Structural Obstacles are Penalizing Innovation in Europe
The financial crisis and a looming recession could have adverse effects on the resources available for investment in research and development (R&D). These effects will be made all the most painful by a series of regulations instituted gradually over the last several decades that make the market more rigid and could prevent companies from innovating and adapting flexibly to current challenges.
A new study from the Institut économique Molinari (IEM) says innovating companies have to deal in particular with three types of public policy whose indirect effects on innovation are little known or underestimated in public debate.
Market access difficult for new products
Driven by what is referred to now as the “precautionary principle,” approval policies that are increasingly tough, heavy-handed and costly are being applied to innovative products. Despite the best intentions, the inevitable consequence of these regulations is to push up the cost of innovation substantially, to undervalue its benefits, and to reduce the number of new products by making certain projects unprofitable.
The pharmaceutical sector – which at more than 71 billion euros is the sector that invested most heavily in R&D worldwide in 2007 – faces growing costs in getting its products approved. The cost of clinical trials nearly quintupled between 1980 and 2000. According to a specialist with the European Organisation for Research and Treatment of Cancer, the European directive, adopted in 2001, alone may have increased paperwork and the costs of trials in Europe by 85%, helping bring down the number of trials from 38 initiated before the reform to only seven after it was instituted.
The IEM study draws a parallel with the European REACH directive and notes that the chemical industry is gradually being submitted to the same type of regulation, thereby penalising innovation. REACH has already added further uncertainty to the business environment. The impact on the chemical industry will affect not only final consumers but also a multitude of downstream companies in various sectors if the costs of registering certain commonly used substances make their commercial sale unprofitable.
Cost containment policies in healthcare slows innovation
Once products reach the market, other policies take charge of penalising innovating firms. This is true of public control over healthcare spending. Drug price controls and growing bureaucratisation in the use of medicines (restrictions on indication, prior authorisation, quantitative targets on prescription, etc.) inevitably affect innovation in this sector. These last policies also bring in a dangerous bias under which doctors can be pushed to favor lower financial costs for mandatory health insurance at the expense of their patients’ health.
The perspective of seeing the prices of its future products submitted to increasingly strict controls and of having to negotiate with administrations whose priority is cost containment is a significant added risk. It contributes inevitably to raising the uncertainty that surrounds innovation, and interest in pursuing it is necessarily diminished.
These policies have no doubt contributed to limiting R&D investment by European drug firms and to reducing the number of new molecules they have launched. It has fallen by half, going from an average of 97 molecules between 1988 and 1992 to an average of 48 between 2003 and 2007.
A competition policy that handicaps innovating companies
With a view to restricting companies presumed to be in a “dominant position,” European anti-trust policy is also ending up, paradoxically, causing harm to innovating companies. This policy, with “pure and perfect competition” as its ideal, disregards entrepreneurial activity, risk-taking and innovation.
With examples from sectors as varied as computer and software technology (Microsoft, Intel), the Internet (Google), telecoms and toys, the new IEM study – which follows from many previous studies in this field (available at: http://www.institutmolinari.org/concurrence.htm) – shows that anti-trust policy handicaps innovating companies through fines, restrictions on business practices, etc. It requires them to face – in addition to the commercial and technological risks inherent to their activities – a permanent climate of uncertainty and to divert part of their resources to dealing with this instead of innovating more.
The Research Paper concludes that it is all the more important to analyse all the effects of these public policies on R&D and innovation in that they are not directly perceptible, and it takes years or even decades for their negative impact to become fully evident.
Titled, Risks and obstacles for innovating companies in Europe, the study is available at: http://www.institutmolinari.org/pubs/cahier1008_en.pdf
Information and interview requests:
Valentin Petkantchin, PhD
Director of research
Institut économique Molinari
GSM: +33 6 82 69 17 39
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