Europe has been enormously unsuccessful in creating substantial digital businesses for over three decades. Rob and Jackie sat down with David Evans, chairman of Market Platform Dynamics, to discuss why it’s imperative that Europe ends this ‘digital winter’.

Mentioned

• David S. Evans, “Why Europe Must End Its 30-Year Digital Winter to Ensure Its Long-Run Future,” (SSRN, April 2024).
• Robert D. Atkinson and David Moschella. Technology Fears and Scapegoats: 40 Myths about Privacy, Jobs, AI, and Today’s Innovation Economy, (Palgrave Macmillan, 2024).

Auto-Transcript

Rob Atkinson: Welcome to Innovation Files. I'm Rob Atkinson, Founder and President of the Information Technology and Innovation Foundation.

Jackie Whisman: And I'm Jackie Whisman. I head development at ITIF, which I'm proud to say is the world's top-ranked think tank for science and technology policy.

Rob Atkinson: And this podcast is about the kinds of issues we cover at ITIF from the broad economics of innovation to specific policy and regulatory questions about new technologies. So if you like this, if you're into it, please be sure to subscribe and rate us.

Jackie Whisman: Today we're talking to David Evans, who is the chairman of Market Platform Dynamics, founder and publisher of Competition Policy International and managing director at the Berkeley Research Group. Dr. Evans is an economist whose work focuses on entrepreneurship, platform businesses, the digital economy, and antitrust economics. He's the author of more than 200 professional articles and nine books, including a gold medal winner on these and other topics, and we're happy to have you here. Welcome.

David Evans: Well, thank you very much. Good to be here.

Jackie Whisman: So today we're focusing on two articles that you wrote recently about European digital innovation or maybe lack thereof. One of them titled Why Europe Must End Its 30-Year Digital Winter to Ensure Its Long-Run Future. Describe for our listeners what their digital winter is and how you defined it, why it matters.

David Evans: So the digital winter has gone on for about 30 years, so if you go back to 1995 and take it all the way through the present, Europe has been remarkably unsuccessful in spawning digital businesses. At the moment, Europe accounts for about 21% of the world's GDP and accounts in terms of market value, less than 1% of significant digital businesses. And what is striking about that is that over the 30-year period of time where those digital businesses have started in the US, but also all sorts of other places in the world, if you look at businesses that have a market cap more than $10 billion, Germany hasn't created any, nor has France or Spain or Italy, and those are the four big economies in Europe. So Europe has been remarkably unsuccessful in creating digital businesses and that winter has occurred over a period of time where Europe would seem to have had some advantage.

So where did the World Wide Web get invented? Well, it got invented in Switzerland at CERN by Tim Berners-Lee. So that was back at around 1990. If you take a look at the mobile revolution, which was the next big thing that has happened in the digital world. In the mid 2000s, 2005, 2006, Nokia was one of the largest smartphone manufacturers in the world. Symbian was the dominant operating system supporting apps in the world, had an enormous advantage there together with the fact that Europe has been over a long time, very, very successful in digital.

And then you fast-forward to let's say the present or fast-forward a few years ago, Europe has about 28% of the academic citations to artificial intelligence articles. So an enormously, a robust group of academics in Europe who focused on AI, who know that inside out. Yet if you look at where Europe was as of the start of the latest AI revolution in early 2023, it was completely absent. So the digital winter I described is a 30-year period of time where Europe has been enormously unsuccessful in creating substantial digital businesses while not just the US but other parts of the world have done so.

Rob Atkinson: David, that's a good list. You could also add into that Skype.

David Evans: You could add Skype into that. Exactly.

Rob Atkinson: Which does anybody use Skype now? One of the things you mentioned that I 100% agree with it, this is also perhaps, one might actually go back a little bit farther in time. The great book by Jean-Jacques Servan, The American Challenge came out in the 60s. It was really about the Europeans losing out to the mainframe and then a mini computer challenge and I guess mainframe challenge at the time, but they never really could get computer companies either. It wasn't just software, it was hardware as well.

David Evans: Well, I'm not sure I entirely agree with that. So if you take a look at the PC revolution, Europe actually was successful at the time in creating a significant chip manufacturer. They were successful at creating SAP. So SAP is an enormous software company that supported not just mainframes, but also became very important for the PC and server revolution as well. So if you go back to the 1970s and 1980s, Europe actually did create some businesses that they're not Intel, they're not Microsoft, but if you look at them today, they're companies that have a market cap of some cases 200, $300 billion. So they're not Microsoft or Intel, but they're pretty successful companies.

So I date the digital winter is really starting sometime around the mid-1990s. We can go back a little bit earlier, but what is absolutely striking is over that 30 year period of time, but also obviously going into the future now with the AI revolution as well, Europe is just nowhere to be found. And I just want to make one point on this because it's easy to compare Europe to Silicon Valley and Europe to the US and say, yes, the United States has been very successful and had all these advantages with Silicon Valley and so forth.

But what is remarkable is if you look around the world, you see Grab, a company that started in Malaysia becoming the super app for the highly Southeast Asian market with all sorts of different applications from different payment methods, digital payment methods to obviously to ride-sharing and so forth. You look at China, so the internet revolution in China with a Alibaba and Tencent and Baidu and other companies like that. That didn't arise as a result of state-owned companies or the communist party basically deciding that's where they wanted to go. Those were all companies that arose in China as a result of entrepreneurship. And one of my favorite facts that I uncovered in the paper is when Alibaba, which is one of the greatest e-commerce platforms in the world now, when Alibaba started as a startup, where did it get investment capital? Well, it got investment capital from the Wallenberg Swedish family fund. So Europe was investing in Alibaba, which became a rock star in the digital world, but obviously wasn't investing in European companies.

Rob Atkinson: It's interesting, I wrote an article over Covid. I was asked to write an article why the US doesn't have telecom equipment leadership anymore, Nortel and obviously Lucent. I dug deep into the Wallenberg and they were actually one of the reasons why Ericsson did well, because they had a very long-term sort of public oriented investment strategy compared to Lucent, which was how do we make money this quarter even by selling out the company. So it's interesting that Wallenberg did that. Even though they're not sort of short-term capitalists. They must have not seen the opportunities in Europe.

David Evans: I think that's right. There are obviously a lot of players in Europe that didn't see opportunities, but the people who have seen the opportunities globally are not the big companies but entrepreneurs. I mean, you look at China, you look at what's happening with Mercado Libre in Latin America, which is a very successful e-commerce platform for Latin America, including Brazil. You look at Africa, you look at South Asia, there are just a lot of companies that were started not by big companies, but were started by entrepreneurs. That really has been the story of the digital revolution and the digital transformation that has swept around the world. It's basically been largely entrepreneurs that have driven it. Entrepreneurs getting investment capital from VCs and from others and really, really becoming very, very successful.

Jackie Whisman: Your article raises and dismisses several common explanations for the digital winter. Can you describe those?

David Evans: I would characterize Europeans as they've been very good at identifying excuses or reasons why they haven't been successful, and that tends to guide them on, well, we need to fix this problem or that problem. And I think all the problems, I'll start listing them in a second, but I think all the problems that have been identified, they're real problems and they've held Europe back. The problem is that while I think they're good at explaining why Europe hasn't been as successful as Silicon Valley, what they're not capable of doing is explaining the null set, explaining the sheer lack of country after country in Europe as a whole in creating digital leaders. Take fragmentation. If you're a startup, it's a bear in Europe blowing out a startup that's going to serve Europe because the countries are still fragmented. They have different regulations. Historically, they've had different cultures and languages, although that's been reduced over time, different banking regulations and so forth, and that's definitely an obstacle.

But go back to Grab. So you think about Grab, which operates in 14 countries in Southeast Asia, countries like Vietnam and Malaysia and so forth, Indonesia. They're fragmented, they have different regulations, different cultures, different languages and so forth, yet they've managed to make a go of it. So fragmentation is a problem, but on the other hand, who's best suited to launch digital businesses in Europe and deal with the fragmentation problem? It should be European entrepreneurs. You have a whole group of young people in Europe that are multilingual and accustomed to working in different environments in Europe. They're the ones who should have been successful at starting businesses in a fragmented environment as opposed to what's actually happened, which is companies start elsewhere in the world, they go to Europe and somehow miraculously a year or two after they start, they're able to go into Europe and deal with this fragmented environment. You take a look at Uber or other companies like that, they've been able to go to Europe and start in different places and become successful.

Jackie Whisman: And then you get to the real issue is their embrace of digital regulation rather than innovation. Can you say more about that?

David Evans: So one of the things I've been very careful in the articles I've written is not to turn this into a debate about the Digital Markets Act and the Digital Service Act and the attack on big tech, and the reason I've tried to not focus on that so much is the digital winter obviously predates that. One can debate, are there problems that those acts, legitimate problems that those acts deal with? Well, one can debate that and maybe there are, maybe there aren't. I think the larger point is really a question of a focus and how you allocate your time. You look at what's happened in Brussels and Europe over the last, let's say five years or so. The focus has been on digital regulation and you can argue whether that should have been a focus or not, but the focus has not been on the big problem, which is why are none of these companies that they're talking about regulating European? That's not a question of they're regulating US companies.

The issue is why aren't there European companies that are big and successful? The big problem that Europe faces, if you're interested in kind of the long-term economic future of Europe, the big issue is why has Europe failed to create digital businesses, which as I argue in the paper, is the canary in the coal mine, not just for digital, but the canary in the coal mine for all sorts of other cutting edge technology. So what we're seeing in digital is also true for example, in electronic vehicles and all the innovations that go into that. 20 years ago, we all think that Tesla and these companies just appeared overnight, but a lot of startups and innovation in that area started in the US and China 15, 20 years ago, but did not start in Europe. You have that same situation with other cutting edge technologies where it's not just digital but it's other cutting edge technologies where Europe is lagging behind and going back to EVs, is in a situation where there's now a risk to the European automobile industry.

So the reason this is a very important problem is because unless it's solved, Europe is going to be in the same predicament not only with digital but other cutting edge technologies 10 to 20 years from now. Going back to your question on the focus on digital, the point isn't that they shouldn't think about regulation. The point is that so much of the effort, so much of the thinking is focused on regulation and not solving one of the most important problems that Europe has for ensuring its long run future that the focus on regulation is just crowding out other things that European policy makers really ought to be thinking about and focused on.

Rob Atkinson: So it's interesting you say that. Let me share two anecdotes. One was, I was talking to a German official and anecdote is not data, but he said to me probably 10 years ago, so when AVs were being really thought about, he said, "Well, the German attitude towards AV and AV regulations, we'll let the Americans go first and then learn all the mistakes from them." The problem with that is when you go first, you can gain first mover advantage that builds upon itself. And so they saw the Americans, for example, as these crazy cowboys, we would never let these technologies be deployed or tested on our roads and that was the result.

The second was, I remember years ago, again, 10 years ago I had lunch with a colleague at the European embassy, the EU office here in DC who was in charge of thinking about AI and all. And this person was going back to Brussels and we're like, oh, this is fantastic, and they were going to be working on an AI employment and development strategy. And I was very enthused and nothing really ever happened. It was sort of like a couple of people down in Luxembourg and not even in Brussels trying to do something like that. It just seemed like they just weren't thinking about that.

David Evans: The story on AI I think is absolutely striking and it's one of the dynamics that's gone on in Europe in the last five, six years that I think really provides a lot of insights into the problem. So back in 2018, the European policymakers recognized that AI could be a big thing and that they were way behind the US and China. So 2018 there was an initiative started by the European Commission, big announcement where the objective was to become a global leader in AI in five years time in the future. There was talk about public investment and stimulating private investment and so forth, but it was all layered together with, but we're going to make this European and we're going to focus on ethical AI and so forth.

Then you fast-forward from 2018 to the start of 2023, five years later and Europe is nowhere to be found. There was at the start of 2023, not a single significant European, and I'm including the UK in there, not a significant European player in the AI space. They weren't responsible for any of the foundational models. They really just weren't significant. We're hearing now about Mistral in France and startup in Germany, and those may be successful in the future, but at least in terms of who are the big players in that space as of the start of 2023, the AI revolution is starting. Europe is not only not a global player, they have a trivial share of the patents granted in AI, they have a trivial share less than 20% in private investment in AI. Europe was nowhere to be found, and I think that's interesting both because as has been true in Europe repeatedly over the last 30 years, European policymakers recognize the existence of a problem, but they come up with solutions that just don't work.

Rob Atkinson: I can't be on a podcast even my own these days without putting a plug into my new book that I coauthored with David Moschella called Technology Fears and Scapegoats: 40 Myths About Privacy, Jobs, AI, and Today's Innovation Economy. The plug is when we talk about Europe and AI and this report and some of the myths that they've and us have gotten into, but really at the end of the day, it seems to me that I just wonder whether fundamentally social democratic nations can get this right. Now obviously we'll talk a little bit about European politics in a moment, but they really are social democrats and the social democrats in general. And I'm not taking a particular party, but the orientation is really about how do we tame, how do we make it so that the capitalist system doesn't create or add to problems as opposed to also saying, how do we spur and enable the capitalist system to drive innovation? Would you agree with that assessment?

David Evans: I think that's tied to a general distrust in Europe, whether it's just social democrats or more broad, a distrust in Europe of markets, an embrace of regulation which is partly a reflection of distrust in markets, but also a desire for living in a less risky world. This isn't so much a, necessarily a social democrat issue, but infused European culture. Obviously there are many exceptions I'm sure is an aversion to taking risk and the only way you get dynamic competition and you get successful companies in the long run is for lots and lots of entrepreneurs to take risks, most of whom are going to fail and some of whom are going to succeed. That's the lesson not only of digital, but that's the lesson of electronic vehicles and that whole sector, one can add lots of other examples of that. I want to just say one thing.

I take your point on the social democrat, but I think it's important for us as Americans to kind of step back and say, well, why do we care about this? And I think the reason we care about it is Europe is a large collection of democratic countries. It's an ally for the United States, and it's a part of the world that we want to be successful. We want the economies to be successful, we want the societies to be successful, and therefore I think it's in our interest as Americans to want this problem to be cracked. But the problem is extraordinarily serious now. Europe has talked about this now for 30 years, but if you look forward to the next 10 or 20 years you have in Europe the long-term effects of slow productivity growth. You have a long, long period of lack of innovation and basic industries in Europe that are now under international pressure.

But then on top of that, you have a plummeting working age population and you need a working age population in order to support the aging population and to support all the social welfare programs. And then on top of that, you have the further issue with Europe that unfortunately defensive spending is going to have to increase because Europe is under significant threat now as a result of what's happening in Russia. So the current situation in Europe is really not sustainable in the long run. Something needs to happen. Obviously we're seeing the political turmoil to some extent in Europe, people trying to figure out what to do about that, but Europe needs to solve this problem because otherwise in 10, 20 years, Europe is going to be in a very, very difficult situation and is not going to be able to sustain even the current relative level of living standards or sustain the social programs and so forth. So these are problems they have to solve and there needs to be something that happens in order to be a wake-up call to jumpstart what happens in Europe, in my view.

Rob Atkinson: So David, I would agree with that 100%, but I would add one other key factor. It is in the US interest for that, and it's because Europe looks at its, let's be honest, as you said, it's digital winter, its failure in the space and in part it lashes out against the US. Let's put taxes on you. Let's break up these companies, let's fine them gazillions of dollars. Let's put in the, there's a blowback to the US and in some ways to the global innovation system because of Europe not getting this right and feeling frustrated and angry I think, and frankly protectionist. And so it's in everybody's interest in the West to have Europe succeed here.

David Evans: I agree with that. And also there's a tendency on the part of some commentators to focus on some of the current really good aspects of Europe. The lifestyle is great. There's a wide social safety net. People don't have to work as hard. They get to take vacation time and so forth and point to that and say, gee, Europe is great and we should really emulate Europe. And unfortunately the reality is the answer is no. We don't want to emulate Europe because Europe is now has been and will continue to be on a path that is not sustainable for Europe. To the extent that we emulate some of the things, some of the decisions that European governments and societies have made over the last 10, 20 years, that would put not only the United States, but other parts of the world that say let's be like Europe potentially on a bad path as well.

Rob Atkinson: So to close you raised the issue of sort of risk of us becoming Europe. And I do think there's to me, to us, there's a whole risk of EU-ization, if you will, of US digital policy. You see a lot of people, particularly on the left in the US who want to emulate Europe. They want GDPR, they want an AI act, they want tough antitrust enforcement. How worried are you about the EU-ization of US digital policies of sort of going towards them? You see this narrative, which drives me crazy of pundits who should know better, who say that US is lagging in digital regulation as if that's the goal. So I worry about that. I'm just curious what your thoughts are.

David Evans: Am I worried about that? Well, I'm not worried about it so much in part because the United States is so far ahead of Europe and pretty much every other part of the world, with the exception of China when it comes to innovation, the digital revolution, and we have a deep reservoir of venture capital funding and entrepreneurs in this country. So that isn't a commentary so much on particular regulations that might be considered with respect to AI and so forth. It is more commentary that the United States is so far ahead now of other parts of the world that we're in a position now where I'm less worried about mistakes or overregulation in the US than I am in Europe.

Europe is at a point where it just needs to focus itself on how do we solve the innovation problem? And that just has to involve changing the mindset towards embracing markets, embracing risk taking, being just less enthusiastic about regulation and spending more time as policymakers on trying to solve these problems. I think I view some of the activity now on emulating Europe as I don't know how permanent it is, and I'm not sure how much of it is ultimately going to get adopted.

Rob Atkinson: I hope you're right. I hope you're right. We will see this soon because Mario Draghi, the former prime minister of Italy is in charge with heading a big competitiveness report for Europe, which will deal with digital. It might be out by the time this podcast has aired, but I think that'll be a really good indicator if your key point is Europe really taking this to heart, realizing it needs fundamental change, not just incremental change. So we will see what happens with that report.

David Evans: Just one thing on that. I'm hopeful that Draghi will come up with a good set of remedies that is not basically top-down, driven by government and encourages more markets and risk taking. But I will point out that we've had similar endeavors in 1995, and 2002, and 2010, and 2018. He's not the first to do this, and he's not the first economist to take the leadership role of doing this. So hopefully he will be the spark that will change things, but history does not make one terribly optimistic.

Rob Atkinson: Although to be fair to that, the other side, it was much easier to be in denial in those other periods, whereas now I think there's much more awareness that something has gone off the rails and so maybe that would be a counterweight to your pessimism. We'll see.

David Evans: You would think.

Rob Atkinson: All right, so. All right. Hey David, this was great. Really, really enjoyed it. We'll link to the articles on the podcast page. So thank you so much.

David Evans: Thank you.

Jackie Whisman: And that’s it for this week. If you liked it, please be sure to rate us and subscribe. Feel free to email show ideas or questions to [email protected]. You can find the show notes and sign up for our weekly email newsletter on our website itif.org. And follow us on Twitter, Facebook, and LinkedIn @ITIFdc.

Rob Atkinson: We have more episodes and great guests lined up, and we hope you will continue to tune in.

Jackie Whisman: Talk to you soon.