Part 1: R&D Investment for the Knowledge-Based Economy Scientific and technological knowledge and its wide dissemination play a vital role in the knowledge-based economy. It is widely agreed that research and development (R&D), along with the availability of a highly skilled workforce, the creation of an intense interplay between the stakeholders of national innovation systems, and the effective use of information and communication technologies, are the key conditions for successful innovation and the competitiveness of advanced economies. The capacity to create and apply knowledge has become more important in the production of goods and services. On the one hand, production is more research-intensive, drawing on the utilisation of research findings; on the other hand, it is technology-intensive, drawing on the exploitation of new technology, and on the command of the knowledge base of advanced and tailored services and complex production processes. This part of the document first examines the investments that various countries are making in R&D, and the main sectors making those investments. Secondly, some key figures on Community funding of research by means of the Framework Programmes are presented.

Thirdly, since in most countries the business sector plays the most important role in terms of R&D spending, private investment will be examined in more detail. As venture capital (VC) investment "C from private as well as public sources "C becomes more and more important for the creation of new firms and employment, key data on VC investment will conclude this part. Key findings!" o Since the mid-1990 s, the gap in R&D financing between the EU and the US has almost doubled in volume terms. The gap is mostly because the growth in R&D activities in the main EU economies has been low by comparison to that in the US, especially in France, the UK and Italy. !" o There are substantial differences between Europe and its main competitors in the structure of their R&D funding. In the EU, while governments account for a much larger share of R&D investment than in the US and Japan, the situation is the reverse in the case of business R&D.

The absolute volume and the growth of R&D investments being made by European companies are substantially below the levels found in the US. !" o The EU countries have converged in terms of the development of their R&D system. On the one hand, most of the small EU economies, and those that are catching up, have recorded the highest growth rates for R&D investment and R&D intensity (the amount of R&D investment per unit of GDP). On the other hand, the major EU economies have registered either comparatively moderate or negative rates for growth of R&D investment and R&D intensity. !" o The business sector finances and executes a high share of R&D in several EU countries.

However, comparing the EU average to the US and Japanese shares respectively, the EU! s business sector is lagging far behind. Perspectives In order to meet the objective set at the Lisbon Summit in March 2000 to make the EU the most competitive and dynamic knowledge- based economy in the world by 2010, the EU has a major challenge ahead. While both the private and the public sectors need to invest more in R&D, these investments should be made in an effective way, with special focus on mechanisms to stimulate efficiency throughout the whole R&D system. During the past few years, growth in R&D financing has been insufficient, but more progress has been made in the way the funds are allocated.

For instance, public funds are increasingly awarded on a competitive basis, often through intermediary public funding organisations and via public-private co-financing programmes. Aiming at achieving the 3% objective by the year 2010, much attention is being paid to enhancing private sector efforts in research. In particular, as Europe lags significantly behind the US in venture capital financing, additional efforts have been made to support venture capital financing in seed, start-up and expansion phases of new business activities; these are expected to generate new business sector R&D activities and R&D performers. Also, public sector R&D should be strengthened with new resources for research along with increases in public funding for private sector R&D. Because of the potential systemic failures of national innovation systems (mismatches, inefficiencies, lack of collaboration), an increase in funding is not enough on its own. Other factors affecting the volume of R&D and the level of R&D intensity should be taken into account as well.

These include, for example: the regulatory environment for R&D; the stock of human resources in research; and the capacity of the innovation system to absorb any increases in funding; and the capability of R&D financiers and performers to co-operate and use funding in a productive way. The role of governments is increasingly seen to be to act as a facilitator, creating a favourable regulatory framework and environment for the various players in the innovation system to conduct research and to collaborate with each other. The key issue is stimulating public " Private partnerships in both financing and in research and development. In this regard, Community funding through Framework Programmes has opened up new avenues for more intensive collaboration and participation in multi-annual pre-competitive R&D bringing together partners from various countries and from different sectors of the economy. This trend is enhanced by the implementation of the Sixth Framework Programme with the introduction of new instruments, and by the favourable development of Community funding for co-operative R&D activities.

Part 2: Human Resources in S&T Human resources are an important element of the knowledgebase d economy. The role of human resources in economic processes is being re-defined "C from the creator of knowledge in S&T processes to the applicant of knowledge within broader the economy. Human resources in S&T are measured by the numbers of people in S&T related occupations, and the level of formal educational qualifications in the labour force. This section analyses key indicators on human resources in S&T, including numbers of researchers, graduates in S&T (especially new PhDs), investment in tertiary education, international mobility of students and researchers and women in S&T. Key findings!" o In the EU Member States, the proportion of researchers in the labour force is low compared to the US and Japan; only Finland and Sweden are at the same high level.

!" o The EU produces more S&T graduates than the US or Japan, both in absolute terms and in relation to population size. !" o EU Member States invest less of their national resources in tertiary education than the US, but more than Japan. !" o The main foreign destinations of EU students are the US and Canada. The main regions of origin of foreign researchers in the EU are other European countries, Asia and Oceania. !" o In the EU, women are less well represented than men in S&T and the situation is even worse among researchers..