This article was written by Thomas Scothern, Academic Associate at the LSE Undergraduate Political Review

Introduction 

The United States looms large over Europe, not just for its hegemonic military status or its cultural soft power, but for its ability to produce titans of technology. The so-called Magnificent Seven is a term used to coin the seven dominant technology firms of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, and it’s no coincidence that they are all American firms. In the race for the future of technology with the emergence of generative AI tools such as OpenAI’s ChatGPT or Google’s Gemini, Europe feels increasingly left in the tailwinds of the Silicon Valley giants. But why is this the case?

It would be unfair to deny Europe’s globally competitive multinational firms. The automotive behemoths of Volkswagen and BMW call Germany home, the oil titans of BP and Shell call the UK home, and the luxury powerhouses of LVMH and Chanel call France home. However, these firms all have a common underlying diagnosis: they are members of the old guard. Europe does not have technology giants able to compete effectively with its American counterparts. 

Sweden is the glaring exception to this rule. The Scandinavian country is second only to the United States in the number of unicorns – technology firms worth over one billion dollars – it produces per capita. Swedish success stories include music streaming colossus Spotify and fintech buy-now, pay-later firm Klarna. The unique concoction of a highly educated workforce, generous tax breaks, state grants to technology start-ups, and deep-rooted societal trust seems to have done the trick. However, Sweden is the odd man out of Europe, and its success has not been replicated convincingly elsewhere on the continent. 

The Scalability Problem 

The primary answer to Europe’s dilemma is scalability, hindered by three key factors: Europe’s heterogeneity, America’s deeper pool of capital, and the absence of a Silicon Valley equivalent. 

Firstly, Europe is heterogeneous: diverse in every conceptualisation of the word. The continent has over 200 spoken languages and around 50 sovereign states, ranging from the smallest state in the world, the Vatican, to part of the largest, Russia. It includes the wealthiest state in the World, Luxembourg, with a GDP/per capita of $132,800, and a state over eight times poorer with Ukraine’s GDP/per capita of $15,900. The sheer volume of nation-states presents nearly 50 distinct legal systems and regulatory frameworks for technology firms to navigate. These empirics may seem individually disjointed. However, when taken in tandem, Europe’s vast linguistic, economic, geographical, legal, and regulatory disparities make scaling technology firms across the continent acutely challenging. Across the pond, however, the United States presents as the near polar opposite, with comparative homogeneity. Over 90% of Americans can speak English to a high standard. Combined with a common underlying regulatory and tax framework, the US presents firms with a much lower barrier to scale than Europe. 

Secondly, the US has a deeper capital pool than Europe, fueled by a more jubilant economic outlook. A recent J.P. Morgan report highlighted the continued exceptionalism of the US economy with resilient consumer spending, GDP above pre-pandemic trend levels, and loose fiscal policy reinforced by Biden’s infrastructure and semiconductor spending. A contrasting IMF report paints the European picture in a much gloomier mood with stubbornly low productivity growth, persistent inflation uncertainty, and limited business dynamism, making Europe “fall short of its potential”. Thus, there is an evident divergence in the fortunes of the economies on both sides of the Atlantic, but with access to capital being the most shocking difference. 

Investors want to maximise their return on investment and, thus, will naturally favour an American economy with a more significant potential for return than its European rivals. Venture capital – which typically provides capital for higher risk, infant projects such as technology start-ups – held 46% of its global capital stock solely in the United States compared to 20% in Europe. This places European firms at a structural disadvantage, with less capacity and resources to scale at an early stage and reduced capital than American peers. Initial Public Offerings (IPOs) – where firms float on a stock exchange to access capital typically at a later stage of funding – for American technology firms were at a volume of over 4x higher and a valuation of 11.6x higher than European technology firms. Consequently, later-stage technology firms in Europe receive lower valuations than their US rivals and have less float on the stock exchanges, reducing access to crucial capital. Therefore, European technology start-ups suffer from reduced early-stage funding and later-stage IPOs compared to American rivals.

Third is Silicon Valley’s unique draw: its unparalleled concentration of capital, labour, and firms make the barriers to scale for technology start-ups lower than those of their European peers. Silicon Valley received 41% of all venture capital in the US in 2023, has the largest concentration of technology workers in the US, and has a dense concentration of technology firms with a combined market cap of $14.3 trillion. Therefore, Silicon Valley provides technology firms with the financing, labour pool, and technological spillover rivals provide to scale effectively. Europe lacks a hub with the same density of these factors.

The European Response 

European technology firms face a dramatic deficit in scalability compared to the United States. The European Union (EU) has produced a multifaceted, if not insufficient, response. The EU has pursued a two-pronged strategy to reduce regulatory burdens and to increase financial resources available to technology firms.

The landmark Draghi Report emphasises the need for the EU to cut red tape to foster competition and innovation. Eurochambres Business Survey revealed that 79.5% of entrepreneurs found “complex administrative procedures” to be a significant obstacle. A balancing act must be carefully struck between safeguarding consumer standards whilst streamlining regulations to ease unnecessary business burdens. To that end, the European Commission is ambitious: it wants to reduce administrative burdens by 35% for small and medium-sized enterprises (SMEs) by 2029. However, cutting red tape in isolation is insufficient to face the magnitude of the challenge of growing European technology firms; while it may reduce the burdens to scale, it does not increase the resources to scale. 

The EU has also proposed various resources to scale technology firms on European shores. The EU’s AI Innovation Package has provided €4 billion for European generative AI projects from 2024-2027; this pales compared to AI investment by Silicon Valley giants, whose spending topped $100 billion by late 2024 and is projected to top $250 billion this year. Generative AI is at the forefront of the technological race, and Europe has barely left the starting line while the US has lapped them several times over. The European Innovation Council (EIC) was established to scale breakthrough technologies, commercialising Europe’s world-leading R&D scene with over two million researchers and a global presence through institutions such as CERN, the world’s largest particle accelerator in Switzerland. The concern with the EIC is not in its founding premise or its impact on the technology firms it has aided in scaling, but instead with the limited impact it can have with a budget of just €10.1 billion over the 2021-2027 period. Compare this to the $100 billion one Taiwanese microchip manufacturer, TMSC, is investing in the US, or the $52.7 billion available to American semiconductor manufacturers under the Chips and Science Act 2022 passed under the Biden administration, and the European investment pales in contrast. Thus, the concern is not Europe’s inaction but the magnitude of its actions.

Therefore, the European response is rooted in the effective diagnosis of the problem, and the treatment plan is embedded with essentially the correct response. However, the fundamental issue remains simple: the size of the reaction pales compared to that of the US.

The Outlook 

Europe’s technology firms have not just fallen behind the United States: they never competed in the first instance. The American titans of technology have developed a firm foothold in global market share that looks set to remain entrenched due to a combination of Europe’s heterogeneity, capital availability, and Silicon Valley’s unique appeal. Admittedly, the EU’s attempts to bolster the European technology industry come from the right angle but lack the generational boldness and scope needed to compete with the US effectively. As a result, the future outlook for European technology firms looks set to remain in the shadows of its American rivals unless a large-scale shift occurs. 

Cover Image: Seat of the European Central Bank and Frankfurt Skyline at dawn by Daniel Vorndran; used under the Creative Commons Attribution-Share Alike 4.0 International license.