European Economic Governance and Technological Dynamics - DIME

European Economic Governance and Technological Dynamics: an Unbalanced Relationship

Elisabetta Marinelli

SPRU, University of Sussex, [email protected] DIME Working paper 2008.2 in the series on “Dynamics of Knowledge Accumulation, Competitiveness, Regional Cohesion and Economic Policies” (DIME Working Package 3.3) Abstract The fast pace of global economic integration and the spread of information and communication technologies (ICTs) have substantial distributional and structural implications which, despite their relevance, are not sufficiently recognised at the policy level. The present work explores these issues through a literature review of scholarly and policy makers’ contributions. It analyses the interactions between economic policies and technological dynamics in the EU and highlights their impact on the development of the European knowledge-based society. Keywords: Globalization, economic policy, technological change JEL Codes: E0, O30

DIME is supported financially by the EU 6th Framework Programme

European Economic Governance and Technological Dynamics: an Unbalanced Relationship Elisabetta Marinelli [email protected]

1. Introduction The fast pace of global economic integration and the spread of information and communication technologies (ICTs) have substantial distributional and structural implications which, despite their relevance, are not sufficiently recognised at the policy level. The present work explores these issues through a literature review of scholarly and policy makers’ contributions. It analyses the interactions between economic policies and technological dynamics in the EU and highlights their impact on the development of the European knowledge-based society. European economic governance is strongly embedded in neoclassical ideas, whereby the smooth functioning of the market mechanisms ensures the growth process itself. Within that framework technology is a neutral agent: as a commodity it is available “off the shelf” and countries and firms can make use of it and increase their productivity immediately, without any other investment being required. From the perspective endorsed in this paper, and in line with the mission of the DIME network, technology is not a neutral agent and its deployment can disrupt previous patterns of development. As such the economic and social effects of technology should be adequately integrated in policy design. By the same token, if such effects are not taken into account, economic policies might not meet their objectives. The EU Lisbon Agenda, which promotes structural reforms to enhance competitiveness in response to the challenges of globalisation, ageing and faster technological change, is an attempt to introduce technological considerations in economic and social governance. However this attempt has, so far, not been successful. It will be argued here, that this is partly due to the fact that the dynamics of technological development, are not sufficiently incorporated in policy making. To clarify how European economic and technology policy are disarticulated, it is useful to make use of Tinbergen’s “instruments-targets” idea. According to this approach, which influenced economic policy after WWII, a number of targets should be set, each of which should be achieved by a different instrument1. The traditional targets and instruments used by Western economies, reported in Table 1, soon proved to be too simplistic. Partly because the instruments were not powerful enough, and partly because the objectives themselves were harder to control, the symmetry implied by table 1 got lost in reality2. The rapid pace of technical change which has accompanied the process of economic and productive globalisation, has contributed importantly to the displacement this traditional logic of governance as new priorities have emerged which require a reassessment and a renovation of old instruments and which make the mismatch between goals and policies even more striking. 1

If there were two targets, such as full employment and price stability, and on instrument only, fiscal policy, expanding government expenditure (fiscal manoeuvre) to achieve full employment would make it harder to keep price stability. Another instruments, such as monetary policy, would be needed for the simultaneous achievement of both targets. 2 Indeed, the recent history of economic policy shows how multiple instruments have been used to tackle targets which were originally managed by other policies For instance, the balance of payment is currently governed by fiscal and monetary policy rather than trade policy.

Table 1 Targets and instruments for industrialised countries after World War II. Targets Instruments Full employment Fiscal policy Price stability Monetary policy Balance of payments Trade policy Economic growth Commercial and industrial policy Economic Equality Incomes policy Source: von Tunzelmann (2003).

The paper is organised as follows: section 2 explores traditional macroeconomic instruments and draws attention to the fact that fiscal and monetary policies are too rigid as to favour a smooth transition to a knowledge-based society; section 3 looks at competition policy and at how this is challenged by the need, among innovative firms, to cooperate in several ways; section 4 focuses on trade policy: building on the contributions of heterodox economics approaches it highlights that, for knowledge transfers and growth to occur, commercial exchange must be accompanied by other types of investment; section 5 analyses cohesion policies which, although increasingly structured as instruments for innovation policy, neglect some crucial aspects of knowledge and technology processes, namely their strong path dependency and geographical specificity. Section 6 draws some conclusions and re-iterates the need of a better integration between technology and economic policies.

2. Technological dynamics and fiscal & monetary policy This section focuses on the links between technology and the main two areas of macroeconomic governance: fiscal and monetary policy. The section will explore how EU macroeconomic policies, as embedded in the Stability and Growth Pact (SGP), conflict with (or complement) the Lisbon Agenda of knowledge based structural reforms. Whilst other studies have focussed on the impact of the Lisbon Strategy on macroeconomic stability3, here a reverse focus will be adopted. The present paper endorses a view of technology as an active agent in social and economic life, changing and potentially disrupting previous patterns of growth. According to the economic model embedded in the EU governance, monetary and fiscal stability, by rendering the business environment more predictable, favour investment and growth. However as technological development breaks that predictability it undermines the development process itself. The uncertainty about productivity trends, implicit in periods of rapid technical change, poses a major problem in the design and implementation of monetary policy as decision makers are challenged by the risk of a productivity slowdown, the consequences of overinvestment and foreign capital flows variations (Ferguson, 2000). Such risks undermine traditional monetary policy and require new analytical and decision models. In such context, not only price stability cannot soothe the business environment, but the turbulence brought about by technology interferes with any policy attempt to govern inflation and keep it within established limits. As a vehicle for pervasive transformation technological change calls for policy responses based on flexibility rather than rigidity of rules, with effective structural reforms complementing (and compensating) more traditional instruments of economic governance.

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For a review see Mabbet, D. & Schelkle, W. (2005).

R&D expenditures and macroeconomic policies Analysing the fluctuations of R&D expenditures can further highlight the links between technology and macroeconomic policy. In that respect, Liagouras et al. (2001), stress the importance of European Structural Funds in explaining the Greek increase in R&D expenditures during the ‘90s; such funds enabled the government to implement restrictive fiscal policies without reducing its support for R&D. This was exceptionally important as at the time Greece was facing the decline of its post-war model of development. During such adjustment period, stabilisation policies, which limited government expenditures, proved not to be an appropriate instrument to find new patterns of growth. Notwithstanding the specificities of the Greek situation, this story points out that structural change, as the one brought by technology, requires specific instruments to ease the transition process. Bounding fiscal rules, might themselves be detrimental whilst expansionary fiscal policies might provide appropriate solutions. The work of Guellec and Ioannidis (1999) brings insights on the relationship between monetary policies and R&D fluctuations. According to their findings, high interest rates have contributed to the reduction in physical investment in the 1990s. In their model a rise in interest rates results in a reduction of business R&D, with a lag of three years. Such gap indicates that the shock is transmitted through interest payments: investors who have to reimburse higher services on their debts, have less cash to devote to R&D. Interest rates also exert indirect impact on business R&D through GDP, which is as well negatively related to interest rates. With these practical examples in mind, the debate on Lisbon and the SGP can be better contextualised. In the following sections these two pillars of European governance will be introduced, in order to explore their complementarities and inconsistencies.

Maastricht, the SGP and its reform In a monetary union, fiscal rules are needed to avoid that deficits and growing debt levels have a detrimental impact on economic growth and welfare as unsustainable public finances will spill over onto other members by raising inflation and putting pressure on the central bank. The SGP, established in 1997, complements and makes permanent the provisions of the Maastricht Treaty (1992). The Maastricht fiscal convergence criteria imposed a government deficit limit of 3% and a government debt limit of 60% of GDP as the price to enter the EMU; moreover, it established that the inflation rate be no more than 1.5 percentage points higher than the 3 best-performing member states of the EU (based on inflation). The SGP, made this fiscal discipline permanent, through monitoring, and sanctions against offending members, in order to achieve a medium-term budgetary objective of “close to the balance or in surplus”. Despite the improvements in public finances of most countries through out the 1990s, after the Pact came into force in 1999, the disappointing performance in a number of member states placed a considerable strain on its implementation, ultimately resulting in a reviewed version of the pact itself4. In the renewed pact, established in 2005, specific national considerations on debt growth and investment expenditure were included, allowing for public deficits to exist also in the medium term. A longer convergence period towards middle run objectives was allowed, and consolidation of public finances was linked to general economic trends5. Finally, and most importantly for the purpose of this work, it was 4

In 2005, five of the 12 euro-area countries either had or planned deficits above 3% and were subject to excessive deficit procedures. 5 More consolidation efforts should be made in periods of economic growth, less during downturns.

decided that expenses on specific “relevant factors”, could be taken into account when deciding whether an excessive deficit procedure should be started: spending on the Lisbon Agenda and on R&D were included among the factors that could justify a deficit higher than 3%.

The Lisbon Strategy6 The Lisbon Agenda, launched by the European Council of March 2000, is the elaboration of a European development strategy in face of the challenges of globalisation, ageing and faster technological change. Its central idea is to recognize that, in order to sustain the European social model, a renewed European economic basis centred on knowledge and innovation is needed. A Schumpeterian model of capitalist evolution underlies the whole strategy. As it is often quoted, the strategy original ambition was to become the most competitive and dynamic knowledge based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion.7 The Lisbon Agenda is relevant to the present analysis for it puts knowledge and innovation at the centre of long-term structural change in the European Union. For the first five years, the strategy was translated into a plan of common objectives and concrete measures, implemented through peer review among Member States8. Progress on its implementation was slow and uneven which led to a renewed agenda in 2004. The review kept the same spirit yet had more sophisticated implementation methods, new financial instruments and aimed at a deeper integration with other policy domains. Implementation was strengthened by introducing the “Broad Economic Policy Guidelines” and “Employment Guidelines” - a form of council recommendation - to replace the weaker peer review approach. National Reform Programmes, identifying the budgetary resources to be mobilised, were also introduced, together with the Community Lisbon Programme, which put together the regulatory and financing actions, as well as the policy developments to be launched at the European level. Stronger coordination among policy arenas was sought by better enabling Community programmes9 to become catalysts of national plans for growth and jobs; by integrating the Strategic Guidelines for the Cohesion Policies (which aim at closing the income gap among European regions), with the Lisbon priorities More to point of this section, coordination was sought by linking the Lisbon Agenda to the SGP, allowing spending on its implementation to be “a relevant factor” in case of the excessive deficit procedure.

Lisbon and the SGP The new pact and the reviewed Lisbon Agenda have generated a strong debate among academics and policy makers. González-Páramo (2005), from the ECB, values the more sophisticated approach to fiscal surveillance and the increased focus on sustainability, although points out that consolidation of public finance could be slowed down. According to the Deutsche Bundesbank (2005) the new rules, severely weaken the Pact, diminishing the incentives to pursue a sound budgetary policy. Rodrigues (2005), the Lisbon Strategy architect, welcomes the reforms as a good first step towards the coordination of different realms of policy; Watt (2005) consider the modified SGP, as an important, though not sufficient step 6

This paragraph builds strongly on Rodrigues (2005). During the Gothenburg summit in 2001, the objective of sustainable development was further added. 8 The so-called Open Methods of Coordination (OMC). 9 Specifically the 7th framework programme for Research and Development, the Community Programme for Competitiveness and Innovation and the Community Programme for Life long learning 7

forward and suggests that public investment in specific areas should be excluded from the deficit calculation. These various points have been captured in the theoretical analysis of Beetsmaa and Debrun (2007) who model the key policy trade-offs involved in the recent reform of the Pact. They find out that allowing for more case-specific judgment on economic issues can strengthen the SGP, although two important conditions must be satisfied: first, looser budgetary restriction should not translate into softer enforcement; secondly, strict monitoring should allow for a qualitative assessment of fiscal policy, especially in relation to structural policies. From a political economy point of view, the same issues can be analysed by focussing on the trade-offs or complementarities between structural reform and fiscal consolidation. The literature on that subject is divided in two strands: the first one argues that combining fiscal consolidation with structural reforms yields to a double dividend as strict fiscal policy constraints too generous fiscal handouts and provides incentives to change the status quo. According to that view the fiscal discipline of the SGP well compensated the reform agenda of the Lisbon Strategy. The second branch sees tensions between an ambitious agenda of structural reform and fiscal consolidation, claiming that fiscal flexibility is required to compensate for reform expenditures and that more fiscal freedom is needed to implement the shift towards the knowledge economy (Mabbet and Schelkle, 2005). From an institutional perspective, as the one adopted by Creel et al. (2005), the strong contradiction between the objective to modernise Europe and its social model, and the lack of active macroeconomic management since 2001, is reflected in a strong institutional asymmetry: whilst the EU macroeconomic policy framework is based on the logic of delegation of power and control to independent authorities with conservative objectives, the Lisbon Agenda requires proactive policies and objectives for which individual members states are responsible. According to the authors it appears problematic to argue that the SGP reform aims at putting the Pact and Lisbon in line by giving the member states the means of their ambitions. Rather the new flexibility of the SGP seems to aim at temporarily relieving the burden on the Euro area member states who don’t abide the pact, at the cost of higher rigidity in the future. From the perspective endorsed in this work, whereby the middle and long-run challenges brought about by ICT technological development have to be synchronised with appropriate macroeconomic policy, the integration between the pact and the strategy is still incomplete because the role of demand is not adequately considered. The pact is, strongly embedded in monetarist views of inflation, ignoring that deficits are driven by slow growth as well as loose fiscal policy; moreover, and perhaps more importantly, although the new pact allows for national specificities and differentiations among types of expenditures to be taken into account, it lacks a sound and explicit understanding of the short and long-run implications of different budgetary items, as such dismissing the importance of demand management. The reviewed Lisbon Strategy, on the other hand, has acknowledged the importance of the demand side. Following the recommendations of the Kok (2004) report, explicit attention has been given to public procurement for innovation and to structural market reforms. Although these must be considered important steps in the right direction the potential of demand side policies is, so far, still underexploited (Georghiou, 2006). This is probably due to the lack of a sound understanding of the interaction between demand and supply in a knowledge driven economy (Marinelli, 2007). The lack of an adequate theoretical framework, itself a manifestation of the disruptive effects of ICT diffusion, renders the integration between macroeconomic and innovation policy still faulty, and economic governance in general, an even more difficult task.

3.Competition policy and technological dynamics This section will concentrate on the interaction between competition policy and technological dynamics. Firstly it will be shown how, the characteristics of the innovative process, identified by innovation scholars, question the rationale and the focus of traditional competition policy, as framed in mainstream economic approaches. Following such theoretical introduction, a more detailed review of instances in which innovation and competition conflict will be made. Finally, these observations will lead to an assessment of EU competition policy.

Competition and innovation Competition policies aim to restrict practices which remove competition from the market such as collusive arrangements to fix prices above their competitive level, mergers aimed at creating a dominant positions, and abuse of dominance by market leaders. Such practices must be avoided on the grounds that they reduce consumers’ welfare. The ultimate goal of competition policy is to restore an optimal market structure where a collection of idealised consumers and producers, by responding to prices as the only relevant information, achieve an allocation of resources that is optimal according to the Pareto criteria. The approach follows a static efficiency logic whereby, in equilibrium, the consumers can purchase the goods at the lowest possible price and no firm earns supra-normal profits. Competition policy, as it is framed in the traditional paradigm, focuses on the bottom end of the production chain: the attention is on final products with fair prices signalling a competitive market structure and, correspondingly, non-competitive practices being reflected in final prices. In such a context, innovation is thought as emerging from a rational process in which all the actors have access to the same information and firms are assumed to obtain immediately the gains associated with the new technology, once they have decided to implement it. Monopolies might rise as firms decide to innovate in the perspective of benefiting from a rent. The progress made by innovation economists in the last decades, has highlighted the weakness of such approach and questioned its rationale. What matters for technological development, is not to preserve the mechanism of rational choice among known alternatives (the traditional scope of competition policy), but to enhance the “viability” of the process through which new alternatives are brought to existence (Gaffard and Quere, 2006) as the capacity of an economy to derive competitive advantage from technical change and innovation depends on the dynamic efficiency with which firms and institutions can diffuse, adapt and apply information and knowledge (Soete and ter Weel, 1999). The current economy is characterised by intensified, global competition to which firms, which need to innovate in order to survive, respond by taking part in different cooperation agreements. Indeed innovation does not result from individual actors, but rather, from the interactions among firms and institutions within a specific environment. In pursuing innovation, firms face costs associated with R&D that they often cannot bear individually. They confront risks and uncertainties related to market acceptance and come up against limits of their internal capabilities for which cooperation and mergers are necessary. Albeit forms of market imperfection in the traditional sense, coordination and cooperation are means for making the innovative process feasible. Moreover the same need to innovate has also generated new patterns of industrial behaviour, unpredicted by traditional approaches: as shown by Garcia and Velasco (2003) in the biotechnology sector the same firms co-operate and compete at the same time, making it hard to identify the boundaries of technologies, firms and industries themselves. Due to the crucial role of cooperation, competition policy has a strong impact on innovation. Competition policy, by governing market structure, determines how information and knowledge are made available in the productive system and therefore influences the structural adjustment needed to achieve productivity

gains. In that sense, technological development questions the traditional logic of competition policy, which should now be defined in relation to the dynamic viability of the innovation process itself, with some degree of tolerance to various forms of agreements in R&D, manufacturing and distribution when they are means to compensate for high innovative costs10. However, the uncertainty surrounding technological change in highly dynamic sectors implies that it is difficult, if not impossible, to evaluate the effects of inter-firm collaborations that can in principle lead to anti-competitive practices. These trends render policy making more complex, as there are no tried and tested guidelines that can identify and quantify the alliance’s welfare implications (Mollgaard and Lorentzen 2005). Competition policy is also being challenged by the increased privatisation of knowledge assets, pursued through the enforcement of intellectual property rights (IPR) regimes at the national and international level. This process has shifted the focus of competition policy from the price/product level, at the bottom end of the productive chain, to the knowledge/technology level, at the top end. IPRs such as patents and copyrights protect intellectual property exploitation by granting exclusive rights to those who own and control them. Patents, which are used when the knowledge is embedded in new ideas, entitle the holder to license, whilst copyrights, used when knowledge is embedded in original expressions, entitle the holder to sell11. As highlighted by Andersen and Konzelmann (forthcoming), IPR systems are characterized by differences in relative power among actors with the risk that those with advantage might (ab)use their position to weaken others within the system. However as collaboration among stakeholders is essential in order to create financial and non-financial value from IPRs (ibid), competition policy needs to ensure that differences in power are not used to limit the participation to cooperative activities to the weaker party. In other words competition policy needs to balance individual short-term benefits, which may be secured by power advantages, and collective long-term interests for which a more distributed power structure is needed. Before concluding this section it is important to mention that tensions between competition and innovation also occur at their interface with industrial policy. As highlighted by Mowery (1995) such policy has been an essential component of the western European ‘national champion strategy’ in high-tech civilian industries. However, as such strategy typically relied on a single firm to supply advanced products in hightech areas and was generally used to reward investment in political influence or market access restrictions, it became associated to monopolisation and inefficiency and is currently no longer in use. At present the EU does not allow any state aid for industrial development, nevertheless, and despite the trade-offs with competition, the instrument can potentially be beneficial especially in declining areas. The following paragraph expands on these points by focussing on the main forms of competition breaches and on other types of collaborations.

Tensions Between Competition and Innovation: Some Practical Examples Unilateral actions by dominant firms, mergers and acquisitions and non-equity collaborations, each present their own characteristics which need to be tackled by an appropriate competition measures. To achieve a better understanding of the interaction between technological dynamics and competition policy, a brief overview of the challenges posed by each of the three types of collaboration is carried out12.

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Indeed since the 1980s, antitrust policies, both in the EU and the US, have acknowledged this point, and regulations, legislation and guidelines have been progressively relaxed (Hemphill, 2003). 11 Other examples are trademarks, used for knowledge embedded in symbolic material and other rights or trade secrets, used when the novelty is not a main characteristic of the property. 12 This paragraph builds substantially upon Shapiro (2002).

Unilateral conduct by dominant firms Unilateral conduct by a patent holder dominant firm, such as the refusal to licence or licensing restrictions can have a strong impact on competition as it affects the possibility of rival firms to enter the market and hinders their ability to appropriate returns on innovation. The ICT sector is a paradigmatic case: due to its characteristics, the industry is particularly vulnerable to such behaviour. The innovation process within the sector usually requires a variety of technologies or products to work in concert with significant licensing and patents. In certain cases the increased number of patents has created a sort of “thicket” that requires firms to acquire patents to have the freedom to innovate and bring their own product to the market. In that context a refusal or a conditional licensing can seriously impact on the firm capability to profit from its innovation. The situation is even worsened by the rapid pace of technical change, which makes rapid returns crucial to market performance.

Mergers and acquisitions Mergers and acquisitions are forms of collaborations that bring various assets under common ownership and control; as such they are of interest to competition policies. In general, merger enforcement in high-tech industries follows the same principles for mergers in other industries; nevertheless special features arise as competition policy is here challenged by paramount problems in predicting future market conditions. For instance an evaluation of the significance of new technologies and products, that have had relatively little market testing, might be required and legal rules, posed in terms of static market share and price considerations, would render the evaluation itself misleading. A typical example occurs when a company with established position based on older technology seeks to combine with another company with newer technology. A number of questions arise in that case, for instance: does the market share of the established company overstate its future competitiveness potential? Is the newer direction really where the market is going?

Other collaborations Several other forms of collaboration have become common in performing innovative activity. As a general rule of thumb, shorter-term contracts and spot relationships have less implication for competition policy than longer term ones13. The term joint venture generally refers to collaborations that create a separate entity, jointly owned by the parents, which enjoys some operational independence. Competition concerns tend to be minimal unless the parents are competitors. In that case in fact the joint venture may either replace or reduce competition among the parents. Standard setting is an increasingly important form of cooperation. In ICT, virtually every firm either participates in standard setting or complies standards set by others. Standards can affect competition in two different ways. If they are actually implemented and widely adopted they allow competition to occur, in the traditional way, among the products adhering to the standards; if the standards are not put in place, competition occurs “for the market” to gain dominance in a “standard war”. As Shapiro and Varian (1999) highlight, such “wars” are a permanent fixture of the information age, and their intensity depends on the switching costs for each rival technology. These issues highlight two main sets of uncertainty for 13

However, even in short-term collaborations there is the possibility of abuse of dominant position if a dominant firm uses exclusive provisions with key suppliers, clients or complementary firms, it can hamper market access to competitors.

competition policy. On the one hand it is ambiguous to draw the limits of cooperative activity in a standard setting procedure; on the other it is hard to draw the line of unilateral conduct that might allow a single firm to control a standard that would otherwise be open. Cross-licenses are mutual arrangements between or among right holders by which each gains the right to make use of intellectual property gained by the other. From a competition policy point of view, an obvious danger arises when two direct competitors agree to charge running royalties to each other for various patents that they hold as such behaviour will eventually result in a raise of the final consumer price. Patent pools are another way for companies to combine their patents and promote diffusion. They involve a single entity (either a new entity or one of the original patent holders) that licenses the patents of two or more companies to third parties as a package. Generally speaking, patent pools can be strongly procompetitive if they provide “complementary patents”, patents that truly need to be together; on the other hand if the pool includes rival or substitute patents, this will result in elevated license fees and loss of competition. A final area of interest concerns the process of patent settlements between rivals, as the possibility clearly exists for rivals to use the settlement process to restrict competition in ways not reflective of their valid intellectual property rights.

A brief description and assessment of European competition policy Competition law is an important part of the economic governance of the European Community ensuring the completion of the internal market. Four areas are covered under European governance: • Cartels, or control of collusion and other anti-competitive practices which have an effect on the EU, are treated under Articles 81 of the Treaty of the European Community (TEC); • Monopolies and prevention of abuse of firms' dominant market positions are governed by Article 82 of the TEC; • Mergers and acquisitions, as well as joint ventures are governed by the Council Regulation 139/2004 EC (the Merger Regulation); • State aid, control of direct and indirect aid given by EU Member States to companies is covered under Article 87 of the TEC14. Article 81 restricts agreements that facilitate concentration or introduce discrimination, and hence create market power, while article 82 outlaws the abuse of monopoly power. Whilst the articles are clearly embedded in the standard analysis of competition, focused on market share and prices, innovation is explicitly taken into account in article 81 (3) which makes inapplicable article 81 (1) if an agreement contributes to promoting technical or economic progress. As pointed out by Gaffard and Quéré (2006), the real issue with the EU legislation is much more related to the way policy makers interpret competition regulation than to its content. In fact the law itself, aimed at promoting fair market relationships, is sufficiently general and vague to be compatible with both a static and dynamic conception of competition. Despite formally taking into account the role of innovation, since the 14

This a unique characteristic of the EU competition law regime: as the EU is made up of independent member states, both competition policy and the creation of the European single market could be rendered ineffective were member states free to support national companies.

late 1980s, the European Commission has been mostly using competition policy as a tool for liberalizing markets, ensuring market openings, exercising control over public aids and going hand-to-hand with deregulation and privatization (p.12). Overall, EU competition policy has focussed on market structure rather than the conditions and outcomes of the process of change. As compared with the US, where competition policy interacts with other dimensions of public intervention in a practical way that favours innovation and growth, the EU competition policy is defined independently from other domains and is effectively dedicated to the application of rules that an expected stage of perfect competition should require. A better approach to competition policy should ease adjustment to technological change allowing a higher degree of discretion about the type of coordination needed in order to innovate and grow. Discretion is required by the nature of the links between innovation, competition and growth themselves. As innovation and technological change are disequilibrium processes, rule based governance is unlikely to provide a universally valid solution.

4. Trade policy and technological development The links between trade and technology are of paramount importance for the long-term economics dynamics. Their controversial aspects have been explored by several schools of thought which have confronted themselves, among other things, on the degree of spontaneity in which trade, by increasing competitive pressure, triggers technological development and growth. This aspect will be explored in this section. Firstly the theoretical debate will be reviewed and the implications of the different perspective will be highlighted. Following that, European trade policies will be described and, to conclude, their links to technological development will be assessed. As in other policy domains, the technological dimension is not fully understood and incorporated in European governance; again, this seriously hampers the long-term vision of Europe as a knowledge economy.

Trade and technological adjustment: a non-automatic process Orthodox approaches According to mainstream economic approaches free trade efficiently eliminates price distortions, favouring an optimal allocation of resources for both producers and consumers. The international distribution of production follows, spontaneously, patterns established by comparative advantages, whereby countries specialise in the production of goods in which they are more efficient. Through that mechanism free trade results in inter industry efficiency. Moreover as strict competition also avoids monopoly firms to emerge, free trade ensures intra industry efficiency. Finally, by enlarging markets trade openness allows scale economies to be implemented and a better use of the capacity to be achieved. This process implies several positive incentives for technological change and activates numerous paths for long-run growth. International exchange opens channels of communication that facilitate the transmission of technical information and the accumulation of knowledge, fostering a rapid reduction in the cost of production. Moreover, it widens the access to up-to-date knowledge bases and enables entrepreneurs to introduce new products, more quickly. It also encourages the use of new production technologies, creating spill over effects on knowledge as exports constitute a key stimulus to innovation. In addition, trade integration enlarges the human capital base, especially for research activities, which exhibit increasing returns to scale. Finally, from a developmental perspective, the technology embodied in import capital

goods, is one of the main sources for countries to innovate by imitation. According to mainstream approaches, since technology and knowledge are, as any other commodity, immediately exploitable, these mechanisms arise spontaneously as a result of market forces interplay

Heterodox approaches The importance of systemic interactions The idea of technology and knowledge as commodities available “off the shelf”, has been criticised by heterodox approaches. As it is now widely recognised, technology and innovation arise from interactions among different actors, they require dynamic learning mechanisms among the stakeholders in the system (Lundvall, 2002) and depend on the historical accumulation of knowledge within the country (or the firm). As a consequence of such different perspective, the automatic mechanisms linking technology to trade are questioned. The technology gap approach, pioneered by Dosi et al. (1990), offers a post-Schumpeterian approach to innovation, international trade and competitiveness. According to that stream of research, innovation and diffusion of new technologies are the main sources of international differences in economic performance. Laggard countries can take advantage of their backward position by imitating and using the technologies developed by the leader, instead of creating their own. However, the process of imitation and diffusion of new technologies is not an automatic consequence of free trade. Rather, it is a costly development requiring social and institutional capabilities and other investment to develop absorptive capacities (Verspagen, 2002). Unless such capacities are developed, information flows, not only will not open growth possibilities, but might themselves generate perverse patterns of development, reinforcing the gap between the technological leader and the laggard. Trade openness is also strictly connected to the process of internationalisation of production, whereby enterprises and clusters are increasingly integrated in value chains that operate in many different countries. The literature on global value chains, which has studied the opportunities to advance technologically within the production chain, has emphasized that upgrading is far from an automatic mechanism, rather it depends on the nature (and the type of coordination) of the links among the various actors within the chain. For instance, as highlighted by Humphrey and Schmitz (2000) network-based chains, where firms of more or less equal power cooperate and share their competencies, offer ideal upgrading conditions (though they are the least likely to occur for developing country producers), whereas quasi-hierarchical chains, where legally independent firms are subordinated to one other, with a leader at the top of the chain defining the rules, offer very favourable conditions for process and product upgrading, but hamper functional upgrading. Trade openness, per se’, does not guarantee technological development and, in turn, economic growth. The characteristics of the environment in which innovation takes place must be taken into account to evaluate the effects of trade.

The importance of behaviour A different way of analysing the effects of trade is proposed by Arza (2003) who re-interprets both heterodox and orthodox approaches, by focussing on firms’ behaviour, specifically on the process through which firms actively decide to translate trade into learning. Micro behaviour is not a simple maximising process, rather, it changes across countries, sectors, and types of firms and is at the core of technological dynamics. As shown by Arza firms’ decisions are responsive to several path-dependent micro, meso and macro

determinants. The ultimate impact of openness on technological performance will depend on its incidence on opportunity, appropriability, cumulativeness and knowledge-based conditions (OACK). On the one hand, liberalisation may be expected to have a positive effect on conditions of opportunity and knowledge base, as it widens the options of local firms; on the other it may have a negative consequence on conditions of cumulativeness and appropriability, as foreign experience and expertise over runs local one. As the author shows, the positive effects will be more important at the early stages of liberalisation, whereas as times goes by, the negative ones will prevail. The effects and consequence of trade openness are therefore more complex than predicted by orthodox views, and their micro-economic dimension should be fully acknowledged and integrated in policy decisions.

Trade policy in the EU: the undelivered promises of trade The rationale of the internal and external trade policy in the EU is strongly embedded in mainstream economic views. Trade is seen an automatic driver of competitiveness. Competitive pressures and access to a wider pool of knowledge and resources are sufficient and automatic mechanisms to ensure growth. The environmental and micro-conditions needed for trade to deploy its effects are not contemplated, nor are the effects of quality and standards on trade partners and accession countries. As the EU trade commissioner, Peter Mandelson, stated in 2005: Trade and Competitiveness. Together they sum up my mission in this job (p.2) Internally, trade liberalisation has been first pursued, since 1968, through a “tariff union”, whereby the same duty was paid on products regardless of which EU country was the entry point to the EU market. The process was pushed forward in 1986, with the Single European Act. With the Act, Member States committed to establish an internal market by 1992, removing the barriers to free movement of capital, labour, goods and services and adopting common norms and principles.15 Currently the process of enlargement requires new countries to transpose and enforce EU norms and principles on product and process standards as well as to apply other common policies (common agricultural policy, transport policy, regional policy, etc.). For accession countries, this might represent a strong barrier to trade, especially for SMEs that serve the local market (Vilpisauskas, 2005). Externally the EU has been a key player, along with its trading partners, in the successive rounds of international negotiations on trade liberalization. Trade policy is the one area where the EU acts as one. Competence is centralised in the Commission, acting within a mandate set by the Council of Ministers. Its role is to negotiate on behalf of the EU Member States in WTO, regional and bilateral negotiations. The EU’s basic philosophy is to open its market to trading partners who do likewise, with preferential treatment for developing and least-developed countries. Despite such commitment to liberalisation, in the EU,

15

Up to today, the internal market has not yet been fully implemented. The Single Market Observatory (2004) estimated that one third had been only partially addressed and one third of barriers (especially tax barriers) still remains and extra barriers are emerging after the enlargement to 25 countries. Especially important, for its consequences on innovation and technological development is the lack of implementation in key areas like financial services and energy.

standards are in some cases being used as to hinder foreign trade penetration at the international level as well as within the Single Market16. Europe is an important player in the international trading system. Even excluding internal trade, the EU is the world's largest exporter, accounting for 18 per cent of world exports in 2004 (Commission 2005, quoted in McGuire 2006). However concerns on its poor competitiveness relative to other industrialised countries, have been a stable feature on any economic debate, raising concerns that liberalisation might not have delivered its promises. Internationally the EU has failed to close the gap in GDP per capita with the US: productivity stagnated throughout the1990s when the US was enjoying a so called “productivity miracle”. Internally, there is no unambiguous empirical evidence of European integration having led to either shortterm or sustained economic growth effects (Ziltener, 2004). Whilst Nordic European countries have achieved a high level of competitiveness in the new technology and services, the biggest European economies, namely Italy, France, Germany and the UK, struggle to improve their position. The expected productivity gains from trade seem not to have emerged, on the contrary, as pointed out by McGuire (2006), the biggest European economies are pondering how to cope with the consequences of trade and the pressure exerted by emerging economies. According to several scholars, including Ziltener (2004), if trade is to deliver its benefits, economic integration has to be supplemented by a coordinated, pro-active growth and employment-oriented macroeconomic measures. From a technological perspective this means that the links between trade, innovation and structural change need to be acknowledged and incorporated in the policy framework.

Research and innovation policy: the missing link between trade and competitiveness From the perspective endorsed in this paper, part of the explanation for lack of competitiveness in the EU lies in the poor integration of trade and innovation policies. Competitiveness is not an automatic consequence of trade; rather it depends on the absorptive capacity of the country and on the behaviour of the productive sector. To achieve the benefits of openness structural adjustments are needed and research and innovation policies have the potential to create a supportive environment for such change. The Lisbon Agenda itself was in fact some recognition of the need to promote structural reform and innovative capabilities in order to achieve that competitiveness that trade had failed to deliver. However, the integration between trade and structural reform has been poor: competitiveness, which is the explicit goal of both policies, is sought by a unified body for the former and in a fragmented way for the latter. As opposed to trade policy (where the Commission has considerable authority), policies and institutions in innovation emerge as an intricate negotiated order among, national, supranational and local actors (Elgstrom and Smith, 2000, quoted in McGuire, 2006). There is no consensus on what European institutions should do about innovation and the commission involvement has been so far dominated by the role of “subsidiarity”, acting as catalyser of the efforts at the regional and national level. In respect to the Lisbon Strategy, the regulatory framework adopted by the Commission aims to enable Member States to develop new measures in favour of innovation and to encourage them to redirect State support towards activities that are correlated with the agenda itself. The role of the Commission is ultimately to facilitate and influence policy but not to intervene effectively. The experiences of the 16

As highlighted by Egan (2002) European companies have gained strategic advantages in influencing standards both internally and at the international and transatlantic level.

Framework Programmes (FP), the Barcelona target and the European Research Area, illustrated below, further highlight how encouragement and guidance are actually the main resources offered at the community level. The Framework Programmes are the instruments through which the Commission implements its scientific and technological research policy. This policy begun in the early 1980s, with the introduction of specific research programmes whose purpose was to encourage cooperation among firms in technological innovation projects. Subsequent programmes increased the funding available to transnational networks of researchers and broadened the main topic areas. Despite their growth, however, the programmes do not constitute a truly European Research Policy, as they are a fraction of the size of national budgets, accounting for only 17 per cent of the combined research budgets of Member States (Commission 2004, in McGuire, 2006). The so called Barcelona target, established in 2002, aimed at raising the amount spent on R&D up to 3% of GDP by 2010, with a two thirds of the funding coming from the private sector. The target however will be hardly reached. In most OECD countries, the large R&D intensive firms appear more inclined in rationalising or decreasing their costs through collaborations, rather than augmenting their investment. At the same time, many small and R&D intensive OECD countries have witnessed declines in their privately funded R&D expenditure regardless of their economic performance (Freeman and Soete, 2007). Moreover, the efforts made to engage the productive structure, a crucial driver of technological change, have not been sufficient. The Round Table of European Industrialists, grouping the biggest companies within the EU, believes that more incentives and more resources, than those currently in place, are needed to persuade the private sector to increase their R&D investment (ERT, 2003). Since March 2000, the Lisbon European Council endorsed the objective of creating a European Research Area (ERA), a research and innovation equivalent of the European "common market" for goods and services to increase the competitiveness of European research institutions. Although many initiatives have been launched, its full implementation is still far from coming, particularly in respect to the fragmentation of the public European research base. Indeed, businesses often find it difficult to cooperate with research institutions in Europe, especially across countries. National and regional research funding remains largely uncoordinated and national reforms often lack a true European perspective and transnational coherence (European Commission, 2007). The consequences for international competitiveness of such a disintegrated approach to innovation are best exemplified the evolution of the life science industry as done by Riccaboni et al. (2003). As opposed to the EU, in the US research funds are administered through the National Institutes of Health (NIH), which support interactions between researchers in basic life sciences and those in drug development. Award mechanisms and principles that complement the NIH’s more academic orientation are also put in place, and overall, these diverse sources of funding enable greater research diversity. Partly as a consequence of these institutional differences, the funding of new biotechnology companies in Europe was more difficult than in the US: the organization of European academic R&D has not favoured start-ups, which are strongly dependent on access to public funding. As a result European pharmaceutical corporations turned to US biotech plants or labs to acquire new scientific competencies.

A schizophrenic search for competitiveness EU R&D funding and EU efforts for structural change are by themselves too small to have a major influence on the rate and direction of technical change in Europe. However, EU trade policies, together with

competition measures, can have a major influence on corporate decisions about technical change. The search for competitiveness is unbalanced and the potential of innovation policy is effectively neglected. Even though with the Lisbon Agenda, innovation policy and structural change, started to gain recognition, their importance is not fully understood17. If trade is to deliver its promises, countries have to be put in the position to make the best use of an open market: a dynamic, technological dimension needs to be added to the policy framework. In that respect, the seventh framework programme, which will strengthen the European Research Area and create a European Institute for Technology represents a step in the right direction.

5. Distribution and technological development: the importance of cohesion policies Re-distributive policies, aimed at a more equal society, have always been a distinctive characteristic of the European social model. However, ever since the ‘70s European member states have been witnessing the erosion of the growth pattern that, after WW2, had led to their economic development. The intensified internationalisation of production, the liberalisation of trade and investment, the diffusion of ICT and the rise of Asian economies, have strongly hit Western societies and labour markets (Freeman and Soete, 1994). In Europe this has led to the partial and progressive dismantle of traditional income policies based on a generous, universal and nationally funded welfare provision. Income policies such as employment and social protection have increasingly become seen as a “cost” and Europe has responded by shifting from “passive” supportive social policies to an “activating welfare state” (Etxezarreta, 2003), where the goal is to make people able to be employed and socially included. Some income policies, such as education and employment policies, are currently implemented at the national level following the direction set up by the Lisbon Agenda Economic Guidelines; on the other hand, regional policy, now evolved into “cohesion policy”, is centralised and implemented through the European Structural Funds. This type of income policy, which aims at reducing economic differences within the EU, has crucial implication for structural and technological evolution as an increasing share of structural funds have been devolved to Research, Technological Development and Innovation (RTDI). This section will explore the role of cohesion policy in fostering technological development and its potential synergies and incompatibilities with other realms of European governance. Regional policy, despite having acknowledged the role of technological change in social and economic development, has not fully incorporated the social and path dependent character of innovation. The current policies are not flexible enough as to adapt to the diverse local capabilities. As a result the programmes are sometimes inefficient and reinforce the economic differences they try to remove. This paradox is strengthened by other strategic ambiguities: in innovation policy there is a clear trade off between focussing on clusters or building wider regional competitiveness. This is mirrored, at the macro-economic level, in the contrast between economic growth and economic convergence or, from a governance perspective, in the incongruence between some of the goals of the Lisbon Agenda and those of cohesion policy.

17

Indeed, the Kok report of 2004 pointed out that innovation policies were especially hard to implement because of the fear of the distributional and economic consequences of such change.

Origins and evolution Cohesion policy was introduced by the Single European Act in 1986, its main goal is to reduce regional economic disparities within the EU by providing Member States and regions with assistance to overcome structural deficiencies and enabling them to strengthen their competitiveness and increase employment. The policy, generates from the convergence of the previous European Regional and Social policies. The former was implemented since 1975 with the setting up of the European Regional Development Fund; the latter was launched in 1957 and implemented through the European Social Fund. In 1988 cohesion policy went through a major reform, the budget was doubled and increasing resources were given to RTDI activities, on the grounds that closing the technology gap among regions was the first necessary step to reduce economic inequalities18. Initially funds tended to be focussed on subsidising R&D projects in the public or private sector, as well as on constructing public R&D centres or science parks. In the 1994-1999 period a wider range of activities was promoted, including various forms of financial supports for SMEs and SMEs networks, or direct finance for the provision of technology-oriented services via the Innovative Action Programme. Bottom up approaches to regional innovation were also pursued through the Regional Technology Plans (RTS), which then evolved into Regional Innovation Strategies (RIS). According to Oughton et al. (2004) RTP and RIS were particularly successful programmes. Their aim was to encourage lagging regions to implement a long-term strategy focussed on innovation, to achieve a more efficient use of Structural Funds. In several cases RTPs and RISs have successfully improved researchindustry relations, increased regional innovation capacity and integrated industrial and innovation policy as to exploit their mutual benefits. Certain aspects of these programmes have been mainstreamed in the 20002006 funds. The 2000-2006 stream also fostered the involvement of the business sector, taking into account firms’ needs, supporting start-ups and emphasising cooperation in projects implementation. In 2004, the Commission identified strategic guidelines for the 2007-2013 funds. Improving knowledge and innovation was put at the heart of programmes in both Convergence regions (regions with less than 75% of the EU’s average income per capita, previously called Objective 1 regions) and Competitiveness regions (more prosperous regions, originally referred to as Objective 2 regions). The new regulation requires each Member State to draw up a National Strategic Reference Framework (NSRF) setting out its main priorities for spending their funds in line with the Lisbon Agenda. There is a considerable congruence between the overall objectives of the Lisbon Agenda and those of cohesion policies, not last the fact that economic growth must be accompanied by social and environmental sustainability. Exploiting these synergies, however, is not easy and requires a deeper understanding of the local and social dimension of innovative activity, as well as an acknowledgement of the potential trade-offs between Lisbon Priorities and the Structural Funds.

18

The theoretical foundations of RTDI policies lay on the development of systemic approaches to innovation which, combined with the study of agglomeration economies, have highlighted the strong geographical dimension of technological evolution (see Cooke (2001) for an introduction to regional innvation systems).

Heterogeneity of policies, approaches and results Evaluating the results of Cohesion policy in the EU is an extremely complex task, both because they are relatively new instruments and because their long-term effects are difficult to assess. The effectiveness of structural funds has been studied by Capellen et al. (2003) from a macroeconomic perspective. The authors have looked at convergence dynamics within the EU and have analysed the changes after the reform of cohesion policy in 1988. Their approach is especially interesting as in the early 1980s the economic convergence among poorer and richer regions, which Europe had enjoyed since the end of the Second World War, came to an end. Their work suggests that especially after 1988, EU regional support had a significant and positive impact on the growth performance of European regions, nevertheless the benefits of Structural Funds have been stronger in more developed environments. The recent evaluations of cohesion policy by Davies et al. (2004) and Technopolis (2006) have delivered similar results. Both works have stressed the strong heterogeneity of approaches, capabilities and outcomes among regions and Member States. Whilst all countries have explicit national strategies and/or policies aimed at enhancing R&D and innovation, not in all of them the links to regional development are made clear (Davies et al., 2004). Furthermore, Structural Funds support is integrated with regional innovation policies and strategies in different ways and with different intensities: in some cases individual regional authorities have developed their own innovation strategies or policies (Pais Vasco) drawing on EU funding, in others (for instance in Lombardia) Structural Funds have been perceived themselves as a regional strategy for innovation (ibid.). During the period 2000-2006, strong dissimilarities in programme implementations emerged between Objective 1 and Objective 2 regions. The former focussed mostly on support measures aimed at developing an innovation friendly environment, the latter resorted to instruments aimed at encouraging innovation enterprises and knowledge transfer instruments. New member states, where SMEs have low R&D capabilities and weak linkages with research organisations, used structural funds to encourage private sector innovation and to boost applied research (Technopolis, 2006). Overall RTDI measures have been most effective, in most developed regions. Poor implementation often reflected weaknesses both at the national and regional level, in the regulatory environment and in the cooperation between stakeholders (ibid.), in other words, it reflected a fragile innovation system. This result questions the rationale of cohesion policy itself and highlights the existence of a “regional innovation paradox”, whereby the comparatively greater need to invest in innovative activities by lagging regions is accompanied by a lower capacity to absorb funding and implement programmes19.

Different absorptive capacities and conflicting goals Several factors explain the high degree of variability of results and the emergence of a regional innovation paradox. One of the most important issues is that Structural Funds are not flexible enough as to accommodate local specificities. Spurring technological development requires elasticity in both the strategic focus and the implementation process. According to Davies et al. (2004) there is a clear need to engage in different types

19

According to Oughton et al. (2004), the Structural Funds have evolved in the right direction and such paradox has become less strong since the 1990s.

of RTDI support according to the local socio-economic characteristics20. Administrative absorption capacities, which deeply affect the ability of exploiting Structural Funds, vary tremendously among regions21. Funds managers face strong difficulties from the complex bureaucratic and administrative procedures required. Moreover there is still a diffuse lack of expertise both at the national and regional level, often worsened by the weak coordination among stakeholders. The problem is even stronger in New Member States which have not yet developed adequate institutions to manage the transition from pre to post accession funds (Horvat 2004) and where the development impact of the Structural Funds can be lessened by their incomplete integration into national public finance systems (Marinov et al, 2006). A second factor explaining the heterogeneity of outcomes lies in the potential collision between innovation and cohesion policies at the strategic level: as R&D and innovative activities tend to concentrate in specific locations, exploiting agglomeration advantages might come the cost of wider regional development. In fact, if RTDI activities are concentrated, it is likely that take up of public funding will be strongest in those sites, unless structural programmes are geographically limited to certain locations. Should that be the case, however, the quality and quantity of RTDI projects could be negatively affected. In fact, when the areas eligible for funding are small and fragmented, it is much harder to attract businesses and it is easier to be locked in a inward looking approach. At the macro-economic scale, these conflicts are mirrored in the long-standing search for the right balance between competitiveness and convergence. In the EU this calls for more attention to the effective integration of the Lisbon Agenda and the Structural Funds. The former focuses strongly on economic growth, whilst the main concerns of Structural Funds are with reduction of economic disparities. Although the two instruments are highly compatible, there is still scope for conflicts to arise. On the one hand Structural Funds can contribute to economic growth by enabling the exploitation of under-used regional resources, on the other empirical evidence suggests that there is a trade off between growth and inequality, whereby in the early stages of catching up processes, greater economic growth tends to start in higher developed agglomeration areas, implying increasing regional disparities (Danish Technological Institute, 2005). Although a review of the debate on growth and inequality is out of the scope of this work, what must be stressed here, is that this trade off can be reduced if Structural Funds interventions and the Lisbon priorities are better integrated (ibid)22. In that respect, the aforementioned developments embodied in the Strategic Guidelines for the 2007-2013 funds are an important step in the right direction.

Some remarks The Structural Funds, as instruments to develop innovation and knowledge, are a large scale learning experience. The successive rounds of implementation do reflect an increasing understanding of the innovation process and its implication for regional development. Nevertheless, the geographical and social dimensions of technological change are not fully acknowledged. The lack of flexibility in programme 20

A similar point had previously been made by Kuitunen (2002), who highlighted that the role of the Funds was itself significantly affected by the interaction of historical tradition and the current state of regional selfgovernment and by the delegation of decision making power over regional development (p.57). 21 See Horvat (2004) for a review of the literature on the Administrative Capacity of EU Structural Funds. 22 As shown by Kauffmann and Wagner (2005), this has certainly not been the case in the Austrian region of Burgenland where EU structural policy did not succeed in enhancing competitiveness. In that case Structural Funds were mostly used for modernization or extension of already existing plants rather than for R&D-projects, start-ups and co-operations with research organizations.

implementation and the lack of institutional and administrative capacities, especially in new member states, indicate that the Funds are not effectively tailored at regions needs and capabilities. Diversity of innovation potential requires equally diverse approaches to priority and target setting, recognising local barriers and opportunities to development, avoiding a ungrounded replication of best practice. The funds need to improve the balance between “structuring infrastructure” in the regional economy and “structuring behaviour” of agents and patterns of cooperation in the regional innovation system (Technopolis, 2006), in other words investment in knowledge infrastructure should be made conditional on changes in management of RTDI organisations (ibid, page V.) Despite the potential conflict of interest between cohesion policy and the Lisbon Agenda, Structural Funds, can contribute effectively to a knowledge-based Europe. For these synergies to be exploited, a better integration between the implementation mechanisms of the Lisbon Agenda and those of cohesion programmes must be achieved. Unless strategic priorities are set as to take into account these aspects the risk is for cohesion policy to generate polarising effects.

6. Conclusions The Lisbon Agenda has recognised the crucial importance of innovation and knowledge for economic performance. As this underlines the importance for innovation and economic policies to be integrated, this paper has investigated the extent of such integration and the implications for knowledge based development. The picture that has emerged from the analysis of the SGP, competition, trade and cohesion policy, is that of an effectively separated economic and innovation agenda. The EU cannot enact innovation measures because both its resources and its political authority are not sufficient; furthermore, some crucial aspects of technological and knowledge dynamics are entirely neglected at the policy level. The scope of the review was by no means to be exhaustive; rather, it was to stress the importance of technology and innovation as instruments for long-run development and the need for their efficient coordination with economic action. This is an essential step if the vision of a knowledge based European society is to become a realistic prospect. To conclude it is important to stress that the implementation of the Lisbon Agenda, and of innovation policy in general, is still very much in evolution, and the present analysis should be interpreted with this caveat in mind.

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