The absence of a “European Google”, “European Facebook”, or “European Alibaba” has long been a major pain for the leaders of the European Union. However, it appears that the new composition of the European Commission is planning to assist the creation of such with the help of a specialized fund with a capital of EUR 100 billion, pompously named European Future Fund.
Its role will be to fund the founding and development of local tech giants which could compete with established market players and bring Europe back into the race on the technological stage. However, innovation is not just a matter of “give some money, and it will happen” – there are many other reasons why Europe is lagging behind in technological development, and we shall examine some of the more important ones in this text.
A brief look at the list of the leading technological companies (here, for example) indicates that they are all established in several countries – the US, China, South Korea, Japan.
What these countries have in common is the provision of relaxed regulatory regimes for start-ups. In the United States, from a regulatory point of view, is much more convenient to do business in than in most European countries (notable, for example, from the “Doing Business” ranking, where Denmark is the only EU country with better conditions that the US), regardless of its type, whereas the policy of China is to remove the barriers in sectors that the state considers key.
The EU’s approach so far, paradoxically, has been closer to the Chinese – instead of easing the regulatory burden for everyone, the European administration prefers to prioritize certain sectors at the expense of others and create special regimes, such as for start-ups, small businesses and the like.
Although overall any removal of administrative burdens is welcome, it is preferable to do so on an equal footing, for all sectors and busiensses at the same time.
At present, the European administration is going in the opposite direction – towards the creation of more and more regulatory regimes in more and more areas, and then of exceptions to them.
However, the problem with implementing the “Chinese approach” in the EU is that none of its countries has the resources and strong control over the economy that allows it to work.
In most cases (especially in the US), innovative businesses rely primarily on market-based funding, whereas the work of the state apparatus is primarily not to interfere with them.
In the EU, however, there are far fewer opportunities to raise capital, venture investments are fewer and less risky, which often causes start-ups in Europe to be acquired by one of the US or Chinese giants (DeepMind and Skype are among the examples that come to mind).
Public funding cannot compete with risky private investments for at least two reasons – administrations (especially the European one) are unable to keep up with technological developments and prioritize accordingly and on time, and the granting of funding is accompanied by even more procedures, bureaucracy and costs for compliance with regulations that hamper the activity of technology companies.
3) Taxes and Subsidies
Tax policies in most European countries is far less business-friendly, whereas subsidizing priority areas further distorts competition and directs entrepreneurs to areas other than technology – agriculture, for example.
Recent examples include, on one hand, attempts to impose a tax on the Internet business, which, along with the American and Chinese giants, will hurt many smaller, local players and, on the other hand, the copyright directive that has intervened directly in the relationship between aggregators and content creators.
While the EU internal market is relatively free and competitive, it is rather protectionist toward foreign businesses, which in an otherwise highly open market, as the technological one, significantly harms competition. In this sense, significant changes in the tax burden and opening up to the world market, combined with a reduction in subsidies for “priority” industries, would significantly improve the competitive environment between companies and, consequently, the achievements of the high-tech industry.
Under no circumstances can it be claimed that EU countries, and especially in the Western part, offer poor quality education – on the contrary, the continent is home to many of the leading educational institutions in the world.
However, as far as STEM majors are concerned, most of the best colleges are in the US and, more recently, in East Asia; this, in turn, this has attracted the best talents in the field from the educational stage. The link between business and higher education is also important, and here the countries that lead technological development have well-established traditions in the creation and maintenance of common hubs and accelerators.
These allow academic achievements to be quickly transferred to the business, and vice versa – the business protects the academic activities and disciplines that are most valuable for its development.
5) Market Structure
The European market is far more fragmented, which means that IT businesses have a harder time reaching critical consumer and customer base. National borders and linguistic differences become a significant barrier to the growth of technology companies, and differences in legislation between the Member States create additional obstacles to it.
On the contrary, the countries of birth of the leading technology companies invariably have a wide and rather homogeneous market, which allows for the rapid distribution of the good and sought-after products (and, in the Chinese case, the possibility of creating a state-guaranteed monopoly).
6) Traditions and Entrepreneurial Culture
We can already reasonably claim that the high-tech industry is mature enough to have its own culture and traditions. There are clear reasons why Silicon Valley or Shenzhen are synonymous with high technologies – they are the place where entrepreneurs and businesses in this field have created their ecosystem, and accordingly attract those who want to break into the industry.
If European countries are to be competitive, they must make additional effort to create a better environment than the already existing in the abovementioned (and several more) places, in order to attract interest and be preferred by future technology entrepreneurs.
7) National Alternatives
Several European countries often try to create their own “national alternatives” that copy and localize already successful products and technologies. This model works relatively well in the Russian-speaking world (and especially its enclosed Internet space), but the EU is much more open to American and/or Asian technological influence.
As a result, attempts to create such local clones are usually unsuccessful, but only after significant (public) funding is channelled into them.
The above are just a few of the biggest reasons that will thwart the success of the giant public innovation fund.
Much deeper transformations are needed if the EU wants to be competitive in the technological field – both in regulations, tax regimes and subsidies, and in the entrepreneurial culture and in the relationship between business and higher education.