How Europe Can Produce A 'Google'

18/11/2010
More dynamism across European businesses would drive productivity and growth

Europe has a less dynamic business environment than the US, underlying long-held concerns about Europe's productivity gap, according to major new research published today by the National Endowment for Science, Technology and the Arts (NESTA) and FORA.

In the most detailed analysis to date of the growth characteristics of six million businesses across Europe, the US, Canada and New Zealand between 2002 and 2005, the report 'Growth Dynamics' finds that European firms grow and shrink at a slower pace than their American counterparts. This lack of dynamic movement in Europe means that innovative, high growth businesses find it harder to penetrate the market whilst companies which stop innovating continue to exist.  

The key patterns of firm expansion and contraction across Europe and the US revealed by the research show that:

• Europe has fewer high growth firms^[1] than the US (4.3% vs. 5.9%). The three-year employment growth rate of a firm at the 95^th percentile of the growth distribution (i.e. a business that grows faster than 95% of businesses in its country) is 86% in the US, compared to only 71% in the average European country.

• The shortfall is not limited to only the fastest growing firms. The share of medium-growth firms^[2] in European countries is also lower. Firms at the 75^th percentile of the distribution grow 19% faster in the US than in Europe (18% vs. 15%)

• There are more steady-state businesses in Europe. Almost half of European firms with ten or more employees are effectively stable (46% of all surviving companies), neither growing nor shrinking^[3]. This compares with 37% in the US.

• Greater dynamism also means more failure. US firms at the 25^th percentile of the growth distribution shrink 27 per cent faster than in Europe (-24% vs. -19%). The analysis also shows that the faster the firms at the top grow the faster firms at the bottom shrink.

This has implications for both innovation and productivity since a more dynamic business landscape allows for experimentation, new products, services, and processes to rise to prominence, and for resources to be relocated from less to more productive businesses.

Jonathan Kestenbaum, Chief Executive of NESTA, says: 'Whilst large established firms are critical to any economy, our research shows that innovative growth businesses are responsible for the majority of job creation. European markets need to be more open and nimble to these businesses if we are to achieve economic growth.'

Bruegel, a European economic policy Think Tank recently showed that the US and Europe have a similar number of companies in the world's 500 largest companies by market capitalisation. However, only 2% of the European companies were founded after 1975, in sharp contrast with 14% in the US.

Jonathan Kestenbaum continued: 'Zara, Autonomy and Skype demonstrate the power of European ingenuity but if we want to see more of these businesses then we have to make sure that we have the right environment to allow them to flourish'.

The research has important implications for policymakers across Europe, suggesting the need to combine an improved venture capital climate to support high growth firms with reforms to encourage competition, entrepreneurship and labour market flexibility. It would also need to remove barriers to entry, expansion and contraction; and remove barriers that stop businesses, especially in service industries, operating across borders.

Over the coming months, NESTA and its partners will examine the specific drivers of business growth, with a view to providing more detailed evidence to support policymakers in tackling Europe's growth challenge.

Today's report coincides with the 'Silicon Valley comes to the UK' events, hosted by NESTA and Cambridge University. The four day programme brings together the best entrepreneurs from the USA - from companies such as Google, Facebook and LinkedIn - with UK entrepreneurs, investors, students and policymakers to exchange ideas and collaborate on business opportunities. For further information please go to www.nesta.org.uk/silicon_valley

Notes to editors

For further information please contact Jan Singleton on 020 7438 2606/ jan.singleton@nesta.org.uk or Chani Hirsch on 020 7438 2601/ chani.hirsch@nesta.org.uk

About the research
Research was carried out by NESTA in conjunction with FORA with support from the International Consortium for Entrepreneurship (ICE). Collaborations were established across eleven countries: Austria, Canada, Denmark, Finland, Italy, the Netherlands, New Zealand, Norway, Spain, the UK and the US.  Each provided harmonised micro aggregated data on business growth following standard definitions provided at the outset of the project. The resulting database draws on individual records for six million firms, which employed over 125 million people in 2002.

Average annual employment growth over a three year period (2002-2005) was measured for each surviving private sector firm with at least one employee. Based on their growth rate, firms were placed in one of the 11 growth intervals. This data was used to compute the percentiles of the growth distribution and produce growth distribution curves for up to 51 sectors, ten business size classes and five age groups.

About NESTA
NESTA is the UK's foremost independent expert on how innovation can solve some of the country's major economic and social challenges. Its work is enabled by an endowment, funded by the National Lottery, and it operates at no cost to the government or taxpayer.

NESTA is a world leader in its field and carries out its work through a blend of experimental programmes, analytical research and investment in early-stage companies. 

About FORA
FORA is an independent research and analysis division under the Danish Ministry of Economic and Business Affairs. FORA carries out business policy research and analysis that form the foundation for concrete policy initiatives in a national as well as European context. FORA's research and analysis focuses on the challenges of the knowledge-driven economy. The organisation's cutting-edge analysis and research contribute to the business policy decision-making process - and leads to new ideas in the area of business policy.
www.foranet.dk

[1] High growth firms are all enterprises with 10 or more employees in the beginning of the observation period with average annualised employment growth greater than 20% over a three year period.

[2] Medium growth firms are defined as all enterprises with 10 or more employees in the beginning of the observation period with average annualised employment growth between 10% and 20% over a three year period.

[3] Stable firms are defined as all enterprises with 10 or more employees in the beginning of the observation period with average annualised employment growth between -5% and 5% over a three year period.