EU Innovation Policy: Time to Stop Funding Ideas, Not Companies?
The EU’s Innovation Crisis: Why It’s Time to Fund Ideas, Not Incumbents
A recent report from Bocconi’s Institute for European Policymaking and the Ifo Institute has delivered a critical verdict on the European Union's strategy for funding innovation.
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The paper, titled "Funding Ideas, not Companies: Rethinking EU Innovation from the Bottom Up," argues that despite a colossal €100 billion investment in research and innovation since the start of Horizon 2020, the EU is not only failing to keep pace but is actually losing ground.
One sobering statistic sets the backdrop for the report’s major findings: "Over the past two decades, the share of EU firms in high-tech sectors has dropped by half—from 22% to just 11%".
At the same time, the EU’s top five R&D spenders are all concentrated in the automotive industry, a sector facing immense global competition and disruption. This has led to what the authors term the "Middle Technology Trap," a precarious situation where Europe's industrial base is anchored in mature, mid-tech sectors while the high-tech frontier is increasingly dominated by the US and China.
The report argues for a fundamental rethink, concluding that to reverse this trend, Europe must "fund new ideas, not incumbents".
Key Findings: A Misallocation of Resources?
The report takes a close look at the allocation of Horizon program funds, and the apparent disconnect between the EU's stated goal of fostering innovation-led growth and the reality of its spending. The findings paint a picture of a system that favors large, established players and bureaucratic processes over the agile, independent innovators who are most likely to generate disruptive technologies.
This misallocation, the authors argue, stifles the very dynamism the EU seeks to create.
Dominance of Incumbents and Low-Growth Firms: More than half of all Horizon funding is channeled to mid-tech firms that have limited potential for breakthrough innovation. A significant portion of this goes to a small number of large corporations who are "repeat recipients—some involved in up to 200 projects". These funds often support research close to the companies' existing corporate interests, promoting incremental improvements rather than radical new ideas.
The Inefficiency of Collaborative Instruments: A staggering 60-80% of Horizon funding is directed to "collaborative instruments". These mandate the creation of large international consortia, which can involve more than 20 participants, to work on detailed, top-down research agendas. However, the report finds "no evidence that these collaborations improve recipients' long-term growth or innovation outcomes". Any positive effects are temporary, vanishing as soon as the three-year grant period ends.
The Rise of a Consultancy Industry: The complex nature of these collaborative grants has fueled a secondary industry. The report reveals that approximately €4 billion, or 15% of all Horizon funding to companies, is awarded to consultancy and support service firms. These firms specialize in managing the administrative burden of applications and project coordination, but often "do not generate new technologies, scalable products, or productivity-enhancing processes".
SME Funding Paradox: While instruments targeting Small and Medium-sized Enterprises (SMEs) are the most effective part of the program, there's a catch. The positive, lasting impact on growth is seen only in small, independent firms. Yet, over 60% of the funding for SMEs goes to those that "belong to wider corporate groups"and are therefore less likely to be financially constrained.
Limited Reach of Effective Funding: The analysis concludes that the most effective funding (grants to independent innovators) make up a tiny fraction of the whole. In the report's sample, only 35% of funding reaches independent innovators. When focusing specifically on SME recipients, that figure falls to just 7.5%.
Recommendations: A Bottom-Up Overhaul for the EU
The report's authors don't just diagnose the problem; they propose a series of steps toward better outcomes. Their recommendations call for a fundamental restructuring of EU innovation policy, moving away from the current top-down, incumbent-focused model to one that is agile, decentralized, and empowers individual innovators.
The core principle is that "the key is not more money, but rather leaving space for disruptive innovation by encouraging bottom-up initiatives, especially by small independent companies".
Refocus Funding on What Works: The report calls for a major reallocation of resources away from the large, ineffective collaborative instruments. These funds should be redirected towards SME-targeted programs, especially those supporting early-stage, high-potential innovation under Pillar 3 of Horizon Europe and the European Innovation Council (EIC).
Champion True Independence: To ensure money gets to where it has the most impact, the authors recommend prioritizing funding for "small, independent companies that do not belong to corporate groups". They also suggest imposing limits on repeated participation to stop grants from becoming a regular financing stream for incumbents and restricting the funding that goes to consultancy firms.
Embrace Bottom-Up, "Challenge" Driven Innovation: Instead of overly prescriptive research agendas determined by committees, the EU should "promote open and flexible calls to allow space for novel and diverse ideas". The report endorses the EIC's "Challenge" approach, which defines a problem but leaves the choice of technology and approach open to the applicants, fostering genuine creativity and breakthrough potential.
We see this report as the beginning of an important conversation about how innovation is funded in Europe. For the EU to truly compete on a global scale, particularly in the rapidly evolving tech landscape, it needs an innovation policy that is agile, risk-tolerant, and focused on nurturing the disruptive ideas that will define the industries of tomorrow. The report makes a compelling case that this means shifting the focus from supporting established companies to empowering the next generation of independent innovators. It's time to start funding ideas, not just companies.
At Contextual Solutions, we help startups, scale-ups, and public sector stakeholders navigate and influence European innovation frameworks. Whether you're seeking funding, shaping a disruptive idea, or entering the EU market, we’re here to help you cut through the noise.
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