Enhancing Technology Diffusion in the EU amid Tough Structural Challenges

To remain globally competitive, the EU must empower firms to adopt the best technology solutions available on global markets. Building on a strong tradition of innovation, the EU relies on corporations across industries to drive the diffusion of technology through the commercialisation of technological innovations. Technology diffusion is crucial for embedding new technologies into society and is essential for sustaining industrial competitiveness. EU and Member State governments must prioritise enhancing the EU’s “diffusion capacity” – the ability to effectively spread and adopt innovations across Member States.

EU Contributors and Beneficiaries in Trade in Technology Products and Services

Knowledge and Technology Intensive (KTI) products and services are essential drivers of innovation and economic growth, pushing technological boundaries, and boosting productivity across multiple industries. KTI sectors are defined by their significant research and development efforts, commercialising technologies that impact a wide range of industries. Over the past decade, the EU’s KTI manufacturing sectors have become increasingly reliant on imported digitally enabled services – such as ICT and high value-added professional services – to maintain export competitiveness. This trend highlights the integration of high-tech industries in the global economy and the critical role of cross-border technology and service flows allowing EU firms to sustain strong positions in the global market.

Western and Nordic EU countries generally possess stronger diffusion capacities, allowing them to more effectively adopt, integrate, and capitalise on advanced technologies and high-tech services, thereby amplifying their economic advantages. Technology creation in the EU is heavily driven by key contributors such as Luxembourg, Ireland, Denmark, Germany, and the Netherlands, which have established themselves as leaders in many high-tech manufacturing and services industries. Companies in these countries excel in sectors like biopharmaceuticals, digital and digitally enabled services, and advanced manufacturing. Countries like Austria, France, Germany, and Central and Eastern European (CEE) countries emerge as significant beneficiaries of technology diffusion, actively importing advanced technologies to strengthen their manufacturing and service sectors. Companies in CEE countries integrate high-tech products and services into their operations, enhancing their industrial capabilities and accelerating overall economic development.?

Tech Divide and Skills Challenges in CEE Economies

The economic divide between Western/Nordic and CEE countries is closely linked to their differing capacities for diffusing knowledge and technology. EU countries like Sweden and Ireland have advanced digital economies with strong R&D investment, while CEE countries are still more dependent on traditional manufacturing and have lower digital integration. This disparity limits their participation in the digital economy and widens the economic gap within the Single Market. It leaves CEE countries vulnerable to protectionist EU policies that could restrict their access to global technology.

The digital intensity of businesses across the EU also reveals stark regional disparities, with Nordic countries leading in digital adoption and CEE countries lagging behind. This growing digital divide not only risks deepening economic inequalities and undermining competitiveness but also threatens to drive skilled workers away from less digitally advanced regions. The EU’s shortfall in STEM education further exacerbates these issues, as the region struggles to keep pace with global leaders like China, which produces a vast number of STEM graduates, and the US, which benefits from its global talent pool and strong innovation ecosystem.

Policy Recommendations to Push Technology Diffusion in the EU

To improve EU’s global competitiveness and accelerate Member States’ technology diffusion capacities, priority should be given to reducing internal market trade barriers and harmonising regulations, enabling firms – especially SMEs – to adopt innovations more easily. Advancing international trade liberalisation and fostering global regulatory alignment is essential for EU firms to access and integrate cutting-edge technologies from around the world. Importantly,?a return to a liberal rules-based global trading order and the reduction of unilateral regulatory actions are critical to preserving the global competitiveness of European industries, ensuring firms can thrive in a more open, cooperative environment.

By strengthening openness to trade and foreign investment, EU policymakers would enhance economic integration and unlock new growth opportunities across all Member States. Encouraging corporate R&D and innovation through tax reforms and investment incentives, such as full expensing in technology-driven industries, would drive growth and help attract leading industry players. Continued investment in advanced digital infrastructure, including critical technologies such as AI and cloud technologies, is essential to keeping European firms competitive in the rapidly evolving global digital economy.

Finally, addressing the growing digital skills gap through targeted investments in STEM education, and digital literacy will be crucial to preparing a future-ready workforce, particularly in regions like CEE that faces more significant challenges.

You can read the full Occasional Paper by Dr Matthias Bauer , Elena Sisto and Oscar du Roy here .