Why Can't Europe Create Digital Businesses?

Abstract

This paper shows that Europe—the EU plus the UK, Norway and Switzerland—has given birth to few leading digital businesses over the last 30 years despite having substantial home-court advantages. Just five of 69 digital businesses worth $10 billion or more, comprising less than 1 percent of the value of these businesses, hail from Europe, which accounts for 21 percent of global GDP. The digital winter is symptomatic of underlying problems that are behind the long-recognized persistent gap between the US and Europe in GDP per capita, output per worker, and various measures of innovation, and is a bellwether for other cutting-edge technologies. The European Commission has periodically documented these problems and called for reforms, none of which has narrowed much less closed the gaps.
The lack of digital innovation during an epoch in which most industry will be driven by digital, along with other cutting-edge technologies with similar trajectories, places European industries at risk of falling even farther behind the US, China, as well as other surging economies. Viewed over the coming decades the situation is dire for Europe as the region faces other serious economic challenges such as the sharp decline in the working age population. Creating digital leaders, and successes based on other disruptive technologies, must be part of the solution if Europe wants to improve, let alone preserve, its economic position in the global economy. Or to remain a global beacon for high standards of living with job security, universal healthcare, and robust social welfare programs.
This paper shows that the common rationales for Europe’s low birthrate of digital and other startups often mistake cause for effect, such as the lack of a Silicon Valley, or cannot explain why Europe does so much worse than other parts of the world where, for example, successful startups emerge to serve fragmented regions. This paper argues that Europe would need to move to a greater reliance on markets, a stronger culture of risk taking, and a smaller appetite for regulation to reverse its long losing streak in digital innovation, which may extend to other critical technologies as well. Globally, digital innovations, and economic growth, have come largely from private investment, entrepreneurship, and market forces, even in China. The European Commission’s past initiatives, most recently in AI, provide insights into what has not worked for three decades now. It would be a profound mistake to repeat them and stick to the same path.

Keywords: digital startups in Europe, Europe digital transformation, Europe digital innovation gap, EU lag in productivity growth, European Commission digital initiatives, European competitiveness, long term economic prospects of Europe, Europe innovation lags

JEL Classification: D02, E02, E24, L10, L16, L26, L38, L50, L53,O00, O12, O30, O38, O52, P00