Feeding future generations How finance can boost innovation in agri-food by Arnold Verbeek, Surya Fackelmann and Brendan McDonagh

1. Introduction 
The agri-food sector is an important pillar of the European economy 
The agri-food sector is an important element of the EU's economy, contributing significantly to 
Europe's overall economic performance. The revenues generated by the sector (in agriculture as well 
as food and beverages) total €1,450 billion, equating to 9% of GDP. This is significantly more than 
in the US, where agri-food amounts to 5.5% of GDP. The food and drink industry contributes 15.4% 
to the overall EU industrial production. This contribution is larger than other key industries such as 
the automotive industry at 13% or engineered products (machinery and equipment) at 9%. 
The agri-food sector creates a large number of jobs. Around 15.4 million people are employed in the 
agri-food sector in the EU (11.2 million in agriculture and 4.2 million in the food and drink industry).
This represents 6.9% of the EU’s workforce and surpasses other key sectors of the economy, such 
as the automotive industry, which employs 13.3 million people or 6.1% of the EU’s workforce.
Compared to other industrial or service-oriented sectors, agri-food is a significant employer in 
disadvantaged regions, due to the decentralised nature of food processing and regionally integrated 
value chains. 
Over the past decade, the EU has become a strong exporter of agri-food products, with exports 
doubling between 2006 and 2016. In 2013, Europe overtook the US as the world's largest exporter in 
the agri-food sector. Exports amounted to €102 billion in 2016, representing a 17.3% share of 
Europe's total exports. At the same time, agri-food exports generated a positive trade balance for the 
EU with a surplus of almost €30 billion. The EU’s largest agri-food export markets are China, the US 
and ASEAN countries, which are characterised by increasing purchasing power and robust economic 
growth, thus offering further potential for growth.
The European agri-food sector has proven to be particularly resilient to economic downturns. During 
the financial crisis of 2008/2009, Europe's key industrial sectors like automotive, manufacturing and 
engineered products saw revenues decrease by up to 25% and employment decrease by up to 15%.
In contrast, the agri-food sector saw hardly any decline in revenue and employment during the crisis. 
This resilience of the European agri-food industry had a stabilising effect on European GDP and 
labour market indicators. The future GDP contribution and employment rate of the agri-food sector 
are likely to remain steady even under adverse conditions. 
Innovation in the European agri-food sector faces a complex set of challenges 
The European agri-food sector is significantly fragmented, which tends to impede higher productivity. 
On the production side, 73% of all farms in Europe are small-scale “family businesses” employing no 
or only a minimal additional workforce. The average number of employees per company in the food 
and drink industry is 15 (compared to 123 in the automotive industry and 32 in engineered products) 
and 99.1% of these companies are SMEs, often still using traditional craft and small-trade business 
models. These companies employ 62% of the workforce in the sector and generate approximately 
half of the sector's revenue. In total, labour productivity in the agri-food sector is only 63% of that of 
the automotive sector and 71% of that of the engineered products sector. 
The European agri-food sector lacks growth dynamics. At an average growth rate of 0.7% from 2008-
2017, total sales in the European food and drink sector have clearly underperformed compared to the 
sales growth rate in the US (1.6% per annum) and China (10.8% per annum) over the same period.

This is, in part, because Europe lags behind in terms of investment in agri-innovation. While R&D 
expenditure within the EU's food and drink sector alone amounted to €2.8 billion in 2017, European 
agri-food companies invest less than their non-European competitors. Only 0.2% of their revenue is 
used for innovation, compared with American or Japanese competitors whose average innovation 
spending is 0.44% and 0.65% of their revenue, respectively. Around 46% of European agri-food 
companies report that they innovated over a recent three-year period (including marketing and 
organisation innovation). Over the same period, only 9% of them introduced technology-driven 
process or product innovations. Just 20% of agri-food companies undertake any in-house R&D, while 
less than 2% engage in R&D collaborations or partnerships. 
Furthermore, there is significant underinvestment of venture capital and related forms of financing 
critical for innovation in both the agri-food sector globally and in Europe in particular. Since 2010, 
venture capital and corporation-funded investment in food-system-related start-ups amounted to 
approximately €12 billion, while comparable healthcare start-ups attracted approximately €124 billion 
in investment over the same period. The EU also trails behind the US; in 2017, single venture capital 
investments in US-based agri-food start-up companies (excluding retail businesses and restaurants) 
reached €3.7 billion. Total venture capital investment in the US is four times higher than in the EU 
per year.
Lack of access to finance is therefore by far the most prominent barrier to innovation reported by 
European agri-food companies, with over a third citing financing problems (e.g. lack of credit or equity, 
lack of grants or subsidies) as the most important reason. Reasons such as a low uptake of innovation 
by the market (11%) and too much market competition (11%) are cited less frequently.
Current financial market conditions add to the challenge of effectively financing innovative agri-food 
companies. Liquidity at near-zero interest rates should be available to finance innovation thanks to 
the monetary easing policy of the European Central Bank. However, regulatory standards for capital 
requirements (e.g. Basel III) are a significant hurdle for commercial banks seeking to facilitate 
investment and may partly offset the stimulating effect of liquidity. In addition, the risk profile of many 
commercial banks with respect to the agri-food sector has not changed in recent years. This means 
that despite high liquidity in the European banking market, most commercial banks favour 
conservative, track record-based business models, resulting in an undersupply of debt financing for 
innovators. 
There are macroeconomic, social, environmental and policy challenges ahead for the European agri-

food sector that can only be resolved with innovation. The global demand for food is projected to 
increase by up to 98% by 2050, while the available arable land is projected to remain largely 
unchanged. The combined agri-food and food logistics sector accounts for approximately 30% of the 
world’s energy demand and strongly depends on non-renewable sources of energy. Thus, innovation 
in the agri-food sector can help the EU reach its climate action target. Nearly one third of global food 
production – 1.3 billion tonnes of food – is lost or wasted annually. 

Feeding future generations How finance can boost innovation in agri-food by Arnold Verbeek, Surya Fackelmann and Brendan McDonagh