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18 Mar 2014

Technology challenge for Europe

Steve Box

by Steve Box

Head of Global Trade and Receivables Finance, Europe, HSBC

Technology challenge for Europe

In the past 20 years China has almost doubled the proportion of GDP it spends on research

Growth may be recovering close to home, but emerging markets still hold the greatest long-term potential for European exporters. Despite the difficult market conditions in early 2014, economies in Asia, Latin America and the Middle East are expected to account for the majority of global trade growth in the years to 2030.

For many European businesses the most important export markets remain local. Around 80 per cent of Polish exports and 60 per cent of French exports go to other countries in Europe. But looking further afield could offer significant opportunities.

In many European countries, investment in research has stagnated. Europe’s share of world patent applications has almost halved in the past decade

Those European exporters that can provide the industrial equipment to build new cities and the consumer goods demanded by a rapidly expanding emerging market middle class are likely to benefit. Trade corridors between Europe and emerging nations are set to expand rapidly, according to HSBC’s Trade Forecast. By 2030, we forecast that China will have become the second most important export market for French manufacturers.

While access to new markets represents an opportunity for European businesses, the rapid advance of emerging economies also poses a challenge. Many European exporters derive competitive advantage from the sophistication of their products, drawing on advanced scientific and technical skills.

Emerging economies are keen to catch up. Countries such as China and Malaysia are boosting their investment in research and development. China now invests the equivalent of 1.8 per cent of its GDP in research, a near doubling of its expenditure 20 years ago, while the UK’s investment at around the same level has stagnated over the past decade. Turning investment into innovative goods and services will enable emerging economies to develop higher-value and more sophisticated goods.

In the case of China this shift is already well underway. It is level with Germany, which ranks third globally in the number of international patent applications it files each year. China's exporters have succeeded in high-technology fields including information technology and telecommunications.

In many European countries, by contrast, investment in research has stagnated. Europe’s share of world patent applications has almost halved in the past decade. Increasing it will be important to enable European businesses to compete for high-quality jobs and growth. Some countries also face specific policy challenges. In France, public sector investment is strong but private sector investment is relatively weak. The UK has world-class universities, but a relatively low level of patent applications suggests it would benefit from strengthening the relationship between academic institutions and businesses.

With the growth in trade of high-technology goods likely to outpace growth in overall trade, getting the right policies could be an important factor in determining export prospects.

The European recovery is welcome news for international businesses, but in the long term it pays to remain alert to new opportunities and competition from emerging economies.

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