Answers to Survey Question From Friends of Europe

Answers to Survey Question From Friends of Europe

Josette Sheeran Shiner, Under Secretary for Economic, Business, and

Agricultural Affairs

Washington, DC

May 10, 2006

QUESTION: What does the EU have to do to stay ahead of China in terms of innovation?

U/S SHINER: Let me first say that no country has an inside track on innovation. Everyone has the ability to innovate, given the right circumstances and the right infrastructure. For centuries Europe has provided the world with lasting inventions and it will continue to do so. But there are ways to maximize innovation opportunities by creating a climate of enterprise and entrepreneurship. Long-term innovation in knowledge-based economies demands flexible labor and capital markets, protection of intellectual property, the ready adoption of new technologies, and increased investment in people and research. The last point is key. As world class innovators like Craig Barrett of Intel will tell you, education and investment in research and development spur innovation.

Rather than looking at innovation and economic growth in China as a threat, we should see it as an opportunity. China is an emerging market -- an enormous market for goods and services that our innovative companies can supply. That said, we must continue to work together to preserve the Intellectual Property Rights of our companies. The U.S. and Europe are doing this. At the 2005 U.S.-EU Summit, we agreed to develop an action plan to strengthen IPR enforcement around the world. And earlier this year, the United States and the EU cooperated on an unprecedented joint World Trade Organization complaint over fair access to China's auto-parts market.

QUESTION: Were the original objectives of the Lisbon Agenda too ambitious? Do you consider the revamped objectives, focusing on jobs and growth, to be a watering down of Lisbon?

U/S SHINER: To achieve anything valuable you must have ambition and make hard choices. In March 2000, Europe's heads of state and government determined to become "the most competitive and dynamic knowledge-based economy in the world." The drafters of the Lisbon Agenda knew that in order to meet this objective, they needed to aim high. I believe EC President Barroso's focus on jobs and growth is appropriate, and gets to the heart of the reforms required to create a knowledge-based, dynamic economy while producing the right kind of jobs for the twenty-first century.

QUESTION: How important a part does education play in innovation?

U/S SHINER: In a world that is changing as rapidly as ours education is essential to innovation, as well as to a country's economic health and stability. Education is what differentiates a dynamic, knowledge-based economy from a stagnant economy. But the role of education goes beyond creating smart students. As we've seen in the United States, modern universities can play a vital role in research and commercialization of new ideas. They can also act as incubators for new technologies and ideas. Workers today can expect not only to have different jobs, but also different careers during their lifetimes. Workers must therefore dedicate themselves to life-long learning and to sharpening their skills.

We also need to get our students into the workplace in order to make connections between the lessons of the classroom and the demands of the job market. Europe has a long tradition of apprenticeship and mentoring, where education continues outside of the schoolroom. This is something that can be adapted for technology learning as well. The OECD has highlighted the need for increased funding at the university level in Europe. Another idea, one that the U.S. has embraced, is to bolster the level of private-sector engagement in education such as endowing chairs, creating research or incubator programs or helping to enhance facilities.

QUESTION: Is the EU target of raising public and private spending on R and D to 3% still too low? If so, what should the figure be?

U/S SHINER: In the OECD's Science, Technology and Industry Outlook, published in 2004, the data shows that the countries that make up the EU-25 have consistently invested below the OECD average in R as a percentage of GDP. In 2003 the OECD average investment in R as a percentage of GDP was 2.24%. The United States invested 2.6% of GDP in R, Japan 3.15%, while the EU-25 invested only 1.85%. The EU's level has been fairly consistent for a decade.

Rather than quibble over whether or not 3% is sufficient, I think the EU should be commended for setting a goal to increase funding.

QUESTION: How big a problem is red tape in discouraging more innovation-friendly conditions in Europe?

U/S SHINER: Excessive red tape is the enemy of innovation. The World Bank's "Doing Business" report analyzes every country's readiness to foster business creation and growth. If it takes 51 years of today's average salary in Syria to create a business, for example, what hope does that country have to develop into a dynamic economy? By comparison, the EU is beginning to feel the benefits of a borderless Europe. Entrepreneurs in one EU country are able to incorporate their company in any other member state. As a result, 15,000 German businesses have saved on notary and other expenses by registering in London, where the required capital is only one British Pound, compared with the minimum required capital of 25,000 Euros in Germany.

Of course, some government regulation is necessary -- it is part of the framework for a dynamic, market-based economy. But while government can help establish the regulatory framework, overregulation carries a very heavy price that is borne by industry, consumers and taxpayers.

In the United States, we require a cost/benefit analysis of all new regulations. There is an Office of Information and Regulatory Affairs (OIRA) in the White House that carefully examines the costs and benefits to society of every rule the federal government proposes. We also provide ample opportunity for the public to comment on new rules via the Federal Register process. This is an ongoing process. OIRA, by the way, was launched by the current Ambassador to the EU, C. Boyden Gray, when he was working in the White House under President Reagan. He continues to be an active participant in the U.S.-EU high level regulatory forum which shares best practices on crafting smart regulations.

QUESTION: Is there a healthy relationship between the U.S. and the EU on innovation, or is it one-way traffic?

U/S SHINER: The tradition of science and technology exchange between the United States and the EU goes back to the days of Benjamin Franklin, who maintained a vigorous scientific exchange with the leading minds of his day on both sides of the Atlantic. We can point to numerous scientists, such as Albert Einstein, who have called both Europe and the United States their home. This relationship between our academic and scientific communities far outweighs what governments can do in terms of collaboration, but our governments are active and have a significant role to play.

In 2004, we renewed a U.S.-EU Science and Technology Agreement that facilitates exchanges, both private and public. Our National Science Foundation has over 50 current joint projects with the European Commission alone. Those projects cover bioscience, earth science, information science and technology, manufacturing, ocean science and social sciences. The U.S. and the EU held our first space dialogue on March 24 of this year, in which we discussed space policy developments and ways to create transatlantic market in space services. Through the OECD and other fora we are looking at new innovative technologies, such as radio frequency identification, nanotechnology, health and medical technologies, and intelligent transport systems. We are also jointly looking at the challenges that arise from new technologies: protecting consumers from spam and spyware, and ensuring that the Internet remains a free and open watering hole of ideas. The U.S. and the EU have also launched an Innovation Initiative through the U.S. Department of Commerce and the EC's Directorate-General for Enterprise and Industry that will focus on measuring innovation in our economies, exchanging best practices and bringing experts together to look at local initiatives.

QUESTION: The EU has just five researchers per 1,000 workers against eight in the US. What can the EU do to address these imbalances?

U/S SHINER: Spending on R and education is essential, as is an environment that fosters innovative research. We have found that an economic and regulatory environment that is conducive to a dynamic private-sector -- especially with regard to the establishment of small and medium-sized enterprises -- is one that best promotes and sustains technical innovation. As President Bush has said, "the role of government is not to create wealth; the role of government is to create an environment in which the entrepreneur can flourish, in which minds can expand, in which technologies can reach new frontiers."

QUESTION: It has been argued (not least at the last Friends of Europe debate at the European Business Summit) that the U.S. is not doing enough to cultivate the next generation of innovators. Why is this the case, and what can be done about it?

U/S SHINER: With about 5% of the world's population, the U.S. employs nearly one third of all scientists and engineers and accounts for one third of global R spending. Nevertheless, the U.S. intends to remain vigilant about maintaining its leadership role in innovation.

Although the private sector and academic institutions are the main sources of innovation, government can help create an atmosphere in which creative minds generate new ideas and see them become reality. In January of this year, President Bush announced the American Competitiveness Initiative (ACI) to encourage American innovation. The ACI commits $5.9 billion in FY 2007 to increase investments in research and development, strengthen education, and encourage entrepreneurship. Over a period of 10 years, the Initiative commits $50 billion to increase funding for research and $86 billion for research and development tax incentives. President Bush's 2007 budget requests $137 billion for federal research and development, an increase of more than 50% over 2001 levels.

Past federally funded research has helped to launch vital technologies such as personal computers, the Internet, medical imaging devices, balloon catheters, hearing aids, laser eye surgery, air bags, global positioning devices, and satellite telecommunications systems.

QUESTION: Many believe the U.S. will fall behind China and India in the resources it devotes to innovation and that; as a result, millions of jobs could be at risk. Do you share this concern and, if so, what can be done to address the problem?

U/S SHINER: This is really a World is Flat question, to reference the book by Thomas Friedman of the New York Times. Economic globalization does create new competition for the United States, but it has also opens new markets for us. I'm conducting a strategic review of the U.S.'s economic transformational diplomacy for Secretary Rice as we speak. The idea is to make sure that we are deploying our talent and resources in a way that keeps the United States competitive and nurtures innovation in the decade ahead.

As for China and India, the United States sees them as both trading allies and competitors. I believe Europe views India and China in the same way. Innovation shouldn't be viewed as a zero-sum game. Whatever the shape of the world -- flat, round or square -- innovation and nimbleness remain the keys to growth and job creation. The key is to not look backward, hoping to regain industries that have moved to other areas of the world, but to look forward and define, develop and expand new areas of enterprise that are yet to be discovered. The United States has always been a country of innovation and nimbleness. And we're committed to remaining so.

QUESTION: Could EU governments transform the climate for innovation though imaginative tax incentives? If so, what specific policies would you suggest?

U/S SHINER: Yes. Time and again researchers have identified certain aspects of the U.S. tax system that provide incentives to invest in research and development. For example, our system provides favorable capital gains treatment and specifically lower tax rates on long-term capital gains. There is also special treatment for small businesses. Taxpayers are able to deduct or amortize R expenditures, and there are special tax credits for taxpayers that engage in R The system also provides investment tax credits that effectively lower the cost of investing in new and innovative capital equipment.

QUESTION: How sensitive are EU level policies to national political upheavals? In which order would you place, as breaks on Lisbon Agenda reforms, the following:

a. the collapse of France's CPE project b. Germany's grand coalition c. The narrowness of Prodi's governing majority in Italy

U/S SHINER: This is more a question for European politicians to consider. There have been tremendous success stories in all three of the member states mentioned. I think it's more important to look at overall trajectory and objectives. For example, in January, Germany's coalition cabinet put the finishing touches on a 25 billion Euro program for research, infrastructure and social spending. That's a move in the right direction.

QUESTION: When looking for an EU member state where the business climate is the most encouraging for innovation, what key elements do you search for?

U/S SHINER: In addition to a high level of investment in R and education, an encouraging business climate would have favorable tax treatment that creates incentives for private sector innovation, strong protection of intellectual property rights, a regulatory framework free of unnecessary and burdensome regulations, and a government that promotes free and fair trade.

QUESTION: Which EU member state is the most attractive from an innovation and entrepreneurship standpoint? And which is least attractive as an investment destination?

U/S SHINER: There are all kinds of studies and charts rating countries on competitiveness, innovation, efficiency in financial services, regulatory environment, etc. In the end, the most attractive member state depends on the needs of the beholder and results. A telecommunications investor might find Finland attractive while a financial services investor might look to the United Kingdom. By the same token, there are likely sectoral differences when judging which is the least attractive investment destination.

QUESTION: How relevant are government policies and incentives for innovation?

U/S SHINER: Government policies and incentives for innovation are relevant because they help set the tone. That said, creating and nurturing a nation's innovative spirit should not be totally dependent upon government. Innovation becomes a national priority when it becomes an intrinsic part of the culture and business community. Often, one of the most important things governments can do is to get out of the way of the private sector by reducing unnecessary taxes and regulation.

QUESTION: Europe has bemoaned its R and innovation shortcomings for many years. Have we been exaggerating the problem, or are the chickens beginning to come home to roost? If the latter, what striking examples of our high-tech deficit come to mind?

U/S SHINER: As I mentioned in a previous question, OECD data makes the history clear. Europe has invested too little in R over at least the last decade -- between 1995 and 2003 EU R expenditure as a percentage of GDP ranged between 1.72% and 1.85%. That's not an isolated one or two year dip in investment.

The EU is now pursuing wide-ranging legislation to manage chemical production and utilization. European universities will likely need to turn out a high number of experts in chemistry and toxicology to meet that challenge.

Europe is beginning to address what is, by its own recognition, an innovation deficit, and we applaud such efforts. A more innovative Europe is good for Europe, it's good for the Transatlantic relationship and it's good for the world.

Released on May 10, 2006

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