Europe’s tech industry lags behind the US – but it gives the continent a chance to write the rules of the game

Europe invests a lot in research, and publishes and patents many ideas. But it fails to compete with the US and China when it comes to translating its innovation effort into large, global technology firms. The seven largest US tech companies, Alphabet (Google), Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, are 20 times bigger than the EU’s seven largest, and generate more than ten times more revenue.

That isn’t to say Europe has no tech success stories. The world leader in music streaming is Spotify, a Swedish company. Dutch company ASML produces the world’s most advanced computer chips, and Danish drugmaker Novo Nordisk is leading the extremely profitable market for weight-loss drugs.

European start-ups are also actually a better deal for venture capitalists on average than US ones. But they rarely develop into major global players. The main reason for this is that Europe regulates more.

Research has found that Europeans are less optimistic than Americans about social mobility, want to redistribute income more than they do in the US, and have a more cautious relationship to owning risky assets. This leads to some very predictable outcomes. Environmental, inequality and life expectancy metrics perform better in Europe, while the US does better on purely economic indicators.

This is not necessarily bad news. In the competition to define the rules of the technological game, combining the huge US tech ecosystem and the European obsession for regulation may be the best chance to protect consumers, freedom of expression, accountability and transparency around the world.

The world leader in regulation

The US Food and Drug Administration (FDA) is faster to expedite its approval of new drugs than the European Medicine Agency. Pharmaceutical firms are also allowed a larger profit: drugs in the US are on average more than three times more expensive than in the rest of the OECD.

So it makes sense for pharmaceutical companies to develop their products in the US first. The same is true if you want to develop a new synthetic meat, a modified crop, or a product linked to Artificial Intelligence (AI).

Europe could grow faster by changing its model. But ask European leaders which precise regulation they are happy to relax, and you will hear a deafening silence.

Britain is perhaps the best illustration. A large part of the Brexit project was to simplify European rules that were perceived as excessive. However, the UK is yet to make any major regulatory change eight years after the referendum, and the government shows no interest in changing tack.

In the US, innovation has gone hand in hand with market concentration and market power. When companies have high market power, they may have fewer incentives to innovate. They also start to gain political power.

This is where the role of Europe as an independent regulator is very important. The largest companies tend to abide by EU law because they want to keep access to the EU. They also have a tendency to offer the same products all over the world, which means European rules apply to everyone.

European rules have clear objectives. The EU’s Digital Markets Act, which comes into force in March 2024, establishes rights and rules for large online platforms – so-called “gatekeepers” such as Google, Amazon or Meta – to prevent them from abusing their market power.

Europe is also credible when it comes to protecting consumers, citizens and transparency. It cannot be suspected of favouring European tech champions, because there are none. Europe can, for instance, judge Tiktok based on whether it breaches child protection rules, and not based on fears that a Chinese company is taking market share away from a European one.

Technology and democracy

Perhaps the best example of the benefits of old regulating Europe and unleashed America is the current race for AI. The US is positioned as the market leader in AI technology, which can power products and applications such as image generators, voice assistants and search engines. Roughly half of the world’s investment in AI currently happens in the US.

At the same time, Europe has already taken several steps to regulate. The EU’s Artificial Intelligence Act, for example, defines different levels of transparency and the auditing of algorithms depending on how dangerous they could become.

Europe will certainly not win the global innovation race for AI. But it has the chance to write the global rules according to its own values. This means it can make companies liable for the actions of their AI tools and transparent on the data used for training them. It also means it can require a company’s AI algorithms to be audited.

But for the EU to write the new rules of AI, western companies must win the innovation race. The main competitor is China, where companies are given massive access to government data, including facial recognition. The Chinese government can largely choose its champions by deciding who gets access to data.

China’s concerns about regulation could not be further away from those in Europe. China is not interested in improving transparency and fair political competition – it wants to use data to promote the policies of the Chinese Communist Party, and discipline and foster the national economy.

Far from a competition between Europe and the US for tech dominance, western democracies should see their different approaches as a unique opportunity to promote their shared values. In that context, the lack of large, global European tech leaders might actually be a blessing.

*Renaud Foucart, Senior Lecturer in Economics, Lancaster University Management School, Lancaster University.

This article is republished from The Conversation under a Creative Commons license. Read the original article.