Europe Proved It Can Innovate During the Pandemic. Now It Has to Figure How to Benefit From It.

BRUSSELS—European Union leaders, aiming to turn the hardship of the coronavirus pandemic into opportunity, are finalizing plans to release almost $1 trillion into the bloc’s struggling economy, reshape industrial policy and strengthen trade defenses.

Underpinning the plans is a push to profit more from the bloc’s brain power, which over recent years has enriched foreign investors at least as much as Europeans.

EU programs and draft laws that will kick off or be presented over coming weeks seek to make the 27-country economy more digital, entrepreneurial and environmentally friendly. The need for fast action has been driven home by recent data showing the bloc fell back into recession during the first quarter while the U.S. and China recovered robustly.

The plans, including the €750 billion Next Generation EU recovery funding, equivalent to about $905 billion, and the €1 trillion European Green Deal environmental program, leverage Europe’s bountiful flow of innovation, which Covid-19 has highlighted.

Pfizer Inc.’s

vaccine was developed by a German company, BioNTech SE;

Johnson & Johnson’s

offering was developed in a Dutch laboratory and

Moderna Inc.

is led by a French engineer.

Europe is an engineering hothouse that nurtures new technologies and constantly improves old ones. Bluetooth, MP3 and the World Wide Web all emerged from European labs, as did

Procter & Gamble Co.

’s Tide Pods.

U.S. corporate giants from

Alphabet Inc.

to

Qualcomm Inc.

have worked extensively with European universities, established research centers across Europe and bought up European companies, boosting U.S. profits and U.S. share prices. Chinese companies over recent years have followed that model.

Yet the coronavirus pandemic and its economic shocks are aggravating a problem European officials have grappled with for years: how to turn the EU’s size, wealth and brain power into world-class companies, high-quality jobs and abundant tax revenue by commercializing its breakthroughs.

European tech startups such as those featured at Spain’s annual Transfiere conference have grown rapidly in number over the past decade.


Photo:

Lorenzo Carnero/Zuma Press

“Unless Europe sees the entirety of the innovation cycle, it risks becoming an incubator for the world,” said Ann Mettler, vice president for Europe at Breakthrough Energy, a company started by

Bill Gates

to foster clean technologies, and former director of the EU’s internal think tank.

The result is fewer corporate giants. European companies last year accounted for only 21 of Fortune magazine’s global top 100, down from 31 in 1995. Alcatel, Philips and

Nokia

are fractions of their former selves and haven’t been replaced by newcomers in the vein of

Tesla Inc.

in the U.S. or Alibaba in China. The slide is significant because big companies spend proportionally more than small ones do on research enabling future blockbusters.

Now, as the U.S. and Chinese economies recover robustly, their companies and investors have deeper pockets than Europeans to pay for talent, intellectual property and acquisitions. The passing shock of the pandemic-induced recession threatens to cause lasting damage to Europe’s broader economic prospects, just as the euro crisis a decade ago did.

Two decades after EU leaders promised to make Europe “the most competitive and dynamic knowledge-based economy in the world,” the bloc is less competitive and, many say, less dynamic. Rather than becoming a seamless market of a half-billion consumers, the EU faces political and commercial divisions among its members, epitomized by the U.K.’s exit last year.

Europe “needs to rediscover its taste for risk,” said French President

Emmanuel Macron

recently, reflecting on the EU’s failure to finance and accelerate vaccine endeavors last year as the U.S. and U.K. did. “We were wrong to lack ambition, to lack the madness, I would say, to say: It’s possible, let’s do it.”

The seeds are in place: Europeans launched roughly 50,000 startups last year, compared with fewer than 10,000 a decade ago, according to GlassDollar, a consulting firm for startups in Germany.

But that new entrepreneurial energy is overwhelmingly going to foreign buyers. U.S. and Asian investors accounted for 61% of Europe’s tech-startup buyout money over the past four years, outpacing 38% from Europeans, according to Dealroom.co, a tech-industry data provider.

Swedish streaming company Spotify turned to the New York Stock Exchange to gain global heft.


Photo:

Richard Drew/Associated Press

In the venture capital world, European funds’ share of deals done in Europe fell to 62% last year from 72% in 2016, according to a report from Index Ventures, a fund operating in the U.S. and Europe.

“The funding is there,” Index Ventures partner

Martin Mignot

said, but added, “a lot of that capital is American.”

European officials are trying to respond. The EU recently launched the European Innovation Council, a new body endowed with €10 billion for technologies, startups and growth capital. EU officials are also pushing a raft of initiatives, dubbed Europe’s Digital Decade, that aim to foster digital industries and help old-line companies go digital. And the European Green Deal aims to promote EU green industries, an emerging field in which European companies are world leaders.

Recent experience, though, offers reason for caution. European companies were leading producers of cutting-edge solar panels and e-bikes more than a decade ago, until China ramped up production and slashed prices, prompting some European rivals to file dumping suits and driving many out of business.

Europeans are now pioneering new environmental technologies, but their prospects remain uncertain.

“We find that too often in Europe, innovation cannot scale up, and that’s really a problem,” said Ms. Mettler.

A study prepared for Breakthrough Energy recently found that while EU environmental startups garner almost 23% of world-wide seed-stage venture capital funding, the proportion plunges as companies expand. The EU companies attract less than 7% of global VC growth equity, compared with more than 54% for North American rivals and 32% in Asia.

The imbalance is “condemning promising ventures to move to North America or Asia to reach scale,” said the report, by Cleantech Group.

Clean technology is just the latest industry to face this barrier. Many European startups that struggled to grow at home have found foreign buyers or listed overseas. Skype, invented in Estonia in 2003, was bought by

eBay

in 2005 and then

Microsoft.

Apple acquired Shazam, a U.K. startup, in 2018. Spotify, from Sweden, gained global heft thanks to U.S. investors with its listing on the New York Stock Exchange the same year.

Chinese green tech rivals like wind-turbine manufacture Goldwind Technology caught up with Europe’s leading producers of solar panels and e-bikes, driving many European companies out of business.


Photo:

alex plavevski/Shutterstock

“It’s not a lack of entrepreneurship,” said

Jacob Kirkegaard,

a senior fellow at the Peterson Institute for International Economics based in Brussels. “It’s going from being a new company to being a great big one that’s a problem.”

Fledgling startups in Europe raised more seed-stage funding than did their counterparts in Asia or North America over the past two years, grabbing 38% of investments that were doled out in chunks of less than €4 million, according to Index Ventures’ report. But as funding-round size grows, Europe’s share plunges. In fundraisings above €250 million, European startups garnered only 9%, Index’s analysis found.

Not so long ago, European multinationals were global tech leaders. A Dutch engineer at Philips invented the cassette tape in 1963 and helped develop compact discs, unveiled in 1982.

AT&T

in 1984 raced to catch up in the personal computer market by slapping its logo on stylish desktops made by Italy’s Olivetti. Nokia,

Siemens

and Alcatel into this century dominated GSM, the world’s first digital-cellular standard, created in France.

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Tectonic shifts came with the internet-inspired shift to a world dominated by software. Europe, like Japan, had excelled in mechanical and electrical engineering, industrial design and precision manufacturing. The internet made many physical products obsolete and increased demand for software engineers—a specialization not valued in Europe or Japan until recently.

Europe also lost a global financing race where it once competed. A wave of deals starting in the 1990s to create pan-European stock exchanges that could rival top U.S. and Asian exchanges failed to reach critical mass. Forays into investment banking and risky ventures this century by one-time European banking powerhouses including

Deutsche Bank,

Crédit Lyonnais and Dutch ABN-Amro ended in massive losses.

As a result, European financial firepower faded just as U.S. hedge funds and venture-capital funds—funding vehicles new to Europe—became global players and sovereign-wealth funds from other countries began prowling for deals world-wide.

Entrepreneurs say one way Europe could better retain talent and help small companies grow is by making it easier to use stock options, which give startups’ employees a shot at future riches. France and the tiny Baltic states treat options favorably but Germany and other big European economies impose heavy taxes and regulatory burdens, investors and founders say.

“The only way local companies can compete for talent is with stock options,” said Mr. Mignot at Index Ventures. “It’s all about talent.”

Write to Daniel Michaels at [email protected]

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