In Europe, many regulatory authorities are debating whether to loosen regulations on tech companies so that they can catch up with their counterparts in the United States and close Europe’s innovation gap. Based on her recent article, Anu Bradford shows that this choice is a false one. She argues that rather than stringent regulation, the gap in tech innovation between the U.S. and EU can be explained by differences in their scaling opportunities, capital markets, bankruptcy laws, immigration policy, and flexibility of their labor markets.
When Mario Draghi, the former president of the European Central Bank and the former prime minister of Italy, published his much-awaited report on European Union competitiveness, he offered a grim assessment of the state of European tech competitiveness. The report shows how the EU has lost economic ground to the United States and China over the past two decades, which is explained to a large extent by the EU’s under-performing tech sector. If the EU wants to revitalize its economy and close the productivity gap between the U.S. and the EU, it needs to nurture successful tech companies that can fuel economic growth and inject new dynamism to the European project.
Draghi’s report adds new urgency to the conversation about the state of the European tech economy. The EU is a globally renowned regulatory superpower that is leading the effort to keep the most powerful tech companies in check with its ambitious regulatory agenda that is often exported to other countries through the phenomenon known as the “Brussels Effect.” For example, leading tech companies such as Meta, Google, Apple, and Microsoft have embraced the EU’s General Data Protection Regulation (GDPR) as their global data privacy standard so as to avoid having to comply with multiple different regulatory standards.
In contrast to its regulatory prowess, the EU’s record of producing leading tech companies is underwhelming. In stark contrast to the American tech behemoths—including Amazon, Apple, Google, Meta, Microsoft, and Nvidia—European countries have nurtured few leading tech companies. A look at almost any key tech indicator reveals the extent to which the EU is currently lagging behind the technological prowess of the U.S. On the Forbes 2023 list of “The World’s Largest Technology Companies,” only three EU-based companies, ASML, SAP, and Accenture, made it into the top twenty. Meanwhile, there were eleven U.S. companies on that list. Other statistics portray an equally sobering picture. When focusing on the world’s top 100 unicorns (private startups worth over $1 billion), only fourteen were European as of January 2024, with six of those hailing from the United Kingdom as opposed to the EU. The ten largest companies investing in quantum computing come from the U.S. and China. Similarly, U.S. companies’ investment in artificial intelligence is six times higher than that of European companies. These figures raise the question of why the EU has been unable to create a vibrant tech industry of its own.
There is a widely held view that the EU’s burdensome tech regulations explain the EU’s inability to cultivate a thriving tech sector. Traditionally, the U.S. has adopted a hands-off approach to digital regulation, reflecting its view that free markets, free speech, and the free internet are the foundations of a thriving digital economy and society. Europeans have chosen another path, adopting stringent tech regulations to protect digital rights of their citizens. The past several years have seen an impressive array of regulatory activity emanating from Brussels, with the EU passing ambitious laws to regulate data privacy, market competition, online content, artificial intelligence, and more. These regulations have reinforced the view of the EU as a regulatory superstate, capable of regulating rather than developing new technologies.
However, the prevailing view that more stringent regulation of the digital economy inevitably compromises innovation is overly simplistic. It also reflects several misunderstandings about the strengths and weaknesses of the American and European regulatory regimes and their respective tech ecosystems. A closer examination points to different factors rather than mere regulation in explaining the EU’s inability to cultivate a tech industry comparable to that of the US. These factors include a fragmented digital single market that prevents the scaling of innovations, under-developed capital markets that limit tech companies’ ability to grow, punitive bankruptcy laws that deter risk-taking, the absence of a proactive immigration policy that would allow the EU to harness foreign tech talent, and inflexible labor markets that limit the ability of talent to move freely in the EU. Conversely, the opposite factors are inherent strengths of the U.S. legal regime and tech ecosystem, directly contributing to the success of U.S. tech companies.
Scaling is key to growth and competitiveness, yet such a growth strategy is harder to pursue when companies are operating across numerous national markets with different languages, cultures, and government regulations. For example, when Amazon started as an online bookseller in the U.S., it was able to take advantage of the high domestic demand for English-language books. No comparable situation exists in Europe, where the publishing market is fragmented because of linguistic diversity, creating obstacles for scaling across the continent. Moreover, there are also legal barriers that sustain market fragmentation within the EU. Tech companies must often navigate a diverse set of national laws across Europe, which increases costs, complexity, and uncertainty for their business operations.
Another major impediment for the European tech sector is the absence of deep and integrated capital markets. While European companies can often secure seed funding and succeed in early fundraising rounds, they struggle to raise capital in later rounds and need to rely on the U.S. capital markets for growth opportunities. The American venture capital market has also benefited from substantial capital provided by institutional investors, such as universities and pension funds, which —unlike their European counterparts—have been free to invest funds drawn from their plentiful coffers in risky startups.
The EU’s punitive bankruptcy laws have presented an additional obstacle to entrepreneurship, making failure so costly that European entrepreneurs often shy away from ambitious—and therefore risky— technological ventures. On the cultural level, business failure carries a greater stigma in Europe, further hampering risk-taking and holding back innovation. In Silicon Valley, in contrast, failure is seen as a badge of honor or rite of passage, leading to the mantra “fail fast, fail often.” This more forgiving American approach includes giving a second chance to individuals whose prior ventures have failed—an approach without parallel in the cautious EU environment.
The U.S. has also been more successful than the EU in attracting the world’s best talent through a more proactive immigration policy. Looking at the founders of the most successful U.S. tech companies reveals a powerful story about immigration: Steve Jobs of Apple was the son of a Syrian immigrant; Jeff Bezos of Amazon is a second-generation Cuban immigrant; Eduardo Saverin, the co-founder of Facebook, is Brazilian; Sergey Brin, the co-founder of Google, was born in Russia; and Elon Musk of Tesla was born in South Africa. These individuals are not rare exceptions. A recent study by the National Foundation for American Policy reveals that 55 percent of America’s billion-dollar companies have an immigrant founder. If the children of immigrants are included, that statistic rises to 64 percent.
These statistics would be difficult to replicate in Europe, given both its current immigration policies and a culture in which diversity and immigration have not been similarly interwoven into the fabric of society. The EU is not only struggling to attract migrants to its tech sector but is also losing European talent to the U.S. There are numerous examples of European tech entrepreneurs relocating to the U.S. to start a business or to grow it there, further deepening the U.S.–EU technology gap.
Finally, U.S. labor markets are more flexible compared to the EU. Not only does this help reallocate and retrain labor in the face of technological disruption, but the hurdles in terminating employment contracts are likely to make EU startups more cautious in offering their employees generous salaries and stock options, thus accentuating existing talent acquisition problems. Since California does not enforce non-compete clauses, talent moves freely in Silicon Valley, facilitating knowledge spillovers across tech firms and sustaining a culture of dynamic innovation. In contrast, several EU member states recognize non-compete clauses, which hinders labor mobility in Europe.
Acknowledging these foundational differences between the U.S. and EU tech ecosystems can help reorient the ongoing conversation about the costs and benefits of digital regulation. To close the technology gap, the EU should channel its policy ambition towards completing the digital single market, creating a genuine capital markets union, harmonizing the Member States’ bankruptcy regimes, rethinking labor markets, and viewing immigration as an opportunity for technological progress and economic growth. The EU certainly has much ground to cover in catching up to the U.S.’s technology sectors, but abandoning digital regulation is not what will get it there.
Conversely, if the policymakers in the U.S. understood that the country’s technological progress is not tied to its lax regulatory approach, they would likely feel more comfortable pursuing regulatory reforms that the American people have increasingly come to support. For example, adopting a federal privacy law, regulating tech giants’ anticompetitive behavior, or insisting on ethical AI development would not dismantle the dynamic capital markets in the U.S., repeal its entrepreneurship-friendly bankruptcy laws, or discourage global tech talent from migrating to the country.
Finally, governments outside the EU and the U.S. should not view these two leading regulatory regimes as alternatives. Instead, they should be seen as complementary digital ecosystems whose best features foreign governments can emulate and pursue in tandem. There is no need for anyone to set up a false choice between tech regulation and tech innovation when it is possible to have both.
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