By Ryan Nabil, Competitive Enterprise Institute

 

Can the European Union become a world leader in innovation? Yes, but Brussels needs to create a more business-friendly environment for businesses and start-ups.

 

The EU is trying to become self-sufficient in sectors such as pharmaceuticals and semiconductors and spearhead post-Covid economic recovery, according to its recently updated industrial strategy. The strategy also reiterates the EU’s goals to transition to a digital and green economy and develop common technical standards and regulations in rapidly growing technologies, such as battery production and cybersecurity and space data.

 

But, unfortunately, its strategy suffers from one major flaw. It falls short in promoting innovation because it does not emphasise creating a favourable regulatory environment for European businesses. The EU’s original 2020 strategy identifies regulatory challenges to European businesses and how business-friendly policies can expand financing options for businesses. However, the most recent strategy update neither evaluates the EU’s recent performance on promoting new start-ups and innovation nor discusses the EU’s plans to do so.

 

Already, the European Union lags behind the US and China in producing world-leading tech companies and start-ups. With exceptions such as Spotify, Klarna, and London-based Wise and DeepMind (which Google subsequently acquired), it remains relatively rare for European start-ups to scale up and become successful internationally.

 

It is not that Europe lacks entrepreneurial talent—plenty of Europeans have founded and currently lead high-growth tech companies in Silicon Valley and London. Likewise, many of Europe’s leading universities provide an exceptional engineering and business talent pool for start-ups.

 

Europe’s two big problems are cumbersome regulations and lack of venture capital funding.  Those problems hold back European companies from succeeding internationally. According to a survey by the venture capital firm Atomico, European start-ups of all sizes list regulatory fragmentation, funding limitation, overregulation, taxation, and immigration rules as leading business challenges.

 

For example, a patchwork of different national rules constrains start-ups in one country from offering services in another. Strict stock ownership rules for start-up employees, inflexible labour market policies, and high tax rates also discourage Europeans from founding, investing in, and working for cutting-edge technology companies.

 

European start-up founders believe the EU must improve the regulatory environment for European companies instead of fixating over how to regulate American Big Tech companies, as the 2018 Atomico survey notes.

 

Brussels should streamline regulations to make it easier for European companies to operate in other EU countries. Flexible labour market policies and lower tax rates will attract businesses. EU-wide regulatory sandboxes—like those used in Britain and the US—could spur European policymakers to work with start-up companies on developing sensible regulations.

 

Regulatory reform will also help European start-ups access financing. For example, special purpose acquisition vehicles (SPACs) are taking off in the US, thanks to friendly Security and Exchange Commission rules. Why is that important? SPACs allow a shell company to list on a stock exchange, merge with another company, and take it public without going through the cumbersome initial public offering process. That is helping a growing number of US-based companies receive financing and remain independent. Between 2020 and 2021, Europe saw only 10 SPAC listings worth $1.3 billion, whereas the US was home to 522 listings with a total value of over $300 billion.

 

With its large market and entrepreneurial talent, Europe should be rivaling the U.S. and China in technology and innovation. The EU’s 2020 strategy acknowledges regulatory barriers as a problem but then does not evaluate how it is doing in promoting innovation — or what it plans to do. European businesses and start-ups deserve better from their leaders.

 


Ryan Nabil is a Research Fellow at the Competitive Enterprise Institute in Washington, DC, and Fox International Fellow at the Institut d’Études Politiques (Sciences Po) in Paris.