Europe’s innovation challenge: scale, security and the search for impact
Friday, 27 March 2026
Europe retains strong scientific capabilities, yet structural weaknesses continue to limit its ability to turn research into scalable businesses and global technological leadership. The challenge is not new, but the context is. The US and China are intensifying their technological competition, governments are tightening controls on scientific collaboration, and the AI race is raising the stakes of Europe’s innovation gap. The question is no longer simply how much to invest in research and development, but how to ensure those investments translate into economic impact.
In the latest episode of the Future is Blue podcast, Alessandra Colecchia, head of the Science and Technology Policy Division at the OECD, and Raymond Torres, Funcas Europe Director, examine why Europe’s innovation investments continue to fall short of their potential, and what it would take to change that.
[You can listen to the episode here]Fragmentation and the search for scale
One of the most persistent obstacles is fragmentation. Europe’s innovation ecosystem remains divided by national markets and by the way public support for research is organised. Colecchia points out that fragmentation goes beyond the well-known absence of a true single market. It also affects how research is funded, as public support for innovation in Europe lacks the critical mass of support seen in China and the United States.
China has dramatically increased its research investment over the past two decades, spending roughly $800bn on R&D in 2023, compared with around $823bn in the US, according to OECD data. Europe remains a leading producer of scientific research, but its investments are spread across national systems that rarely achieve the same concentration of resources.
At the same time, Europe’s innovation landscape is far from uniform. As Colecchia notes, «when we compare Europe to other big innovation leaders like China and the United States, we are comparing averages, and, inside Europe there is a lot of diversity.» That diversity can be a source of dynamism, but it also complicates efforts to reach the scale needed in strategic technologies.
Bridging the gap between research and the market
An additional long-standing weakness lies in the difficulty of moving from research excellence to commercial application — what policymakers call the «valley of death.» A problem that, according to Colecchia, is especially acute in Europe.
Governments still play a critical role in shaping innovation systems. They can support basic research, encourage collaboration between universities and industry, and use procurement to stimulate demand for emerging technologies. «It’s not just a question of funding,» Colecchia says. «Taxes, regulation and public procurement also provide incentives for firms to innovate.»
The challenge is coordination across the innovation chain. Different parts of government have responsibility for different stages of the chain, Colecchia notes, which makes alignment more difficult. In practice, many governments have experimented with mission-oriented innovation policies and challenge-based funding to align priorities.
The growing securitisation of science
To the economic barriers, a geopolitical constraint has been added. Innovation policy today is conditioned by strategic competition. Tensions between major powers have led governments to introduce new safeguards aimed at protecting sensitive research and critical technologies.
As of 2025, the OECD tracks around 250 research security policies across member countries, ten times more than eight years ago, and the number of countries with such measures has risen from 12 to 41. While these policies reflect legitimate concerns, Colecchia warns that excessive restrictions could undermine scientific progress. «It is good to have research security, but we need to be careful not to over-securitise science, because that can be counterproductive and stifle innovation,» she argues. “The challenge for policymakers is to strike the right balance between security, openness, and international collaboration”. And the recently released OECD Science, Technology Innovation Outlook 2025 offers principles governments can follow when navigating this tension.
Europe’s scaling problem
From a European perspective, structural economic factors may matter just as much as policy design. Raymond Torres argues that Europe’s innovation challenge has less to do with generating ideas than with creating the conditions for them to grow. The main constraint, in his view, emerges when companies need to expand rapidly and secure large amounts of capital. European start-ups frequently move to the United States at that phase, attracted by deeper capital markets and stronger venture capital ecosystems.
The paradox, notes Torres, is that Europe does not lack resources. The EU runs a surplus of savings — roughly 1 per cent of GDP — much of which is invested abroad. “There is no lack of funding as such,” he argues. The challenge is channelling them into innovative domestic firms. In his view, strengthening Europe’s capital markets and improving venture capital ecosystems are essential steps.
The AI race and Europe’s strategic dilemma
The debate becomes even more pressing in the context of artificial intelligence, where the policy challenge is not only about investment, but also about how innovation systems are organised.
For Europe, the key question is how to reconcile the need for greater integration with the preservation of competition. While reducing fragmentation is essential to achieve scale, excessive concentration could weaken the competitive dynamics that drive innovation.
“Europe needs more integration rather than fragmentation,” Torres argues. “But at the same time we need to preserve competition.”
This tension is reflected in the different models observed globally. In China, public authorities tend to organise competition by allocating resources across multiple projects and allowing them to compete for scale. In the United States, financial markets play a central role in selecting which firms succeed. Europe, by contrast, relies more heavily on competition policy, but without always achieving the scale required in strategic sectors.
The result is a structural dilemma. Building larger, more integrated innovation ecosystems may be necessary to compete globally, particularly in areas such as AI, but doing so without undermining competition remains a complex task for policymakers.
A moment for strategic coordination
There are signs that Europe is beginning to respond. Colecchia notes that policymakers are increasingly aware of the need to pool resources and focus investment in strategic technologies. «I think Europe is getting its act together,» she says, pointing to emerging initiatives aimed at concentrating funding and supporting larger collaborative projects.
Whether these efforts will be sufficient remains an open question. What is clear is that innovation policy can no longer rely on isolated measures. In an era of geopolitical rivalry and technological transformation, Europe’s position in the next wave of global innovation will depend not on the quality of its ideas, which remain strong, but on its ability to scale them, fund them, and protect them without closing itself off.
[You can listen to the episode here]Carlos Carnicero Urabayen Host, Future is Blue