The European Union's vision of building a hi-tech economy could be left in the dirt if businesses do not spend more on research and development (R&D).
That is the conclusion of a European Commission report comparing R&D in the EU with that of its competitors.
Europe will be outdone by China, Japan and South Korea unless EU member states take urgent action, it says.
The report says boosting R&D spend is essential if Europe's economy is to remain competitive in the future.
In 2000, the European Council set out the Lisbon Strategy, an action plan designed to tackle low productivity and stagnating economic growth in the EU.
It sought to make Europe "the most competitive and the most dynamic knowledge-based economy in the world" by 2010.
Key to this vision was boosting investment in R&D to 3% of GDP by that same deadline. But Europe looks set to miss this objective.
The report, which contains new data on Europe and its main competitors, says that R&D intensity (R&D expenditure as a percentage of GDP) in Europe has stagnated since the mid-1990s.
At the same time, Japan, China or South Korea have been able to increase substantially their R&D effort.
"The landscape is truly changing - and changing extremely fast," Europe's Commissioner for science and research, Janez Potocnik, told a news conference in Brussels.
"Europe is good at producing knowledge. But knowledge impact and flows to business and use of knowledge remain a weak point."
One of the most worrying aspects, the report points out, is the low level of business investment in research and innovation.
"Knowledge is a key component of competitiveness," said Commissioner Potocnik.
"If our businesses are to be at the leading edge in the future, they need to invest in knowledge now. And governments need to put in place the appropriate measures to help them do so."
The European Commission says that differences in the industrial structure of the EU compared with countries such as the US are the main cause for this low level of business R&D spend.
The EU has a smaller high-tech industrial sector, that area of the economy which usually spends most on R&D.
Commissioner Potocnik said that China was about to overtake the EU in terms of world share in exports of hi-tech products.
Since 2003, China has become the world's biggest exporter of computers.
Changes in economic activities in countries such as China and South Korea meant that the US was now targeting Asia and other regions for outward R&D investment.
As a result, the EU's share of America's outward R&D spend has been declining since the mid-nineties.
Since the last key figures in 2005, several initiatives have been launched to boost Europe's "knowledge economy".
These include the Framework Programme 7 (FP7) funding project. In addition, member states have set future R&D intensity targets within the framework of a renewed Lisbon strategy.
Britain, like many of its EU counterparts, will fall short of the 2010 target of 3%; but the government said it was working hard to fulfil its objectives.
"UK investment in R&D was £19.2bn last year compared to £17bn the previous year," added a Department for Trade and Industry spokeswoman.
"The proportion of UK companies with high R&D intensity (over 10%) is also rising and is significantly above that of the rest of the EU.
"R&D plays a key part in business success. The UK is a choice location for R&D activities and companies are increasingly recognising the benefits of the UK as a great environment, where eight of the top 10 foreign-owned UK companies have higher R&D intensities than their overseas parents."
She also pointed to the measures put in place to stimulate R&D, including significant real increases in science spending and R&D tax credits.
"R&D investment is part of long term strategies by business and government and measures will inevitably take time to have effect."