Technology venture capital (VC) investments in emerging economies are set to outstrip those in Europe by 2011.

Indian and Chinese investment markets are growing annually by 90 and 55 per cent respectively and will match Europe in three to four years, says research group Library House. The European growth rate is about five per cent.

The EU must heed the warning signs if it is to meet its target to become the world’s most competitive knowledge economy by 2010, says Library House analyst Dr Roger Franklin.

‘We cannot do anything about China and India, but we can get our own house in order,’ said Franklin.

A key issue in Europe is the fall-off in funding of very early ‘proof-of-concept’ technology development – investment levels have dropped by £100m, from £402m in 2006 to £303m in 2007.

There is a clear role for government funding, possibly following a similar model to the US, says Franklin.

The US government spends $2bn (£1bn) annually on small companies developing technologies by linking development with the procurement process.

‘The US government buys research and development contracts from small companies, so the firm gets money to develop their technology and a potential public sector customer,’ said Franklin.

‘We need more public sector support of early-stage technology companies in Europe to get those companies to the point at which they are attractive propositions for commercial investment,’ he said.

Stewart Davies, from VC firm New Venture Partners, says the capital investment community in Europe has substantially diminished in the aftermath of the dot com crash.

The biggest VC firms are focusing more on large corporate buyouts and smaller companies are wary of taking a chance on unproven ideas, he says.

‘It is hard for individuals in the early stage of technology development to get funding because there are too many unknowns at the proof-of-concept stage for increasingly risk-averse investors,’ said Davies.

The dangers of falling behind global competitors should not be underestimated, says Davies.

‘Some of these countries have a plethora of scientists and engineers and are investing heavily, so we could find ourselves on the back foot in 10 or 15 years’ time,’ he said.