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Future Development

How can Europe compete with the American innovation onslaught?

Isfandyar Z. Khan

Step out in the Tenderloin district in San Fran, tap your phone and minutes later an Uber arrives and you’re in plush seats on your merry way to Nob Hill. Barely months since its inception, this American-born company had already changed the way we move. Now try doing the same in central Milan: eventually an Uber will show up, the driver will look around in a shifty fashion, and then insist you sit up front. It’s technically illegal to take Uber in a number of European countries. Yet in Brussels an Uber from the airport to the European Parliament costs 20 euros and a cab 65 euros.

So what does this have to do with innovation? At its core innovation is new way of doing something, at times in a way so much better that it can disruptive to existing services. Some ecosystems are built to encourage innovation, even when disruptive, while others stifle it. Europe needs to do a bit of soul searching and decide what side it sits on. There are definitely great success stories (though easy to count on two hands) that have out of the continent: Skype, the ability to have VoIP (thank you Estonia), and, ahem, Angry Birds. Yet given the immense potential and European skills, these stories seem merely a trickle of what’s possible.

Clearly the United States and Europe are worlds apart when it comes to geography (and quality of bread), but they both aspire to be the front runners of spurring innovations to boost growth and create jobs. However, there are subtle and stark differences that make the United States the Usain Bolt of the innovation sector with Europe still at times on the starting line. Some differences can be captured by the existing innovations indexes, and a few others are more inherent.

Three big differences between innovation in the U.S. and Europe stand out:

  1. A waltz between regulation and innovation. Only two generations ago, Silicon Valley was a desert, yet today it is an oasis that waters innovation globally. Looking at the evolving nature of the regulatory landscape, the U.S. system is more dynamic. When innovation requires a change in regulation, the consumer groups work to force it. As crowdsourcing took off, concerns about investor rights were rightly raised.The Securities and Exchange Commission worked to simultaneously regulate the market and protect investors, and yet also enabled the industry to grow. By its very nature innovation is spurred when there is space to operate and a balance of the right enabling regulatory framework—a balance hard to reach. Looking at tax systems, the same ideas apply. A venture capital firm investing $20,000 in an American company needs $20,000 regardless of where it is based, however to invest $20,000 in a European startup, that same firm would need a number that can increase exponentially, due to navigating the cross-border tax liabilities. A startup needs cash, and it would be wise to make it easier for the latest digital billionaire in Palo Alto to invest in Europe.
  2. A fear (or not) of failure. Around 90 percent of startups fail. If you set up a company in the U.S. and fail, there is inherent learning in that failure and you get right back up. “Fail fast, fail often” is the Silicon Valley mantra. You can file for bankruptcy, clear whatever debts you can and start over. In Europe failure is not a desired option, and it is one with more consequences. It is not looked upon as a learning experience, more importantly the insolvency regime keeps you mired in debt for much longer. So while in the U.S. setting up a company may be like going to a speed-dating event (you keep skipping from one to another until there is a match), in Europe it’s more akin to a medieval marriage (no way out).
  3. Being approachable and open-minded. In the digital space the ability to create value is surprisingly free from the shackles that surround traditional business environments. Ideas and capital flow freely. The recent “safe harbor” ruling does improve consumer protection but also risks hindering digital innovation. Again, here the U.S., while perhaps agnostic on nationality, is religious about value creation. If a firm supported by the French government is scooped up by an American firm, it really should be seen as a victory of the French ecosystem; after all, are open relationships not a French thing?

So, is Europe ready for the American onslaught? As we head into autumn, Europe, like the falling leaves, may fare better by being carried away on a gust of wind (to an ecosystem friendlier to innovation) rather than dropping in place on the ground and fading away. 

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This blog was first launched in September 2013 by the World Bank in an effort to hold governments more accountable to poor people and offer solutions to the most prominent development challenges. Continuing this goal, Future Development was re-launched in January 2015 at brookings.edu.

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