Why EU innovation policy fails to promote disruptive innovation

Europe’s long-term prosperity depends on its ability to generate and absorb disruptive innovation. This column argues, however, that the European Commission’s proposed 2028–2034 Multiannual Financial Framework continues to prioritise large, highly prescriptive, and administratively complex collaborative schemes, and that there is little evidence that such grants foster disruptive innovation. The grants boost recipients’ short-term revenues but shows no long-term impact. Nearly half of the current grant programme is allocated to existing ‘mid-tech’ companies. EU innovation policy needs to shift from supporting established firms to funding bold, bottom-up ideas, especially from small, independent companies.

The 2025 Nobel Prize in Economic Sciences – awarded to Joel Mokyr, Philippe Aghion, and Peter Howitt for their work on innovation-driven growth and the dynamics of creative destruction – offers a timely reminder that long-term prosperity depends on societies’ capacity to generate and absorb disruptive innovation. Their research shows that productivity and welfare advances emerge when new technologies replace old ones, and when institutions create the conditions for experimentation, risk-taking, and the reallocation of resources toward more productive uses.

Against this backdrop, the European Commission’s latest proposal for the 2028–2034 Multiannual Financial Framework (MFF) seems inadequate. Taken at face value, the proposed Framework constitutes an unprecedented commitment to research and innovation (R&I) – nearly €175 billion, almost twice the size of Horizon Europe, the existing multiannual programme that is still running. However, the headline figure of €175 billion must be seen in context. Over the years of the EU’s planning horizon, this amounts to about €25 billion per annum, or less than a fifth of 1% of the EU27’s GDP.

Even more concerning is the proposed structure. The largest component of the proposed budget rewards incrementalism rather than disruptive – and, hence, truly innovative – ideas. In a recent report (Fuest et al. 2025), we examine how this structural bias has translated into weak scientific, economic, and innovation outcomes.

Anatomy of EU spending for R&I

The EU aims to support competitiveness by funding the entire value chain in innovation, from pure research to projects that demonstrate the commercial viability of ideas.

Table 1 shows how the proposed EU R&I budget for the next 7-year period (2028–34) is distributed over different components, called ‘Pillars’, and the differences relative to the current allocation (2021–27), called Horizon Europe.

• Pillar I – Excellent Science aims at strengthening Europe’s scientific base by supporting frontier research, skills, and infrastructures through instruments like the European Research Council and Marie Skłodowska-Curie Actions.
• Pillar II – Global Challenges and European Industrial Competitiveness funds collaborative research that is supposed to address major societal, environmental, and technological challenges while reinforcing EU industrial leadership.
• Pillar III – Innovative Europe promotes innovation via the European Innovation Council, support for innovation ecosystems, and enhanced small and medium-sized enterprise participation.
• Pillar IV – European Research Area (a novel component) provides funds to reduce R&I disparities across member states.

Table 1 Budget breakdown by pillar

Notes: The table reports only the main budget components. Shares might therefore not sum to 100%.

The table shows that the allocation for Pillar III, dealing with innovation, almost doubles in the proposed budget. This is an important step in the right direction. However, Pillar II remains the single largest component, absorbing more than €75 billion, despite a slight reduction in its budget share – to 43% from 51%. The Pillar brings together three sub-programmes – called industrial leadership, societal challenges, and joint undertakings. However, there is currently no rigorous evidence indicating that these funding instruments provide value for money. 

An important weakness of Pillar II is that it requires applicants to form consortia across multiple EU member states, including 20 or more participants, each with different national reporting requirements, institutional interests, and bureaucratic constraints. The administrative burden alone consumes a significant share of time and resources, and the complexity of these partnerships makes it nearly impossible to assess, ex ante, whether a proposed project is likely to generate genuine scientific or technological breakthroughs.

An even more concerning weakness of Pillar II is that its grant calls are highly prescriptive and, as a result, tend to foster incremental rather than disruptive innovation (Fuest et al. 2025). By tightly defining eligible technologies, performance targets, and production methods, they leave limited room for experimentation or alternative approaches. Consequently, such calls mainly support incremental advances that align with the capabilities of incumbent firms, whose interests often shape the call specifications through member state committees, reinforcing established industrial players rather than enabling radical, transformative innovation with high potential.

Pillar II and scientific excellence

The Commission’s own rules under its “better regulation toolbox” make it mandatory for the Commission to provide evidence on the impact of its spending. However, very often these impact assessments are a perfunctory exercise.

The Horizon Europe interim evaluation – the main official source for assessing outcomes – devotes just a single paragraph to Pillar II’s performance (European Commission 2025). It claims that “scientific excellence is a primary evaluation criterion”, but reports only 3,026 peer-reviewed publications from projects that had already absorbed €25 billion in funding. In other words, under Pillar II, each publication effectively costs €8 million.

Even acknowledging that not all projects aim for academic output, this figure starkly contrasts with European Research Council (ERC) grants under Pillar I, which average less than €2.5 million per project and routinely produce multiple high-impact papers, implying a much lower cost per paper. If scientific excellence is the goal, Pillar II clearly underperforms.

Pillar II and economic performance

These structural problems would be tolerable if collaboration yielded strong results in terms of economic performance – probably the closest metric of ‘competitiveness’ – so strongly emphasised by the European Commission (European Commission 2024). However, our analysis suggests otherwise.

Figure 1 presents the results of an event study examining the change in beneficiaries’ revenue before and after the receipt of the grant. Our results suggest that R&D grants from all collaborative programmes are associated with an initial boost in revenue, followed by a subsequent decline. It is unsurprising that an enterprise receiving an injection of funds would exhibit increases in employment and sales. Yet the true metric of success is whether the company continues to perform once project financing has ended. ² While the estimates in Figure 1 are descriptive and not necessarily causal, the lack of a positive correlation between grants and the long-run revenue of recipients is still quite concerning.

Figure 1 Grant recipients’ revenue is initially boosted but subsequently decline

Notes: The estimates are based on IEP-COMPET, a novel dataset linking Horizon grants to recipients’ financial performance. The sample in Figure 1 comprises Pillar II grant recipients. Treated units are companies that received the grant. The control group is formed by grant recipients who did not yet receive the grant. The details of the approach are provided in Fuest et al. (2025).
Source: Authors’ calculations based on IEP-COMPET.

Pillar II and innovation

It is still possible that, despite not translating into increased company revenue, Pillar II grants generate innovation and externalities that translate into future performance. Unfortunately, this does not seem to be the case.

The EU’s own interim evaluation lists a mere 24 intellectual-property-rights applications – including patents and trademarks – and about 1,900 ‘innovative outputs’. The problem is that the report provides no clarity on what counts as an ‘innovative output’, how it is measured, or whether it leads to any tangible market or productivity gains. Without that information, the claim of innovation remains unsubstantiated.

Fuest et al. (2024) describe how the EU is stuck in a ‘middle-technology trap’ and argue that policy should support disruptive innovation to break this path dependency. Yet Figure 2 shows that firms in mid-tech – traditional industries based on mature technologies – account for over half of all patents filed by Pillar II’s beneficiaries. This implies that almost half of the budget is allocated to companies that are unlikely to produce disruptive technologies.

Figure 2 Mid-tech firms account for over half of all patents filed by Pillar II beneficiaries (Horizon recipients)

Source: Authors’ calculations based on IEP-COMPET (Gros et al. 2025)

Conclusions

It is now commonplace to assert that innovation is the key to reviving Europe’s growth. The Commission has bravely proposed a substantial increase in the proportion of the EU budget to research and innovation. But unfortunately, it continues to reserve the largest part for Pillar II, composed of large, highly prescriptive, and administratively complex collaborative schemes. This underperforming part of the budget that absorbs more than €75 billion does little to improve European competitiveness because it funds mainly narrowly defined technological paths selected by companies in incumbent industries.

The new Multiannual Financial Framework programme should focus on funding ideas, not just existing companies. Resources should be reallocated toward less prescriptive and less administratively cumbersome programmes. EU innovation policy should encourage disruptive innovation by encouraging bottom-up initiatives, especially by small independent companies. This will strengthen the innovation process celebrated by the 2025 Nobel laureates.

Source : VOXeu