Local roots: a competitive edge and a structural trap
One of the report’s most nuanced conclusions is that while the traditional strengths of European clusters are real, they are no longer sufficient. Decades of cumulative investment in research and production facilities, a highly skilled workforce, and the close proximity between businesses, universities, and research institutions ensure that established R&D activities remain deeply embedded in their local environments.
The problem lies in that this embeddedness applies to what already exists, not to what lies ahead. For emerging technological fields—such as artificial intelligence, quantum computing, biotechnology, and semiconductors—the investment decisions being made today will dictate where talent, value creation, and long-term technological leadership will concentrate. And in the race for new investments, Europe is not starting from a position of strength.
The proposal: flagship clusters with critical mass
The report’s response is strategic rather than fiscal. The authors advocate concentrating European resources into a select number of innovation clusters capable of competing internationally, rather than spreading support thinly across numerous smaller-scale initiatives. These flagship innovation clusters should bring together corporate players, research institutes, start-ups, investors, and the public sector around specific technologies with the potential for global leadership.
The proposed selection criteria include existing technological strengths, available research infrastructure, and the private sector’s willingness to invest. The process ought to be inclusive—recognising industrial strengths across different regions of Europe—and tracked against transparent progress indicators.
The Executive Director of the Fraunhofer ISI, Jakob Edler, puts it succinctly: ‘Europe does not need to fund everything. What matters is pooling and connecting existing scientific and industrial strengths to create internationally visible innovation hubs with critical mass.’ The goal is to generate a halo effect: when a cluster achieves sufficient success and visibility, it acts as a magnet, drawing in additional talent, investment, and innovative businesses, thereby reinforcing its own position in a cumulative spiral.
Four pillars of action: regulation, funding, demand, and talent
The study structures its proposal around four specific areas for action. The first is the consolidation of existing strengths, incorporating into these clusters proven public-private collaboration models, such as that of the Karlsruhe Institute of Technology (KIT).
The second pillar is the elimination of regulatory barriers. The report places particular emphasis on the role of public procurement as a driver of innovation—a tool that remains underutilised in Europe—and calls for competitive intellectual property frameworks. The most ambitious proposal in this area is the establishment of a European ‘fifth freedom’: the free movement of knowledge, research, and innovation, complementing the single market’s four fundamental freedoms.
The third pillar addresses the financing of innovative companies. The report notes that many European start-ups lack sufficient funding options during their growth phase and proposes mobilizing additional sources of public and private capital, alongside improving cross-border coordination for scale-up financing. It also calls for a European demand-side strategy to unlock early-stage markets for new technologies.
The fourth pillar is talent mobility. The report proposes introducing a European talent visa for international researchers and entrepreneurs, alongside the portability of social security benefits and pensions through a digital European social security account.
Context: the pressure of the moment
The report comes in the same week that the German government convenes an investment summit aimed at bolstering its appeal as an industrial and technology hub—a sign of the growing pressure felt by Europe’s leading economies in the face of competition from the United States and China. The alignment between this backdrop and the Fraunhofer ISI’s diagnosis underscores that the question is no longer whether Europe needs to act, but rather how to concentrate that action to deliver genuine impact on an international scale.
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“The Fraunhofer ISI report does not state it in so many words, but its logic is clear: to compete with the United States and China, Europe must double down on those who already hold an advantage. That is how the halo effect operates—a cluster achieving critical mass attracts more talent, more investment, and more businesses, creating a self-reinforcing loop. It is a winners-take-all strategy, and applying it in Europe collides head-on with one of the founding tenets of the European project: territorial cohesion. Decades of structural funds, smart specialisation strategies, and regional innovation policies have sought to spread innovative capacity across the continent. The result is a landscape dotted with numerous hubs of activity, yet precious few clusters with genuine international visibility. This is not because those policies failed, but because concentration and redistribution are forces pulling in opposite directions. The unspoken question posed by the report is the most difficult facing European innovation policy: is Europe willing to concentrate resources in territories that are already strong—accepting a temporary widening of internal disparities—in exchange for building the critical mass the continent requires to compete globally? That decision is not technical; it is political. And postponing it for too long carries its own cost.
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