Large companies move their investments to countries with more favourable circumstances. What could the government do to prevent this?

The government, and especially EZ, should put the interests of large companies on their agenda. It is important that EZ learns about the specific problems that large companies encounter. We have already identified a number of problems in this sector that must be address. However, as parts of our weblog are based on the EZ reports, it could be that we also overlooked certain problems for large companies.
Most important, the number of qualified researches must go up. Several studies show that the lack of skilled personnel is the most apparent problem for large companies. Policy measures should be aimed at structurally increasing the number of biotech graduates in the Netherlands. However, as such policy can only yield long term results, the government should, in the mean time, fulfil the need for researchers in a different way: attracting foreign researchers. This could on the one hand be done via a better promotion of the Netherlands as on of the top countries for biotech related research. On the other hand, the government should create more favourable conditions for these foreign researchers to come work in the Netherlands. Or create more favourable conditions for future researchers to study here.
Also, the government should make haste with a public debate on biotech based products. It is important to somewhat counterbalance the negative publicity put forward by Greenpeace-like organizations by giving a more objective picture of the opportunities and threats of biotechnology. Mainly the larger companies, as there business is situated closer to the market, are highly dependent on a certain level of biotech acceptance.
Last, the government has to come up with a solution for the overregulation problem. Because of this administrative burden it is enormously time consuming and complex for companies to deal with the legal aspects of biotech. At least, the government should offer guidance in the administartive jungle. Measures taken for SMEs are a step in the right direction, but why these are limited to SMEs is unclear to us. Rather, the government should pursue a one-window strategy. There should be only one organisation to which companies can turn for information, advice and legal judgements on the use of biotech. Transparancy is of the utmost importance!

Even if all these policy recommendations are implemented, changes will not be effective immediately. It is never to late to take action, but the sooner the more likely future results will be positive. Although the government does seem to realize that biotechnology holds great promises for the future, we feel they should definetely widen their scope.

Considering the EZ measures, put forward in our last post, it becomes quite clear that the government mainly focuses on startups and SMEs when dealing with biotech failures. Although we certainly agree with these measures, the current Dutch biotech innovation system gives SMEs a hard time, we find it strange that measures supporting large, existing companies are to a large extent missing. We observe that these companies are moving their R&D abroad, the so-called braindrain, because Dutch conditions are simply too unfavorable. This observation is endorsed by biotech branche organizations (see our earlier post on branche critics).
The government does too little to prevent this. Large companies also suffer from overregulation. There are little investments in educating high quality researchers while these are very much needed for large companies. More over, stimulating entrepreneurship among researchers might even lessen the availability of skilled personell for these comapnies. Also, as their business is much closer to the market, large firms suffer the most from the low acceptance of biotech products.
We argue that there is an important failure in the current view of the government on the biotech sector. Large companies should get more attention! Therefore we come up with the following, more specified research question:

What policy measures should the government take to prevent large companies from leaving the Netherlands?

By analysing the innovation system we have identified a number of failures in the Dutch biotech sector. These include (1) over regulation, (2) lack of venture capital, (3) low acceptance of biotech products, (4) not enough qualified personnel and (5) insufficient linkages between the research and the business world. These failures are not unknown, the ministry of Economic affairs, to a large extent, recognises the same. On its website, it proposes measures to deal with some of these failures.
The government has started to lessen the administrative burden resulting from extensive biotech regulations. As mentioned, this is mainly focussed on SME’s: SME’s are exempted from certain payments, and they are provided guidance. Second, to deal with the lack of venture capital, subsidies are available for biotech starters. This helps reduce the risk of setting up a business in this field. The lack of linkages, third, is mainly adressed by stimulating entrepreneurship. The government hopes this will result in more researchers setting up their own business.
The other failures seem to be lower on the government’s priority list. Actions to win the population’s hearths for biotech products are only just beginning. There are public debates about the acceptance of biotech product but large scale campaigns (e.g. Postbus 51) are not yet available. Also, the problem of insufficient personell is not yet widely recognised by the government. Although the government is stimulating people to study exact sciences, this is not tailored to biosciences. Furthermore, the existing beta-initiatives are not at all successful.

Good education and good research alone is not enough to be competitive. Especially the linkage between education and research (by companies) is important. The education system should create skilled workers for companies to do their research. There is, however, one big problem, the so called “European paradox“.
Universities in Europe are very good in producing knowledge. When looking at scientific papers and influence of these papers Europe scores very high. But European societies have a problem of putting this knowledge in the market. It is often said that entrepreneurship in Europe is not high enough. Not enough graduates from universities continue their research for companies. In general a ‘culture change’ would be needed, one were entrepreneurship is valued, and graduates are encouraged to set up their own businesses in biotech, or continue their research for large, commercial firms.

One of the important aspects of the innovation system is research and education. Education creates new workers with special skills for the biotech sector, and research creates new knowledge to be used in the biotech sector. Only when the Netherlands can succeed in constantly educating skilled workers and create innovative ideas can it be one of the leading countries in biotech.
When looking at the graduates in bio sciences and looking at the scientific publications in the Netherlands, it can be concluded that these are very good. The quality of the graduates is high, the number of publications (per researcher) is high, and these papers are cited very often. There is, however, a problem with the quantity of graduates. Companies need quality researchers, but also need enough of them. In recent years the number of people graduating in bio sciences has dropped almost 50%.
This means companies have, or will have trouble finding new, qualified employees for their R&D activities.
Indeed, when looking at the research that is being done in Europe and the US, it is evident that US companies are spending far more on biotech than European companies. For example, the R&D expenditures of US companies in 2002 and 2003 were twice as high as European companies. However, when looking at the amount spend on R&D per employee in 2003, European companies were spending about 10% more than American companies. In 2002 the amount where almost equal. This seems to suggest that European companies are willing to invest money on R&D, but are not able to because there are not sufficient researchers.
In R&D people are still the most important, above labour cost, and companies will follow the people. The task for the Netherlands is to either increase the number of graduates, or to attract foreign researchers. Something needs to be done to prevent larger companies from moving their R&D activities abroad.

As discussed earlier, biotech is a dynamic, international sector which has just arrived at the beginning of it’s growth phase. Many countries recognise the importance of biotech for their future economy. Looking at the knowledge output (patents, citations) and at the investments done in this industry, you can see that the US, UK and Germany are the current leaders in this field. Leading is mainly defined as the number of companies, patents, and the turnover of these companies.

However, there is a problem when trying to compare countries. Although it is possible to say that the US is currently ahead of the Netherlands, it is impossible to say exactly how far the US is ahead. Biotechnology is a new sector, and its main focus is still on basic research. Competition is not very fierce in the sector; a lot is still undetermined, and the market dynamics of the sector are still taking shape. Companies are not yet trying to out-compete each other, as happens in other, more mature sectors.
It may be more useful to say something about the climate for investments in biotechnology. When a company or bank wants to invest in biotech, they expect it to be profitable. This assumption can be either based on the current value of the company, or on the expected discoveries from future research. When looking at the index figures for biotech firms in Europe and the US, it is clear that US firms are valued higher that European firms. Therefore the expected returns in the US are more promising, indicating that they have a stronger position in this field. Also, when looking at revenues and R&D expenses in Europe and the US, US biotech firms are leading by a long way.
Also, when looking at other factors, such as number of companies or employement in the biotech sector the differences between Europe and the US are large. Per head of the population the US employs 4.5 times as much people in biotech as biotech firms within the European Union. The number of companies per head of the population give a slightly better picture: the US has about 1.5 times as much companies per head of the population. For the Netherlands this number is only 1.1 times.
So, while the Netherlands (and the whole of Europe) are not doing such a bad job when looking at number of companies, it can be concluded that the companies in Europe are smaller (less people employed). US firms, on average, are twice as large. All sings that the biotech sector in the US is more mature then the one in Europe.

It should be noted however, that the Netherlands (and Europe) can turn this disadvantage into an advantage. Smaller companies are often more flexible, there is less corperate structure and less oversight by managers. This is an ideal environment for innovation and breakthrough discoveries. With enough captital to continue research, European companies must the able to successfully compete with US firms. Especially in a sector where research is of such importance, the countries with the best innovation system will win.

In their report Life Sciences, een peiler van de Nederlandse kenniseconomie, the Dutch ministry of Economic affairs mentions a number of solutions for the overregulation problem.
One of the problems with biotech is that it is a relatively new technology that covers aspects from severlal existing technologies. This means there are many regulative institutions that have a say on biotechnology. As a result, companies have no idea who to turn to. The best solution would be to somehow group biotech related institutions – this would also make decision-making more efficient – but at least the government should offer some guidance in this ‘jungle’. As mentioned in our earlier post ‘lowering the administrarive burden’ the Dutch government already offers such guidance for SME’s. They also are excempted from most payments for research request, etc. Strangely, the government feels large companies can sort out these things themselves.
Second, and this problem is especially eminent when comparing Europe to the USA, there is hardly a European standpoint on biotechnology; every member state has its own regulation. For biotech companies the USA is therefore more interesting because it offers an equally large market (maybe even larger) but there is only one set of rules to obey to. So, it is important to harmonize European legislation.
But a large problem remains. Large changes in regulation, will have to pass the lower and upper house: representatives of the Dutch population. As long as the population feels ‘threatened’ by biotechnology it will be very hard to get things done. That is why informing and debating with the public is so important.

The lack of acceptance of biotech is an important problem. If the government wants to attract more companies they should better not neglect this problem. Companies need a stable environment, otherwise they are not willing to invest here.
Therefore the government should started a discussion on biotech as soon as possible. Currently this is mainly done by organisations like Greenpeace who often take a sceptical standpoint in the discussion and mainly address the possible failures and hazards. The government communicate more intensively the economic benefits of biotech. Of course they should provide a total view of the problem, including the possible negative effects, but right now the public’s main source of information are environmental organisations. In order to come to a broad discussion and to overcome people’s first negative reactions, an agressive approach should be used to start this discussion. SIRE commercials and open debate programs on TV are a good way to start and reach many people.
Next, the government should ease the public’s worries by creating a strong and clear set of rules for the industry and open a government institute who monitors and judges developments in this field. This assures people that the goverment is actively watching and guarding their safetey when it comes to biotech. A good example is how medicine are judged in the Netherlands. If a comparable institute could be founded for biotech inventions, people can be sure that the products allowed on the marktet have been intensively checked on safety. A nice side affect of such an institute could be that this makes the Netherlands more attractive for companies to invest here. In the medicine industry this has been the case: clear rules and an efficient way of judging medicine have attract many companies.

We are having a bit of a hard time structuring our web-log. Different from more common web-logs our log tries to answer a specific question. We are trying to work to and end, just as in a ‘normal’ research project. However, different from a normal research project, a web-log is ordered in time. As a result we feel it becomes unclear to what subject our posts belong.
We figured out the following solution. In one of our first posts we introduced the biotech innovation system. Following posts elloborated on this system and / or identified failures in this innovation system. These posts are now updated in two ways, with a capital F in the headline (if they are about failures) and with a picture of the innovation system, indicating (in cyan) what part of the system is explained.
Please let us know whether this puts the posts in a clearer pespective!

In a globalizing world it is becoming easier to shift part of a company’s business from one country to another. This especially holds for R&D facilities. As the Netherlands wants to attain and attract business R&D – expenditures on R&D are too low at the moment – it is important to understand location factors, reasons why a company would settle in a certain country.
The most important factor is the availability of skilled personell, quite a problem in the Netherlands. The demand for biotechnical engineers by far exceeds the availabilty. Also intensive linkages between research institutions and business life are needed. As explained below the Netherlands suffers from the ‘European Paradox’: because of a lack of linkages, too little knowledge flows from research to business.
No wonder important biotech companies – think of Akzo’s medical subsidiary Organon – move to the United States.