Accenture Europe in Tomorrows World

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Europe in Tomorrows World

Harnessing new waves of growth:the views of business leaders.

Report prepared for the European Business Summit 2011

An initiative of Carried out by

Sponsored by


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Contents

Contents

Executive summary

IntroductionEurope in tomorrows world: harnessing new waves of growth

Seven levers for accelerated growth and job creation

Economic governance: a base for stronger growth

Entrepreneurship and SMEs: breaking the ceiling

Human capital and labour markets: bridging the gap

ICT and social media: digital highways to growth

Innovation: creating a pan-European innovation ecosystem

Industrial strategy: a future for Europe in the global economyTrade and investment: building new bridges in a multi-polar world

ConclusionEuropes new direction

Methodology

Acknowledgements

References

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An initiative of Carried out by Sponsored by


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Executive summary

After the storm

New waves of growth

After a period punctuated by sovereign debt crises and financial

volatility, Europe has managed to pull itself out of an economic

tailspin and engineer a modest resumption of growth. With

the economic backdrop beginning to improve, our survey

shows that over two-thirds of business leaders from both

the European Union and the rest of the world now feel more

optimistic about Europes growth prospects compared with

this time last year. Despite continued volatility and sluggish

growth, business leaders also remain convinced of the longer-

term growth potential that Europe offers: 48 percent of business

leaders plan a moderate increase in their investment levels in

Europe over the next three years (6-20 percent), and 9 percent

plan a much bigger increase (more than 20 percent). Viewed

from a global perspective, Europe still ranks favourablyagainst competing regions in terms of future growth potential

and as a place in which to invest and do business.

Europe must not recoil from these long-term trends but mustinstead confidently reframe them as opportunities for growth

and job creation. An older population will generate growth

opportunities in health care, third-age education, leisure, tourism

and age-related consumer markets. With its global leadership

position in environmental technologies, Europe is ideally

situated to benefit from booming demand for intelligent

energy, green infrastructure, alternative fuels, and waste and

water management. Its expertise in many types of services

gives Europe a head start in emergent sectors such as carbon

finance and consultancy. Look closely at the driving forces

of emerging-market growtha growing middle class and

increased urbanisationand it is easy to see major opportunities

for Europe to trade on its expertise in areas such as financial

services, education, infrastructure and citizen services. Emerging

markets need all of these services, and Europe can supply

them competitively.

Yet, while business leaders are positive about Europes potential,

they are equally realistic about the scale of the challenges

currently confronting the region. Many of Europes economies

remain mired in high levels of consumer and sovereign debt,

and are beset by sluggish economic growth and persistently

high levels of unemployment. In addition, volatility in energy

and financial markets continues to cast a cloud over the outlook.

Looking ahead, Europe must prepare for a world that is being

transformed by seemingly inexorable internal and external

forces. The regions population is ageing and the squeeze on

global resourcesincluding land, water and foodis a major

concern for citizens, corporations and policymakers. The world-

wide financial crisis and recession have accelerated the shift

to a multi-polar world, where economic activity and power are

gravitating away from the core developed economies of the last

century towards the powerhouse emerging economies. In the

corporate arena, a new cast of emerging-market multinationals

is also coming to prominence, intensifying competition in

global markets as well as bringing new approaches to markets,

business models, and risk and resource management.

These opportunities are real and within Europes grasp. But howcan Europe become a smart, sustainable and inclusive economy?

In other words, what is needed to fulfil the objectives of the EU's

Europe 2020 growth strategy for the decade ahead? Our survey

of more than 400 business leaders285 from the European

Union and the rest from other parts of the worldprovides a

comprehensive insight into the actions that Europe can take to

stimulate renewed growth and job creation. New growth must

be built on a bedrock of sound public finances and macro-

economic stability. This means tackling unsustainable public

finances and addressing financial sector risks. Indeed, 41 percent

of business leaders cite high budget deficits as the biggest

challenge to European growth, and 36 percent believe that

European governments must take faster action to rein in soaring

deficits if they hope to restore market confidence and promote

investment and long-term growth. Such views were expressed

even more forcefully by business leaders from outside the

European Union.


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Seven levers for accelerated growth and job creationDrawing on detailed research and our survey of more than 400

C-level business leaders, this study identifies actions in seven

key areas that can help position Europe to harness new waves

of economic growth. These areas are as follows:

1. Economic governance: a base for stronger growth.Restoring order to battered public finances is only one

element of a new approach to economic governance. Europemust take the following actions to promote long-term growth:

Steady the shipget the macro fundamentals right.Many business leaders in our survey believed that more

urgent action is needed to tackle budget deficits and debt

levels in the Eurozone in order to restore financial market

confidence. Only 26 percent of business leaders believed

that governments are cutting deficits too quickly.

Develop forward-looking approaches to systemic risksand imbalances. These approaches can include greatercoordination of fiscal policy between member states

(mentioned by 36 percent of respondents), early warning

systems to spot the growth of asset bubbles and stronger

mechanisms to monitor divergences in national competitiveness

(endorsed by a quarter of business leaders).Incorporate pro-growth measures in economic

governance. Restoring macro-stability to public financesand financial markets is a necessary condition for

growth and job creation. However, such action must

be complemented with pro-growth structural reform.

Forty-three percent of business leaders mentioned greater

use of tax cuts to promote employment, 28 percent cited a

greater focus on capital spending as opposed to current

spending, and an equal proportion cited measures to free

up bank lending to small businesses.

2. Entrepreneurship and SMEs: breaking the ceiling. Smalland medium-sized enterprises (SMEs) are a driving force of

the European economy. While creation and survival rates for

European SMEs are roughly comparable to those in the UnitedStates, SMEs in Europe struggle to grow into larger enterprises.

Our research and analysis of business views highlight the

need for the following actions:

Remove the ceiling to growth. Fifty-three percent of businessleaders we surveyed indicated that reducing and simplifying

regulation and taxation would be effective in encouraging

SMEs growth. Necessary actions include introducing pro-

growth legislation through exemptions and incentives for

SMEs that want to expand, as well as improving access to

credit and financing.

Help SMEs go beyond borders. Thirty-nine percent of ourrespondents identified the need to dismantle barriers to

cross-border trade within the European Union as a priority.

Policymakers must focus on completing the Single Marketand build export capabilities through language and

managerial training for entrepreneurs.

Scale up for growth. SMEs need to reach a critical mass inorder to compete internationally. Partnerships and technology

can play an important role. For example, they can use cloud

computing to lower the cost of fixed infrastructure, create

SME-to-SME hubs and build networks to promote collaboration

and knowledge sharing between large and small enterprises.

3. Human capital and labour markets: bridging the gap.The European Union has a large pool of educated workers. But

Europe is failing to fully capitalise on this advantage, due to a

combination of rigidities in labour markets and a longer-term

mismatch between skills provision and future jobs. It is imperative

for Europe to address these issues and possible actions include:

Improve geographic mobility. More than a quarter of businessleaders cited better mutual recognition of qualifications as anaction that would aid increased geographic mobility of workers

within the European Union, while 37 percent said that

tailoring immigration policies to attract skilled workers

would be important.

Widen the labour pool. Thirty percent of C-level executivesbelieve that Europe must take action to widen labour pools.

Examples of actions to bring this about include reforming tax

and benefit systems and aligning pension systems to encourage

greater labour-force participation among older workers, as

well as investing in lifelong learning and the wider infrastructure

needed to help older workers stay in the workplace.

Invest in science, technology, engineering and mathematics

(STEM) skills. Investment in education and training in general(34 percent), and STEM skills in particular (33 percent), werehighlighted by business leaders as important in preparing

Europe for the jobs of the future. Specific measures to achieve

this include promoting STEM options from an early stage, as

well as encouraging businesses to work more effectively with

educational bodies to produce the right mix of academic

and practical skills.

4. ICT and social media: digital highways to growth.Information and communications technology (ICT) can be

an important catalyst for faster European growth and job

creation. But a focus on the technologies themselves is not

sufficient; explosive growth will occur when investment in

technologies is coupled with measures to promote widespread

usage of IT in peoples home and working lives. Our surveyresults suggest the following measures:

Outperform in digital infrastructure and market regulation.The establishment and adoption of superfast broadband

was the most-cited ICT imperative, with 38% of respondents

choosing it among their top three actions for maximising the

return from ICT and social media. A number of actions can

assist with this, such as coordinating national responses to

the European Commissions Digital Agenda and enhancing

the ability of European consumers to compare broadband

speeds and prices across the European Union and the world.

Set clear ground rules. Twenty-nine percent of businessleaders we surveyed included consistent data privacy and

cyber-security laws across Europe among their top three ICT

priorities. Policymakers can do this by setting out citizensrights to consistent data security and privacy throughout

Europe, setting a long-term vision of the responsibilities of

companies that handle personal data, and encouraging the

creation of ICT-intensive businesses by entrepreneurs and

inward investors.

View digital skills as todays literacy. In our survey, 31percent of business leaders identified the improvement of

IT skills among people unfamiliar with technology as a top

ICT growth imperativesecond only to the call for superfast

broadband. To support this effort, policymakers can encourage

the spillover of workplace skills from consumer ICT, under-

stand age-related and other digital skills gaps, and promote

the role of businesses and the non-profit sector in shaping

digital literacy.

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5. Innovation: creating a pan-European innovation ecosystem.While Europe produces a wealth of raw ideas and generates

a large proportion of global research, it conspicuously fails to

commercialise much of that research as new products, services,

business models and processes. Our analysis highlights three

key action areas that can help create a stronger innovation

ecosystem in Europe:

Promote services innovation. Recommended actionsinclude completing the Single Market in services, establishing

standards to enable interoperability between new and

existing products and services, and providing better methods

of valuing intangible assets related to services innovation

(to induce increased capital market funding of innovation).

Providing the right framework conditions, such as simplifying

and reducing the burden of regulation and taxation, is also

important, with 34 percent of business leaders citing it as an

effective action for boosting innovation.

Develop and retain innovators and entrepreneurs.Suggested actions include incorporating business skills

in STEM degrees and teaching STEM skills in business

degrees, encouraging more placements between research

institutes and industry, and attracting a critical mass ofresearchers from around the world. Twenty-five percent of

survey respondents cited the introduction of measures to

attract non-EU researchers as a potentially effective action.

Rethink clusters to harness networking benefits. Thirty-eight percent of business leaders said that knowledge

exchange between research organisations and business

is an effective way to stimulate European innovation. Key

actions can include harnessing the power of technology to

draw on the creativity of stakeholders, changing academic

incentives to encourage more commercialisation of

research, and supporting technology-enabled virtual

clusters that link agglomerations of early-stage SMEs with

venture capitalists.

6. Industrial strategy: a future for Europe in the globaleconomy. Industry remains the backbone of Europe. Buta combination of emerging-market competition and disruptive

business models wrought by technology now calls for a new

approach to industrial policy in Europe. Required actions

to enhance the environment for industry and to spur new

business include the following:

Reinforce the foundations.Among the business leaderswe surveyed, reducing or simplifying regulation and tax was

the most popular action identified for stimulating industry

growth in Europe over the next few years, supported by 47

percent of respondents. Increased investment in STEM skills

was also cited by one-third of respondents, particularly

leaders in larger firms, with 42 percent citing it as a key action.

Strengthen the link between industry and services.As the lines blur between manufacturing and servicesa

process dubbed servitisationthe European Union needs

to foster closer collaboration between the two sectors

across the value chain. It can also support innovation within

the manufacturing sector by encouraging greater linkages

between manufacturing firms and universities/research

institutes. Our survey revealed that one-fifth of business

leaders favour a sharper focus on interdisciplinary research

to stimulate industry growth.

Articulate a pan-European industrial strategy.A reinvigoratedindustrial strategy can include forging stronger ties with

emerging-market businesses (cited by 36 percent of business

leaders), creating centres of excellence in key technologies

or sectors where Europe has an identified comparative

advantage (34 percent), exploring the role of common

standards in eliminating investment uncertainty (32 percent)

and creating a critical mass of users in new technologiesacross the EU market.

7. Trade and investment: building new bridges in a multi-polar world. As the worlds largest trading bloc, Europe is inprime position to capitalise on its extensive trade and investment

links with other regions. But it cannot rest on its laurels: the

balance of economic power is rapidly shifting towards emerging

economies. Europe can take the following actions to harness the

benefits of this changing environment:

Explore new channels of economic diplomacy. Additionalchannels that can complement the Doha trade negotiations

include regional trade agreements, bilateral free trade

agreements (FTAs), cross-country business delegations

and a new strategic vision of Europes strengths. Specifically,45 percent of business leaders indicated bilateral FTAs

as a prioritythis was the most popular action among the

survey respondents.

Become a magnet for emerging-market investment.Europe can benefit from technology transfers associated

with foreign direct investment and the creation of new jobs

through joint ventures or greenfield investment. Europe can

show that it is open for business by establishing a stable

investment climate with clear decision processes that apply

in respect of inward investment, and by increasing regional

coordination of European efforts to attract foreign direct

investment. For example, a collective approach to attracting

emerging-market investment could draw on areas of excellence

residing in several European regions.

Reach out to emerging markets. Promoting conditions forEuropean enterprises to go abroad is essential to help them

capitalise on the increasing importance of emerging markets

and to boost exports of goods and services. Actions to

achieve this include encouraging partnership with enterprises

outside Europe and investing in infrastructureincluding

ICTsto pave the way to new consumers.

Europe in Tomorrows World Page05


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IntroductionEurope intomorrows world: harnessing

new waves of growth

Figure 1: What are Europe's growth prospects in 2011?

Compared with this time last year, how do you feel about Europes economic growth prospects in 2011?

Figure 2: Challenges to European growth and employment in 2011

What do you see as the most significant challenges to economic growth and employment facing Europe in 2011? Select up to three.

After a year of battling a succession of economic and financial

crises, Europe appears to be regaining its economic momentum.

Despite a volatile and uncertain economic outlook, two-thirds

of business leaders now feel more optimistic about Europes

growth prospects in 2011 compared to last year, with the

proportion rising to 88 percent in economically resurgent

Germany (see Figure 1). This sense of renewed optimism in

Europes growth prospects is shared by business leaders from

outside the European Union, 60 percent of whom feel more

optimistic about Europes prospects than in 2010.

Yet business leaders confidence in Europes future is tempered

by a sober assessment of the challenges that Europe still faces

on several fronts (see Figure 2). These include the need to rein

in soaring budget deficits and sovereign debt levels in a number

of European economies, to stabilise financial markets, to contain

inflationary pressures from rising energy and commodity prices,

and to stem the damaging consequences of persistently high

levels of unemployment. A particular feature of the recent crisis

has been the precipitous rise in youth unemployment. Twenty

percent of those under age 25 are now unemployed across the

European Union;1 the proportion is even higher in economies

such as Spain, where two-fifths of young people are struggling

to find jobs.2

Keyfindings

Page06 Europe in Tomorrows World

05

6%8% 6%

14%9%

5%

23%

3%

25% 24%

27%

18%

12%

30%

21%

31%

26%

61% 64% 54%

49%

70%

65%74%

40% 70%6% 6%5% 24% 18% 5%

All

respondents

Respondents

based

in the EU

Respondents

based in the

rest of the world

France Germany Italy Spain United

Kingdom

Respondents

based in other

EU countries

Very optimistic: prospects are much better than 2010

Optimistic: somewhat better than 2010

Neither optimistic nor pessimistic: prospects will beabout the same as 2010

Pessimistic: somewhat worse than 2010

Very pessimistic: much worse than 2010

All respondents

Respondents based in the EU

Respondents based in the rest of the world

0%

10%

20%

30%

40%

50%

High

government

budget

deficits

Financial

market

uncertainty

Growing

competition

from emerging

markets

Unsustainable

sovereign

debt levels

Inflationary

pressures

Persistently

high

unemployment

Weak

private

sector

investment

Currency

fluctuations

Skills

shortages


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New domestic and global dynamicsEurope will need to address these economic issues against

a backdrop of domestic challenges. For instance, many parts

of Europes population are ageing and in some cases even

shrinking. Between now and 2020 in Germany, for example,

the over age 60 cohort will increase by 14 percent, to 24.5

million, compared with a total of 14 million people age 16 or

below. Germany will also have more than 6 million people age

80 and above by 2020a 40 percent increase.3

Externally, the worldwide financial crisis and recession have

accelerated the shift to a multi-polar world, where economic

activity and power are gravitating away from the core developed

economies of the last century towards the powerhouse emerging

economies. Emerging markets now account for more than half

of global GDP (at purchasing power parity)4 and show increasing

heft in globally competitive markets for goods, services, talent,

capital, resources and innovation. Economic interdependence

is the name of the game, with Europes economic fate bound

up with developments in Beijing or Mumbai as much as those

in London or Brussels. In the corporate arena, a new cast of

emerging-market multinationals is also coming to prominence,

intensifying competition in global markets as well as bringing

new approaches to markets, business models, and risk and

resource management. This shifting balance of economic power

is echoed in our survey of business leaders. More than one-

third of them identified increasing competition from emerging

markets as one of the most significant challenges to growth and

employment facing Europe in 2011.

Europe in Tomorrows World Page 07

Business Leader Insight

Europe needs to speed up reforms, encourage

people to work longer and save more, increase

productivity, and encourage immigration.

New waves of growthAgainst this backdrop, how can Europe become a smart,

sustainable and inclusive economy? In other words, what

is needed to fulfil the objectives of the Europe 2020 growth

strategy for the decade ahead? The first essential step is to

restore macroeconomic stability by swiftly tackling budget

deficits and debt levels within Europe. The resulting stability

would provide the foundation for a return of long-term market

confidence and investment. Europes system of economic

governance must also be equipped with better forward-looking mechanisms and tools to ensure fiscal discipline and

detect the early warning signs of future economic crises.

Yet sorting out the European debt trap is not sufficient in

itself for long-term growth and employment. Beyond ensuring

macroeconomic stability, Europe must find a way to kindle

new sources of structural economic growth. Many of these

will involve inventive responses to long-term challenges on

Europes own doorstep, such as:

Demographics: The greying of Europes population willcreate opportunities in age-related demand such as health

care, financial services, tourism, and leisure and consumer

products.

Resources: The squeeze on global resourcesland, water,energy and foodwill present growth opportunities for

Europe in areas such as clean technologies, wind turbines,

carbon capture and storage, smart buildings and cities,

carbon finance, agribusiness and water management

technologies.

Technology: Major breakthroughs are occurring in a whole

range of technologiessuperfast broadband, cloud computing,mobile and robotics, materials, nanotechnology and biotechnology.

These technologies promise to transform business models

and competition in sectors as diverse as education, health

care, transport, music, manufacturing and logistics.

The emerging-market opportunity:A burgeoning group ofmiddle-class consumers, rising income levels and increased

access to credit are creating a critical mass of demand in

emerging consumer markets such as consumer electronics,

automobiles, health care, insurance and banking. Accelerating

urbanisation is also powering demand for hard infrastructure

such as transport and communications and soft infrastructure

such as health care, education and citizen services. These are

all areas from which Europe can stand to benefit.


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Figure 4: Where will businesses invest?

Which of the following geographical areas offer the most significant growth opportunity for your company in the next 3 to 5 years? Select up to three.

Keyfindi

ngs


0% 10% 20% 30% 40% 50% 60%

Australasia

Sub-Saharan Africa

Other Latin America (e.g., Mexico, Argentina)

Turkey

Other Non-EU Europe

Russia

Brazil

Mature Asia (Japan, South Korea,

Singapore, Hong Kong, Taiwan)

Middle East and North Africa

Other emerging Asia (e.g., Vietnam, Indonesia)

India

United States and Canada

China

European Union

Respondents based in the EU

Respondents based in the restof the world

Figure 3: Future investment intentions in Europe

Thinking about your companys average level of investment in Europe over the period 2009-2011, how do you anticipate that your average

investment levels in Europe over the period 2012-2014 will compare?

The landscape for investment in EuropeDespite its recent economic woes and longer-term challenges,

Europe remains an attractive location for investment in the

eyes of business leaders, a testament to its underlying growth

potential (see Figure 3). Forty-eight percent of business leaders

said that their company plans a moderate increase (6-20

percent) in their average investment levels in Europe over

the period 2009-2011, while 9 percent plan a large increase

(above 20 percent). Only a small proportion plans to reduceinvestment. German and French business leaders are particularly

positive about their future levels of investment in Europe.

Perhaps surprisingly, Europe continues to fare favourably with

other regions in terms of perceived future growth prospects.

Half of business leaders surveyed put Europe among the top

three growth regions for their company over the next three

years, the highest proportion of any region. But other regions

are catching up fast, particularly China (34 percent), India (24

percent) and other emerging Asian economies such as Vietnam

and Indonesia (21 percent). However, the respondents basedoutside the European Union took a much less sanguine view

of Europes growth prospects. Thirty-six percent put Europe

among their top three growth markets over the next three years,

with 40 percent opting for China, followed by India (28 percent),

other emerging Asian economies (27 percent), the Middle East

and North Africa (26 percent), and the United States and Canada

(23 percent) (see Figure 4). This is unlikely to bode well for

Europes ability to continue attracting high levels of foreign

direct investment from markets such as the United States and Asia.

A large increase (increase >20%)A moderate increase(increase between 6% and 20%)

About the same (+/-5%)

A moderate reduction(decrease between 6% and 20%)

A large reduction (decrease >20%)

3%

1%

4%

3%

5%

6%

8%

6%

36%

26%

37%

33%

47%

57%

42%

48%

8%

9%

9%

9%

Respondents from companies

with 2010 revenues between

US$100m-US$500m


with 2010 revenues between

US$500m-US$1bn


with 2010 revenues above

US$1bn

All respondents

Note: Totals may not add up to 100 as some respondents chose not to answer this question.


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Figure 5: Europe's report card

Thinking about ways of boosting growth and employment in Europe, how would you rate Europes effectiveness currently in each of the

following areas?

Europe is failing to capitalise on its strengthsThese opportunities are real, sizeable and within Europes

grasp. But, without the right set of supply-side factors in place

to nurture and accelerate that growth, they could easily be lost.

A sound innovation ecosystem, measures to augment Europes

human capital, faster scaling of high-potential SMEs and greater

use of technology to drive productivity improvements are just

a few of these factors.

How does Europe currently perform on these measures? Our

survey of business leaders suggests that the report card is

mixed (see Figure 5). Europe gets good marks for improving

essential infrastructure, such as transportation, housing and ICT,

and developing green opportunities. But across a range of other

factorsarticulating a long-term industrial vision, creating a

competitive intra-EU services market, and tapping into emerging-

market opportunitiesbusiness opinion is polarised or

undecided on the effectiveness of Europes actions.

Why is this? A common refrain in our research into each of these

levers for growth is that, all too often, Europe fails to capitalise

on its strengths and natural advantages. Europe has a well-

educated and generally skilled workforce, but its labour-market

outcomesin terms of productivity and employmentare less

successful than those in the United States. Europe possesses an

abundance of innovation inputshigh volumes of pure research

and many research-intensive companies5but it has trailed

other parts of the world in commercialising those inputs as new

products, new business processes and new business models.

Europe matches the United States in terms of the creation of

new enterprises, but too few of these firms manage to break out

to become larger firms. Europe also has extensive trade and

investment connections with the emerging world, but it has notfully capitalised on these networks and is in danger of being

supplanted by new competitors.

The functioning of seven growth levers in Europe can be

enhanced to maximise their contribution to economic growth

and employment across the continent, through a set of concrete

actions. These levers are:

1. Economic governance

2. Entrepreneurship and SMEs

3. Human capital and labour markets

4. ICT and social media

5. Innovation

6. Industrial strategy

7. Trade and investment


Extremely effective

Effective

Extremely ineffective

Dont know/not applicable

Neither effective nor ineffective

Ineffective

6%

9%

7%

7%

8%

8%

8%

6%

6%

11%

23%

26%

33%

33%

32%

33%

34%

36%

42%

38%

35%

32%

35%

32%

40%

36%

34%

35%

37%

31%

25%

27%

22%

21%

17%

18%

19%

18%

12%

16%

9%

6%

7%

5%

Articulating a long-term industrial vision

Supporting entrepreneurship and the development

of small and medium-sized enterprises

Tapping into emerging-market opportunities

Developing the competitiveness ofhuman capital and labour markets

Maximising the return from information andcommunications technology and digital media

Turning research into new products, servicesand business models

Creating a competitive intra-EU market for services

Improving the quality and efficiency of citizen services

Improving essential business infrastructure (e.g., transport,housing, information and communications technology)

Supporting the development of green opportunities 3%

2%

4%

3%

2%

3%


Infrastructure investment is both a key to

economic recovery and an extraordinary

economic multiplier.


The longer Europe does nothing, the more it

will be left behind.


10/36

Economic governance:a base for stronger growthOver the last two years, the Eurozone has endured the biggesttest to its stability since its creation over a decade ago. It has

survived. Significant progress has been made in stabilising

debt markets and shoring up bank balance sheets. Europe

is growing again, albeit less quickly than it needs to. These

achievements testify to the innate strength of Europes

economic governance.

Nevertheless, significant vulnerabilities remain. First, large

parts of Europe remain trapped in a debt crisis. Eurozone

public-sector debt stands at around 88 percent of GDP. The

figure is 158 percent of GDP in Greece and 120 percent in Italy

(see Figure 6). Financial-sector bailouts and weak economic

growth have also caused a sharp deterioration in public-sector

budget balances, particularly in Ireland where the deficit is

estimated to reach 9.9 percent of GDP in 2011, the United

Kingdom with 9 percent of GDP and Spain with 6.7 percentof GDP (see Figure 7). High levels of indebtedness act as a

brake on future growth prospects, increase the cost of borrowing

and intensify investor uncertainty and market volatility.

Second, financial market risks have abated but not disappeared.Forty percent of business leaders identified this group of

risks as one of the most significant challenges to growth and

employment in Europe in 2011. The International Monetary

Fund estimates that total banking writedowns or loss provisions

in the Eurozone over the period 2007-2010 were in the order

of US$600 billion.6 Vulnerabilities remain, including a high

proportion of short-term debt requiring refinancing and

significant dependence on the wholesale money market and

central banks for financing needs.7

Third, a multi-speed Europe is emerging, driven by a more

fundamental competitiveness gap in terms of productivity and

labour costs (see Figure 8). Germany is enjoying its strongest

growth in a generation as its ultra-competitive manufacturing

sector taps into rising export demand in international markets,

especially from fast-growing emerging economies. By contrast,the more peripheral economies are increasingly lagging,

buckling under the weight of unsustainable government debt

levels, troubled banks and collapsed property markets.


While macroeconomic stability is the first step, Europe must

review its economic governance systems and reforms for

sustainable growth.

Imperatives for Europe:

Steady the shipget the macro-fundamentals rightBusiness leaders in our survey clearly believe that more

urgent action is needed to tackle budget deficits and debt

levels within the Eurozone in order to restore financial market

confidence and promote long-term growth. Thirty-six percent

of European business leaders stated that governments

in Europe need to cut deficits faster, while 35 percent were

satisfied that the current speed of deficit reduction is about

right (see Figure 9). Only 26 percent believed that governments

are cutting deficits too quickly. This view was expressed even

more strongly by business leaders from outside Europe, 44

percent of whom would like to see faster deficit reduction

within Europe.


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Fixing the current problems in Europes public finances andfinancial system is not enough. The financial crisis and subsequent

recession provided a stark reminder of how macroeconomic

imbalances, if left unchecked, can quickly spill over into assets

bubbles and create contagion risks across highly interdependent

economies. To prevent similar crises in the future, business leaders

believe that the toolbox of economic governance should include

more and better safeguard mechanisms to identify the buildup

of imbalances and to defuse the risks associated with them

(see Figure 10). In particular, they point to the following actions:

Improve coordination between member states on fiscal

policy (mentioned by 36 percent of respondents). The Pact

for the Euro, adopted by the Eurozone heads of state and

government in March 2011, includes measures to address the

sustainability of national pensions and health care systems,

and stronger enforcement of Stability and Growth Pact ruleson national budget deficits and debt levels.8

Enhance regulation to address financial sector risks (cited

by a quarter of business leaders) and restore stability to

public finances. In practice, this can include measures to

shore up levels of capitalisation or improve macroprudential

supervision of the links between banks and the monetary

system.

Design early-warning systems to prevent asset bubbles (forexample, in property and financial markets), highlighted by

one-fifth of respondents. This can include measures to monitor

the evolution of asset prices over time to spot divergences,

modelling of the risk-transmission channels between assets

or markets and a renewed focus on macroprudential supervision

of financial institutions.

Create stronger mechanisms for central monitoring of national

competitiveness (endorsed by a little more than a quarter of

business leaders). Such measures form a cornerstone of the

Pact for the Euro, which requires member states to review

their competitiveness as embodied in wage and productivity

developments. The Pact also requires member states to take

actions to increase productivity, such as opening up services

sectors to competition, promoting productivity and R&D, and

improving the business environment for SMEs.



As economic growth returns, member states musttake immediate actions to facilitate the process

of scal consolidation through far-reaching

structural reforms.

Develop forward-looking approaches to systemic risks and imbalances

Incorporate pro-growth measures in economic governanceRestoring macro-stability to public finances and financial

markets is a necessary condition for growth and job creation.

It is not a sufficient condition, however. Pro-growth structural

reformin areas such as skills, innovation and tradeis also

needed. Business leaders indicated several ways in which

the tools of economic governance can support a pro-growth

agenda:

Make greater use of tax cuts to promote employment. This

was mentioned by 43 percent of business leaders as opposed

to 19 percent who favour increased public spending to

stimulate employment.

Modify fiscal rules to encourage increased capital expenditure

(for instance, on growth-enhancing infrastructure) in preference

to current spending, an action cited by 28 percent of business

leaders.

Adopt measures to free up bank lending to small businesses,

cited by more than a quarter of respondents.


12/36Page12 Europe in Tomorrows World


The economic stimulus measures have worked

but will not lastnow we must look for real

economic growth.

Figure 6: Public sector debt (% of GDP)

Keyfindings

2007

2009

2011

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

European

Union

Eurozone Spain Germany United

Kingdom

France Ireland Italy Greece

Source: Economist Intelligence Unit

Figure 7: Public-sector budget balances (% of GDP)

Source: Economist Intelligence Unit

Spain

2007

2008

2009

2010

2011

European

Union

Eurozone GermanyUnited

Kingdom

FranceIreland ItalyGreece-35%

-25%

-15%

-5%

5%


13/36Europe in Tomorrows World Page 13

Figure 8: The competitiveness gap: evolution of unit labour costs for a selection of EU economies (index 2001Q1=100)

Figure 9: Is the speed of deficit reduction right?

How do you assess the actions being taken by European governments to reduce their budget deficits and levels of public debt?

Source: Organisation for Economic Co-operation and Development

80

100

120

140

160

180

200

220

Q1-2002 Q1-2003 Q1-2004 Q1-2005 Q1-2006 Q1-2007 Q1-2008 Q1-2009 Q1-2010

Greece

Italy

Spain

France

Germany

Governments need to cut deficits faster; they needto restore the confidence of financial markets andpromote long-term growth and investment

Current speed of deficit reduction is about right

Governments are cutting deficits too quickly; governmentstimulus still has a role to play in supporting short-termgrowth and employment

Dont know

Too slow

36%

About right

35%

Too fast

26%

Dont know

3%

Figure 10: Driving growth and job creation

What macroeconomic actions should policymakers focus on in order to drive economic growth and employment in Europe over the next few years?

Select up to three.

43%

36% 35%

28% 28%25% 25%

23%19%

Tax cuts to

stimulate

growth and

employment

Greater

coordination

between EU

member states

on fiscal policy

(including

surveillance

and

enforcement

of limits on

public sector

deficits)

Cut public

sector

deficits to

restore bond

market

confidence

Greater focus

on capital

spending (e.g.,

infrastructure)

as opposed

to current

spending

Measures to

free up

bank lending

to small

businesses

Stronger

mechanisms

for central

monitoring of

national

competitiveness

(e.g., relative

labour costs)

Regulation

to address

financial

sector risks

Introduction

of early

warning

systems to

prevent asset

bubbles

Public spending

measures to

stimulate

demand




Fundamental scal, labour and nancial

reforms are essential to improving economic

performance.



Entrepreneurship and SMEs:breaking the ceilingEurope excels at creating new businesses. There are morethan 20 million SMEs in the European Union and they make up

99.8 percent of total European enterprises.9 This is a dynamic

environment, where for every 10 European SMEs, a new one

is created every year.10 Europe is also successful in ensuring

that these SMEs survive. Two years after creation, around 70

percent of new enterprises are still in business11a result

roughly comparable to that in the United States.12 Moreover,

SMEs in Europe employ two-thirds of the active population13

and create more jobs than large enterprises do.14

However, European SMEs struggle to grow (see Figure 11).They are smaller than their US counterparts.15 Nine out of 10

SMEs in Europe are microenterprises employing an average

of two people.16 Our analysis ofForbeslargest companies

by market capitalisation shows that only around 3 percent of

European enterprises founded since 1980 have made it to

the top 1,000. The equivalent figure for the United States is 11

percent.17 With increasing competition as well as opportunities

coming from emerging economies, growth in the size of the

enterprise can help SMEs better position themselves to unlock

future growth.

Increasing European SMEs size as well as access to foreignmarkets will be fundamental to driving their future growth.


Remove the ceiling to growth

Help SMEs go beyond borders

Regulation and administrative barriers must be simplified to

foster SME growtha priority shared by 53 percent of C-level

executives surveyed (see Figure 12). Simplified regulationand better conditions are often available for microenterprises.

However, as they grow, their costs and obligations rise, making

expansion an unappealing option. Europe must adopt a

pro-expansion agenda for SMEs. To achieve this, policymakers

can:

Internationally active SMEs are more innovative and report

higher employment growth than SMEs that operate only

in their home markets (7 percent versus only 1 percent).18

However, a large proportion of European SMEs are too small

to cope with the costs of exporting. On the one hand, Europe

must reap the benefits of fast-growing markets outside the

European Union. On the other hand, SMEs exports are mostly

directed to other European partners, so fostering intra-EU

trade is equally important. Actions to help SMEs go beyond

their borders include the following:

Introduce pro-growth legislation through exemptions

and incentives for micro- and small enterprises willing to

expand, and drive down the cost of regulatory compliance.

Increase visibility of existing EU funding programmes and

build partnerships with the financial sector to improve

access to credit.

Increase awareness of existing internationalisation programmes

and develop facilities to operate in emerging markets

not only in China and India but also in other fast-growing

economies.

Dismantle barriers to cross-border EU trade by completingthe Single Marketthe opening up of services markets

being a top priority.

Enhance SMEs export capabilities through initiatives aimed

at developing language skills, managerial capabilities and

legal training.


Evidence that Europe is competitive would be

to see 10 European start-ups becoming global

companies in ve years.


SMEs are very good foundations for economic

stability and for durable economic growth.


16/36

SMEs need to reach a critical mass in order to competeinternationally. Hiring new people is not the only way to

do it: partnerships and technology can play an important

role. Sixty-nine percent of SMEs have broadband access but

their use of ICTs remains limited.19 Through better harnessing

of the power of ICT, these firms can group together or join

forces with larger enterprisesan option favoured by 28

percent of C-level executives surveyed. Possible initiatives

to build economies of scale include the following actions:

Use cloud computing to drive down costs and implementfunctions such as electronic invoicing, HR services outsourcing

and business process simplification.

Understand how to create virtual hubs and unlock the

advantages of economies of scale among firms in different

locations to share expertise and costs.

Promote collaboration between SMEs and larger companies

(for example, through job secondments, training and supply

chains) to combine small enterprises creativity with larger

firms reach.


Scale up for growth

Figure 11: Challenges to European SME growth

What do you see as the most significant challenges to SME growth in Europe? Select up to three.

Figure 12: Boosting European SME growth

In your opinion, what actions would be most effective in encouraging SME growth in Europe over the next few years? Select up to three.

Keyfindings

Administrative

barriers (e.g.,

bureaucracy,

regulation)

Insufficient

or adverse

incentives

transmitted

by the tax and

subsidy system

Lack of access

to additional

rounds of

financing and

capital

Shortage of

management

capability

among SME

leaders

Insufficient

trade finance

(e.g., export

credits,

guarantees)

Lack of export

capabilities

(e.g., language

skills, legal

or financial

expertise)

Lack of access

to professional

expertise (e.g.,

legal, financial

consultancy)

Trade barriers

limiting the

geographical

reach of

the SME

Rapid

employee

turnover

in SMEs

inhibiting

investment

in skills

47%

37%

32%

26%24% 24%

23%20%

15%

Reduce and/

or simplify

taxes and

regulation

Dismantle

barriers to

cross-border

trade within

the EU

(includingfor services)

Promote

collaboration

between SMEs

and larger

companies

(e.g., jobsecondments,

training, supply

chains)

Invest in

information

and

communications

technology

infrastructureto enable

cost reduction

and market

expansion

Establish

SME-to-SME

business hubs

for sharing

expertise and

costs

Increase

training in

export

capabilities

(e.g., language

skills,international

marketing)

Increase

investment in

management

training for

SMEs

Identify SME

role models

to share best

practices and

success stories

Develop

mechanisms

for SME

employees

skills to be

certified andrecognised

53%

39%

28% 28% 26% 26% 23%

17%13%


We need less and smarter regulation in order to

create an environment where entrepreneurship

both for SMEs and big companiesis stimulated.



Human capital and labourmarkets: bridging the gapThe European Union has a large pool of educated workers, witharound 19 million students in tertiary education20 and seven

EU member states ranking in the top 10 of the World Banks

Knowledge Economy Index, with each of the seven ranking

above the United States.21 But Europe is failing to make the

most of these advantages.

In the short term, Europe faces labour-market inefficiencies as

rigidities prevent the appropriate allocation of the available

skills of the unemployed. There are 23 million unemployed

people searching for a job22 but a large number of vacancies

3.5 millionremain unfilled as employers struggle to find

people with the required skills.23 One in four employers reports

difficulties in filling vacancies.24 At the same time, estimates

show that in Europe 30 percent of todays employees possess

a higher level of education than that required for the jobs in

which they are currently working.25

In the long run, Europe will have to cope with a skills mismatchthat is the product of a structural shift induced by factors such

as globalisation, technological change and the move to a lower-

carbon economyall compounded by the recent economic

crisis. The resulting imbalances in European labour markets

can become significant. For example, engineering graduates

account for only 12 percent of Europes graduates26 despite

the fact that vacancies for technicians and engineers are some

of the most difficult to fill.27 This shortage will worsen in the

future: estimates show that by 2015, EU member states will lack

2.7 million skilled workers in their IT, health and research sectors.28

Increasingly, Europe will have to expand the supply of skilled

and adaptable workers who can be employed in jobs that do

not yet exist.

Europe must act now to make the machinery of labour markets

operate more efficiently and to develop the appropriate human

capital for the jobs of the future.


Improve geographic mobilityOn average, only about 2 percent of resident EU citizens take

advantage of their freedom to live outside their native country.

By contrast, non-EU nationals make up almost 4 percent of the

EU population.29 According to 35 percent of all the business

leaders surveyed, the lack of geographic mobility is one of

the most significant challenges they face in labour markets

(see Figure 13). C-level executives from large companies

were particularly concerned, with 43 percent citing it as a

challenge. Policymakers can facilitate greater geographic

mobility through a range of actions:

Ensure the mutual recognition of qualifications acrosscountriesan option favoured by 28 percent of respondents

and encourage improvement in language skills and

qualificationsmentioned by 29 percent of respondents

(see Figure 14). Business leaders also highlighted the

potential of a Europe-wide labour exchange to balance

demand and supply more effectively in labour markets.

Integrate existing European mobility tools, in order to

increase awareness of their capabilities and broaden their

take-up across sectors. There is also potential to widen the

scope of these tools to address other key barriers, such as

pension portability and housing market rigidities. An example

of a tool that can be adapted in this way is Europassa service

that aims to make qualifications easily understood in Europe.

Encourage mobility among young people through a focus

on the Europe 2020 Youth on the Move initiative. This

initiative aims to support young peoples access to and

take-up of job openings abroad, and encourages employers

to create openings for them.

Tailor immigration policies to improve geographic mobility

between EU and non-EU countries. Thirty-seven percent of

C-level executives surveyed agreed that this would be an

effective strategy.


Demography will translate into a lack of man-power in the future. We need more exibility in the

retirement age and new thinking on immigration.


18/36

As older employees retire, workforces in Europe will losethese employees knowledge and expertise. At the same time,

Europe must reverse the declining employment rate (it fell

from 65.9 percent in 2008 to 64.6 percent in 2009) to reach its

target of 75 percent by 2020.30 Widening the labour pool was

considered an effective strategy by 36 percent of C-level

executives from high-growth companies, compared with 26

percent of all other companies. To support widening of the

labour pool, policymakers can:

Incentivise a longer working life by reforming tax andbenefit systems and aligning pension systems with these.

Invest in lifelong learning and the wider infrastructure

needed to encourage older workers to stay in the work-

place, such as digital networks that enable remote and

flexible working. Twenty-nine percent of business leaders

agreed that using technology to enable lifelong learning

would be an effective action.


Widen the labour pool

Invest in STEM skillsOnly four EU countries rank in the top 10 countries of the

Programme for International Student Assessment in mathematics

and science.31

Investment in education and training in general(34 percent), and STEM skills in particular (33 percent), were

considered effective strategies by our surveyed business

leaders. Specific measures can include:

Promote STEM options from an early stage to encourage

young people to pursue STEM subjects in their subsequent

education.

Encourage businesses to work more effectively with

educational bodies to produce the right mix of academic

and practical skills: for example, through the establishmentof business-run academies.

Adapt curricula and teaching methods to the changing

needs of the knowledge economy and strengthen the role

of vocational qualifications and training.

Focus on career counselling that helps young people under-

stand the link between STEM-related subjects at school and

the future career paths these skills make possible.

Figure 13: Skills challenges for companies

What are the most significant skills challenges for companies in Europe? Select up to three.

Key

findings

0% 10% 20% 30% 40% 50%

Poor or limited information for workers aboutavailable job opportunities

Poor or limited information for employers aboutavailable skilled labour

Loss of skilled workers to destinations outsideof Europe (brain drain)

Lack of experienced employees due to retirement

Low levels of basic and intermediate skills

Multiple and differing qualifications and trainingstandards across Europe

Lack of graduates with applicable

skills in the job market

Cost and complexity of sourcing skilledworkers from outside Europe

Shortage of available workers in growth sectors

Lack of geographic mobility of workers within Europe

All respondents

Respondents from companies withannual revenues above US$1bn

Respondents from companies withannual revenues between US$100mand US$1bn


Thirty-eight percent of workers have no basic

e-skills, but we expect that 90 percent of jobs

will require these skills in ve years time.


We need to shift the focus of labour market

regulation from job security to employability.Lifelong training is a key element of exicurity.



Figure 14: Building the talent pipeline

In your opinion, what strategies would be most effective in addressing skills challenges in Europe over the next few years? Select up to three.

All respondents Respondents from companieswith 2010 revenue growth 5%

0%

10%

20%

30%

40%

Establish a

Europe-wide

labour

exchange

(e.g., an online

platform for

advertising

demand and

supply)

Undertake

better

long-term

skills

planning

Ensure better

mutual

recognition

of

qualifications

across Europe

Encourage

improvement

in language

skills across

Europe

Use

technology

to enable

lifelong

learning

and the

development

of skills

Widen the

labour pool

(e.g., extend

retirement age,

increase female

participation,

encourage

flexible

working hours)

Boost science,

technology,

engineering

and math

(STEM)

training in

particular

Increase

public and

private

investment

in education

and training

generally

Tailor

immigration

policies to

attract skilled

workers

(e.g.,

simplification

of work visa

rules)


A competitive Europe would be a Europe where

it is easy for companies to operate, where an open

and challenging environment stimulates entre-

preneurship, where the level of education is high,

and where people are stimulated to be mobile.


20/36

ICT and social media:digital highways to growthAfter years of promise, information technology and socialmedia have finally come of age. Technological advances

are transforming the business landscapeseparately and in

combinationand Europe has a chance to benefit from these.

Cloud computing, for example, puts business support services

within reach of small businesses, at entirely variable costa

significant boost to innovation and entrepreneurship. Mobile

commerce promotes productivity in ways of working and

opens up new channels to customers, particularly in overseas

markets. Equally, the breathtaking rise of social mediajust

think of Facebooks 500 million active usersis redefining

advertising, marketing and product development.

In an economy increasingly geared to knowledge and information,a greater focus on ICT has the potential to drive faster

European growth and competitiveness. But several studies

have shown that a major part of the productivity gap between

Europe and the United States is attributable to differences in

the take-up and application of ICT.32 Indeed, business leaders

we surveyed identified productivity gains through more

innovative business models as one of the most significant

benefits from increased investment in ICT (44 percent), along-

side the ability to gain better insights into customer demands

preferences (see Figure 15). Yet a focus on the technologies

themselves is not sufficient. Explosive growth occurs when

new technologies reach a critical mass of users, unleashing a

wave of creativity across the general economy.


Europes actions around investment in technologies must also

be coupled with measures to promote take-up and widespread

usage of IT in peoples home and working lives.


Outperform in digital infrastructure and market regulationWorld-leading digital infrastructure is essential if Europe is

to set in train a self-reinforcing wave of ICT-enabled growth

and access to fast broadband is central in creating this. Yet

there remains still a long way to go before the European

Union can meet its target of giving all Europeans access to

basic broadband by 2013 and to ultra-fast broadband by 2020.

Business leaders share the European Commissions vision, with

38 percent of survey respondents citing the establishment

and adoption of superfast broadband as an imperative for

maximising the return from ICT and digital media (see Figure

16). To assist ICT leaders with the journey, policymakers can

consider a number of actions:

Progressively coordinate national responses to the

European Commissions Digital Agenda to provide clear

and durable frameworks for investment in fast broadband,

regulation of next-generation access, and growth of mobile

and satellite broadband.

Enhance the ability of European consumers to compare

broadband speeds and prices across the European Union

and the world, thus increasing market competition.

Create investment incentives for the establishment in the

European Union of the servers and other infrastructure

required by cloud computer service providers.

A clear and far-sighted understanding of Europes laws on

data handling, migration, privacy and security is vital to

confident business investment and consumer adoption in

an increasingly ICT-intensive economy.33 Twenty-nine percent

of business leaders we surveyed included consistent data

privacy and cyber security laws across Europe among their

top three ICT priorities; and 26 percent cited the improvement

of intellectual property laws to promote the digitisation of

content. As part of the process of building this essential base

of ICT-powered growth, policymakers can:

Articulate citizens entitlement to consistent data security and

protection throughout an increasingly virtual Single Market.

Set a long-term vision for how the responsibilities of enterprises

handling personal data are likely to evolve.

Formulate incentives for the establishment of ICT-intensive

businesses within the European Union.


ICT and digital and social media are excellent

elds for Europe to focus on.

Set clear ground rules




The EU must facilitate the ow of data both

internally and with its international partners to

promote global innovation.


A digital single market can bring additional

digits to GDP.

As ICT increasingly plays a pervasive role in Europeans daily

work and life, digital illiteracy is more disabling than ever.

Being unskilled in the basics of IT excludes people from job

opportunitiesand makes the process of job searching harder.

As consumers, they can be denied the IT-enabled benefits of

better information, wider choice and lower prices. In our survey,

31 percent of business leaders identified the improvement of

IT skills among people unfamiliar with technology as a top

ICT growth imperativesecond only to the call for superfast

broadband. Actions to support this effort include the following:

Promote and harness the consumer adoption of newtechnologies, which over time builds transferable digital

skills for the workplace.

Identify digital literacy or accessibility gaps in specific

geographic, age or other groups.

Encourage business links with the third sector and social

enterprises to transmit ICT know-how, particularly in

disadvantaged communities.

View digital skills as todays literacy

Figure 15: The case for greater ICT investment

In your view what would be the most significant benefits of increasing investment in information and communications technology (ICT) and digital

media networks for Europe? Select up to three.

Figure 16: Maximising the return from ICT and digital media

What actions would be most effective in maximising the return from information and communications technology (ICT) and digital media in Europe

over the next few years? Select up to three.

Keyfindin

gs

44% 44%

40%

36%

26%

Productivity

gains

generated

by lowercosts of

communication

Harnessing

innovation

from multiple

stakeholders(e.g.,

crowd-

sourcing)

Increased

environmental

sustainability

(e.g., viaintelligent

energy

solutions)

Boosting

efficiency

and reach

of publicservices

More

efficient

supply chain

operations

Better access

to new

customers

(e.g., throughsocial

networking,

mobile

commerce)

Better

insights into

customer

demands andpreferences

(e.g., through

analytics)

Productivity

gains

through more

innovativebusiness

models

26%

22%

19%

Assimilating

consumer

IT for

workplace

use toimprove

productivity

Closing

digital

skills

divides

acrossEuropean

economies

Public

procurement

of new

advanced

technologiesand

solutions

Freeing up

government

data to

enable

citizen-sourced

digital tools

(websites,

apps, etc.)

Measures

to promote

the

adoption

of cloudcomputing

across

Europe

Better use

of online

social

networks

formarketing

and

crowd-

sourcing

Improved

intellectual

property

rules to

promotedigitisation

of content

The

establish-

ment of

consistent

data privacyand cyber

security laws

across

Europe

Measures

to improve

IT skills

among

peopleunfamiliar

with

technology

The

establish-

ment and

adoption of

superfastbroadband

across

Europe

38%

31%

23%

26% 26%

21%21%

20%18%

17%


22/36

Innovation: creating apan-European innovation

ecosystemThe EU member states include world leaders in manufacturing,design, aerospace, telecommunications, energy and environ-

mental technologies. The region accounts for a little more than

25 percent of scientific publications, the highest share of any

region.34 As Martin Schuurmans, chairman of the European

Institute of Innovation and Technology, points out, half of the

Nobel Laureates for medicine originate in Europe, yet many of

the global players in the pharmaceutical sector stem from the

United States.35

So while Europe produces a wealth of raw ideas (see Figure

17), its innovation performance is lagging in the global arena,

with the United States widening its lead and emerging markets

catching up. The European Union spends 2 percent of GDP

on R&D, compared with 2.8 percent in the United States and

3.4 percent in Japan (see Figure 18).36 China has increased its

global share of scientific publications to 12 percent in 2007,

a major improvement over the 2.5 percent it had in 1997.37

So far, Europe has failed to create a pan-European innovation

ecosystem that can adapt to the new nature of innovation. On

the one hand, innovation measures have been fragmented

across member states and between various EU policymaking

bodies. On the other hand, innovation has become increasingly

global and dispersed. Innovation hotspots are springing up in

emerging markets, and technology is enabling new models

of innovation around crowd-sourcing and coproduction.


Europe must create an effective innovation ecosystem that hosts

dynamic networks with rapid exchange of knowledge and capital

between stakeholders.


Promote services innovationThe services sector makes up more than 70 percent of the EU

economy, but accounts for only 20 percent of the European

Unions internal trade.38 The appropriate framework can

encourage business-model innovation and product innovation

as businesses seek to tap into new markets. To unlock this

potential, action must be taken to:

Complete the Single Market in services. This would make

it easier for economic activity to take place across borders

and boost services, including business-to-business services.

Establish standards to enable interoperability between new

and existing products and services and to provide a platform

for further innovation.

Support better methods of valuing intangible assets related

to services innovation to induce increased capital-market

funding of innovation.

Provide the right framework conditions, such as simplifying

and reducing the burden of regulation and taxation. Thirty-

four percent of all survey respondents cited this as an

effective action for boosting innovation (see Figure 19).

Europe must develop a labour force with a broad skills base,

a critical element in transferring high-value ideas all the way

to market. But it must also retain and attract talent from around

the world to create a truly networked innovation ecosystem.

Suggested policy levers include the following:

Reform education systems to incorporate business skills in

STEM degrees and teach STEM skills in business courses.

Encourage more internships and placements so that students

and researchers gain hands-on experience with the technologies

used by industry.

Focus on measures to attract non-EU researchers, such as

visa arrangements and scholarships. A quarter of the survey

respondents cited this as a potentially effective action for

European innovation.


We need links between universities and companies

R&D centres to develop new products.

Develop and retain innovators and entrepreneurs




Programmes to stimulate innovation need to be

simple if companies are to participate in them.

Innovation clusters are central to the knowledge architecture

of modern economies. Their creation can bring together a

broad and diverse mix of skills, venture capital, marketing and

development expertise, universities, industry and spin-outs.

Our survey found that promoting knowledge exchange between

research and business would be the most effective strategy.

This was markedly higher among high-revenue-growth

companies (42 percent) than average- or no-growth

companies (35 percent). Actions that can support knowledge

exchange include the following:

Harness the power of technology, including social media

and digitisation of public data, to draw on the creativity of

a wide range of stakeholders.

Change academic incentives to encourage commercialisationof research and university spin-outs, and develop areas of

excellence in areas of societal concerns.

Support technology-enabled virtual clusters or online platforms

that link agglomerations of early-stage SMEs with venture

capitalists; 29 percent of all business leaders agreed that a

hub that connects investors with innovators was important

for European innovation. For example, GrowVC is a community-

based social networking platform that brings together start-up

companies with providers of seed capital.

Facilitate greater understanding of industry among universities

and research institutes through secondments and collaborative

projects.

Rethink clusters to harness networking benefits

Figure 17: Tertiary education graduates in mathematics, science and technology (% of population age 20-29)

Figure 18: Gross domestic expenditure on R&D (% of GDP)

Keyfindings

Japan

European Union

United States

0.5%

1.0%

1.5%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Japan

United States

European Union

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Eurostat

Source: Eurostat



Figure 19: Creating an innovation ecosystem

What actions would be most effective in increasing the level of innovation in Europe over the next few years? Select up to three.

Keyfindings

All respondents Respondents from companieswith 2010 revenue growth >5%

Respondents from companieswith 2010 revenue growth




Europes leaders need to be real thought leaders

who are inspirational and can set a new direction

for entrepreneurship, innovation and education.



Industrial strategy:a future for Europe in

the global economyIndustry remains the backbone of Europe, with manufacturingindustry a major source of EU growth and jobs. Before the

global financial crisis, European manufacturing accounted for

around 17 percent of GDP and 22 million jobs.39 But the importance

of the industrial base stretches far beyond the core activity of

manufacturingit also encompasses the broader productive

sector, associated business services and wider businesses that

rely on industry (and vice versa). Including this broader definition,

the servo-industrial economy accounts for nearly half of the

EUs GDP.40

EU industry is a key player in the global economy and very

competitive in new green technologies. Europes core eco-industries have a turnover in excess of 300 billion and have

global market shares of up to 50 percent in some sub-sectors.41

The European Union is also a specialist in niche marketssuch

as craftsmanship, design and creative contentthat have high

barriers to entry. And with careful nurturing, niche markets can

turn into mass markets. But European industry faces a number

of challenges.

The current phase of globalisation, marked by the rise of

emerging markets and low-cost centres, is placing pressure

on European industry, especially on higher-volume markets

that compete mainly on cost rather than service and quality.

Emerging-market companies with functional business models

are carving out market share in areas where European businesses

previously dominated. As emerging markets focus on higher-

value-added goods, they will also join advanced countries

in competing with Europes newer growth successes. The

European Unions first-mover advantage in the green sector

could easily be eroded by rapidly expanding industries,

particularly in the United States and Asia.

In addition, competition from emerging markets is playing out

beyond the corporate arena. Emerging markets often have a

more strategic vision of industrial planning; their governments

are striving to establish certain industries at the forefront of the

global stage and are investing heavily in key sectors. Beijings

12th Five Year Plan, for instance, has marked out 4 trillion

yuan (US$600 billion) of financial support for the development

of key emerging industries: energy conservation andenvironmental protection, information technology, biology,

advanced manufacturing, new energy, new materials and

new-energy automobiles.42

At the same time, disruptive business models are emerging

for EU industry. The lines between manufactured products and

services are blurringthe so-called servitisation of products.

Services are increasingly being built on the back of manufacturing,

with the manufacturing workforce employed in less traditional

roles including R&D, design and after-sales care. The auto-

mobile industry, for instance, sells vehicles with maintenance

schemes, financing options and insurance. And the degree of

integration between goods and services is intensifying. Some

products and services cannot be separated, as demonstrated

by the car-sharing service Zipcar.

Europe needs to build a dynamic and sustainable industrial base

to remain competitive in areas such as the green sector and to

take advantage of the growing trend in servitisation.


Reinforce the foundationsThe basic conditions for growthsuch as a favourable tax and

regulatory regime, low levels of bureaucracy, skilled staff to

hire and access to financeneed to be suitably created for

EU industry to prosper. Complex tax and regulatory systems

discourage investment, and a shortage of appropriate skills

inhibits industry growth and innovation. Reinforcing the

foundations is vital not only to industry in Europe but also

for attracting foreign investment. Among the business leaders

surveyed, removing the obstacles to industry development

included the following:

Reduce and/or simplify regulation and tax, as mentioned

by 47 percent of respondents (see Figure 20). This view was

expressed even more strongly by high-growth firms, with 56

percent of business leaders supporting tax changes.

Increase investment in STEM skills, endorsed by one-third of

respondentsespecially large firms (42 percent)to support

emerging industries such as the green sector.


There is the need for integrated policies at

the European level to address climate, energy

efciency and sustainability issues.



The servitisation of industry can carve out new niches and areasof comparative advantage over low-cost, functional business

models. As manufacturing and services become more

intertwined, the growth and demand in manufacturing and

in new services will reinforce each other. This virtuous cycle

of growth can be encouraged through the following actions:

Foster stronger linkages and closer collaboration between

the two sectors, spanning the value chain, from product

design to outbound logistics and marketing.

Support innovation within the manufacturing sector byencouraging greater linkages between manufacturing firms

and universities/research institutes. Our survey revealed

that one-fifth of business leaders favour a sharper focus on

interdisciplinary research to stimulate industry growth.

Create an advisory service to share knowledge and best

practices in the servitisation of goods. Such a service can

encourage the use and adoption of technologies to promote

innovation in processes and business models.

Strengthen the link between industry and services

Articulate a pan-European industrial strategyAs barriers to trade and capital erode, and as technology

opens up more sectors to international competition, Europewill need a more strategic vision of industry. A number of

actions can frame an EU industrial strategy, including the

following:

Encourage stronger ties with emerging-market businesses,

cited by 36 percent of business leaders.

Consolidate areas of existing comparative advantage to

create emerging centres of excellence. Thirty-four percentof our business leaders agreed that Europe needs to

prioritise business sectors seen as advantageous to Europe,

such as finance, aerospace and automotive.

Implement common standards across the European Union

to eliminate uncertainty and encourage investment in new

technologiessupported by 32 percent of respondentsin

order to create a critical mass of users in new technologies

across the EU market.

Figure 20: Stimulating industry growth

How can European industrial policy most effectively stimulate industry growth in Europe over the next few years? Select up to three.

Key

findings

Reduce

and/or

simplify

regulation

and tax

Encourage

stronger

ties between

European

and

emerging-

market

businesses

Articulate

a pan-

European

industrial

strategy,

prioritising

business sectors

seen as

advantageous

to Europe(e.g., finance,

aerospace,

automotive)

Increase

investment

in STEM skills

(science,

technology,

engineering

and

mathematics)

Implement

common

standards

across

Europe to

eliminate

uncertainty

and encourage

investment

in newtechnologies

Encourage

stronger

partnerships

between

business

and labour

to reduce

risk of

industrial

action

Apply more

focus on

inter-

disciplinary

research (e.g.,

information

technology,

genomics)

Facilitate

more

apprenticeship

programmes

Facilitate

greater

emphasis on

management

training

47%

36%34% 33% 32%

28%

21%

16%14%


We need to invest in areas of existing competitive

advantage such as manufacturing, aerospace,pharma and clean energy.


Given its current positioning in the sustainable

technology eld, Europe must lead the world inbreaking the link between the production of

wealth and the consumption of resources.

8/3/2019 Ac

Accenture Europe in Tomorrows World

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