2. A Competitive Europe
2.4 Framing business opportunities
Europe is rich in ideas and talent but obstacles remain to it reaching its full potential. This requires a fit-for-purpose and forward-looking regulatory framework, higher institutional quality, risk capital, and completing the Single Market for research, education and innovation.
‘Good’ framework conditions are key enablers for innovative companies to flourish and for resources to be allocated efficiently.
Bureaucratic and often redundant requirements (red tape) to engage in economic activities and exchanges pose additional, often unnecessary, burdens on companies. Their impact is specifically relevant for companies in the R&I domain, characterised by higher risk and uncertainty over the outcomes.
Overall, the EU has improved the quality of framework conditions over the last decade, reducing costs related to starting and running a business and going through bureaucratic requirement, especially in lagging Member States.
However, there is still heterogeneity across EU economies, most notably in the quality of the institutions and the efficiency of product and labour markets and the quality of institutions. This suggests that there is still room for improvement, especially in the peripheral Member States in the east and south of Europe.
Disruptive and market-creating innovations have ‘high risk’ profiles which traditional finance is often not able to bear.
In the EU, markets remain mainly banking-driven, which means investment opportunities created by capital markets could be further explored.
The EU trails behind other major economies when it comes to transformational entrepreneurship. The large gap in terms of venture capital compared to countries such as the United States helps to explain this trend.
Venture capital funds raised in Europe are eight times less than in the United States (and the average fund size is five times smaller). The gap gets larger in late-stage financing, most notably when considering funds above EUR 250 million, with only 8 funds in the EU compared to 70 in the United States.
Companies use the acquisition of innovative start-ups as a strategy to reach higher rates of innovation and to access data and a talented pool of engineers and researchers.
In a period when the competition for talent in specific STEM fields – for example, AI – is fierce, acquiring start-ups, mergers and acquisitions enables larger companies to access a pool of talent.
US tech giants are the top acquirers of start-ups worldwide, accounting, for instance, for a total of 27 billion-dollar acquisitions since 1999, granting them access to new markets, and absorbing potential direct competitors. This strengthens their overall market dominance.
Around a third of European start-ups have been acquired by US companies, while Chinese acquisitions are on the rise, targeting mainly ‘next-generation IT’ and ‘energy-saving’ oriented companies.
Completing the Single Market for research, education and innovation can foster knowledge diffusion across the continent.
When it comes to R&I-related activities, three main barriers to the internal market can be identified: i) limited knowledge circulation; ii) limited innovation diffusion; and iii) gaps in the quality and efficiency of R&I systems.
Europe needs a fit-for-purpose and forward-looking regulatory framework encouraging innovation to support social, economic and environmental transitions.
Overall, while Europe is progressing towards a fit-for-purpose and forward-looking regulatory framework, there are still strong differences between EU Member States and the challenges ahead.
The innovation principle has been introduced to ensure that EU legislation is analysed and designed to encourage innovation to deliver social, environmental and economic benefits and help protect Europeans. It is integrated in the EU Better Regulation approach to help to enact smart, future-oriented regulation.