Can Europe Dominate In Innovation Despite US Big Tech Lead?
Federal research labs and Government grants accelerated core research across the US that helped to create new technology companies which are still household names today: HP, IBM and Google's Alphabet all have their roots in government sector funding.
Next, in comparison to the US, European labor laws are often much more stringent and inflexible. The laws make it harder for companies to reduce costs during hard times, which makes them more wary of spending capital on skilled talent, research and development. It's no surprise that the countries with the most flexible labor laws, like the UK, have the largest tech companies. As an example , 14% of UK residents are foreign-born, with 49% of UK businesses possessing at least one foreign born co-founder. The top 100 list includes seven unicorns, with five having at least one immigrant co-founder, such as Monzo and Deliveroo.Another reason is that Europe faces many cumbersome trade restrictions and regulations. The EU has one of the most complex regulatory frameworks compared to other major economies. This complexity prevents start-ups from scaling up due to cost and bureaucracy. There are also restrictions on what hardware can be imported, limiting startups who want to use off the shelf products instead of building their own prototypes. The trade barriers that Europeans start-ups face are focused on legal setup related complexities and challenges that make it difficult for them to grow at scale.
Over the years, European companies have been outmaneuvered and outgrown by the US tech industry. Despite the fact Europe is home to high-end brands such as LVMH, L'Oréal, Hermes, Pernod Ricard, and Anheuser-Busch, they lack the economies of scale to grow as quickly as their American counterparts. The most valuable public company from Europe is the luxury conglomerate LVMH, with a market capitalization of $411 billion (nothing to brag about when compared to any of the American FAMANG’s).
With this being said, there are several key structural challenges that can be highlighted in the European technology industry – proposed by the Scale Up Europe Community. First of all, there is a lack of investment in late and exit stages, as well as a weak appetite for tech within stock markets (27% of the top 80% of large and mid cap companies in the US, compared to only 13% in German stock exchange and 7% in French). There is also less of an emphasis on efficient corporate-startup collaborations. These partnerships can be seen as a springboard that can help European startups, and contribute to their growth.
Furthermore, The Digital Services Act and Digital Markets Act was proposed in December of 2020 by the European Commission in order to better compete with the United States and overthrow its dominance in Big Tech. "The Digital Services Act and Digital Markets Act aims to create a safer digital space where the fundamental rights of users are protected and to establish a level playing field for businesses." These Acts would help to enforce rules for data protection, copyright and e-commerce.
The Digital Services Act mandates that digital platform owners be held responsible for material that is posted on their platforms (i.e., “what is illegal offline should be illegal online”). The Digital Markets Act, on the other hand, is intended to enhance competition in digital markets that are presently controlled by a few firms who act as "gatekeepers" for what the Council describes as "core platform services. These services, according to the EU's definition, are "online intermediation services (e.g., marketplaces, app stores), online search engines, social networking sites, cloud services, advertising services, and other activities."
The Digital Markets Act, therefore, is directed squarely at Amazon (marketplaces, cloud services, advertising services), Alphabet (online search engines, advertising services, cloud services), Apple (cloud services, marketplaces, app stores), and Microsoft (cloud services).
Nevertheless we are seeing progress and acceleration in certain nations – such as France that have taken initiatives to develop the European technology sector from the inside out. President Emmanuel Macron's initiatives include expanding the French TIBI program at the European level, which permitted France to attract €5 billion in late-stage investment and develop funds specialized in listed technology businesses from institutional investors. At the European level, the country launched the Next 40/FT 120 (a French indicator of the most promising tech startups). The country also adopted the European tech visa, in order to help firms access the fragmented European market more smoothly and attract talent.
Europe has also focused on European finance market structuring, in order to make it easier for startups and tech stocks to go public. Megarounds (€100-250M) were one Europe's weak spot, but they are now steadily underway. Two FinTech mega rounds were completed in 2021, including UK-based Revolut's €672.9M fundraising round, and Swedish-based Klarna's $639B financing round. UIPath, a Romanian robotic-process automation firm that went public this year in one of the largest software IPOs ever at $1.3 billion, is yet another example.
Overall, there are many challenges that the European technology industry is facing. However, with the right leadership, strategy, governance, and investments, it can grow to be just as successful as its American counterparts. The below recommendations will help to take the European tech industry one-step closer towards success:
1. Support the attraction of global talent to spur on innovation, energy and new ideas using different measures than just grants-based funding streams.
2. Accelerate access to capital for investors and innovators through financial instruments that are tailored to the risk-return profile of start-ups in nascent industries with novel technologies, before they face an "exit dilemma".
3. Scale up digital services that promote the competitiveness of organizations at strategy formulation level by providing them with analytics, big data management tools or artificial intelligence capabilities - among others things - to boost their productivity and creativity in order to improve their innovation performance based on critical thinking skills development rather than on the acquisition of new technology only.
4. Increasing collaboration among universities, research centers and industry in order to create sustainable growth both for themselves and the wider European ecosystem/economy (collaboration should be at all levels - management structures should provide opportunities for co-creation)
5. Modernize regulations to better include breakthrough innovations and technologies. This European-wide initiative may assist tech start-ups and businesses in overcoming some of the difficulties they encounter when dealing with such a diverse set of rules and market conditions.
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