NESTA

Europe lacks the dynamism required to produce the 'next Google'

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Europe’s business environment lacks the dynamism required to produce the next ‘Google’, according to a new report published by the National Endowment for Science, Technology and the Arts (NESTA) and FORA, which compared the business climate in Europe with that of the US, as well as Canada and New Zealand.

Based on detailed analysis of the growth characteristics of six million businesses in total between 2002 and 2005 across each region, the report titled ‘Growth Dynamics’ found that European firms grow and shrink at a slower pace than their American counterparts.

“This lack of dynamic movement in Europe means that innovative, high growth businesses find it harder to penetrate the market whilst companies which stop innovating continue to exist”, notes the report.

Ouch.

Specifically, the key patterns of firm expansion and contraction across Europe and the US reveal that:

  • Europe has fewer high growth firms than the US (4.3% vs. 5.9%). The three-year employment growth rate of a firm at the 95th percentile of the growth distribution (i.e. a business that grows faster than 95% of businesses in its country) is 86% in the US, compared to only 71% in the average European country.
  • The shortfall is not limited to only the fastest growing firms. The share of medium-growth firms in European countries is also lower. Firms at the 75th percentile of the distribution grow 19% faster in the US than in Europe (18% vs. 15%).
  • There are more steady-state businesses in Europe. Almost half of European firms with ten or more employees are effectively stable (46% of all surviving companies), neither growing nor shrinking. This compares with 37% in the US.
  • Greater dynamism also means more failure. US firms at the 25th percentile of the growth distribution shrink 27 per cent faster than in Europe (-24% vs. -19%). The analysis also shows that the faster the firms at the top grow the faster firms at the bottom shrink.

This lack of dynamism has implications for both innovation and productivity since “a more dynamic business landscape allows for experimentation, new products, services, and processes to rise to prominence, and for resources to be relocated from less to more productive businesses”, warns the report.

On that note, Jonathan Kestenbaum, Chief Executive of NESTA, comments: “Zara, Autonomy and Skype demonstrate the power of European ingenuity but if we want to see more of these businesses then we have to make sure that we have the right environment to allow them to flourish.”

Indeed.

What’s required, says the report, is to combine an improved venture capital climate to support high growth firms with “reforms to encourage competition, entrepreneurship and labour market flexibility”. Europe will also need to “remove barriers to entry, expansion and contraction; and remove barriers that stop businesses, especially in service industries, operating across borders.”

Policymakers across Europe take note.

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