Europe’s innovation strategy is failing. Here’s how to fix it

Europe is experiencing what many economists refer to as the mid-tech trap: Most companies based here are too advanced to compete with emerging markets on low-cost production, yet not agile enough to rival the high-tech innovation of the US and China.

While numerous government subsidies and innovation programs have been introduced to help close the gap in business, many have struggled to deliver meaningful impact. For example, Horizon Europe, the EU’s flagship research and innovation program, has committed nearly €100 billion through 2027, but less than 5% of those funds have resulted in true “breakthrough innovation.”

While initiatives like Horizon Europe play a critical role in Europe’s tech future, they alone are not enough. To break free of the mid-tech trap, Europe must modernize the strengths it already possesses, reimagining traditional industries like automotive, telecommunications and energy through digitization, sustainability, and AI tools, and updating the governance model to reflect the new needs and realities of the digital era.

Leaders understand both the urgency and the challenge. Research recently found that 85% of senior executives are concerned or very concerned that their existing tech estate will hinder their AI efforts, and 63% said the complexity of modernization will be a major obstacle. Nevertheless, this challenge must be faced. To that end, I offer several suggestions.

Aligning for change

The most recent CxO Growth Survey from Forbes Research found that digital transformation and innovation was among the most divisive issues facing senior leaders today, with 37% citing it as a point of frequent debate. And therein lies the problem: many leaders are likely debating technologies and tactics instead of aligning on what really matters: strategy, governance, goals and metrics.

For the innovation agenda to succeed, the entire organization needs to be equipped for change, aligning functions like procurement, legal, and employee development in service to an agreed-on innovation agenda and governance model.

Consider procurement. Traditionally focused on cost control and supplier management, procurement is now a driver of innovation—experimenting with AI-driven sourcing, dynamic risk assessment, and sustainable materials strategies that reduce emissions and improve resilience.

By rethinking how it evaluates and partners with suppliers, procurement can open the door for faster, smarter innovation across the enterprise—creating space for legal teams to modernize contracts around data sharing and ethical AI, and for HR teams to upskill employees.

Finding the innovation balance

Organizations usually fall into one of two camps when it comes to the innovation agenda: those where it’s pushed top-down by a select few—what I call forced innovation—and those where it’s expected of everyone, everywhere, all the time—free-flowing innovation.

In reality, companies need to balance both. Excessive top-down pressure will result in project delays and pushback from middle management, who may doubt the scalability, readiness or necessity of new technologies. On the other hand, abandoning hierarchy may unleash chaos as new ideas are pursued without a clear purpose.

The goal is not to take an always-on approach to innovation, but to always ensure alignment with the innovation strategy, work towards the common goals set forth in it and measure progress consistently and continuously.

Further, companies need to remember that “breakthrough innovation” doesn’t only come from high-tech sectors or agile startups. It can come from the reimagining of traditional products, services, or processes within established organizations.

Take, for instance, financial services. According to the European Banking Authority (EBA), 92% of EU banks are already deploying AI, with common applications including customer profiling, risk management, and automated document summarization. 

Deutsche Bank, for example, is using AI to create personalized “next best offers” for wealth management clients, as well as to detect financial crimes like fraud, money laundering, and tax evasion. Amsterdam-based neobank bunq, which serves over 17 million users, is also using AI to enhance fraud detection.

Modernizing goals and metrics

For innovation to deliver value, initiatives need to focus on the key areas that will set the business apart, such as customer experience, productivity, or revenue enablement. Traditional performance metrics cannot capture the agility, adaptability, and business impact needed in an AI-driven environment. As such, to evolve, organizations must shift from function-based goals to outcome-based governance.

This means building structures around desired outcomes like sustainability, supply chain optimization, or product innovation, and managing governance holistically across those dimensions—rather than in functional silos.

For example, the automotive sector, particularly in Europe, is under immense pressure as tariffs, rising competition from China, and shrinking product cycles have created a perfect storm that few were prepared to weather.

While digital innovation has surged, many automakers remain constrained by rigid structures, legacy governance, and fragmented priorities. Therefore, the innovation strategy cannot simply focus on deploying AI, IoT or 5G, but rather on delivering on broader goals related to growth, profitability and resiliency.

Reinventing innovation through effective governance

Today, only four of the world’s top 50 tech companies are European—and not a single homegrown firm valued above €100 billion has been founded from scratch in the past five decades.

With these stats we see a clear need not just for innovation, but a reinvention of the innovation strategy. Those that cling to legacy models will only fall further into the mid-tech gap, while those that align purpose, governance, and strategy around transformative innovation could define Europe’s next era of competitiveness.

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