—— ABOUT CRISES —— Francesco Nicoli's ideas den

« L'Europe se fera dans les crises et elle sera la somme des solutions apportées à ces crises »—Jean Monnet

The Atlantic Innovation Divide (and what Europe can do about it)

In at least two occasions, recently, I have been asked to comment on the growing technological innovation divide between the US and Europe. No doubt, high-tech innovation is in full-traction speed at the moment, in several key sectors: energy, biotech and medicine, artificial intelligence, material science and advanced manufacturing, automotive, aerospace, and futuristic weaponry. In each of these sectors, the US fields at least one champion (but usually, many more than one) with the combination of skills, ambition, funding, and capacity to disrupt its own industry in the years to come.
Europe, however, lags behind. By any account, this is not due to the lack of bright people or missing research institutions: in fact, much of the fundamental research which shapes US technological advance has been originally carried out on this side of the Atlantic.

Europe faces a more fundamental issues with its economic and governance structures. I can identify at least four core problems: lack of industrial policy, lack of genuine venture capitalism, excess of regulation hindering entrepreneurship, and lack of tech clusters.

  1. Europe’s missing industrial policy.

Years ago, Europe used to be the holy land of state-led industrial policy; it resulted, however, in utter failure. The consequences of the State taking care of large chuncks of the economy was a permanent hindering of competition and competiveness, as was the public power (i.e., individual politicians) with the power of picking winners and losers. It did not work, and when the Single Market was established between 1986 and 1991, the Single European Act basically abolished national industrial policies, which were preventing fair competition across countries.
The problem, however, is that a truly European industrial policy never emerged. Some sectors need, at the beginning of their development cycles, lots of public support to accompany private investment. We shall not forget that many innovations of our everyday life began in the US as public sponsored, when not military sponsored, public projects. This may be changing today, but the time we lost is lost forever: in some sectors, like consumer IT, it’s now extremely challenging for newcomers to compete with the US tech giants of the sector like Google, Amazon or Apple. This does not imply that the State should take care of producing goods, saving jobs in mature sectors, or using public money to subsidize inefficient industries; rather, solid public investment is needed to accompany innovative start-ups to develop their products. One of the functions that a European industrial policy shall cover is investment risk reduction; we might have just started to do this with the European Fund for Strategic Investments (EFSI), which provides a more start-up, risk oriented branch to the European Investment Bank. This is even more important in light of point 2: Europe’s missing venture capitalism.

  1. Lack of Venture Capitalism

A second fundamental issue with Europe’s technological weakness, compared with the US, is the well-documented European reliance on bank finance rather than on venture capitalism. By all accounts, banking institutions are less prone to risk than venture capital, which, by definition, engages with high risk, high payoff activities. Moreover, the reliance of Europe’s industrial sector on bank finance comes in a very bad moment for European banks, most of which have been heavily hit during the crisis, having to digest large shares of toxic public bonds, non-performing loans, and the like. Moreover, the counter-crisis measures have rightly reduced the risk profile of banking institutions, especially of particularly large lenders which would surely need public support in case of trouble. Finally, the fragmented capital market of the European Union is of no help, with different regulations, tax profiles, supervision and technical requirements hindering cross-border investment. In sum, Europe has a fragmented, over-regulated and risk-averse financial system, whereby a unified, liberalized, and risk-prone financial system would be needed to unleash disrupting innovation.[1]

  1. Over-regulation hindering Entrapreneurship

Over-regulation, also known as red tape, is an endemic problem that the EU inherited from its member-states, all afflicted by the same issue in their domestic economies. The overall effect of over-regulation is three-fold. On the one hand, it increases costs and liabilities, hindering investment. Second, it creates a general environment wherein doing business is perceived, and communicated, as a very challenging thing to do; young people and innovators prefer to stay clear of the trouble of creating a new company, rather seeking protected jobs in the public or private sector. Europe would need to make comparatively easier and worthier to begin a start-up in innovative sectors with strategic relevance by facilitating investment, reducing dramatically paperwork, and easing bankrupt rules for start-ups; in fact, many “serial innovators” with successful outcomes in the US have seen their earlier efforts end up in a bankruptcy, but simpler rules, likely along with the right mentality, have contributed to push them forward till success. The general logic of a technological start-up, in fact, is that financers, employers and employees are aware of the high-risk, high-payoff nature of the enterprise, and they freely decide to join the effort; the role of the state would be to make their decision as easy as possible, taking into account that 9 out of 10 start-ups would probably fail but the one that succeeds can disrupt the market, realising huge benefits for the community.

  1. No true tech clusters.

Finally, Europe lacks, to some extent, high-tech clusters of comparable size to the Silicon Valley. Of course, this is an endogenous phenomenon: no way that such clusters could emerge without a vibrant innovation sector across Europe behind. However, it’s quite hard for such a sector to emerge without appropriate clusters behind: economies of scale matter, professional circulation matters, readily-available suppliers, skills, and technology is key. The larger and more developed is the cluster, the easier and quicker would be to discover, develop and commercialize new techs. Being the first to develop such clusters, along with creating tech giants, is the true premium for technology developers, which will make comparatively harder for competitors to keep pace; they would not only have to develop the technology, but also to win over market quotas through fierce competition, and support further R&D without appropriately-sized clusters behind. One particular problem Europe faces in dealing with clusters is that – lacking the EU formal competence on industrial policy- the member-states fail to pool resources into joint projects, but rather pursue half-hearted, cash-stripped national projects in competition with each other. In this context, Europe should recalibrate its tools – the regional investment policy, which already covers technologically-intense sectors, and cross-border regional cooperation institutions- to support and develop cross-border clusters, making possible the pooling of resources from several member-states. Among the several institutionalised forms that Europe’s regional cooperation can acquire, the European Groupings of Territorial Cooperation (EGTC), which can provide regulatory environment, could be retooled to provide a more harmonized regulatory environment in such cross-border clusters. Finally, the European Strategic Investment Fund and the European Investment Bank can be given mandate to support tech start-ups opening in the clusters on more favourable terms.

In sum, Europe is weak because its industrial policy, broadly speaking, is weak or non-existent. However, thanks to recent developments, the EU has the instruments in place that could be used, with minimal retooling and reshaping, to support a technological renaissance in the Union. As usual, it’s a matter of will, rather than of possibilities, if such progress happens or not. National pride and blind protection of sovereignty notwithstanding.

[1] Claiming that Europe needs financial liberalization does not imply liberalization should be equally addressing all sectors. Rather, differentiating regulation and taxation would help in addressing capital flows in the direction sought by the regulator; differentiated liberalization, in other words, would be a good tool to accompany a European industrial policy.

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This entry was posted on April 23, 2016 by in Crises, Economics and economies, Europe, Futures, Uncategorized.

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