Vive la Revolution! Europe's bigger problems are regulations, and a fear of risk.(Industry Overview)(Cover Story)

Byline: Rana Foroohar, With Alison Brooks in Paris

White-coated scientists don't usually take to the streets, but they did earlier this month at Paris city hall. More than 2,000 French lab directors resigned in protest over a research funding shortage, and 74,000 signed a related petition. They want the government to reinstate funding that was cut two years ago during an economic downturn. The cuts, they say, have forced scientists to flee to Japan and North America, threatened France's scientific enterprise and, in general, made it impossible to conduct research.

The French scientists aren't the only ones worried about Europe's leadership in science and technology. Four years ago European politicians signed onto the Lisbon agenda--a pledge to become "the most innovative, knowledge-based" society in the world by 2010 by supporting research, encouraging high-tech start-ups and attracting top entrepreneurs and scientists. Since then, Europe has only moved farther from that goal. The Continent has fallen 130 billion euro behind the United States in R&D funding, and the gap continues to grow. Despite producing more Ph.D.s per capita than the United States, talent is going where the money is--abroad. Those who stay have to contend with Byzantine patent laws and fragmented capital markets, which make it tough to start high-tech firms. In 2002 Europe exported a lower proportion of high-tech goods than either Japan or America, reports the European Commission, and had fewer patent filings per capita.

The underlying causes of this malaise go beyond a lack of money. "We need a deep change in European attitudes on a number of subjects," says EU Research Commissioner Philippe Busquin. "Unnecessary regulations and a negative attitude to risk are too often a brake on the creation and growth of companies."

For starters, Europeans too often view business and science as completely separate enterprises. With a few notable exceptions like Cambridge, European universities have been unable to reap the full commercial rewards of their research. European companies themselves are increasingly moving their R&D efforts to the United States or Asia, where there is less red tape and more tax breaks.

European legislators are trying to reverse the trend--in 2002, the EU announced a plan to increase the percentage of GDP spent on research to 3 ...