Europe’s ICT Startups Critical to Economic Growth, Difficult to Retain

Europe is catching up to the United States in areas such as idea creation and risk capital but lacks the means to retain its talent, according to a recent report from authors at the Imperial College Business School in London. In ICT innovation in Europe: Productivity gains, startup growth and retention,  the authors note that the fragmentation of the European digital market and the scarcity of skills and venture capital create growth constraints for the region’s smaller firms and negatively impact Europe’s ability to retain high-growth ICT firms.  

While conversations about European brain drain can cover a wide range of topics from academic insight into Great Britain’s emigrants to the broader ramifications of a European diaspora, generally speaking, Europeans are much more geographically rooted than Americans, writes UC-Berkeley economist Enrico Moretti for the Wall Street Journal.  Because of the uncertainty involved, demographic decline causes European communities to worry and obsess, just as it does nearly all communities. Typically, however, brain drain conversations involve the migration of individuals with potential, not full-fledged entrepreneurs. While losing educated workers may be expected, losing their already-established businesses, according to the authors, hinders Europe’s economic development. During the period from 2011-2014, 47 percent of successful EU startups end up being acquired by U.S. companies, according to the Startup Europe Partnership.

In the report, the authors identify the numerous ways in which ICT drives Europe’s economic growth and development.  Investments in IT, the authors note, have two key effects: direct impacts from increased capacity, and indirect impacts from management or organizational changes. Although firm investments in R&D increase in absolute terms as companies scale in size and revenue, the intensity of R&D investement per sales represent an inverse path, as young and small ICT companies lead considerably. ICT investments also drive Europe’s economic development: one-fifth of all economic growth in the EU during the period of 1995 to 2010 can be attributed to ICT investments. From the period between 2005 and 2010, this effect increased to one-third. Venture capital funding for London startups increased 20-fold between 2010 and 2014, making it one of the world’s largest tech hubs. Approximately one in four of the world’s accelerators are located on the Continent.

For many years, the problem seemingly facing European startups was a lack of innovation. Now, however, access to capital, primarily venture capital, is the main reason European startups find themselves coming to the U.S. Ultimately, the authors conclude that EU countries need to do more to further their efforts in funding and nurturing innovative startups and propose the following policy recommendations to do so:

• Expand and coordinate incubator and accelerator programs to strengthen the commercialization of ideas, including those that take longer to mature and materialize;
• On the country level, address systematic constraints to growth such as taxation, access to capital, bankruptcy law, and other sector-specific bureaucratic processes;
• Remove regulatory and entry barriers to allow firms to attempt to scale in one digital market of 500 million customers, as opposed to 28 separate ones; and,
• Connect and train Europe’s innovators.