Silicon Valley – a name that has become synonymous with high tech innovation, fast-paced start-up culture, and household name tech giants such as Google, Apple, and Facebook. Named after the silicon computer chips that were once produced in the region in the 1970s, the region continues to be a technology-based economic ecosystem and helps drive one of the United States’ most important sectors. In fact, according to the Brookings Institution, between 2015 and 2017, digital services made up about 80% of the growth in advanced industries (aerospace, computer software, high tech services, etc.). Silicon Valley remains the preeminent tech industry region in the world, with the larger San Francisco Bay Area representing what would be the 19th largest economy in the world with a GDP of $748 billion. The Bay Area economy is growing at a rate double that of the United States economy as a whole, at 4% according to Economic Institute Vice President Jeff Bellisario. In 2015, the Bay Area alone was the source of 17% of all patents issued in the United States.
Despite the ways in which high-tech industry has driven economic growth in the United States and in Asia, continental Europe (mainly France and Germany) has lagged behind in terms of building similar environments that foster technology-related innovation. Within the Information and Communications Technology (ICT) sector, only nine of the top 100 ICT companies are headquartered in Europe. Furthermore, demand for ICT technology in Europe actually dropped from 25% in 2012 to 24% in 2015. Certain structural barriers also prohibit the expansion of European companies to achieve a scale that American and Asian companies can. For example, the European Union has 28 members with different languages and cultures that make coordination and cooperation more difficult. Poorly developed capital markets and limited access to venture capital has also hindered the creation of an advanced high-tech sector.
Many argue that the reason for this divergence is the use of different political-economy models between the United States and the United Kingdom on one end, and continental Europe on the other. The US has developed what is known as a “liberal market economy” (LME) while continental Europe has adopted a “coordinated market economy” (CME). LME systems are marked by having flexible labor laws, shareholder-based corporate structures, and highly-developed capital markets centered around high-powered incentives for a fast-moving economy. High employee turnover, the ability to quickly start a company with a new idea, and the capacity to raise large amounts of capital for potentially high-risk investments are a necessity to drive the kind of innovation that Silicon Valley is known for. The European CMEs, on the other hand, are known for highly regulated labor markets predicated on long-term employment. Capital financing is also mostly done through large banks that are more hesitant to fund riskier projects. Additionally, banks often own stake in large companies and are represented by seats on supervisory boards which creates an environment that can constrain radical innovation. The strong established relationship between banks and European corporations favored by their respective governments to advance national interests also creates a high barrier to entry for small tech companies and makes it more difficult for European regulators to adapt to a fast-changing industry. The potential instability caused by Brexit is also at the forefront of investors’ and entrepreneurs’ concerns, given that the end of 2018 saw a shrinking of investment in tech companies. This was the first time in almost a decade that the UK tech industry had not grown in investment. Investors are also anxious about a potential ripple effect on Europe and the rest of the world.
At the same time, there are signs that these structural issues might be changing. As of 2018, $23 billion was invested into European tech companies, up from a mere $5 billion in 2013. Three of the top 10 tech initial public offerings (IPOs) in 2018 were also based in Europe, and tech industry employment grew about four times as fast as the overall EU workforce. London, Paris, and Amsterdam have also grown as European tech clusters, representing 15% of the region’s developers. Eastern European countries in the Baltic region such as Estonia and Latvia have also made headway into turning their countries into tech hubs through policy reform.
Certain policy reforms have made sector growth in western Europe possible as well, such as those in France. For example, if a company in France went bankrupt, the entrepreneur was banned for nine years from starting another one, and certain tax credit incentives have been put in place to encourage entrepreneurship. In Germany, somewhat better access to capital including through Chinese venture capital firms might also help to improve the European startup environment. In 2017, German startup investment increased by 88% to €4.3 billion ($4.82 billion). Overall, while there are still many structural hurdles, continued reform and an increased interest in regional investment in European tech may change the trajectory for the future of Europe’s startups.