Why the EU Struggles to Produce Tech Giants: A Matter of Financial Courage
The European Union's struggle to produce tech giants like Google, Amazon, and Facebook is a multifaceted issue.Contrary to popular belief, Europe isn't short on entrepreneurship, technical expertise, or imagination. The EU surpasses the US in creating high-tech start-ups. However, many European firms wither due to a lack of adequate financing. The solution, glaringly obvious yet ignored, lies in finance.
Europe's Impressive Start-Up Ecosystem
In each of the past five years, the EU has generated more high-tech start-ups than the US. Despite this, many of these ventures fail to scale and often relocate to the US due to the superior financial support. The root cause is Europe's reluctance to invest and a general lack of financial sophistication among its population.
A Conservative Investment Culture
Compared to just 12% in the US, the EU holds 31% of household savings in currency or deposits. This conservative approach results in less investment in stocks and bonds, leading to twice as much money in EU banks relative to GDP but only half as much in capital markets for stocks and bonds.
Insufficient Venture Capital
The financial system in Europe is not conducive to nurturing start-ups. EU firms receive about 80% of their finance from bank loans, an unsuitable method for funding risky start-ups with intangible assets. The disparity in venture capital availability is stark: the US has €1.3 trillion in venture capital compared to just €72 billion in the EU. For firms not yet ready for an IPO, the situation is even worse, with European start-ups receiving significantly less venture capital and private equity funding than their US counterparts.
Learning from Silicon Valley
Many often attribute Silicon Valley's success to brilliant entrepreneurs and US government research funding. However, a pivotal factor was the 1974 enactment of the Employee Retirement Income Security Act (ERISA), which allowed pension funds to invest in venture capital. This regulatory change unleashed a flood of investment into tech ventures, a development crucial to Silicon Valley's rise.
Europe's Potential
EU pension funds hold assets worth around €4 trillion, with insurance funds holding another €9 trillion. Despite this, pension fund investments in venture capital are minimal. A significant increase in these investments could transform the EU's venture capital landscape, providing much-needed financial support to promising start-ups.
The Path Forward
We must free pension funds and insurance companies in the EU from restrictive investment rules. A twenty-fold increase in current investments would still represent less than 0.2% of pension funds' assets, but it could triple the EU's annual contribution to venture capital. This shift would not only benefit the digital sector but also strengthen the pension funds and insurance sectors, ultimately benefiting future pensioners.
Overcoming Timidity and Conservatism
The primary barriers to these changes are European timidity and conservatism, coupled with the absence of a concrete policy program. Pension funds can balance risk and reward by adopting a diversified investment strategy, resulting in high venture capital returns.
Conclusion
The EU has the potential to foster tech giants, but this requires bold financial reforms and a shift in investment culture. By embracing a more dynamic approach to financing and leveraging its existing assets, Europe can create an environment where high-tech start-ups not only survive but thrive. The measures needed are clear and straightforward, waiting only for the political will to implement them.