The contribution of the U.S. and China to emerging technologies in Europe is essential, whether through the infrastructure, products and solutions they deliver, or the financing they provide. While there is no question of European Union’s countries doing without them in the near future, this growing external influence – which is showing no signs of fading away in some areas (search engines, online marketplaces, social networks, cloud infrastructure…) – is likely to result in a structural dependency that will be tricky to disentangle from.
Taking better control of tech development in Europe is not only an opportunity for the European Union (E.U.) to foster economic growth, but it is also a matter of sovereignty for all its member states. By looking to better protecting European values and establishing more balanced partnerships with foreign superpowers, the E.U. will strengthen its influence both on European policies and international relations.
In early Feb.22, as part of the “Scale-up Europe” (1) conference and the French Presidency of the European Union, some bold decisions were taken in the fields of (i) venture capital financing, (ii) talent mobility and (iii) deep tech, with a view to facilitating the emergence of at least ten big tech European champions valued at more than €100bn by 2030.
Although the European Union can sometimes be portrayed as an impediment to economic and tech development, especially as the effects of larger internal markets in the U.S. and China are not as impactful within the scope of the single European market, we will show that (and how) the E.U. can become a powerful catalyst for European tech by (i) combating “fragmentation”, (ii) building trust and restoring competition and (iii) expanding financing.
I. Combating fragmentation
One of the reasons put forward to explain the significant gap between European technology “champions” and their competitors relates to the fragmentation of the European market, reflected in regulatory discrepancies, differences in business and consumption cultures or mobility hindrances for talents. In these areas, the U.S. and China have a clear comparative advantage in terms of scaling potential when fostering the emergence of international leaders such as GAFAM or BATX (2). Obviously, a large internal market is not the only factor that accounts for this success.
Developing a genuine single market has actually been at the heart of the European project since decades. Still, it is key for the E.U. to continue in that direction, and technology is another opportunity to accelerate the path of uniformization.
Illustration 1: Allocation of Gross Domestic Product (GDP) between the E.U., U.S. and China (2020 figures stem from the International Monetary Fund).
A. Regulation harmonization
Though regulatory convergence between most of European countries has been underway since the 1950’s, there appears to be much room for further improvements. As expansion into other European countries is becoming a more sought-after objective for start-ups, different rules among member states are considered the main regulatory hurdle within Europe, according to a survey conducted by the VC fund Atomico in its “State of European Tech 2021” report. These differences are reflected in many fields, such as in tax and social rules, but also in the way business is done in some sectors. The complexity they introduce delays the expansion process and leads to additional costs, thus limiting economies of scale. In many cases, it proved easier and more profitable for a European-based start-up to expand internationally, say into a larger market such as the U.S., than in some other E.U. countries. When they are not suffering from divergent rules, E.U. start-ups are burdened with “over-regulation”, resulting in the same sort of hindrances.
The E.U. and its member states should pursue convergence and simplification within its member states, with a view to fostering further innovation and facilitating the emergence of European “big tech” companies. However, this convergence should not be pursued unreservedly, as it could upset the balance with some delicate national and local objectives. In that regard, the complexity of the E.U.’s work rightly lies in identifying the actionable levers that are essential to creating a more favorable environment for European tech companies to thrive, both in the short- and longer term. It is unlikely that the E.U. will create a unified, efficient single market comparable to the U.S. in the coming years, if only as far as tech is concerned. Still, the E.U. must keep contributing to the convergence of best practices that could be identified through the diversity of its member states and to use the motive of tech sovereignty to further strengthen European ties between member states.
B. Cultural diversity
With its 27 countries imbued with diverse cultures, the E.U. is fertile ground for diversity. However, the contribution of this diversity to economic prosperity is questionable and could give rise to numerous debates. In this article, our objective is simply to underscore a few patterns relevant to our discussion and examine their potential underlying impacts. With respect to technology development in Europe, diversity mainly stems from business/work behaviours, consumption habits or languages. We do not consider business and consumption practices to be a significant hurdle to a more integrated market. Or, to put it differently, we think that to some extent the complexity and difficulties arising from such differences can be partly offset by the creativity that such situations may generate. Also, tech ecosystems across Europe seem to share some common modern values and to be relatively aligned regarding working practices, driven by flexibility, agility, creativity and a sense of purpose.
With at least 24 languages, the linguistic hurdle is more significant, though it is partly mitigated by the share of the English language as a common interface. English is relatively well-spoken in the tech ecosystem – probably better than in many other ecosystems. The success of U.S. start-ups, combined with the historical importance of English on a global scale, may have contributed to this situation. Nevertheless, it inevitably slows down some processes and interactions. Still, we think the impact of this hurdle is likely to decline in the years ahead, as the level of English among E.U. member states converges to the level of Nordics countries especially.
All in all, we do not think cultural diversity constitutes the most significant barrier to tech development in Europe, and as interactions between ecosystems intensify, we invite you to see it as an opportunity for greater creativity and thus innovation.
C. Talent mobility
Tech talent shortages, especially for software developers, could seriously impede growth potential in the months and years ahead. Improved recruitment of workers outside the E.U. and a better allocation of competencies across the E.U. should help to optimize growth. Many European countries already have special programs for tech visas. In France, for instance, the “French Tech Visa” is a simplified procedure to obtain a multi-year residence permit – “Talent Passport” – which is intended for founders (selected by partner incubators and accelerators), employees (within companies recognised as “innovative” by the French Ministry of Economy and Finance) and investors (who wish to settle in France).
In order to reduce the complexity among member states, the ESNA (European Start-up Nations Alliance – an entity launched by the E.U. in Nov.21 with the objective of promoting start-up nations’ standards, which consist of a set of best practices that can be shared among member states) will contribute to better monitoring and harmonisation of immigration practices in the area of start-up mobility, representing a landmark for immigrants planning to come to work in Europe.
Beyond visa policies, increased structural reforms in the areas of education and research will increase the attractiveness for foreign talents. Here, too, counteracting fragmentation by concentrating the centres of excellence would definitively prove to be a crucial lever.
While the path towards further harmonisation has been set, key steps still need to be taken at the E.U. level to improve market conditions and better protect citizens facing new types of technological threats.
II. Building trust and restoring competition
Against the backdrop of the growing predominance of – “foreign” – big tech companies (especially the U.S. GAFAM) and increased concerns among citizens about their privacy, the E.U. Commission proposed in 2020 two legislative initiatives in the field of digital services in order to modernise rules that had remained largely unchanged since the early 2000’s (3). The Digital Markets Act (DMA) and Digital Services Act (DSA) (both being referred to as the “DSA package”) projects were adopted by the European Parliament, in early 2022, and are expected to be discussed and finalized with member states by mid-2022.
A. Building trust with the Digital Services Act
The DSA primarily aims to protect consumers / citizens by creating a safer and more open digital space in which the “fundamental rights” are preserved. Although the Act covers a broad category of online services, it is intended to provide a set of rules for online intermediaries and platforms (online marketplaces, social networks, content-sharing platforms, application stores, online travel and accommodation platforms, etc.), especially larger ones, which will be expected to tackle disinformation and online hatred.
The DSA is thus a fight for more trust in data, and the more European citizens trust data, the more technology and innovation are likely to proliferate.
Complementing the DSA, the DMA appears to be even more explicitly geared to addressing internal market efficiency and the development of European tech.
B. Restoring competition with the Digital Markets Act
Online actors have provided significant benefits to European consumers and businesses, by making the trade of goods and services more efficient both within the E.U. and with the outside world. Without denying all these benefits, in recent years, the E.U. institutions have intensified their efforts to address competition infringements resulting from some tech monopolies. Utilising the existing framework of European competition laws, the European Commission has conducted several antitrust inquiries against Google in particular, which resulted in significant fines. It is now closely investigating the data collection and advertising processes at Google, Amazon, Facebook and Apple. In addition, the Commission has found that the regulation of digital services largely takes place at the member state’s level. This leads to new barriers in the internal European market, which favours well-established, very large “gatekeeper” platforms, that function as bottlenecks between businesses and consumers for important digital services. By controlling preferential auto-referencing and the unfair use of competitors’ data, the Act aims to establish “asymmetric rules” against these larger actors, so as to encourage the emergence of smaller competitors.
It is not clear whether the DSA package in itself would provide clear benefits for the development of European tech, as the GAFAM might be able to circumvent the measures to a certain extent and their historical contribution cannot be easily replaced. Behind it also lies the the E.U.’s intention to limit the growing influence of foreign privately-led rule-makers, and to combat disinformation. In that regard, and without neglecting the potential net positive impact in terms of harmonisation and market efficiency at the European level, we consider these acts to be primarily politically motivated.
III. Expanding E.U.-backed financing.
In 2021, the U.S. accounted for around half of venture capital investment (with a 1/4 of global GDP) – which is a clear indicator of the scale of the financing for innovation and emerging technologies -, whereas Europe accounted for only 1/5 of it (with 1/5 of global GDP). As we have seen, improving regulation and competition in Europe is likely to foster innovation. In Feb.22, the E.U. took additional measures not only to accelerate and expand the financing of start-ups and scale-ups, but also to mitigate the relative influence of foreign investments.
A. Additional funding opportunities for deep tech and scale-up.
Launched in Mar.21 with a €10bn budget until 2027, the European Innovation Council (EIC) – under the auspices of the European Commission – aims to contribute to the financing of disruptive innovations and the emergence of European deep tech leaders. In doing so, the objective is to improve the transfer of fundamental knowledge into practical innovations that can be brought to market, while improving the connection between the different European hubs. Part of the EIC budget is earmarked for fundamental research, but the bulk of the financing (2/3) is for the validation of a technology that has already been validated, with a view to helping to commercialise the products. In the latter case, funding is provided through subsidies up to €2.5m or equity investments up to €15m. In that regard, the fund should be seen more as a catalyst to late-stage venture capital funding.
Illustration 2: European Innovation Council funding opportunities.
Following the “Scale-up Europe” conference in Feb.22, several E.U. member states announced the creation of a fund of funds within the framework of the European Investment Fund (EIF). So far, €3.5bn has been injected into the fund (principally backed by France and Germany), but the aim is to raise more than €10bn to facilitate the emergence of private late-stage funds of at least €1bn. By comparison, around €70bn of venture capital was raised by European countries in 2021 (with a significant portion coming from foreign investors) and almost €300bn in the U.S.
B. Fostering the semiconductor industry
In the aftermath of the economic recovery from the Covid pandemic, a global shortage of semiconductors seriously impeded the growth potential of some industries, including the automotive sector. The shortage once again highlighted the urgent need for European countries to reduce their dependence on Asian countries, especially for components that play a crucial role in our modern economies. As a top priority since 2019, the European Commission finally unveiled in Feb.22 a €43bn investment plan – the Chips Act – to boost research and production capacities in the field of chips.
The plan’s objective is to achieve a 20% market share of semiconductor production by 2030, up from 10% in 2021. As the global market is expected to double by 2030, European production should be multiplied by a factor of four by the plan’s time horizon. In addition to increasing capacities, European countries will focus their efforts on the most cutting-edge chips, fueling the development of an ecosystem of proficient workers, so that Europe can once again become a net exporter.
Such an industry investment plan, tantamount to state-backed subsidies, is far from common within the scope of the European Union and once again illustrates the determination of its member states to reduce their dependence on strategic components and strengthen their position among the international competition.
The worldwide battle for technology supremacy is not over. Altough the U.S. and Chinese predominance are certain, the European Union has clearly demonstrated that there are actionable levers to foster innovation further in Europe and that measures which aim to enhance technology are also designed to establish a genuine sovereignty at the European level.
Notes:
- (1) The “Scale-up Europe” conference is part of the “Scale-up Europe initiative” launched in Mar.21 by the French government as an extension of the “French Tech” philosophy to Europe. It focuses particularly on themes such as (i) growth funding, (ii) start-up talents, (iii) deep tech and (iv) bridging the gap between start-ups and corporations. At the time, more than 200 start-up founders, CEOs of corporations, investors, representative of public institutions, university leaders and start-up associations fueled a debate that has since been extended to the E.U. level.
- (2) GAFAM refers to the U.S.-based Google, Apple, Facebook, Amazon and Microsoft. BATX refers to the China-based Baidu, Alibaba, Tencent and Xiaomi.
- (3) The “E-Commerce Directive”, which was adopted by the E.U. Parliament in June 2000.
Source of information:
- Atomico, “The State of European Tech 2021”, https://2021.stateofeuropeantech.com/chapter/executive-summary/
- Dillet, Romain, “France’s strategy for EU startup policies: Talent and money”, TechCrunch, https://techcrunch-com.cdn.ampproject.org/c/s/techcrunch.com/2022/02/08/frances-strategy-for-eu-startup-policies-talent-and-money/amp/
- European Commission, “The Digital Services Act Package”, https://digital-strategy.ec.europa.eu/en/policies/digital-services-act-package
- Crespi, Francesco; Caravella, Serenella; Menghini, Mirko; Salvatori, Chiara; “European Technological Sovereignty: An Emerging Framework for Policy Strategy”, https://www.intereconomics.eu/contents/year/2021/number/6/article/european-technological-sovereignty-an-emerging-framework-for-policy-strategy.html
- European Commission, “European Innovation Council: biggest annual funding opportunities for innovators to scale up”, https://ec.europa.eu/commission/presscorner/detail/en/IP_22_847
- Helberg, Jacob, “The Wires of War – Technological and the global struggle for power”.