Today’s world is vastly influenced by tech innovation. From clothes to food, from sports to education, technology is everywhere to take the human race further ahead. And many countries are playing a crucial role in bringing those technologies to us, changing our way of interaction and thinking. For example, Google is an American tech company. And it is pretty much needless to say what Google does. Like Google, there are also many tech giants in North America, such as Apple, Microsoft, Facebook, and the list goes on and on. Another prominent tech hub is in Asia, where you will find tech giants like Samsung from South Korea, one of the most renowned electronic brands worldwide. Then we have Mitsubishi Electric, Sony, Canon, Tencent Holdings, and many more. But when we take a look at Europe, the numbers are too little to mention. So why is Europe lagging behind in tech? In this article, we are going to dig deep into this matter. So let’s get started.
Overview
It was not like Europe has always been behind in the tech race. In fact, they had a stronghold in tech, and there were many leading tech giants in Europe. If you can remember, Nokia was the biggest name in the mobile phone industry, based in Finland. But Nokia couldn’t hold its place in the market. Other players like Google and Samsung took over the market share of Nokia.
Phillips was another giant in the electronic market. But after selling its TV business to Hong Kong-based TPV in 2012, it has lost its place of being one of the top-tier electronic brands in the market. Apart from that, there were many promising tech companies in Europe, such as Skype, Beddit, Shazam, and Mojang (the creator of Minecraft). However, almost all of them have been bought by big giants like Apple, Microsoft, and other US-based companies.
So, tech companies in Europe are either going out of business or are being bought by other companies. Now let’s discuss the underlying reasons that are causing Europe to fall behind in tech.
Tax Regulations
Though Europe lacks tech giants, there is no shortage of tough regulations to curb the advancement of technology. For example, Taxes are high in European countries, especially for tech companies. Recently many European countries have imposed a “Digital Services Tax”. It has been reported that more than half of the European OECD (The Organisation for Economic Co-operation and Development) is considering, proposing, or already has implemented the digital tax on large digital companies, or in other words, mostly on U.S based tech giants like Apple, Google, and Amazon. This imposition has resulted in an increase in the tax for search engines, social media services, and online marketplaces.
And if you are thinking about how this has impacted the overall tech environment in Europe, well Apple and others have passed the additional cost on to the consumers. Apple increased the developer fees to be paid for the App Store in the United Kingdom. Google has also increased the advertisement fees in the UK.
So clearly, Europe is not a hotspot for tech giants to do their business smoothly and it is largely because of the adverse regulatory system against the tech companies.
Labor Law is the Strictest
Technology is an ever-changing sector, which also requires changes in the workforce at regular intervals. Hiring and firing employees is a common phenomenon in tech companies to keep them updated with the changing environment. But things are a little different for tech companies in Europe as they have to comply with certain labor laws. These labor laws restrict them to freely hire and fire people which is necessary for tech companies to scale up.
The same has been also quoted by Frank Slootman, who is the chief executive of the cloud software provider Snowflake. He said, “Silicon Valley founders had a huge advantage over their European counterparts because America had fewer legal protections for workers.”
To explain why tech companies need to hire and fire people frequently, He also said, “In the US we’re very dynamic in terms of hiring and firing. You have to be. Some people work out and some people don’t,” According to the observation of Frank Slootman, Europe has made replacing workers “excruciatingly difficult”, and hence “burdened companies with social costs”.
Privacy is the Strictest
European governments, as well as their people, are very serious about privacy concerns. A survey was done in 2019 which shows that about 74% of European citizens wanted to know the way their data is being used by social media platforms.
The research also showed that concern has recently emerged because of some recent incidents like the Cambridge Analytica-Facebook scandal of 2018, in which the personal information of the users was used to influence the outcome of the election.
On top of that, the European Commission has recently proposed the Digital Services Act. If effective, this law will impose an obligation to the tech giants to disclose the algorithm used by those companies to collect data from users. The act would also require to reveal how those data are processed and used.
Failure to abide by this law would result in severe consequences, including 6% of a company’s annual revenue. That means, if companies like Facebook fail to comply, it has to pay a fine of about 4.2 billion dollars.
Investment Climate
The investment climate is not very favorable for tech companies in Europe. One of the major reasons for this is the risk aversion attitude of the European investors. Risk aversion attitude holds the investors back from investing in high-risk high-return projects. And since almost all of the tech startups that want to bring innovation to the market are high-risk high-return projects, they do not receive the necessary investment or funding.
Innovative technologies are disruptive. And any disruption is not perceived as good at first. For example, if you think about film cameras, then digital cameras were a disruptive technology. Though digital cameras were way more capable than film cameras, it’s not like that the whole market shifted from analog to digital cameras just after it came into the market. It took decades for people to truly understand the power and ease of use of digital cameras.
Amazon was also a disruptive technology in the face of purchasing goods. And if you look at the early offices of Amazon, it merely looked like any other business. But now it is one of the most successful businesses in the world.
So, until the market is educated and becomes ready to accept the change, investors need to wait patiently. And this is the attitude where European investors lack.
However, the US and China are less sensitive to risk factors when it comes to investing in tech companies. And this has also been showing up in their startup IPO’s.
According to PitchBook, Europe was reported to have just 26 venture capital-backed IPOs in 2020. On the other hand, for the US it was 70, and for China, the number was even bigger at 92.
Lack of Research and Development
Now let’s discuss how Europe is doing in research and development. One of the factors that work as fuel for technological advancement is Research and Development (or R&D). The European Union has been investing enough money in R&D until recently.
If we take a look at the past, in 2000, the EU invested about 1.67 percent of its total GDP in R&D, whereas China invested half of that (0.89 percent). But after that, the European Union’s research intensity remains almost the same while other countries like China, Japan, and the US are way ahead of the EU.
Geographic and Demographic Constraint
Geography plays a vital role in the growth of a tech company. Europe has many countries, meaning many cultural barriers. On the other hand, the US, Canada, and China are some of the biggest countries in the world. So launching a tech product would face a lesser cultural barrier in those countries than in Europe.
Another factor that determines the cultivation of tech hubs in a certain region is the demographic features of that area. People in Europe are skeptical about technology. They see technological advancement as the root of all problems. On the other hand, people in the US and China are more enthusiastic about new technologies. They see those technologies as ways of solving their problems, rather than threats.
This has also been reflected in Europe’s response to newer technologies. A report from BBC states that, “Europe seeks to limit the use of AI in society”.
Recommendations
The recommendations are pretty straightforward. If you want to live in the jungle, you have to be wild. First, a deep analysis should be made by European countries as to where they lack compared to the US and China. And then they have to work on it. This change should be brought into the legal framework. Europe should make a tech-friendly system that will facilitate making it a tech hub.
Taxes should be cut down and regulations should be revised. It is not like the regulations should be pulled off. Rather European countries should come to a middle ground where it helps tech companies while safeguarding consumers and the state’s concerns to a certain extent. The labor law should also be revised so that the tech companies could bring the most suitable persons and lay off the incompetent ones without facing any legal issues.
So, these are the major reasons why Europe is lagging in tech and how it can cultivate a tech culture by bringing some changes. Changes take time. And it is high time Europe seriously thought about the future and took steps to advance in the field of technology.
