From Revolut to TransferWise, the success stories of European startups seem to reflect a healthy spirit of innovation on the continent. However, research from consulting firm McKinsey suggests that Europe could do much better.
While capital spending on technology across Europe is at a high level, with $23 billion invested last year, the report shows that not enough attention is being paid to areas of innovation that can drive real growth – in particular cutting-edge technology and digitalisation.
Klemens Hjartar, a senior partner at McKinsey, told ZDNet that European companies tend to invest in tangible assets such as machinery and buildings, perhaps as a legacy of the continent's strong position in manufacturing.
“But we must recognize that intangible assets, such as data and software, are the real investments that will put Europe at the forefront of the next wave of innovation,” he said.
Software and data, but also artificial intelligence, IoT, blockchain, quantum computing or synthetic biology: all these digital opportunities could give Europe an additional percentage of productivity growth, according to McKinsey analysts.
However, the continent invests 1.7 percentage points of GDP less than the US in research and development (R&D) for these key assets.
This is not a problem at the government level. Europe has the largest share of public spending on R&D. “Our startups, however, have a much smaller share of R&D spending,” Hjartar said. Europe’s share of R&D in software and IT is about 8% of the total. “However, R&D is what takes us to the next phase of innovation,” he said.
Private investment in Europe amounts to 19% of the global total, far behind China at 24% and the US at 28%. The result is, obviously, that both countries are far ahead of the continent when it comes to innovation and successful digital transformation.
Apart from the lack of funding, this is also due to the fact that Europe is made up of many separate countries and that despite its efforts to create a single market, fragmentation is still part of its identity.
In this context, startups face the challenge of growing in a continent that has different national regulations and structures – a task much more complex than in large homogeneous markets like China or the US.
Thus, over the past 20 years, the share of European “superstar” businesses – the 10% of companies with annual revenues of more than $1 billion – has halved.
But while the effects of fragmentation are evident, Hjartar explained, Europe could leverage its national differences to use them as a strength.
“We have pockets of leaders spread across the continent,” he said. “We have 5.7 million software developers – compared to 4.4 million in the US. We have all the building blocks to succeed, but now the biggest hurdle is connecting them together with an ambitious vision.”
Ultimately, he continued, Europe cannot rely on the excuse that it is made up of several different countries to justify the situation. The real issue at stake is that a new innovation-.
But to regain its footing, Europe will need to demonstrate a deeper change in mindset. “We come from a position of strength, but now we need to be much bolder and more ambitious,” Hjartar said.
