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Why is Europe Lagging Behind in the Tech Race?

February 14, 2019

 

 

 

Ever wondered why most of the huge tech companies such as Apple, Google, Amazon, Baidu or Alibaba, are American or Chinese, and almost none are European? So have I. For having a population of almost 750 million people (World Population Review, 2019), and being the richest region in the world in continental terms, this is a rather strange fact, I thought. Even more, as history has shown that a strong tech industry is vital for being or aspiring to become a global power. Especially with the recent rise of China and the ongoing strength of the United States, a high correlation between technological hegemony and political/economic power can be seen. Their clear leadership in technology unmistakably undermines Europe’s goal to become a strategically autonomous global power.

 

A Question of Resources?

 

What is clear is that if Europe wants to become more relevant in tech, research and innovation are the cornerstones that need to be tackled. Although the EU itself and most of the single governments within Europe have already shifted funding from other sectors to innovation and technology, the region is far behind the USA and some Asian countries when it comes to factors such as R&D spending, patents or number of researchers.

However, as the EU has already increased its expenditure on R&D (2,06% of its GDP in 2016 compared to 2,8% (US), 2,1% (China), it becomes obvious that the resources spent on R&D are not the main reason for Europe’s technological stagnation. Much more, it seems like the resources are not used as efficiently or effectively as they are in other parts of the world. This fact becomes very obvious when you compare the - just mentioned - R&D expenditure with the number of patent applications, where Europe is suddenly far away from China and the United States, and even lagging behind Japan and South Korea (Turcanu, Boháček, 2018).

 

 

A highly fragmented market as barrier

 

The probably most obvious factor is the high fragmentation of the European market. Unlike in China or the USA, in Europe there are many different cultures, languages and regulations which increase bureaucracy and decrease the reactiveness and decisiveness of business (Birnbaum, 2016). As a result, European tech companies are suffering a lack of dynamism and scale compared to their Chinese and US counterparts. Furthermore, the high fragmentation also leads to a very diverse customer base within the continent, thus slowing down growth of start-ups as they first need to focus on single countries (Turcanu, Boháček, 2018). Additionally, the different innovation policies within the European countries have led to a very uneven level of innovative power across Europe, with countries such as Germany or the Nordics counting to the world’s leaders and other countries like Bulgaria holding the last positions within developed countries (Craig, 2018).

 

 

Misleading Higher Education

 

A leading role in creating and maintaining a great environment for technological progress belongs to higher education. Especially the US is known for hosting the best universities in the world and being exceptionally strong in subjects such as computer science or engineering. Some institutions like the MIT or Stanford are so strong that they created powerful tech hubs, attracting the best companies and entrepreneurs because of the vast talent at these places (Brnabic, 2017). But such universities did not just originate by chance. In fact, the US spends 2.6 times more on university students than Europe does. Also, while science is quite strong within the Old Continent, research has revealed that practical subjects such as engineering are less favored in most European countries (Turcanu, Boháček, 2018).

 

 

 

 

 

A cultural matter

 

Another often mentioned reason is the culture itself. If is often said that, compared to Americans, Europeans are just much less willing to take risks, thus not as likely to found start-ups. However, with Asians being known as particularly risk-averse, and Americans having no social safety nets and huge college loans (and therefore having a greater incentive to get jobs with a fixed income), I believe this point should even speak for Europeans. Yet, there are certainly some other cultural factors that play a major role.

 

For instance, the culture of employee ownership through stocks seems to be a formula for success. It not only attracts top talent, but it also makes sure that the employees stay longer at the companies. On top of that, as it makes sure that employees might also highly profit from selling the company, the network of potential investors grows much faster and the chances of creating or financing a next successful start-up are automatically much higher (Detrixhe, 2018).

 

An essay about tech giants would not be complete without mentioning the Silicon Valley.  Just because it perfectly demonstrates how important such a vibrant startup-network is. Mentorship and support from former entrepreneurs is key to help young companies to get through tough times.

And of course, being constantly surrounded by investors and other tech companies is another huge advantage of such a hub. In fact, the size of the funding rounds is believed to be another main reason for Europe’s backlog. Having easy access to investors and raising large amounts of money is key for young resource-intensive tech companies to quickly grow.

However, some cities like London, Paris or Berlin have recently put a lot of effort into building strong communities to achieve such advantages. Yet, such cultural and infrastructural changes need a very long time until the rewards can be reaped.

 

Gloomy Outlook

 

So, to conclude, Europe is a highly fragmented market which makes it almost impossible for tech firms to reach a large market at an early stage (Colin, 2018). Also, a wrong focus of higher education, some cultural aspects such as employee ownership, and the existence of huge start-up hubs outside of Europe like the Silicon Valley are among the main reasons why Europe is not able to keep up with China and the US in creating tech giants.

 

Luckily, some of Europe’s most important leaders such as Macron and Merkel, seem to have recognized the urge and are well aware that Europe needs to “increase and pool” their efforts in innovation and tech for keeping track (Fouquet et al., 2018). Yet, as nowadays most of the leading European economies are busy with themselves (Brexit, Yellow vests movement…), it remains highly questionable whether Europe will find a common way to close the gap in the near future.

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