To move into a greener, more secure, and more autonomous future, we need more venture capital and an environment in which innovation can thrive.

Research and innovation are vital to our future economic competitiveness and the transition to a green economy. But Europe continues to invest less than other advanced economic regions in these areas and risks slipping further behind. To move into a greener, more secure, and more autonomous future, we need to create an environment in which innovation can thrive.

Spending on research and development is a key indicator of innovation activity. The European Union aims to invest 3% of GDP on research and development, with 2% coming from businesses. The European Investment Bank’s latest Investment Report, which is released on 28 February, shows that while Japan and the United States have already exceeded this goal, research and development expenditure in the European Union accounts for less than 2.5% of GDP, out of which businesses contributed a little more than 1.5%.

But the problem goes deeper than a that. Almost 60% of EU firms report that they do not engage in any kind of innovation, far more than in the United States, where the figure is below 40%. European companies are also far slower at adopting new technologies or market innovations than their US competitors, which is one of the main reasons for the innovation gap between the United States and the European Union.

Europe still leads in green innovation but American and Chinese firms are catching up. Meanwhile, Europe continues to lag behind the United States in digital patents. In addition, the US Inflation Reduction Act, which is expected to provide almost $369 billion for energy and climate change projects could give an enormous boost to the country’s green innovation sector.

Innovation is not just about the future, it’s also about today. Its importance is hard to overstate because innovation is so vital for economic resilience. Our research shows that innovative firms withstood the pandemic-induced economic downturn much better than their peers. Unsurprisingly, innovative firms were more likely than others to have seen their turnover increase between 2019 and 2022.

Improving innovation in Europe would not only help the economy better weather crises, it is also a pre-requisite for surviving the climate crisis, for which much of the technology needed to achieve our goals has yet to be invented or commercialised. This is a real problem in Belgium, where our Investment Survey shows that over half of all companies (53%) report that weather events—such as the massive floods of 2021—have an impact on their business. Yet only about a quarter of companies are investing in solutions to avoid or reduce their exposure to such risks.

The importance of venture capital

Europe urgently needs policies to support innovation, including more financial support for start-ups and successful innovators looking to expand. Over the last decade, Europe has built a fast-growing start-up scene that has launched global players, including more than 70 unicorns, and created more than two million jobs. Between 2010 and 2020, investment in European start-ups rose sixfold to about €40 billion.

In 2022, the European Investment Bank Group invested nearly €2.7 billion in Belgium, of which €335 million from the European Investment Fund, our SME and equity financing subsidiary, went to small companies.

Among the innovative Belgian companies to benefit were Exevir, a biotech developing a COVID-19 therapeutic from llama-derived nanobodies with the help of €25 million in venture debt.

In addition Belgium’s PUNCH Group received a €40 million loan to help further develop its hydrogen and electric propulsion technologies and related energy storage systems at its facilities in Italy and France.

To turn the tide, however, we must do much better at nurturing young companies that could grow into the industry leaders of tomorrow. Too many promising European start-ups struggle to raise the capital they need to expand and mature. They are forced either to move abroad to the deep capital markets of the US, or to sell themselves to larger rivals with deeper pockets. In 2020, nearly a quarter of all European venture capital deals had at least one US or Asian investor. European investors accounted for a small minority of the capital raised in most deals, particularly the biggest ones.

One of the reasons for this is simply that there are far fewer venture capital funds in Europe than in the US and even fewer of a size capable of scaling up the most successful companies. The number of venture capital funds with €200 million to €500 million to invest is three times greater in the US than in Europe. The number of funds in the €500 million to over €1 billion range is six to eight times greater.

The European Tech Champions Initiative (ETCI)

The launch of the European Tech Champions Initiative, a fund of funds managed by the European Investment Fund with €3.75 billion of commitments from Germany, France, Italy, Spain, Belgium and the European Investment Bank, aims to address this issue. It will help European late-stage venture capital funds bulk up, so that they can channel much-needed scale-up capital to promising European innovators.

Venture Debt, of which the European Investment Bank is one of the largest providers in Europe, will remain an important part of innovation financing, especially in the growth and scale-up stages of companies. It is a unique financial product that complements regular venture capital investment by allowing companies to scale-up their activities without diluting the shareholdings of founders and early investors. Beneficiaries of venture debt loans on average report higher total assets and are more likely to find new investors in later funding rounds.

Our ability to innovate and support the commercialisation and scaling up of innovations will help to determine our future. We must invest more in it today.