Obstacles and opportunities for a digital Europe

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Written for FutureEnterprise by Maria Logotheti.

A highly populated, culturally diverse union of over 500 million people, with high standards of living, advanced education levels and significant (if unequally distributed) technical and industrial infrastructure, the EU is, at the moment, the largest economy in the world, with close competition from the US and China.

In a rapidly changing global landscape, though, with China’s rapidly developing middle class, the increasingly significant role of India, Brazil and South East Asian economies, and the slow but steady rise of Africa, Europe’s dominance is hardly secure — especially when one considers its worrisome long term recession trends.

But what’s even more important, given the increasingly digital nature of the global economy, is the continued USA’s domination of digital entrepreneurism.

That the most widely used internet services come from the US (Google Search, Facebook, Twitter, YouTube, Amazon, Yahoo, PayPal, Ebay, Bing, Gmail) and that the top-10 several Chinese one’s (Baidu, Qq, TaoBao, Sina) but no European, is neither an accident, not a good sign for the EU’s digital competitiveness.

Of course, as Skype and Spotify (among others) have shown us, it’s not impossible for a European digital startup to grow big — only even for these, the biggest market (and eventual buyer in the former’s case) ended up to be the US. But even such success stories are still few and far between (and smaller scale) compared to the Silicon Valley situation.

As a digital economy, the EU has several shortcomings that it needs to overcome.

No centralized tech startup hub

While decentralization has its benefits, it has been proven time and again that tech startups thrive in specialized hubs. Even in the US, the overwhelming majority of entrepreneurial activity happens in the Silicon Valley.

While London, Paris and Berlin have seen significant startup growth, they still cannot compete in venture capital possibilities, tech company count, salaries and market reach to the Valley.

While peripheral hubs are always useful, and can cater to national and linguistic sub-markets, Europe needs a central, well funded, tech hub, that has the infrastructure required for high tech company growth, ample housing, shopping and entertainment opportunities (to attract young programmers), and business laws and tax-cuts that make it attractive for startup founders.

London could fulfill that role, but all the talk and uncertainty about the “Britain leaving the EU”, and a cultural disconnect between the UK and continental Europe, doesn’t help matters much (neither does the high cost of living, especially when it comes to rent — though the latter is an issue shared with the Valley).

Risk averse VCs

Big results require big bets — especially when your intention is to produce a global scale internet service, where the churn rate can be significant for many years before any profit is seen.

The problem is that European VCs (and, in equal measure, entrepreneurs too) are less willing to take big risks compared to their US counterparts, something which might make investing safer and the European market less prone to bubbles, but doesn’t promote early startup growth and tends to favor conservative, rather than disruptive ideas.

Tax incentives, EU funding programs and investment matching schemes, can all help encourage the kind of more aggressive VC funding and bigger visions of growth that are needed to compete with Silicon Valley’s funding opportunities.

Market barriers

While the EU leadership has done an admirable job all these past decades in unifying and coordinating EU-wide and national level market rules and regulations, there are still several pain points that need to be addressed for a truly united digital European market.

Here are a few examples:

• The quality of postal services and delivery infrastructure still varies widely among member countries, making cross-border eCommerce problematic. Whereas in the US (and thanks in part to distributed order fulfillment facilities) online retailers ranging from Amazon to small regional businesses can offer 1 to 2 day delivery services (or even same-day delivery in select areas), delivery times across the EU can come close to a full week or more. Long delivery times along with high delivery costs, make internet retail commerce problematic in the EU.

• Another user concern is the legal framework and legal recourse options with regards to consumer rights. This doesn’t only apply to damaged physical goods that need to be replaced or repaired, but also to things like reimbursement, dispute resolution, etc. concerning all kinds of digital services.

• Arbitrary barriers based on intra-EU nationality also hurt online services and digital commerce, with customers being refused service in EU-based online services depending on their country of origin, being charged more by foreign sellers (often much higher than the difference in local value added tax percentages would call for), etc.

Providing equal access and appropriate prices to citizens of all member countries when performing cross-border online transactions should be a mandatory requirement for digital businesses operating within the European Union — even if language barriers will still remain.

This EU-wide right to access should include digital IP rights and goods too (e.g. access to streaming content, digital music and video downloads, etc.). As it is today, consumers from one EU country traveling to a different EU country are often not even allowed to view streaming content (e.g. Netflix subscription) that they have already paid for in their country.

Unequally distributed digital infrastructure

The quality and quantity of critical digital infrastructure such as broadband speeds, next generation mobile networks, FTTH solutions, etc., can vary widely from country to country, and often between areas in the same country.

In order to improve the “multi-speed Europe” situation, the EU must continue its development programs and packages, while simultaneously increasing their inefficiency (due to lack of planning, bureaucratic delays, EU and national-level corruption, and other reasons).

As Europe in general has higher population density than the US, and fewer geographical obstacles to overcome, it should be easier for the EU to build a more equal and future-proof infrastructure landscape across its member states, something that is a prerequisite for a truly unified digital market.

Brain drain

Another area where Europe doesn’t fare well, is in retaining tech and entrepreneurial talent.

While the tech and communications industry is a  major economic driver for Europe, accounting for about 1/3 of the economic growth in EU (and bringing secondary benefits to many other sectors), the lack of systematic encouragement and enticing employment options see thousands of its most skilled graduates in IT and communications experts seek work in the Unite States.

Europe, then, pays the double cost, of paying to educate its scientists and tech workers, only to lose the best of them because of the brain-drain to the US.

And even when it comes to Europe’s startup success stories, a whopping 43% of them end up being acquired by US tech companies.

Conclusion

The EU is the world’s largest economy, but its lack of focus, coordination, opportunities and incentives when it comes to the digital economy and tech entrepreneurism cloud its future in an increasingly ICT dependant global economy.

EU policy makers need to prioritize the creation and continuous development of a sustainable digital entrepreneurship ecosystem capable of competing with the US and emergent world players, to avoid Europe become a second-tier player in the new digital economy.

FutureEnterprise

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