Income, sovereignty, and cohesion: the political economy of Europe’s first mover innovation deficit

Abstract

Europe’s economic stagnation and declining global position stem from its failure to lead in first mover innovation, as the United States and, increasingly, China have produced the new breakthrough technologies of the latest industrial revolution. In this paper, we consider the causes of this innovation problem: interrelated issues in the structure of innovation institutions, education, geography, finance and markets, all of which have deep political roots. We build on a game theory model of strategic complementarities and mutual commitments to suggest a path forward which would allow a ‘coalition of the willing’ of advanced European states to develop US style institutions of innovation while combining them with Europe’s social model. Using this, we chart a feasible transition path for Europe which builds on strengths in incremental innovation while creating first mover capacities through integrated capital markets, venture ecosystems, and focused regional cluster development. Only by overcoming its first mover innovation gap, while not abandoning the goals of its social model, can Europe achieve growth, global relevance, and social stability in an era of intensified geopolitical and technological competition.