Com­men­tary europe’s sur­pris­ing tech suc­cess en­com­passes Baltics, too

The Baltic Times - - COMMENTARY - Wil­liam Echik­son

Europe is of­ten viewed as a dig­i­tal lag­gard, run­ning far be­hind the fron­tier-push­ing United States and Asia. But ap­pear­ances are de­ceiv­ing. In fact, ac­cord­ing to a new re­port by the Lon­don ven­ture capital firm Atomico, Euro­pean star­tups are now tak­ing the lead in ar­ti­fi­cial in­tel­li­gence, build­ing new tech hubs, and draw­ing in­vest­ment from tra­di­tional in­dus­trial stal­warts. Last year, a record-set­ting $13.6 bil­lion dol­lars was in­vested in Europe’s tech sec­tor, com­pared with $2.8 bil­lion dol­lars in 2011.

Gone are the days when Europe’s tech sec­tor largely com­prised con­sumer-ori­ented ecom­merce busi­nesses – of­ten bla­tant knock­offs of suc­cess­ful US com­pa­nies. To­day, Europe is the home of real pi­o­neer­ing innovation, led by what Atomico calls “deep tech” – the kind of ar­ti­fi­cial in­tel­li­gence de­vel­oped by Google’s Deep­mind. Deep tech ac­counted for $1.3 bil­lion dol­lars of Euro­pean ven­ture in­vest­ments in 2015, de­liv­ered in 82 rounds, up from $289 mil­lion dol­lars, de­liv­ered in 55 rounds, in 2011.

Europe’s new tech hubs are emerg­ing in un­ex­pected places, far be­yond the early hotspots of Lon­don, Ber­lin, and Stock­holm. Atomico pin­points Paris, Munich, Zurich, and Copen­hagen as the cities to watch over the com­ing years. The French capital, Atomico points out, is al­ready start­ing to chal­lenge Lon­don and Ber­lin in terms of the num­ber and vol­ume of ven­ture­cap­i­tal-fi­nanced deals.

Europe’s tra­di­tional in­dus­tries are now awak­en­ing to tech. Twothirds of Europe’s largest cor­po­rates by mar­ket cap­i­tal­iza­tion have made a di­rect in­vest­ment in a tech com­pany. One-third of those com­pa­nies have ac­quired a tech com­pany since the be­gin­ning of 2015.

For­eign firms are also rush­ing to take ad­van­tage of Europe’s tech tal­ent. Google, Face­book, and Ama­zon have all an­nounced ma­jor ex­pan­sions of their Euro­pean tech hubs. Trans­ac­tions worth more than $88 bil­lion dol­lars took place last year – com­pared to just $3.3 bil­lion dol­lars in 2014 – in­clud­ing Softbank’s pur­chase of the Bri­tish semi­con­duc­torde­sign firm ARM and Qual­comm’s $47 bil­lion dol­lar pur­chase of NXP Semi­con­duc­tors.

An­other study, by the Bos­ton Con­sult­ing Group, points out that many small ex­port-ori­ented Euro­pean Union Mem­ber Coun­tries – namely, the Benelux, Baltic, and Nordic coun­tries - rank well above the US in so-called “ein­ten­sity,” which cov­ers IT in­fra­struc­ture, In­ter­net ac­cess, as well as busi­nesses, con­sumer, and gov­ern­ment en­gage­ment in In­ter­net-re­lated ac­tiv­i­ties.

These “dig­i­tal fron­trun­ners” gen­er­ate about 8% of their GDP from the In­ter­net, com­pared to 5% in Europe’s Big Five (Ger­many, France, Italy, Spain, and the United King­dom). Dig­i­ti­za­tion is ex­pected to gen­er­ate be­tween 1.6 mil­lion and 2.3 mil­lion more jobs than it elim­i­nates in these coun­tries be­tween 2015 and 2020.

Of course, Europe’s tech sec­tor still has its weak­nesses, re­flected in its fail­ure so far to pro­duce a tech gi­ant to ri­val the be­he­moths of Sil­i­con Val­ley. While Euro­pean tech en­trepreneurs find it as easy as their Amer­i­can coun­ter­parts to raise startup funds, US firms en­joy 14 times more later-stage capital. That fund­ing gap would dis­ap­pear, if Euro­pean pen­sion funds al­lo­cated just 0.6% more of their capital un­der man­age­ment to ven­ture in­vest­ments.

A re­lated weak­ness is the lack of a true Euro­pean sin­gle dig­i­tal mar­ket. In the US or China, tech en­trepreneurs gain im­me­di­ate ac­cess to a mas­sive mar­ket. In Europe, they still must nav­i­gate 28 dif­fer­ent con­sumer mar­kets and reg­u­la­tory regimes.

To be sure, the Euro­pean Com­mis­sion promised to cre­ate a sin­gle dig­i­tal mar­ket two years ago, es­ti­mat­ing that it could boost the EU econ­omy by €415 bil­lion Eu­ros ($448.5 bil­lion dol­lars) an­nu­ally. But Ho­suk Lee-makiyama and Philippe Le­grain of the Open Po­lit­i­cal Econ­omy Net­work re­cently de­liv­ered a scathing as­sess­ment of the re­sults. Europe’s “sin­gle dig­i­tal mar­ket,” they ar­gue, cur­rently amounts “to a jum­ble of out­dated, cor­po­ratist, coun­ter­pro­duc­tive in­dus­trial poli­cies that fa­vor pro­duc­ers over con­sumers, big com­pa­nies over small, tra­di­tional in­cum­bents over dig­i­tal star­tups, and EU firms over for­eign ones.”

In­stead of lib­er­al­iz­ing, the EU wants to reg­u­late. For ex­am­ple, it is work­ing to ban com­pa­nies from re­fus­ing on­line sales (ex­cept for copy­right rea­sons) or set­ting dif­fer­ent prices on the ba­sis of a cus­tomer’s home coun­try. Other dan­ger­ous pos­si­bil­i­ties – such as an ef­fort to reg­u­late data own­er­ship, ac­cess, and usability – lie on the hori­zon.

De­spite these risks, the over­all trend in Europe’s tech sec­tor is a pos­i­tive one. A new ap­petite for risk seems to be sweep­ing the con­ti­nent; Atomico re­ports that more than 85% of founders say it is “cul­tur­ally ac­cept­able” to start one’s own com­pany. Add to that deep re­search tal­ent – five of the top ten global com­puter sci­ence fac­ul­ties are within the EU – and Europe’s start-up boom looks sus­tain­able.

Po­lit­i­cally, too, there is rea­son for op­ti­mism. Europe’s dig­i­tal fron­trun­ners are be­gin­ning to or­ga­nize into a po­tent force, with 16 small EU coun­tries, from Den­mark to Ire­land and Es­to­nia, hav­ing formed a pro-in­ter­net group. To­gether, these coun­tries have urged the EU to ban data-lo­cal­iza­tion re­quire­ments.

At a time when the US is pur­su­ing pro­tec­tion­ist, in­su­lar, and back­ward-look­ing poli­cies, Europe is step­ping up as an in­no­va­tive and for­ward-look­ing eco­nomic force. Wouldn’t it be ironic if, as now seems likely, it is the sup­pos­edly back­ward EU that ended up lead­ing the way in un­lock­ing the In­ter­net’s true eco­nomic po­ten­tial?

Wil­liam Echik­son is As­so­ciate Se­nior Fel­low and Head of the Dig­i­tal Fo­rum at the Cen­tre for Euro­pean Pol­icy Stud­ies in Brus­sels

Wil­liam echik­son

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