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1. INTRODUCTION

Research and innovation (R&I) plays an

essential role in triggering smart and sustainable growth and job creation. By

producing new knowledge, research is central to developing new and innovative

products, processes and services, which enable higher productivity, industrial

competitiveness, and ultimately prosperity.

The importance of productivity in driving

sustainable economic growth and consolidating Europe's recovery has been

broadly recognised1. However, EU labour productivity is around 12% lower than

that of the United States and the gap

has widened in the last 10 years. Increasing labour productivity depends

on the ability of economies to invest more in the capital available per worker,

i.e. capital deepening, and to raise efficiency in combining production

factors, i.e. multifactor productivity. Since the crisis, investment in capital has

been low and multifactor productivity

growth flat or negative in most EU countries.

For countries that show high levels of

output per capita, R&I, skills and technological development are of

paramount importance to multifactor

productivity2. For those that are catching up, it is also crucial to starting to narrow

the productivity gap. Coupled with better regulatory and institutional frameworks

1 The future of productivity, OECD, Paris, 2015. 2 Global Competitiveness Report 2016-2017, WEF series, Geneva, 2017.

and efficient market functioning, R&I systems are essential to raising

efficiency in combined use of a country's

labour and capital.

R&I systems are complex ecosystems which need various elements to perform

optimally. These include a solid public science base producing high quality

outputs; strong business participation in

innovation activities; fluid and abundant knowledge flows across R&I actors; and

good framework conditions that allow business innovation to flourish.

Given the diversity of national R&I

systems across the EU, it is important to

identify the main bottlenecks in each one. The R&I policy analyses in the

Commission's Country Reports3 are therefore based on a two-step approach:

identifying for each Member State,

based on a set of R&I performance

indicators, what its main R&I challenges are: that is, finding the

main bottlenecks impeding the full contribution of R&I to economic and

productivity growth; assessing whether the policy

response is adequate to address the challenges identified.

3 https://ec.europa.eu/info/strategy/european-

semester. See also the Research and Innovation Observatory — Horizon 2020 Policy Support Facility for analysis, insights, statistical data and best practice in designing, implementing and

evaluating research and innovation policy at EU and national levels.

EUROPEAN SEMESTER THEMATIC FACTSHEET

RESEARCH AND INNOVATION

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This factsheet builds on this two-step approach as follows. Section 2 reviews

the performance of European R&I

systems and identifies persistent challenges in terms of investment,

knowledge flows and framework conditions. Section 3 discusses the

available evidence on potential policies to address these challenges and the

policies' effectiveness depending on the specific conditions in which they are

applied. The policy levers presented in section 3 are only an illustration: they do

not reflect the whole spectrum of policy

responses that can boost R&I systems. Finally, section 4 sketches good policy

practices in Member States to address their challenges.

2. POLICY CHALLENGES

The main R&I policy challenges identified in the European Semester Country

Reports fall into three broad categories: the low quality of the public R&I system

(2.1), weak knowledge flows and science-business linkages (2.2) and

bottlenecks affecting investment in

innovation (2.3).

2.1. Low quality of the public R&I system

The public R&I system (composed of higher education institutions and other

public organisations performing research and innovation) plays a key role in

generating and boosting the knowledge and talent needed by innovative firms,

enabling them to build on their R&I efforts. Analysing its quality across

Member States helps to identify those

countries where there are bottlenecks.

There are a number of relevant performance indicators to assess the

quality of a public R&I system. Some of the most widely used are: 'bibliometrics',

to measure the impact of scientific

publications on the generation of new knowledge; the number of prestigious

'European Research Council' grants awarded to researchers in a country (as

these are considered to reward scientific excellence); and the number of top-

performing universities in a country according to international rankings.

An analysis of these indicators highlights a clear and persistent science divide in

the EU. First of all, there is an east-west

divide, with lower overall quality of public R&I systems in eastern European

countries compared to other Member States. Secondly, there is also a north-

south divide, albeit less pronounced, as Greece, Portugal, Spain, Cyprus, Malta

and Italy are performing just below the EU average, and hold an intermediate

position between eastern European and northern European countries.

To a large extent, these divides are the result of lower public R&D investment in

the countries that lag behind. However, when we account for different levels of

public R&D investment, we still see that several countries that lag behind perform

worse than their public R&D investment

level would predict, which hints at potential problems with the way public

R&D investment is allocated.

To illustrate these divides, figure 1 shows: (i) on the vertical axis, a

bibliometric indicator of scientific

excellence (the percentage of highly-cited scientific publications among all

national scientific publications)4; and (ii) on the horizontal axis, public R&D

intensity (expenditure on R&D performed in the public research system as a % of

GDP).

This reveals three main types of

situation:

Member States where the very low quality of the public R&I system is a

key issue to be addressed, in

particular through capacity building. For these countries (e.g. Bulgaria,

Latvia, Croatia and Romania), increasing investment needs to go

hand in hand with far-reaching reforms to increase efficiency and

quality. Member States with a very strong

science base, such as the United

4 'Highly-cited' publications are the 10 %

most cited. As citations need to be assessed over a period of several years after publication, the most recent data are for research published in 2014.

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Kingdom, the Netherlands, Denmark and Belgium. For these Member

States, the key challenge might be to

translate their world-class science base into an increased level of

innovation in the economy. Member States like Finland, the

Czech Republic, Estonia and Lithuania, which do not show a level

of scientific performance in line with

their public R&D expenditure. In the cases of the Czech Republic, Estonia

and Lithuania, this situation may be

linked to significant increases in public R&D expenditure in the last 10

years which have not yet had their full impact. This highlights the need

for these countries to focus now on increasing the efficiency of this

investment.

Figure 1 — Quality of scientific output and public R&D investment

Source: DG Research and Innovation — Unit for the Analysis and Monitoring of National Research and

Innovation Policies

Data: Eurostat, EIS 2016

Notes: (1) Scientific publications within the 10% most cited scientific publications

worldwide as % of total scientific publications of the country, fractional counting method.

(2) Government expenditure on R&D plus higher education expenditure on R&D as % of GDP. Linear regression: y = 7.3693 + 4.3233

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2.2. Weak knowledge flows and science-business linkages

While some Member States urgently need to increase the overall quality of

their public science base, others should focus their efforts on better harnessing

the strengths of their science base to increase productivity and to boost

economic wealth and job creation. This mainly means fostering science-business

links to allow knowledge to spread more

widely and be used in the business sector.

This knowledge diffusion can occur through many channels and the relative

importance of these channels will depend on the structure of each national R&I

system. Given that some knowledge flows are difficult to measure, assessing

countries' overall performance on this

score means combining a range of quantitative and qualitative information.

One of the key elements to be assessed is the level of public-private collaboration

through 'contract research', i.e. direct

investment by firms in concrete projects carried out by public research

organisations. Figure 2 shows:

- on the vertical axis, the volume of research performed in the public R&I

system and funded by business (in % of GDP).

- on the horizontal axis, business R&D intensity (which needs to be reflected as

the scope for public-private cooperation

depends on the volume of business R&D activities in the country).

In combination with other quantitative and qualitative information, this allows

us to spot countries such as Ireland, Italy and Portugal in which the low level

of collaboration between the public science base and the business sector is a

major bottleneck in the R&I system.

Figure 2 — Public expenditure on R&D financed by businesses in % of GDP versus business expenditure on R&D

Source: DG Research and Innovation — Unit for the Analysis and Monitoring of National Research and Innovation Policies

Data: Eurostat

Notes: (1) Government expenditure on R&D plus higher education expenditure on R&D. (2) Financing from abroad is not included.(3) BE, LU, AT, SE: 2013; BG, DE, IE, ES, FR,

IT, CY, PT, EU: 2014. Linear regression: y = 0.0145x + 0.0234

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2.3. Bottlenecks in investment in innovation

To maximise the potential economic

returns of the R&I ecosystem, companies need to operate in an environment that

allows them to transform knowledge effectively into economic returns. This

not only depends on the quality and quantity of scientific and technological

outputs, but also on the framework conditions in which they operate. It is

therefore crucial to build an environment conducive to R&D investment and

entrepreneurial activity through structural

reforms and effective policy instruments.

The gap in business R&D intensity between the EU and the US5 is the result

of the EU's lower ability to develop major

R&D-intensive businesses based on advances in science and technology,

notably in ICT. It is a stylised fact that, when new firms are founded in the EU,

they grow more slowly than in the United States and fewer of them join the ranks

of the world's largest6.

Figure 3 below shows the number of

employees in fast-growing firms in the most innovative7 sectors compared with

the total number of employees (horizontal

axis).

Figure 3 –Employment in fast growing firms in innovative sectors as % of total employment, 2012 and 2014

Source: DG Research and Innovation — Unit for the Analysis and Monitoring of National Research and Innovation Policies

Data: EIS 2017

Note: (1) EL: data are not available for Greece.

5 In 2015, the business R&D intensity was 1.25% in the EU while it was 1.99% in the US.

Business R&D is also significantly higher in other major economies: Korea (3.28%), Japan (2.58%) and China (1.59%). 6 Veugelers and Cincera, 'Europe missing yollies', Bruegel policy brief, Brussels, 2010. 7 The top 50% 'most innovative' sectors are selected based on the innovation coefficients of each sector at EU level as shown by Community Innovation Survey scores weighted by employment in knowledge-intensive sectors. Firms with fewer than 10 employees are not taken into account.

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The figure shows that several countries such as Ireland have managed to create

dynamic environments to foster

entrepreneurship and conditions for innovative businesses to be able to grow.

It also reveals the interesting situation of countries like Belgium, which ranks at the

bottom while still performing well in the other R&I indicators presented above.

Belgium boasts a good science base and strong academia-business cooperation but

fast-growing firms in the most innovative sectors account for rather a low share of

employment in Belgium. Although Belgian

R&I policies have enabled business R&D intensity to increase in the last decade,

R&D seems to remain too concentrated in a limited set of large multinationals. This

weakness prevents the strengths of its R&I system from translating fully into

economic performance. Enterprise growth is complex and largely

context-dependent. Businesses in

different markets are confronted with different framework conditions and

competitive market environments, have different capabilities and make use of

different business models and innovation strategies.

Nevertheless, evidence suggests that framework conditions that support the

reallocation of market shares to more

productive companies are important for the emergence and number of high-

growth innovative enterprises in a country. Friction related to regulations

and policies that hamper the processes of reallocation of resources to more

efficient uses hold these enterprises back8.

Moreover, other factors may be behind this lower performance regarding high-

growth enterprises in innovative sectors.

For instance, the availability of suitable financing is crucial. In this regard, the

EU as a whole and all individual Member States continue to lag behind the US in

the amount of available venture capital invested as a percentage of GDP: the

ratio of the gap between the US and the EU is 6:1. In addition, other framework

conditions, such as the tax system,

financial development, the availability of skilled labour, the efficiency of the public

administration and the rule of law can have an impact.

Figure 4 — Ease of doing business (highest scores represent the easiest environments for doing business), 2010 and 2017

Source: DG Research and Innovation — Unit for the Analysis and Monitoring of National Research and Innovation Policies

Data: Ease of Doing Business Indicator (World Bank)

Note: (1) EU: unweighted average of the values for the Member States (the average for 2010 does not include

MT).

8 Hölzl, 'High growth firms in Europe', 'Science, Research and Innovation performance of the EU', Commission, Brussels, 2016.

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Figure 4 shows the results of the World Bank's annual Doing Business report,

which ranks countries on the quality of

regulation for businesses, including protection of intellectual property rights,

thereby capturing another set of relevant framework conditions for innovation.

The World Bank composite indicator

shows that:

Denmark, the UK and Sweden have

very good framework conditions in place for doing business.

Some eastern European economies

(such as Poland, the Czech Republic,

Slovenia, Romania and Croatia) have been narrowing the gap with the best

EU performers since 2010, mainly by reducing the complexity and cost of

regulatory processes and strengthening legal institutions.

Greece, Italy, Portugal and Spain, all among the economies most adversely

affected by the economic crisis, have maintained a steady pace of

regulatory reforms.

Although most Member States have

improved their framework conditions for doing business overall, one specific policy

challenge is still properly supporting fast-growing SMEs in innovative sectors, which,

by boosting competition and making resource allocation more efficient, are

better able to speed up structural change at the aggregate level and transform the EU

into a more knowledge-oriented and

innovation-driven economy.

3. POLICY LEVERS

3.1. Increasing the quality of the

public R&I system

The level of financial resources made available to the public R&D sector is a

key determinant of the quality of its output as measured for example by

highly-cited scientific publications: if

Member States have invested more than the average in their public research base

the system tends to perform well in terms of scientific excellence.

At the same time, while a high quality

science base depends on adequate public funding, merely increasing investment

will not get the job done. Ensuring the

effectiveness and efficiency of these investments sometimes requires ambitious

reform of national R&I systems focusing on how public resources for R&D are allocated.

Such reform may feature the use of international panels to allocate project-

based funding or the use of performance criteria in distributing institutional funding.

In some Member States, excessive fragmentation among research-performing

institutions is a brake on the efficiency of their public research systems: wide-

ranging institutional reforms are required to reach critical mass, especially in fields

identified as relevant to implementing a 'smart specialisation' strategy.

Finally, international mobility among researchers benefits scientific quality,

innovation and growth. The scientific impact of authors who have never

moved has been shown to be lower than that of authors who have spent time

abroad. Both returnees and incoming

researchers usually help to increase the quality of scientific output because of

their exposure to other ways of conducting research and their

contribution to an international research network. For the countries most affected

by outflows, it is therefore vital to put in place policies to reintegrate researchers

into their system of origin or attract

international researchers. This may also stimulate those who remain to increase

their productivity.

3.2. Building stronger knowledge flows. Strengthening science-business

linkages

In some Member States benefiting from

a good quality public R&I system, science-business cooperation may

remain limited due to a mismatch between public research capacity and the

needs of the economy. A key lever of

science-business cooperation is thus the design and implementation of 'smart

specialisation strategies' which focus resources on areas where there is

potential for business absorption. In many Member States, though there is

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such a strategy, it is not being implemented effectively.

Moreover, governments can also use a set of policy instruments that help to

better channel public research capacity towards the needs of industry and the

economy. Some of these are:

incentives for public research, aimed

particularly at institutions (e.g. through funding criteria that favour

engagement with businesses) and at researchers (e.g. through recognising

experience working with the business sector in public-sector career

development);

targeted funding schemes for public-

private projects, proofs-of-concept, research agendas defined with

industry and PhD studentships in industry.

3.3. Putting in place an investment-friendly environment for innovation

In addition to factors related to the

quality and relevance of the science base, a broad range of policy levers can

be used to boost business R&D

investment and help transform new scientific and technological outputs into

innovation and economic activity. Member States use both direct and

indirect support instruments to promote business R&D investment and activities.

They provide grants and buy R&D services (direct support), and they

provide fiscal incentives, such as advantageous tax treatment of R&D

expenditure and preferential treatment for income from licensing and for sales of

assets attributable to R&D or patents (indirect support).

However, the availability, accessibility and efficiency of direct public support for

R&I and other incentives aimed at stimulating business R&D often needs to

be improved to ensure public support creates additional private investment.

Administrative burdens linked to public

support can be a serious obstacle to investment, especially for SMEs. In some

Member States, R&D tax credits schemes need to be improved, as some may be

skewed towards big companies and need to be fine-tuned to better take into

account the needs of SMEs and of young,

high-growth innovative companies.

Access to finance for innovation is crucial to translate new ideas into innovation.

Although bank loans and equity finance, notably through venture capital, are still

the most widely used means of financing innovation, there are other channels that

can be used, and some novel methods

such as crowd-funding, which have gained traction in the last few years,

may provide a useful alternative for SMEs trying to transform new ideas into

innovation.

Another issue to be addressed is the

availability of a workforce with adequate skills: in particular, skills shortages can

arise from mismatches between academic curricula and labour market

needs.

In general, fostering an environment

favourable to business R&D investment and innovation requires coordinated use

of a range of policies: moving from a 'silo' approach and developing a 'whole

government' approach to the policy mix.

This should encompass the adoption of

smart regulation, public demand for innovative products, and the development

of efficient product markets through structural reform that supports effective

(re)allocation of production resources towards innovative, high-productivity

activities. In many Member States, this will require strengthened institutions and

governance.

4. POLICY STATE OF PLAY

Effective and efficient research and

innovation systems are those that

succeed in producing strong scientific, technological and innovation outputs,

both in terms of quality and relevance, to address societies' economic and social

challenges. Although there are still major differences between Member States in

terms of their R&I systems' performance, most of them have actively worked to

improve the quality of their public

research systems and/or to put in place the right framework conditions to

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facilitate investment and innovation, and some have obtained excellent results.

4.1. Increasing the quality of the public research system

In the EU, scientific excellence is still to

some extent concentrated in a group of

leading countries, such as the United Kingdom, the Netherlands and Denmark.

Nevertheless, progress has been made in

recent years by most of the other Member States, as shown in figure 5 below, which

shows highly-cited publications as a

percentage of total national scientific publications in 2004 (red dashes) and

2014 (blue bars).

Figure 5 shows that some countries such as Estonia, Luxembourg, Malta and

Slovenia are indeed actively catching up

Figure 5 - Scientific publications within the 10% most cited scientific publications worldwide as % of total scientific publications(1), 2004 and 2014

Source: DG Research and Innovation — Unit for the Analysis and Monitoring of National Research Policies

Data: CWTS based on Web of Science database

Notes: (1) Scientific publication within the 10 % most cited scientific publications worldwide as % of total scientific publications of the country. The citation window for a

publication is the publication year plus two years.

These improvements in scientific quality have been made possible mainly by

major investment in R&D, either from national resources (Luxembourg) or

from EU structural funds (in eastern

European countries). The causal link with investment can be seen in figure 6,

which shows the change between 2004 and 2014 in both the share of highly

cited publications (vertical axis) and public R&D intensity (horizontal axis).

Both the positive impact of increased investment and the negative impact of

reduced public R&D investment

(Hungary, Bulgaria) can be seen in this figure.

Nevertheless, figure 6 also shows that the impact of increased investment on

quality has been smaller in some countries (such as the Czech Republic,

Latvia and Lithuania) than in others.

Scientific quality does not depend only on the level of public R&D investment. It

also depends on the diverse capacity of national research systems to obtain the

most value from that investment: system are essential for the countries

that lag behind. There are some good examples of reform

fostering efficiency of the public research

system. In Denmark, higher education reform has aimed to consolidate

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Figure 6 — Quality of scientific output and public R&D investment levels, 2004 and 2014

● 2004 ● 2014

Source: DG Research and Innovation — Unit for the Analysis and Monitoring of National Research Policies

Data: CWTS based on Web of Science database

Notes: (1) Scientific publication within the 10% most cited scientific publications

worldwide as % of total scientific publications of the country. The citation window for a publication is the publication year plus two years.

higher education programmes in fewer

institutions and so increase the coherence and critical mass of public

research. In the UK, the Research Excellence Framework was introduced to

reinforce the link between research excellence and institutional funding.

4.2. Building stronger knowledge

flows. Strengthening science-business linkages

While many Member States still need to focus their efforts on fostering science-

business links to raise private and public investment in R&D and allow proper

knowledge diffusion (see section 2.2), some countries already show particularly

strong public-private cooperation. Belgium, the Netherlands and Germany

have examples of interesting policies put

in place to this end.

In Belgium, the 'competitiveness

clusters' policy was launched in the Walloon region in 2005 as a forward-

looking industrial policy concentrating significant resources in specific economic

areas to create growth and jobs, and to attract both foreign investors and highly

skilled human resources. The clusters

involve companies, training centres and public or private research units in a

given geographical area (Wallonia) which are committed to a partnership-based

approach intended to generate synergies in relation to common innovative

projects.

The partnerships are formed in five

specific markets (life sciences, agri-food,

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mechanical engineering, transport and logistics, and aerospace) and related

technological and scientific fields. The final

aim is to achieve the critical mass needed for competitiveness and international

visibility. The competitiveness clusters have enabled the companies involved to

reach a higher level of excellence, and have brought together the competencies

required to launch successful and more ambitious projects, to innovate by relying

on the competencies of their partners, and to improve their workers' qualifications.

Public authorities support the

competitiveness clusters in carrying out investment, R&D and training projects in

line with the strategy of competitive positioning they have themselves defined.

In the Netherlands, the so-called 'top sectors' approach, which was launched in

2011, helps to build on the strength of the country's science base in a targeted

manner through partnerships between

businesses, academia and public research centres and aims to increase the scope

and ambition of business innovation. This new form of industrial policy, which

focuses on nine key economic sectors, puts industry representatives at the centre

of the coordination process while the government mostly concentrates on

developing sector-specific policies across

ministerial portfolios, including education, innovation and foreign policy.

Finally, in Germany, the so-called 'Fraunhofer model' is a good example of

public-private cooperation. The Fraunhofer Society is one of the world's major

international research organisations, consisting of 67 institutes spread

throughout Germany, each of them

focusing on different fields of applied science. Although some basic funding for

the Fraunhofer Society is provided by the State, more than 70 % of the funding

comes from contract work, either for government projects or for industry. This

model has allowed a flexible, autonomous and entrepreneurial approach to the

Fraunhofer's research priorities while

boosting cooperation with the business sector by paying attention to its research

needs.

4.3. Putting in place an investment-friendly environment for innovation

With highly efficient and effective public R&D investment, a high and improving

level of science & technology excellence and the development of hot spots in key

technologies, the Dutch R&I system has succeeded in increasing its innovative

capacity. Indeed, its innovation performance improved steadily between

2008 and 2014 and the Netherlands is

now an Innovation Leader according to the European Innovation Scoreboard

(European Commission, 2016)9. The framework conditions for innovation are

soundly in place in the Netherlands and, as a result, the country benefits from a

highly competitive knowledge-intensive economy.

The 'Green Deal' approach is a good

example of a Dutch policy which aims to create an investment-friendly environment

and remove barriers to innovation for sustainable economic growth, in particular

early on when innovative initiatives face the most difficulties. This approach is used

to supplement existing instruments, such as legislation and regulation, market and

financial incentives, and measures to

stimulate innovation, and to bring the government closer to firms, stakeholder

organisations and interest groups.

The Green Deal has inspired 'Innovation

Deals', a new pilot scheme launched by the European Commission in May 2016,

the main aim of which is to help innovators with promising solutions to

navigate regulatory challenges to bringing

their ideas to market10. Innovation Deals represent a new way to address obstacles

to innovation presented by EU legal provisions in a pragmatic, open and

transparent manner. They should take the form of voluntary cooperation between

innovators, national/regional/local authorities and Commission departments.

This cooperation is formalised via a Joint

Declaration of Intent.

9 http://ec.europa.eu/growth/industry/ innovation/facts-figures/scoreboards_en 10 https://ec.europa.eu/research/innovation-deals/index.cfm?pg=home

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Innovation Deals build on evidence from Member States suggesting that almost

two-thirds of the perceived regulatory

barriers currently preventing innovators from bringing their ideas to the market

can be overcome through explanation or clearer interpretation of specific

regulations by public authorities. If a rule or regulation is confirmed as being an

obstacle to innovation that could bring wider societal benefits, the Deal will

make it visible and feed into possible further actions.

Date: 16.11.2017

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5. REFERENCES

2016 European Commission, Brussels Science, Research and Innovation Performance

of the EU,

The Future of Productivity, OECD, Paris, 2015

Global Competitiveness Report 2016-2017, World Economic Forum, Geneva, 2016

European Innovation Scoreboard, European Commission, Brussels, 2017

Doing Business, World Bank, Washington, 2017

Veugelers and Cincera, 'Europe missing yollies', Bruegel policy brief, Brussels, 2010

http://bruegel.org/wp-content/uploads/imported/publications/PB-RVMC_Yollies_27082010_01.pdf

H2020 Policy Support Facility website: https://rio.jrc.ec.europa.eu/en/policy-support-

facility

European Semester website: https://ec.europa.eu/info/strategy/european-semester

Innovation Deals: https://ec.europa.eu/research/innovation-deals/index.cfm?pg=home

6. USEFUL RESOURCES

Highly cited publications, source: CWTS, updated in September each year

Public R&D intensity (public expenditure on R&D as % of GDP): source: Eurostat, updated in March and November each year

Business R&D intensity (business enterprise expenditure on R&D as % of GDP): source: Eurostat, updated in March and November each year

Public expenditure on R&D (government expenditure on R&D plus higher education expenditure on R&D) financed by business enterprise (not including financing from

abroad) as % of GDP: source: Eurostat, updated in March and November each year

Ease of Doing Business: source: World Bank, updated once a year (October)