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Playing catch-up or changing the rules of the game for European innovation?

Playing catch-up or changing the rules of the game for European innovation?. Bruegel Brussels, March 2019. There is a strong – and increasing – superstar effect Average economic profit per firm in each decile of large firms $ million (2016 dollars). Top. Middle. Bottom. Bottom 10%. Top 10%.

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Playing catch-up or changing the rules of the game for European innovation?

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  1. Playing catch-up or changing the rules of the game for European innovation? Bruegel Brussels, March 2019

  2. There is a strong – and increasing – superstar effectAverage economic profit per firm in each decile of large firms$ million (2016 dollars) • Top • Middle • Bottom • Bottom 10% • Top 10% • Top 1% • 3,500 • 2 1.8x • –1,023 • 1995-97 • 6,400 1.6x • 1,355 • 7 • 2014-16 • –1,562 SOURCE: McKinsey Corporate Performance Analytics; McKinsey Global Institute analysis

  3. R&D intensityR&D spend as % of revenues by economic profit decile Private sector R&D spend% of total done by largest spenders Superstars seem to matter for innovation Multiple of median • In bottom 10% • Median 0.36x • In top 10% • In top 1% • Top-2500 • ~90 2.03x • Top-250  • ~63 2.88x SOURCE: McKinsey Corporate Performance Analytics; EU Industrial R&D Investment Scoreboard; McKinsey Global Institute analysis

  4. Europe is losing share of large superstar companies Regional representation of firms within the top 1% of economic profit; % • Western Europe • United States and Canada • Latin America • Asia–Pacific • China • 4% -50% • 4% • 2% • 1995-1997 • 2014-2016 1 Compared to median firms in the economic profit distribution … NOTE: Superstar firm is represented as a firm with the largest economic profit, eg NOPLAT minus weighted cost of capital charges SOURCE: Capital IQ; McKinsey Corporate Performance Analytics, McKinsey Global Institute analysis

  5. Could Europe play to its strengths despite fragmentation and change the rules of the game? Objective Ways Examples • Innovate in ecosystems around Europe’s superstars • European Automotive-Telecom Alliance • United Kingdom´s FinTech sandbox • Completing the non-digital single market • Play industrial strengths • Rethink data and user access • Level playing field, protect citizen data and connect data pools • Open government (and private) data and APIs • Cross-industry platform Verimi • Create demand at scale • Leverage Europe's substantial public sector footprint • eEstonia • Requirement to use BIM in public works • Innovation scale-up fund • Alter high-skill immigration flows • Encourage return of Europeans that work abroad and attract international talent • EURES, portal for job mobility • Taxation on stock options • Leverage scale of global firms • Derive as much value and benefits from non-European large firms as possible • Google Campus in Warsaw and Madrid

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