Europe has failed to create the right "ecosystem" that would encourage the creation of new ICT companies and sub-sectors, holding back the continent's post-crisis recovery, says a new study from the Brussels-based think tank Bruegel.
The problem in Europe does not appear to be a lack of generating new ideas, but rather problems in getting these ideas successfully to the market, according to the report titled: New ICT Sectors: Platform for European Growth?
"Among the barriers are the lack of a single digital market, fragmented intellectual property regimes, lack of an entrepreneurial culture, limited access to risk capital and an absence of ICT clusters," write the authors of the report.
"The emphasis should move beyond providing support for infrastructure and research, to funding programmes for pre-commercial projects," the researchers recommend.
Europe indeed has a less efficient growth model for the ICT sector, which continues to be a major contributor to innovation and growth in the United States or Korea.
A report on R&D in ICT in the EU from 2011 by the European Commission's Joint Research Centre similarly concluded that, "The ICT sector has a smaller weight in the EU economy than it does in other major economies, and it has a dominant service component."
The EU’s economy specialises less in ICT sectors. The EU also lags behind in terms of private investment in research and development (R&D) into ICT goods and services. This ICT investment ‘gap’ accounts for a substantial part of the difference between the total R&D investment in the EU and the US.
"The EU ICT sector fails to focus on the new ICT sub-sectors and firms which have the greatest potential for ICT-based growth, most notably internet and software," the report states.
In particular, Europe lacks young leading innovators in these areas that could compete with corporations like Google, Apple, Amazon and Qualcomm in the US. The EU does not host comparably performing internet firms.
Similarly, when it comes to smart phones and tablets, US-based Apple and South Korea's Samsung are the leaders, whereas the European firms from this sub-sector, such as Finnish Nokia, report relatively lower performance in terms of revenue and R&D expenditure.
A single digital market in Europe?
The lack of a large integrated digital market in Europe is an impediment for commercialisation, the report stresses.
This is primarily due to language barriers, which hinder the development of some sectors in Europe such as web 2.0 or the e-paper industry. At the same time, Europe’s cultural differences could also be an opportunity to differentiate and create niches.
To underline the importance of information and communication technologies (ICT) and boosting the EU's competitiveness, the European Commission appointed Neelie Kroes in February 2010 as a special commissioner dedicated to the 'Digital Agenda'.
Kroes' five-year plan includes among other things:
- the creation of a new single market to remove all barriers to cross-border trade and licensing;
- improving the ICT standard-setting by reviewing the European Interoperability Framework; and
- boosting research and innovation by upping the ICT R&D budget by 20% annually.
Europe not lacking ICT ideas
Europe’s weakness compared to the US is not so much concerning the generation of new ideas, but rather further down the commercialisation path.
When attempting to bring ideas to market, EU firms face the lack of a single digital market, fragmented intellectual property regimes and lack of access to risk capital and strong ICT clusters with pooled labour markets. There are also too few advanced early (public) users and complementary industries in Europe.
Most recent studies identify a major problem for firms in Europe to create commercial value from their new technologies, to access early lead customers willing to take the high risk of first adoption, to mass customise and successfully brand their innovations.
Mergers and acquisitions are a common business practice in the new ICT ecosystem, particularly the takeover of small young startups by large incumbents. Most successful innovations typically come from new start-up companies, particularly the more radical type of innovations.
However, the start-up companies face problems accessing finance for their growth investments and as firms need complex combinations of different tools to provide ‘solutions’. They also require complementary assets such as a well established reputation or brand recognition. Therefore the most prevalent growth path for successful start-ups is acquisition by one of the incumbents.
Small firms are either acquired by one of the large incumbents when successful, or go out of business. Occasionally they rise independently to become a world leading innovator.