Is Europe ready for the 21st-century digital economy? The gap between European and American tech development has been clear for a while now, as we can see in issues from Brussel’s war on Google to the corporatism that stifles innovation across the EU. Now, a new article in Harvard Business Review quantifies some of Europe’s problems:
Europe, according to a June 2015 report by McKinsey Global Institute, spends 2% of its GDP on R&D, about the same as China’s 1.98%, but well behind United States’ 2.8%. More significantly, Europe’s private sector R&D spending at 1.3% of GDP, compares poorly with that of the U.S. (1.8%), Japan (2.6%), and South Korea (2.7%). Europe’s gap is concentrated heavily in electronics, software, and internet services. In their tracking of “unicorns,” or venture-backed companies valued at $1 billion or more, the Wall Street Journal and Dow Jones VetureSource find that as of July 2015, a mere 8% are Europe-based, compared to 25% from Asia, and 67% from the United States.
A major reason for this deficit is insufficient investment. Traditionally, Europe’s growth has been financed to a significant extent by the banking sector, and there has historically been a continent-wide leeriness towards the provision of risk capital by other financial types. Venture funding for European digital groups in 2014 remained a fifth ($7.75 billion) of that of the United States ($ 37.9 billion). Another area where the absence of a vibrant VC and corporate investment culture hurts promising startups in Europe is that, because realizing gains from an IPO on European exchanges is still difficult, a primary exit for entrepreneurs is to sell to U.S.-based corporations – prominent examples being Skype, founded in Estonia, acquired by eBay in 2005 for $2.6 billion, and Swedish Mojang AB, the maker of the “Minecraft” video game, acquired by Microsoft for $ 2.5 billion in 2014.
The “unicorns” problem should be familiar to readers of TAI; we covered it in June. But this HBR article is a must-read for anyone who wants to understand that and other European tech issues in greater depth—a story that’s much more important than media coverage would suggest.
As the article’s authors, Tufts Professors Bhaskar Chakravorti and Ravi Shankar Chaturvedi, point out, Europe’s digital struggles are a result of both legal and cultural issues. Culturally, the authors’ data shows that young Europeans are much more afraid to fail than their global counterparts. Not surprisingly, this makes entrepreneurship difficult. And, legally, Europe is still a hodgepodge of regulations on matters digital. Despite the EU’s raison d’etre as a customs union, its digital marketplace still has not been harmonized. Even matters secondarily related to tech—such as shipping from one country to another, which is vital to online retail—are more complicated and more expensive than they should be.
And in a combination of both cultural and legal issues, Europeans have reacted to American tech success not by seeking to emulate the structures that built it, but by using regulatory might to tear down new companies. As Chakravorti and Chaturvedi point out, this isn’t just a project of well-connected, old-guard industrial elites but rather reflects popular sentiment: In France, American tech companies are known derisively as Les Gafa (Google, Apple, Facebook, Amazon). Moreover, Europe’s beggar-thy-neighbor regulatory policies are turned not just against American competition, but also against any European Googles, Apples, Facebooks, or Amazons that might emerge. Google can take a few hits from Brussels, but a struggling European start-up usually can’t.
All of this adds up to a worrisome tech gap, and one that increasingly exists not just between Europe and the U.S., but between Europe and the rest of the world:
Of the 50 countries we studied in our Digital Evolution Index, 23 were European (not counting Turkey). Of these, only three, Switzerland, Ireland, and Estonia, made it to a commendable “Stand Out” category – which means that their high levels of digital development are attractive to global businesses and investors and that their digital ecosystems are positioned to nurture start ups and internet businesses that can compete globally.
Fifteen European countries have been losing momentum since 2008 in terms of their state of digital evolution – this is what we mean by a digital recession – with the Netherlands coming in dead last in our momentum rankings. European countries occupy the nine bottom spots in our list of 50. Plus, the digitally receding countries include large economies like Germany, the UK, and France, as well as Finland and Sweden, Scandinavian tech powerhouses that were the early leaders of mobile telephony. Across the rest of Europe, the state of digital evolution has been mediocre and the pace of improvement, tepid.
This is of serious concern for the U.S. Our European allies are key pillars of the world order we have spent half a century building, and, as Walter Russell Mead recently wrote in testimony submitted to the Senate Armed Services Committee, one of the challenges faces going forward in the next few decades is that:
Many of Europe’s leading economies—which is to say, many of the top-ten economies of the world by GDP—are stagnating, and have been for some time.[.. P]rospects for European adaptation to the 21st century tech economy are dimmer than one would like. Entrenched interests are using the force of government to repress innovation, start-ups are thin on the ground, and major new tech companies—“European Googles”—are nowhere to be seen.
We need to explain clearly to our allies how we have built and sustained tech growth, legally and culturally, and encourage them to do the same. It’s increasingly clear that the world is going to be filled with challenges and rivals going forward; we need our friends to be prosperous, confident, and ready to confront them alongside us.