2. A Competitive Europe

2.2 The state of business dynamics in Europe

The revival of business dynamism would deepen creative destruction and productivity growth in Europe. It means creating the right conditions for innovative start-ups to grow and lead the way in solutions that match the urgency of the challenges ahead.

While R&I is the engine of long-term productivity growth, the capacity of an economy to invest in R&I is shaped by its economic structure.

A greater weight of knowledge-intensive sectors in the economy correlates with higher R&D investments and productivity performance.

While we observe a generalised transformation towards knowledge-intensive services, differences persist among EU Member States.

The EU’s industrial strategy is key to facing deindustrialisation trends in the EU and increasing its long-term competitiveness while addressing the need for a transition towards a climate-neutral and sustainable economy.

Declining business dynamism may hamper productivity growth.

Stronger business dynamism can lead to creative destruction in the economy as resources move from less-productive to more-productive businesses and hence increase overall productivity growth in the economy. However, firm entry rates have been on the decline since 2000 in both Europe and the United States.

The presence of young companies in EU Member States ranges from more than half in Greece to only slightly over 10 % of enterprises in Belgium.

Most jobs created by new firms emerged in less-productive sectors of the economy. 

Considering the link between productivity and wage-setting, it seems that most jobs created by new firms were in lower-productivity sectors and hence, in principle, were lower-paid jobs. This is the case for countries like Spain, Portugal, Greece and Austria, where over 80 % of the new jobs are in firms in less-productive sectors. 

However, recently, in some countries, such as Lithuania, Slovenia and Italy, there has been progress towards job creation in more-productive sectors.

Europe’s scaling-up performance needs revamping.

The share of high-growth enterprises in Europe has increased. Slightly more than 1 in 10 enterprises in the EU are high-growth enterprises, although only a small share is ‘high-tech’.

The EU’s scaling-up performance lags behind the United States and China. As of 2018, there were 1.3 scale-ups per 100 000 inhabitants in the EU28 compared to 7 scale-ups in the United States. For each private unicorn in the EU, there are seven in the United States and four in China.

There are considerable intra-EU differences in entrepreneurial quality and motivation.

Four EU Member States are in the ‘top 10’ in the Global Entrepreneurship Index. However, intra-EU differences are significant, especially between the top and the lowest performers.

In the global technological race, Europe could benefit from developing its start-up ecosystems further to reach a greater critical mass.

The EU has seven ecosystems in the world’s ‘top 30’ start-up ecosystems compared to 12 in the United States and only three in China.

The top ‘ecosystems to watch’ in the EU are notably present in fintech, cleantech, agritech and advanced manufacturing and robotics.

The presence of zombie firms is still problematic in some EU Member States.

Rigidities in the market may lead to capital and resources locked in so-called ‘zombie firms’. This means that these resources could have improved economic performance if they had been redirected towards higher-productivity firms.

Overall, the shares of zombie firms have increased in the aftermath of the crisis. While there has been progress in some countries in recent years via, for example, a more effective deleveraging process, in others, zombie firms continue to rise, especially in the services sector.

A ‘tech-with-a-purpose’ approach would leverage R&I to create the solutions that match the urgency of the environmental and social challenges of our time.

While innovation has resulted in greater choice from more products and services, there is an ongoing debate as to whether all innovation has created value (and proven its relevance) for society.

Activating a global mindset which directs innovation activities towards solutions that effectively address societal challenges is demanding but certainly necessary and collectively achievable.

Source: DG Research and Innovation, Chief Economist - R&I Strategy & Foresight Unit based on Eurostat and OECD data
Notes: Knowledge-intensive sectors includes high-tech manufacturing, medium-high-tech manufacturing and knowledge-intensive services. Thousands PPS€ per worker at 2005 prices. Data missing for MT and LU. EU: 2015.
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Source: DG Research and Innovation, Chief Economist - R&I Strategy & Foresight Unit, based on Eurostat (online data code: bd_9pm_r2)
Notes: Enterprises with at least 10 employees at the beginning of their growth and having an average annualised growth in the number of employees greater than 10 % per annum, over a 3-year period.
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Source: DG Research and Innovation, Chief Economist - R&I Strategy & Foresight Unit, based on CBInsights-Unicorn tracker, accessed on 24 January 2020
Notes: A private unicorn is a private company with a post-money (i.e. ‘after funding’) valuation of more than USD 1 bn.
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Source: JRC estimations based on Orbis data
Notes: A zombie firm is a firm that is at least 10 years old and has an interest coverage ratio below 1. This latter term suggests that the firm does not make enough profit to pay debt obligations on bank loans. This is the OECD definition. The figure reports the variation over time of the share of zombies in each country in our sample. We report three-year averages in manufacturing and services in the periods: 2008-2010 (left), 2011-2013 (middle), 2014-2016 (right). Countries are sorted by the zombie shares in the figure according to the last period in 2014-2016.
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2.3 Investing in our future