CHAPTER 4
Enterprise and Innovation The chapters on trade and finance analyzed how the 26 countries in emerging Europe have balanced the demands and dividends of integrating economically with advanced Europe. Chapters 4 and 5 now widen the analysis to include developed Europe. What binds these two chapters is productivity, a favorite subject of economists interested in economic growth. The chapters show that some parts of Europe are doing as well as North America, while others are falling behind. Much is expected of Europe’s enterprises. Workers look to them for jobs. Owners expect them to create value and generate profits. Governments want them to become export “champions.” Chapter 4 documents that between 1995 and 2008, remarkably, European enterprises delivered all three—jobs, value added, and exports. But over the last decade, Europe’s southern periphery has been falling behind Continental and Northern Europe, while Eastern Europe has been catching up. The timing—100 million people in the new member states became part of the European Union as another 100 million living in Greece, southern Italy, Portugal, and Spain reached high income levels—may not be a coincidence. The chapter discusses whether the industrial structures in Eastern Europe—despite the communist past—are better suited for an integrated continent than those in the south, and suggests that they are. These differences are manifest in productivity growth differentials between countries in six internationally contestable sectors (manufacturing, construction, transport and telecommunications, wholesale and retail trade, hotels and restaurants, and real estate and professional services). Two gaps in productivity motivate chapter 5—the widening gap between Southern and Northern Europe, and a persistent gap between advanced Europe and the United States. Europe’s “innovation deficit” is assessed, trying not to fixate on shortfalls in research and development (R&D) spending but seeing them instead as the most readily available measures of innovation performance. The chapter also tries to assess demand shortfalls and the weaknesses in linkages between demand and supply in European innovation systems. A big part of Europe’s R&D deficit is due to the lack of “young and large” companies such as Amazon, Apple, Google, and Microsoft. This in turn may be due to regulations that inhibit labor turnover and mechanisms for funding research, and that discourage profitable collaboration between business and research institutes. Because the information needed to carry out serious study of productivity growth is mostly available for the European Union, the 27 member states are the focus of chapters 4 and 5. Wherever possible, the analysis is extended to the other 18 countries in Europe: the four countries of the European Free Trade Association, the eight EU candidate and potential candidate countries, and the six eastern partners.
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