Why Europe doesn’t have its Silicon Valey

The industry of software It’s quite peculiar. Creating and developing applications does not require exotic raw materials, complicated supply chains, precision machinery, or enormous amounts of energy. All you need is, essentially, a handful of clever engineers and computers that can be purchased at almost any shopping center. Thanks to the Internet and the constant drop in the price of any computing component (bandwidth, memory, CPU, cloud computing), a leading company in the sector can be literally anywhere; The barriers to entry are much lower than in any industrial sector.

One would think then that any country with a reasonable number of computer engineers is a good place to have leading software companies. In Europe there should be several centers of excellence with top-level companies. What we see, however, is that European technology companies in 2023 had aggregate revenues of $133 billion. The technology sector in the United States, meanwhile, brought in 1.72 trillion dollars. Clearly, there is something wrong with the European economy. The question is why this is the case.

There are several academic theories trying to explain Europe’s failure to adopt and create technology companies. Anupam Chander, from Princeton, has pointed out that the European problem is one of regulation, or more specifically, the combination of several intellectual property laws that have ended up favoring the American internet giants. Chander cites regulations that give websites and intermediaries immunity from content created by third parties, a clearer and more elegant copyright regime, and the absence of privacy protection laws. Note that two of these three regulations (copyright and immunity) are simply clearer, but not more restrictive, in the United States. The clarity and stability of the regulatory system facilitate the creation of new companies.

We tend to mock Wall Street, but the reality is that the US capital markets are much larger and more efficient than the European ones.

This explanation, however, has the problem that European regulation, due to the size of its market, ends up being the de facto standard on many issues. American companies have to adopt much of the European privacy regime, and yet they continue being much more innovative than the European ones. Anu Bradfordfrom Columbia, has suggested that Europe’s problems are due to a combination of deeper institutional factors.

The first is access to risk capital, which in the United States is much more developed. We tend to mock Wall Street, but the reality is that the US capital markets are much larger and more efficient than the European ones. Added to that is a much more open immigration regime in America than in Europe, making the Silicon Valley of the old continent probably in that California full of emigrated engineers. Finally, the European single market is not really such; the barriers of culture and language make it difficult to grow a business without incurring additional costs, and state regulations remain not fully harmonized.

Additionally, most European regulation is quite late. It is somewhat mysterious how the administration Clinton got it right in the regulatory framework they approved for the nascent internet economy. What we do know is that the European Commission waited decades before starting to harmonize EU legislation, leaving many companies behind.

In reality, companies often benefit when they operate in a region where there are other companies in the same sector. Being a startup in San Francisco offers you certain advantages: The city is filled with venture capitalists, lawyers, accountants and advisors with experience growing companies, thousands of engineers and programmers bouncing from one startup to another, and multiple universities churning out glory-hungry graduates. Since it is the best place to start a company, the best minds from all over the planet are willing to come to the city to launch their businesses. Economists call this phenomenon network effects.

Better regulation made it grow faster; This caused the network effects of the region’s innovation ecosystem to become increasingly pronounced.

In the early 1990s, Silicon Valley enjoyed a small relative advantage over any other technology hub on the planet thanks to the legacy of all those technology companies. hardware born in the 70s and 80s. Better regulation made it grow faster; This caused the network effects of the region’s innovation ecosystem to become increasingly pronounced. When Europe finally decided to regulate as it should, the American technology sector was already unreachable.

We need to know then whether Europe can do something to recover ground in this sector. Honestly, I’m not sure; My feeling is that it is extremely difficult to create this kind of network economies based on public policies. A decisive investment in research and development, for example, is likely to end up with a lot of computer scientists emigrating to the United States as soon as they have a promising project. Given that Europe’s ills are the result of a combination of factors, there is not really a magic wand that can solve the problem, but rather a package of measures is necessary that complement each other (regulation, capital markets, immigration, universities. ..). Focus on developing softwareFurthermore, it may end up with Europe chasing the latest technological revolution and missing the boat on another new idea.

One thing is clear: Europe is falling behind. It’s time to abandon complacency and take this problem seriously.