EU spending on research and development is falling well behind that of the US and Japan, according to new figures from the European Commission.
EU research and development is 'falling well behind' its rivals
Total funding by EU firms actually increased slightly this year after falling in 2004, the commission said.
However, R&D spending by firms and governments totalled just 1.9% of GDP, well below Japan's 3.15%, it added.
The annual survey covers 1,400 of the world's top companies, with half drawn from within the EU.
A high level of R&D spending is regarded by many as crucial to ensure that companies stay competitive and innovate.
The EU survey found that the world's biggest corporate investor in R&D was Germany's DaimlerChrysler, which spent $5.66bn last year.
But it said a small number of big firms were responsible for most of the spending, with just 54.3% of the EU's R&D investment coming from private firms, as against 63.1% in the US and 74.5% in Japan.
In a statement, the EU said the figures showed that European R&D spending was too reliant on government handouts.
As part of the Lisbon Agenda - launched in 2000 to make the EU "the most dynamic and competitive knowledge-based economy in the world" by 2010 - governments vowed to raise research spending to 3% of GDP by the end of the decade.
But the report suggests that this target is far from being met.
As EU governments struggle to agree upon a future budget, money earmarked for R&D is one area which could get squeezed, says the BBC's Europe business reporter John Moylan.
EU Research Commissioner Janez Potocnik said: "The message is very simple. The situation is serious."