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14 Jan 05. BusinessWeek reported that European politicians seem to have a thing for the 1970s. But it’s not bell-bottoms or disco music that turns them on. It’s industrial policy. On Jan. 5, French President Jacques Chirac unveiled a plan to pump $2.6bn into a new government agency to finance innovative industrial research. Recalling how European governments decided more than 30 years ago to create a world-class aircraft manufacturer and satellite-launch business, he said: “Our responsibility today is to launch the Airbus or Arianespace programs of tomorrow.”

The dirigiste French aren’t the only ones calling for a stronger government hand in industrial policy. The Germans are talking about cooperating on cross-border industrial projects. The European Commission’s new industry and economic-policy chief, Gunter Verheugen, is supportive, too. “Let’s concentrate our research efforts and structural financing on the industries of the future,” he said in a recent interview with Le Monde. Verheugen even suggested that antitrust rules be relaxed to permit mergers that would create “European champions.”

No question, Europe has an innovation problem. The Old World collectively devotes a little under 2% of its economy to R&D, compared to 2.8% in the U.S. In research-intensive industries, from biotechnology to high-end semiconductors to video-game development, the Europeans are steadily losing ground.

More than prestige is at stake. High-tech industry is a major driver of productivity growth, and Europe badly trails there as well, with only 1.2%
labor-productivity growth last year compared with 3.7% in the U.S. So why shouldn’t the Europeans try to forge their own champions? After all, they created a thumping success in Airbus, which was cobbled together from competing aerospace businesses in four countries and now has surpassed Boeing Co. (NYSE:BA – News) as the world’s biggest jetmaker. Arianespace is the global No. 1 satellite-launch company, and has made a profit since 2003, after several years of losses.

There’s a glaring flaw in this argument, however. The government’s main role in Airbus was not in promoting research, but in stitching together the company and providing subsidies to get production going. Nurturing the research-driven industries that Europe now covets, such as biotechnology and the development of solar fuel cells and “clean” cars, is a more complicated proposition. Which projects are most worthy of support? How much money should go to basic research and how much to projects with obvious market potential? These are not questions a government agency is equipped to answer.

Even some Europeans who favor a new industrial policy want government to limit its role. Jean-Louis Beffa, chief executive of French glassmaker Saint-Gobain, and the author of a recent report proposing France’s new innovation agency, has suggested that the agency recruit private companies to distribute the research money. In exchange, the companies would be required to put up money of their own to finance R&D. Finland used much the same approach in the 1980s, when it seeded research projects that in turn fueled the rapid development of cell-phone giant Nokia.

Besides providing more funds for R&D, European governments need to get smarter in coordinating their efforts. Much of the Continent’s public-sector research money flows through bureaucracies that duplicate each other’s efforts while freezing out fresh ideas. One solution, proposed to European leaders in 2003, but never acted upon, is to create a Europewide counterpart to the U.S. National Science Foundation that would allocate funds based on scientific criteria and peer review. Most of all, Europe needs to catch up with the U.S. in providing tax credits to spur private-sector research, while easing regulatory and tax burdens to help high-tech startups flourish. T

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