Why are so few high-tech companies based in Europe?

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June 8 2011 5:12 PM

Good at Wine, Bad at Computers

Why does Europe suck at technological innovation?

France's president Nicolas Sarkozy. Click image to expand.
The French government has banned broadcasters from using the words Facebook and Twitter

The French government has banned television reporters from using the words Twitter and Facebook when referring generically to social media, because all that free advertising gives the companies an unfair advantage. * European competitors have a long way to go before posing a challenge to the social media giants, though. According to Bloomberg, only seven of the world's best-performing 100 tech companies are based in Europe. Why is Europe so bad at technology development?

Heterogeneity, among other things. European policy makers have labored for decades to integrate into arguably the largest economy in the world. From the perspective of a young software company, however, Europe is still 27 very different markets. That means a new social media site in, say, Norway, has just 5 million potential users—about the same number you could find in Alabama—before it's forced to translate its appeal to different languages and cultures. It would need a new interface, a different marketing strategy, and probably different advertisers, not to mention the difficulty of dealing with new regulations and multiple tax schemes. This situation lends itself to a number of smaller companies dominating national markets, rather than the high-tech behemoths that rule the United States and Asia. To be fair, Europe has produced a few tech giants, such as global business software mammoth SAP. But, by any measure, its technology output is out of step with its overall economic might.

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Diversity isn't the only problem. Euro-born technology entrepreneurs who have weighed anchor and set up shop in the New World offer a variety of justifications for their move. Silicon Valley is uniquely appealing, because it offers a deep talent pool and nearby companies that provide consulting or infrastructure support to fledgling tech businesses. More importantly, the Valley is where the money is. Start-up CEOs in Northern California can spend weeks meeting with venture capitalists without boarding a plane. Asian locales such as Singapore, Taiwan, and Bangalore also pack lots of financial and human capital into small areas. Despite claims from Bavaria and Ireland, Europe doesn't yet have anything like Silicon Valley.

Free-marketeers also blame strict labor laws in parts of Europe. In countries such as France and Germany, hiring and firing employees can be complicated, which makes rapid expansion difficult and risky. According to some, the problem is acute in the tech sector, with its high job mobility and fast-growing competitors.

The technology gap between Europe and the United States is nothing new. In 1967, Time magazine published an article in which Western European leaders fretted about the state of innovation in their home countries. While many of the "modern" products in question are now archaic—instant coffee and condensed milk are on the list—the seeds of the current European deficit were already recognizable. The 1960s Europeans relied on U.S.-made typewriters and telex machines, and U.S. companies built three-fourths of the computers in Europe.

The Time article blames the problem primarily on small markets, as do today's observers. But it also mentions tiny research budgets, noting that a lot of U.S. innovation spills from defense initiatives into the commercial market. (Modern commentators have made the same argument.) Lastly, the author perceived a cultural problem: Europeans, in his view, find theoretical or laboratory achievements more important than engineering.

Fourteen years ago, Bill Gates warned of the technology gap, noting that European businesses lagged far behind the United States in Internet utilization. The European Council attempted to address the problem with the 2000 Lisbon Strategy, a 10-year program of education and research funding initiatives. At the end of the decade, most viewed it as a failure.

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Explainer thanks Andrew Bartels of Forrester Research.

Correction, June 9, 2011: This article originally suggested the French government imposed a total on-air ban on the words Facebook and Twitter. In fact, reporters may still use the words when referring specifically to the companies. ( Return to the corrected sentence.)