Innovation and R&D in Covid-19 recovery plans: The case of France, Germany and Italy

by A. Benramdane, S. Guillou, D. Harrich, and K. Yilmaz

Economies have been dramatically affected by the pandemic of Covid-19 in 2020 (OFCE, 2020). In response, several emergency measures have been undertaken by governments to support the people and the firms that were directly and strongly hit by the lockdowns. After the first shock in spring 2020, which had an international dimension, all economies experienced a decline in their production which jeopardizes their future and the wellbeing of their population. In the near future, bankruptcies and unemployment are expected to increase and the slowdown of private investment will minor both quantitatively and qualitatively the future capacities of production. Meanwhile, the huge rise in public debt will complicate the States’ ability to invest and promote long term growth through public investment. To cope with this dismal future, in addition to emergency measures, many governments have implemented recovery plans to boost and support the economy and to sustain a return to previous levels of wealth. Some governments try, through the recovery measures, to orient their future growth toward specific objectives. In the EU, the Resilience Recovery Facility (RRF), which aims to finance part of EU members’ plan, is adopting this stance by demanding that part of member’s plan will include at least 20% of measures dedicated to digital improvement and 27% dedicated to green investment.



This post is focused on the technological dimension of recovery plans designed to face the downturn triggered by the Covid-19. By technological, we mean what is related to R&D, innovation and digital technology. Our concern is associated with the fact that R&D investment as well as technological enhancements are fundamental seeds of future growth. They are necessary to ensure sustained growth under the paradigm of globalized competition where education, technology, and intellectual property are the materials of future comparative advantages (Haskel and Westlake, 2017).

Our
interest in the technological dimension of EU recovery plans is also bound to
the duality of the COVID-19 shock regarding technology. Indeed the COVID-19
entailed both a negative and a positive digital shock.

Negative
because the economic crisis will lead firms to cut into their R&D spending
which will affect negatively the nature and the amount of capital. There is
indeed a risk that the smallest investors will cut into their R&D expenditure
as well as their digital investment because of the lack of cash and the rise in
debt. But meanwhile, the lockdowns fostered the use and adoption of digital
tools to work, to organize, to produce and to sell. There are some digital
firms which are benefiting a lot from the constraints imposed to the economy by
the sanitary measures. The huge rise in share price of firms from tech and
e-commerce sectors relative to more traditional sectors witnessed the division
which is fracking economies. Given the leadership of those firms in world
R&D investment, the latter are likely to be sustained by them, but
traditional industries such as car, airplanes and smaller actors are likely to
disinvest by lack of cash and rise in uncertainty. Moreover, letting the
biggest ICT, digital and platform firms to drive the R&D will accentuate
their leadership and expansion and be detrimental to competition.

Crises
always divide unevenly the population of firms between winners/leaders and the losers/followers
by giving larger market shares to the leaders which usually enter crises with
larger financial means and other organizational buffers. But the nature of this
crisis exacerbates the effect and highlights the frontier between digital users
and producers and the rest of the firms. The only way to balance the superpower
of digital giants is to reinforce the digital dimension of the rest of the
economy. In addition, numerous studies established the existence of a digital
dividend which means that increasing the digital intensity of the economy is
helping to push growth (see for instance, Sorbe et al., 2019).

The
direct political benefit of a digital orientation is weak, and the returns of
investment in technology are not immediate and will not push growth in the
short term. Hence, although governments might not be enticed
with such orientation of their plans, they are expected to
tackle the future needs for mastering digital technology. Recovery plans should
account for the need for future growth to self-sustain and it explains the
position of the EU.

This
post aims to explain and evaluate the technological dimension of main members’
recovery plans within the EU framework of the RRF.

It
shows that the 20% share recommended by the EU is not fully respected by
Members’ plan. Germany is clearly the country which is allocating a higher
weight to technology than other countries. Italy, while lagging behind in
matter of R&D, productivity and digital indicators, is privileging
emergencies expenses and France is mixing the two, pushing green technology.

The EU stance in favor of digital

In July 2020, the EU Council has agreed to create a €807 (or €750 in 2018 euros) billion Covid-19 recovery fund titled  “Next Generation EU” in addition to the long-term budget of €1 211 billion.

The
EU plan is mostly a framework with an amount of money to finance EU members’
plan after request. It is less of a Keynesian stimulus style than of a
long-term structural reform plan. The final form of the EU plan was the result
of the debates around the respective share of loans and subsidies and about the
conditionalities to associate with the financing. Conditionality was hugely
debated within the EU council.

The
2 pillars of the EU plan are digital and green orientations which should drive
the investment projected by countries’ plan.

The
digital pillar is associated with the long promotion of R&D and innovation
throughout EU policies, goal which was clearly established in the Lisbon Agenda
of 2000. The latter had the ambition to make the EU, by 2010, « the most
competitive and dynamic knowledge-based economy in the world ». This
ambition was associated with the objective of R&D spending reaching a 3%
share of GDP. While the weight put specifically on the digital enhancement is
new, it is inspired by the EU’s long-held belief
in the power of technology to increase potential growth.

Regarding
R&D the objectives have been matched only by Germany; Italy and
France did not. The ratio of R&D spending to GDP reached a mere 1.43%
for Italy in 2018. France performed slightly better than Italy by keeping this
ratio at 2.19% percent in 2018, still below the target of 3%. Despite the
failure to reach the Lisbon’s goals, the EU has always fostered R&D
policies with a generous financing budget and a very flexible monitoring of
State aids dedicated to encouraging research and innovation.

For
the last 10 years, China joined the United States as a source of challenging competitors
to EU companies. The EU is increasingly lagging behind concerning digital
activities from e-commerce, e-finance to cloud services. The need for
digitalization to help the economy and the SMEs cope with the new digital turn
of branches of the economy is motivating the EU digital policy. Regarding
digital indicators (OECD digital indicators), Italy is lagging behind in ICT
adoption, e-commerce or R&D intensity while France and Germany are very
close to each other.

Green
objectives came later in the EU policies but are more and more central and
invade all areas