Europe’s future depends on investment in innovation

A humanoid robot companion presented during a technology conference in Warsaw, Poland
​Engineers present a robot at a competition in Warsaw, Poland. Europe needs more innovation to maintain its global competitiveness (source: dpa)​

Switzerland is a global champion in savings. The savings rate (the ratio of the disposable income that private households put aside) is more than 20 percent.

Much of these savings have been placed in pension funds. Swiss regulators, like those in many other European countries, oblige pension funds to invest mainly in debt instruments, such as bonds and mortgages, as well as in real estate. As a result, these funds are now having trouble reaching returns that will satisfy the future payment obligations to retirees.

Investment in venture capital is limited by regulations and best practice norms. In fact, it appears that Swiss pension funds invest less than one thousandth of their money in new companies and technologies. In the United States, pension funds invest some 5 percent in such firms, from which they reap more than 20 percent of their earnings.

A new Swiss foundation, founded by a group of scientists, business leaders and politicians, addresses this problem and promotes a fund, Zukunftsfonds, which should allow Swiss pension funds to make diversified investments in new technologies and ideas, enhancing returns. Zukunftsfonds would provide the necessary specialists who are not available to the pension funds.

Culture of mediocrity frustrates innovation

This model addresses an even more important problem not only for Switzerland but for the whole of Europe: a lack of innovation. Innovation means developing new products, services or processes which can then be implemented or marketed successfully. Switzerland and other European countries spend large amounts on research – mostly in universities. However, as opposed to the U.S., there is little return on it. The capital to make the results marketable is usually not made available, and the fruits of Europe’s research are harvested abroad.

These limitations are partially the result of overregulation and misunderstood best practices. The approach is aimed at avoiding criticism. There is a saying in the investment community: “Nobody gets fired for buying IBM” (the tech firm was always acknowledged as a safe pick).

But there are also other reasons. Innovation needs both economic freedom and entrepreneurial spirit – a readiness to take calculated risks, including the risk of failure.

Innovation needs both economic freedom and entrepreneurial spirit – a readiness to take calculated risks

Europe has become saturated and, unfortunately, very risk averse, focusing on protecting the advantages and privileges that have already been accumulated. The regulations are meant to provide protection in case of failure, but they sometimes go too far, limiting upside potential. This exchanges freedom for security, and blocks creativity and innovation. There is very little tolerance for failure: those who fail have difficulty receiving support for new projects.

This also leads to a culture of mediocrity, of remaining within a comfort zone that supposedly avoids failure and criticism.

This short-term view ignores that Europe, a high-cost continent, can only maintain its high living standards by being a leader in innovation. This is even more the case for Switzerland. Overprotecting the status quo will inevitably lead to stagnation and decline.

Europe has great universities, scientists and engineers. It also has some great companies. Unfortunately, due to overregulation, risk aversion, and insufficient capital, there is insufficient innovation, especially when it comes to start-ups in new areas. This is a core problem.

Bring in business

To address these challenges, collaboration between universities and business should intensify. Some shocking, archaic views can still be heard, especially from left-wing politicians, concerning scientific independence. In Zurich, for example, many have been critical of the fact that leading Swiss companies sponsored universities.

Overprotecting the status quo will inevitably lead to stagnation and decline

The Swiss Zukunftsfonds is a great model for Europe. But perceptions of risk and failure will also need to change. Second chances should be allowed. The relationship between universities and business must be enhanced – and the antiquated perception that science should take place in a university’s ivory tower, independent of all business, must be trashed. Scientific research must be applied and universities should coordinate their achievements in different sectors, but business is key for real innovation to occur.

A university financed exclusively with public funds can even be less certain to guarantee scientific independence – the research will become dependent on politics. In Germany, for example, much of its nuclear research came to a halt for reasons of political expediency.

Only innovation can help Europe maintain its global competitiveness. The returns from these innovations will guarantee the retirement payments for Europe’s aging populations.

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