Diving into the Innovation Gap: Decomposition of the EU’s R&D Efforts and Structural Upgrading

Abstract

This thesis investigates the persistent R&D intensity gap between the European Union (EU) and the United States (US), with a focus on the structural and intrinsic drivers of this divide over the period 2007–2023. Using a longitudinal decomposition framework based on Moncada-Paternò-Castello et al. (2010), the study disaggregates the EU-US innovation gap into sectoral composition effects (structural) and firm-level investment behaviour (intrinsic). Results show that while the structural component of the gap has narrowed, this is not due to widespread upgrading toward innovation-intensive sectors but rather statistical offsetting among divergent sectoral trends. In parallel, the intrinsic component has widened significantly, revealing declining R&D intensity within EU firms across most sectors, but advantage in Hardware as well as convergence in Software & Computer Services. Country-level analysis highlights that only a few EU economies have meaningfully reoriented toward high-tech sectors, while others have expanded R&D without structural transformation or experienced dilution. Firm-level data further reveal high concentration of R&D investment in dominant firms, raising concerns about system-wide resilience. These findings contribute to debates on technological upgrading, innovation policy, and structural transformation. The results of the thesis reinforce the importance of targeted and distributed investment and question the adequacy of aggregate targets in EU innovation policy. While limited by its exclusion of smaller firms, the research offers insights into the interplay of structural and behavioural dynamics in national innovation systems. Future research could advance the findings by investigating factors behind firm-level performance in different sectors and the systemic effects of R&D concentration.