The innovation paradox: 12 questions and answers

The innovation paradox is a term used by the European Commission in 1995 for the finding that European countries are less able to translate scientific knowledge into new products and business activity. Much has been written and researched about this innovation paradox since then.

We state in the report that an innovation paradox is also present in the Netherlands. This manifests itself in two ways. First, the Netherlands excels in scientific output and publication quality, but this does not translate into a proportional number of patents or other applications. Relatively low private R&D spending and a limited share of experimental development also suggest that the Netherlands struggles to convert fundamental research into new products and processes. Second, we see the innovation chain faltering in the scaling‑up of startups. Although the Netherlands is known for its vibrant startup ecosystem, signs of stagnation are visible and the progression to scale‑ups lags behind.

In our research, we argue that possible explanations and solutions depend on the paradigm – or ‘lens’ – used to examine the paradox. The linear innovation paradigm searches for causes in market failures that hinder knowledge institutions and companies from developing and converting knowledge into economic value. The innovation‑system paradigm emphasises that the paradox can also be understood as the result of broader systemic shortcomings (system failures) within the research and innovation ecosystem, meaning the framework conditions must be in order. The transformative innovation paradigm, finally, stresses that R&D efforts can miss their mark when they do not sufficiently contribute to societal value creation.

Startups and scale‑ups, especially deep-tech ones, play an important role in strengthening a country’s competitiveness. These fast‑growing firms are more productive than the average company and lead the development of new technologies.

But startups and scale‑ups face major barriers in the Netherlands. One of the biggest barriers is a shortage of capital, particularly local growth capital. In addition, the shortage of STEM talent is a major problem, making many vacancies difficult to fill. Finally, entrepreneurs, employees and investors face strict regulations and limited fiscal advantages. This makes it harder for Dutch startups to grow into scale‑ups than their international counterparts.

The Dutch startup ecosystem primarily needs more financial support to reach its full potential. Blended finance and pension funds can help catalyse this growth by mobilising capital for startups. The talent shortage can be mitigated by investing in attracting, retaining and developing (international) employees. The Netherlands can also become more attractive for high‑tech talent through new employee participation schemes and investments in business‑location conditions. Stimulating the European internal market for young entrepreneurs can help ease strict regulations and fiscal constraints. Reducing bureaucracy in public‑private innovation cooperation and opening procurement budgets to startups could also help.

In simple terms: yes. We examined R&D expenditure by sector. Our findings show that the Netherlands indeed has an R&D spending gap compared with other countries, and that this gap has even increased from 2013 to 2022. This gap is not only due to the structure of the economy, but can be increasingly attributed to systematically lower R&D spending within the same sectors compared with other countries.

Our analysis highlights that the sectors with the greatest potential to raise R&D intensity include industry (especially pharmaceuticals and electrical engineering), the information and communications sector, and specialised business services. If the Netherlands raised R&D intensity in these sectors to the average level of our international benchmark, private R&D intensity would increase sufficiently to meet the 3% target (assuming 1% public and 2% private).

First of all, our research shows that general location factors (the investment climate and business climate) are important in persuading companies to choose the Netherlands rather than one of the neighbouring countries. Getting and keeping the basic conditions in order within the investment and business climate essentially requires generic, nationwide policy, with attention to issues such as space for expansion, infrastructure, access to capital, grid congestion, labour market tightness, shortages of technical staff, housing availability, accessibility and fiscal arrangements (such as the 30% expatriate tax ruling). Programmes such as Beethoven may additionally address specific regional needs.

In addition to these general location factors, our research indicates that it is also crucial for the Netherlands to offer the right conditions, resources and opportunities for innovative companies to invest in R&D, the broad adoption of innovation and scaling‑up under acceptable levels of risk. In other words, an attractive innovation climate.

Productive and dynamic research and innovation ecosystems play an important role in keeping the Netherlands attractive to new and existing (foreign) R&D intensive companies. Whereas individual entrepreneurs and firms were once seen as the primary driving forces behind innovation, there is growing recognition that innovation is the outcome of a complex interaction between a wide range of actors and conditions.

In our research, we therefore present a research and innovation ecosystem framework that provides an integrated perspective for understanding and addressing the innovation paradox and the R&D gap in a targeted manner, by focusing on the interconnections between actors, enabling conditions and governance. Linking structural barriers (forms of failure) to concrete elements of R&I ecosystems supports the development of targeted and coherent policy interventions. Targeted support for R&D intensive ecosystems is therefore also necessary to improve the investment and innovation climate in the Netherlands. Such an approach requires insight into the functioning of Dutch R&I ecosystems and an assessment of the position of ecosystem actors within international value chains, including potential control points and (overly) strong dependencies.

The innovation policy instrument mix refers to the ways in which policymakers can intervene in the innovation system to bring about change and to overcome different forms of market, system and transformational failure. In our research, we discussed the main policy instruments and linked them to these three types of failure. These instruments range from direct financial support, such as grants and tax incentives, to indirect support, including regulation and the stimulation of public–private partnerships. A distinction is also made between supply side and demand side policy instruments.

To break the innovation paradox, innovation policy instruments must address the underlying market, system and transformational failures. To prevent and/or correct market failures, for example, financial instruments can provide appropriate incentives to make investment in R&D&I more attractive. In the context of system failure, the role of government is seen as creating frameworks and conditions that foster collaboration, investing in the improvement of research and innovation ecosystems and their enabling infrastructure, and facilitating technological and economic diversification through innovation programmes. In the context of transformational failure, the role of government is not viewed merely as facilitating or corrective, but as actively providing direction, connecting actors and experimenting. This requires broader, coordinating policy instruments that provide strategic direction and stimulate demand, so that research and innovation activities are aligned with societal needs and priorities.

Increasing R&D and innovation efforts is an important means of making the Netherlands’ earning capacity future proof. At the same time, future proof earning capacity also implies that the Netherlands makes progress on societal challenges and transitions. In this context, societal challenges serve as a guiding perspective, namely as a market opportunity for sustainable products and technologies on the global market and for the realisation of a resilient Europe. This calls for targeted, thematic measures in addition to generic and non targeted measures that promote R&D in general - precisely because transformational failure may occur, whereby existing policies or systems fail to provide direction for the necessary societal transitions.

In our research, we carried out a policy mapping, using LLMs and expert judgement, of the opportunities for synergy between economic objectives and societal challenges. This policy analysis shows that there is relatively strong potential for synergy between innovations that contribute to economic objectives and six societal challenges. This potential for synergy provides guidance for making clear choices in specific innovation and renewal challenges, as resources are limited. A focused commitment to a limited number of specific themes can be a valuable complement to generic innovation policy.

The potential for synergy between economic objectives and societal challenges will need to be further explored in cooperation with other ministries and policy domains and levels. Interdepartmental collaboration, the establishment of thematic teams, core teams or mission teams, the development of a cross‑ministerial innovation programme, or the establishment of an institute in which mission‑driven innovation programmes are developed, such as DARPA, can support this process.

Consideration can also be given to ways in which demand for innovation can be stimulated, as this can act as a multiplier by triggering economic activity and R&D investment. By deploying demand‑driven policy instruments, such as innovation procurement and commissioning policies, government can also assume the role of a launching customer. For a coherent approach that takes both the short and the long term into account, a portfolio approach helps to balance impact, likelihood of success and investment requirements. This should prevent fragmentation and create synergy in the deployment of scarce public and private investment resources.