Zu Luc Soete: "Activating Knowledge"

Activating Knowledge

by Luc SOETE, United Nations University, Maastricht

Discussion paper prepared for the UK Presidency

October 2005

If there is one policy slogan that would be appropriate in describing the challenge the European Union currently faces it is the need for policies “activating knowledge”. 1

The most relevant comparison, which can be made here, is that with policies for “activating labour” which rose to popularity in the 1980’s and 1990’s and were instrumental in reducing long term, structural unemployment in a number of European countries. Such policies focused on the many “passive” features of the labour market, and the way these features had contributed to a rise in long-term unemployment.

“Active labour” market reforms opened up labour markets, making them more flexible without putting in jeopardy the essence of the social security protection model, typical of our European welfare systems. Countries which went furthest in such “active labour” market reforms such as the UK, the Scandinavian countries, and the Netherlands witnessed not just reductions in unemployment, but also impressive increases in employment participation rates, particularly among underrepresented groups in the labour market.

The challenge today appears more or less similar, but this time with respect to knowledge. Knowledge understood here as including both research, innovation and knowledge diffusion as well as education, training and life long learning.

“Boosting” and “activating” knowledge investment in Europe is therefore an essential part of our discussions on the reform of the European social model.

Confronted by fundamental challenges in our external environment with the entrance on the world scene of major new emerging economies, and in our internal environment by ageing populations and new technologies that change our way of life, we have no other choice but to embrace modernisation. To free resources to invest in knowledge and to activate knowledge throughout all areas of our societies. No longer just in agriculture and industry but increasingly so in all these other services sectors essential to the competitiveness of our

This is an abbreviated version of a contribution commissioned by Policy Network for a larger project on the European Social Model. 3 economies and the quality of life of our citizens: health, education, transport, finance, wholesale and retailing, and in government administration. Modernisation and the accompanying investment in knowledge will give us the tools to respond to the new external and internal challenges Europe faces today: remain competitive and prosperous in a world where other less prosperous countries are growing faster and catching up, develop our social welfare so that more rather than less people find better jobs, and provide a vision to future generations of a sustainable and better world. Interestingly it is those EU Member States (MS) which have succeeded most in “activating” their labour markets and developing better functioning social welfare models – such as Sweden, Denmark and Finland – that are also the ones which have performed best in terms of knowledge investments. It suggests, that being successful in boosting knowledge investment provides ultimately the public resources for the development of social welfare models capable of addressing rapid change, and in particular the global changes of the 21st Century.

Diagnosis

As the above diagram illustrates, overall Europe has failed, and continues to fail in boosting knowledge investment. Knowledge investment (measured here as research and education expenditures as a percentages of GDP)2 is for the EU as a whole well below that of the US, at the same time our social expenditures as a percentage of GDP are nearly double that of the US. A situation which is not only unsustainable in financial terms but is also unfair to our future generations.

Our failure to invest and activate knowledge holds for both higher education (HE) and for research. We fail at the national level and we fail at the EU level.

Let me give you some figures.

For definitions and details on data sources see the Appendix The EU spends currently 1.2% of its GDP on HE, the US more than double that figure: roughly 2.6% of its GDP. At the same time the EU has more or less the same number of HE establishments, around 4000.

Not surprisingly, the large majority of European universities find themselves in a, sometimes dramatically, under-funded position, with poor teaching and research facilities and a continuous emigration of their biggest talents. In short: knowledge investment in human capital does not have any of the growth features we had promised our citizens it would have.

In financial terms our public knowledge investment efforts are actually broadly comparable to those of the US. But they are scattered over a multitude of public research and higher education institutions across the EU.

But it is the dramatic difference between the US and our private funding investments in knowledge which is actually most striking. Only Sweden attracts a similar amount of private funds into knowledge investment, primarily research as the US does. In the EU as a whole we fail to convince our firms and our citizens to invest in knowledge.

It is a failure which is first and foremost a failure to “activate”, to open up higher education to private funding.

In the UK, steps have been taken in this direction by enabling universities to charge tuition fees and giving them more freedom to compete with each other. Obviously such reforms in the university funding will have to take into account the differences in MS in income taxation, it is after all a MS competence, but it is an issue of the utmost importance to the whole of Europe. We do have to address the reform of our HE system as an absolute priority if we want Europe to able to compete in the knowledge based society of the 21st Century.

The EC too has a role to play, even though education is the competence of individual MS.

But indirectly (according to Art. 149 of the Treaty of Amsterdam), the Community has the possibility to “contribute to the development of quality education by encouraging cooperation between Member States”, through various actions. In short, the Community has a complementary role to play: to add a European dimension to education, to help to develop quality education and to encourage life-long learning. Here, the Commission should help define an EU policy framework supporting European universities in adapting to the new context of increased competition and globalisation in higher education and training, and look

forward to the Commission's forthcoming Action Plan on University-based Research which will be presented before the end of the year. We will need the support of all stakeholders: at national and at European level if we are to succeed in responding to the challenges confronting European universities.

At the level of research, the situation is probably as challenging. Again a comparison with the US is illuminating.

Of total US university research, 60% derives from so-called federal agencies: the NIH, the NSF, the DoE, the DoD and NASA to name the most important ones3. However, 95% of those federal funds are spent in no more than 200 universities out of the US total of 3300. This has brought about a concentration and scale of research which is incomparable with what we have in Europe today. It has led to research excellence in a limited number of knowledge “gravity centres” capable of attracting the best researchers world wide and with sufficient resources to invest in the best, ideal research facilities research excellence thrives on.

The diagnosis I’m presenting here is not new. Actually we have known this for a long time. At the Lisbon summit five years ago the concept of a “European Research Area” and the current 6th FP pays special attention to European networking and excellence was launched.

But if we look midway at the hard facts, we notice that all these efforts for greater European coordination in research have at best led to what I would call “research saupoudrage”: allocating an albeit limited amount of research funds over a very broad scattered field of research institutions. An old slogan some of you might remember from the French ‘68 students revolt “Culture is like jam, the less you have the more you spread it“ seems particularly applicable to EU research funding.

In short, the diagnosis is hard and clear: while we have kept up with the US in investing public resources in knowledge, both in higher education and research, we have dramatically

failed to convince the private sector and our citizens to invest in knowledge, in our own long term future. As a result, we have not reaped the benefits in Europe of knowledge-led growth.

Whether it is the form of the delivery of highly skilled youngsters from universities, professional or technical high schools, or in the form of research output, knowledge in Europe has, in other words, remained unused, and under exploited. In short, it has remained passive.

A policy of “activating knowledge” should aim at activating competencies, risk taking and readiness to innovate. It should be directed towards the activation of the many forms of unexploited knowledge.

While the figures presented here were limited to research and higher education, my claim is that there are many such forms of un- or under -exploited knowledge, covering the full spectrum of knowledge creation, application and diffusion. They address many different actors in very different ways in each of our Member States: not just universities and research institutions, but also financial institutions in general and not just venture capital providers; private firms in manufacturing as well as services; and last but not least European citizens as entrepreneurs, as employees or employers.

Proposals

It is obvious that “activating knowledge” involves first and foremost efforts and insights from individual MS. These are currently governed by a set of rather soft guidelines, based on the so-called Open Method of Coordination (OMC). We have to admit today that they haven’t been very successful.

With another 6 to 7% from business, 7% from individual states and the rest from own funds (own endowments, large foundations, etc.) If we want to rise to the challenge of activating knowledge, we need urgently to come up with more efficient guidelines, leaving at the same time sufficient scope for the specificities of each MS’s situation.

First, I would propose introducing alongside the quantitative targets, a qualitative “knowledge investment” or “knowledge activation” target for each Member State. An appropriate target, better in my view than the 3% research and innovation Barcelona target, would consist of combining the various knowledge investment components into one single target, including education and both private and public funds.

Such a broad knowledge investment target would provide more leeway to individual MS. The amalgamation of both public and private funding would offer MS also the freedom to design their own knowledge investment boosting policies: through public funds in high income tax MS or through the design of appropriate incentive schemes to raise more private funds in others. The broadening of the knowledge concept to education would also enable MS to address particular weaknesses in their education systems as an integral part of their knowledge and innovation investment strategy.

Second, I think we should undertake a major concerted policy at opening research and higher education to private funding. There is strong argument to be made, given the significant impact of R&D tax credits on “incentivising” private R&D efforts, to evaluate whether there would be merit in contemplating a broader EU wide framework of R&D tax credits. Tax policy is obviously a MS’ competency, but as the EC has noticed4, the effectiveness of MS tax credit regimes could be improved by identifying good practice compliant with Community law, and promoting more consistent approaches across the EU to common issues such as cross-border outsourcing of research, expansion of young research intensive firms, or synchronisation of national support to large European research projects. Extending them to other forms of innovation such as design or process engineering can also be explored.

see http://europa.eu.int/invest-in-research/pdf/comm_native_com_2005_0488_4_en_acte.pdf The Commission only funds pre-competitive research through its various funding programmes. R&D tax credits do not have this constraint. It is interesting that Germany had an R&D tax credit policy which it ended, while countries like Canada use tax policy as a fundamental driver of their Innovation Strategy.

Similarly, we should prioritise the reform of universities in Europe. European universities are under-funded and fragmented, they lack "critical mass" with only a couple of exceptions. The EIT (European Institute of Technology) launched by President Barroso, as a concept is an attempt to create more critical mass in research, not by building a new bricks and mortar institution, but by linking up key institutions and creating several "Centers of Gravity" in Europe. The Bologna Process and the European Credit Transfer System (ECTS) were examples of how a voluntary coordination could be achieved across MS in a very short time. So we can get fundamental changes under way in our universities. However, these initiatives should get additional focus and funding.

One way to do this would be to strengthen universities specializing in specific areas and with sufficient buy-in from industry. Indeed we will need the help and support of private industry. We then need to foster competition between those universities. Competition to attract the best professors, competition to attract the best students, competition to attract funding. This competitive aspect has been one of the key reasons for the dynamism of the US higher education system.

Given the wide diversity in the institutional set up of higher education systems across MS, we can achieve the best results if we succeed in convincing our universities to concentrate their resources in a certain direction tied to a clear outcome. There are obviously difficult policy and political choices that will need to be made between policies that drive concentration and excellence and those driving accessibility to higher-education, but we should be prepared to address those if we want to open the door to private investment. Business models of universities will need to change, a fee structure similar to that developed in theUK should be implemented and gradually be moved towards market rates while taking care to avoid a situation in which higher education becomes unaffordable for lower and

middle income students. But what better European ideal then to support lower income talent through education grants and loans?

Third, I would argue that the Lisbon Strategy’s interpretation of “knowledge and innovation as engines of sustainable growth” represents a too segmented policy approach. The vision put forward here of “activating knowledge” forces one to deal with a much broader spectrum of policies than just research policies: education policies, competition policies as I argued here, but also social policies.

Maybe it is time for a fundamental rethinking of the “universality” of social security systems as they were developed in Europe over the last Century in a variety of ways, in broad synergy with the emerging industrial society. Such a rethinking should recognize the duality in the labour force between work involving “labour”, a physically or mentally wearing activity, and work involving “satisfaction”, activities providing self-satisfaction in terms of recognition, realisation and creativity.

Workers involved in the first sort of activity will consider past social achievements as important achievements intrinsically associated with their quality of life. They will consider any change in those conditions as a possible deterioration in their quality of life and reject it. Workers, involved in the second sort of activity, which I would call knowledge workers, are less in need of such social measures. Obviously they too will appreciate social “security” guarantees to their employment, but these will be used as a substitute rather than as complement to their own life long learning efforts and investments. You might even say that today knowledge workers are “free riding” on social “security” guarantees designed in another industrial age, aimed at a different category of workers. The extension of social rights to knowledge workers appears from this perspective not only unjustified, undermining the financial sustainability of the European social model, but could also explain the lack of dynamism of knowledge workers in Europe.

Fourth, given the increasingly global nature of the social, economic, environmental and demographic problems Europe is facing, a unilateral focus on strengthening knowledge and innovation activities carried out within Europe with the aim of improving our competitiveness reflects increasingly, I would argue, a rather out-dated “Eurocentric” approach.

A research strategy that is limited geographically no longer fits today’s global, knowledgebased economy. Our policies can be rooted in one geographic jurisdiction but their scope and perspective must be global. In a growing number of research fields, European welfare will in the long term be directly influenced not so much by the development of “our” knowledge, its international commercial exploitation and intellectual appropriation, but by global access to such knowledge. By the development of joint global standards and the rapid world-wide diffusion of new technologies to other, non-EU countries. Think of energy saving, environmental sustainability, but also health and security.

The revised Lisbon Strategy following the mid term review offers new opportunities to revitalize knowledge and innovation capacity building in Europe. I have outlined here what the major challenges are before us in “activating knowledge”.

European society with its high level of social welfare has undoubtedly more difficulties in managing change. It is, however, not alone in having to deal with this challenge. We will have to convince our fellow European citizens that change is part of life and that the best form of security and employment protection is the development and preservation of skills through an active investment in knowledge. Stakeholders in society (trade unions, firms, governments, educational institutions and most importantly individuals) all have a role to play in making this change a reality. Let’s challenge them.

Luc Soete is a Professor of International Economics at the Faculty of Economics and Business Administration, Maastricht University and director of the Institute for New Technologies at the United Nations University.