European Competitiveness: A new EU innovation policy to address the Middle-Technology Trap

In the wake of a global productivity slowdown, rising geopolitical tensions, and protectionist challenges, economic competitiveness has returned to the forefront of academic and policy debates. This dissertation addresses the question of how innovation policy could help restore Europe’s competitiveness and support its catch-up to the technological frontier represented by the US. Across three chapters, it combines evidence on the European Middle-technology Trap with new causal estimates of the impact of EU R&D support, and complementary trade-based evidence on how diversification and connectivity shape exposure to external shocks and economic resilience. Chapter 1 maps Europe’s position in global innovation using firm-level data on business R&D expenditure (BERD) and patents. It identifies the industrial sectors where European countries underperform compared to other regions and documents a pronounced transatlantic gap in innovative investment in high-tech sectors. The European Union today attracts half as much business R&D expenditure (BERD) compared to the US benchmark—most of which accrues to less R&D-intensive mid-tech sectors like the automotive industry, which together make up almost 50% of European BERD. This pattern is consistent with a “Middle-technology Trap,” in which industries are more likely to fund incremental innovation of mature technologies rather than generating breakthrough innovation. By contrast, Europe is largely absent in key high-tech activities such as software and computer services, where it represents only 7% of global sales and less than 3% of global BERD. The same technological imbalance can be observed when considering innovation output, as measured by patent applications to the international patent system (PCT). Chapter 2 evaluates the productivity-enhancing potential of Horizon 2020 and Horizon Europe—the EU’s flagship innovation programmes—by providing causal evidence on the long-run effects of EU R&D grants to small and medium-sized enterprises (SMEs), and how this is mediated by firms’ ownership structure. The chapter introduces a novel dataset (COMPET) linking the universe of European Commission grants awarded between 2014 and 2024 to recipients’ performance. To address selection bias and the potential endogeneity of receiving public support, it exploits a quality label awarded by the European Commission to high-scoring R&D grant proposals that could not be funded due to budget constraints. Event-study estimates indicate that receiving an R&D grant raises productivity in the long run on average, but the gains are driven entirely by independent firms; there is no detectable effect for SMEs belonging to corporate groups. This heterogeneity is not explained by firm size and is robust across alternative performance measures. Chapter 3 shifts the empirical lens to another region of the world—the Caribbean—to study how trade diversification and infrastructural connectivity contribute to competitiveness and resilience. Using goods and services trade data, this chapter sets up a two-way fixed effects gravity framework to study regional trade integration and diversification. It shows that geographic distance and weak sea and air connectivity are a binding constraint for goods exports and are associated with more concentrated trading partners and higher vulnerability to external shocks. Similar concentration dynamics emerge in services, where tourism and financial inflows depend heavily on a limited set of source countries. Overall, the results highlight the role of policies that strengthen shipping and air connectivity in facilitating the diversification of goods and services trade partners, thereby reducing exposure to external shocks.