia. Ericsson has announced major cutbacks, as the firm is facing difficulties competing with Huawei.

These examples are reflected in international enterprise statistics. In 2005 European firms made up 34% of Forbes 500 fortune companies. Ten years later, the share had plummeted to 28%. The majority of the leading global firms are now found in China and other Asian economies.

How can Europe adapt to the changing global business landscape? If Europe’s economies are strong, it’s thanks to a knowledgeable workforce and high innovative capacity. European firms compete on knowledge, patents, design and other forms of immaterial rather than material value creation.

In a recent study, we looked at the share of the EU business sector (excluding agriculture and finance) which relies heavily on intellectual property rights (IPR) such as patents, design rights, trademarks and copyrights in their day-to-day operations. The study, based on data for the years 2011-13, found that as much as 40% of employment in the European business sector and 51% of value created exists in businesses with intense IPR reliance.

All business activity in publishing, film, music and software is IPR-intensive, as the value produced generally takes the form of digital content, protected by copyright. This is true of a number of other sectors including ICT, manufacturing, professional services, real estate and trade. Utilities, accommodation and food services, on the other hand, have a negligible share of IPR-intensive businesses.

Governments around the world have typically competed to create favourable business environments with the goal of attracting physical capital investments. Now, though, it’s knowledge capital and the people who create new knowledge that are increasingly flowing across borders. Innovative firms, entrepreneurs, researchers, designers and programmers are today willing to move from one region or country to another if offered better conditions and the corresponding chances of success. The globalisation of innovation processes fosters global growth, but also means that countries have to adapt in order to remain attractive locations against tough competition.

Europe already has a number of advantages, including a skilled workforce, an advanced business sector with the substantial hidden capital of organisational know-how, and significant investment in research and development from the public and private sectors. Additionally, the cultural heritage and diversity of Europe can benefit creative enterprises.

In order to secure future prosperity, these advantages should be combined with policies that encourage entrepreneurship and protect the immaterial values created by successful businesses.