Europe’s missing Yollies

Europe’s lackluster capacity to generate growth and particularly productivity growth is for a significant part attributable to a subdued capacity to innovate. Policies aimed at boosting growth through research and development have not delivered. Private R&D intensity remains to date low (and productivity growth has declined). Looking at potential causes for this poor performance, analysis has looked at the importance of sector specialization as well as churning problems and firm demography. In this paper we go further by linking the two dimensions. We show that the EU’s business R&D deficit with the US can be almost entirely explained by the EU having fewer young leading innovators and, even more importantly, having fewer of these in new high-R&D intensive sectors. It addresses the implications of this finding for EU’s research and innovation policy design.