What do Alphabet, Meta, Alibaba and Tencent have in common? These global consumer technology giants were all founded outside Europe, underscoring a fundamental problem: the continent is facing a gap in digital innovation.
Despite being home to world-leading engineering and pharmaceutical companies — such as Airbus and Roche, which both deploy sophisticated technology in product design — Europe still lags behind the US and China. But it is racing to catch up, with the help of the commercial sector.
Many companies are looking to apply digital technology to the next generation of products and services in order to grow faster and identify new customers, as well as to solve existing business problems.
Yet with Europe still a fair way behind some other advanced economies, what do the region’s companies and policymakers need to do to build on the areas where Europe excels, and shore up the continent’s weaknesses?
To provide some guidance, we spoke with Prof. Philip Meissner, founder and director of the European Center for Digital Competitiveness at ESCP in Berlin, who outlined several policy recommendations for governments to invigorate digital industries, alongside actionable insights for business leaders looking to bolster their digital capabilities.
Tackle complacency on digital innovation
Unfortunately, as Meissner tells us from the start, Europe is playing catch up with the US and China. He underlines two main reasons for Europe’s lowly place in the global system: “First, I think that over the past two decades, China and the US have built a more supportive ecosystem for technology. This involves both massive investment in technology and start-ups, and a regulatory system that allows for innovation and new solutions.
“Second, I believe the mindset in many parts of Europe has been too comfortable with the status quo for a long time. The economy seemed to be doing well. However, many European countries and companies have neglected to invest in, and to prepare for, the technological developments of the future.”
To address this complacency and close the innovation gap with other regions, Meissner recommends that Europe draws upon its unique strengths that are giving the continent an edge.
Our expert says there are areas in which Europe already excels, notably a strong track record on research and development and the continent’s green agenda, with Brussels developing new proposals to boost clean technologies. Additionally, its world-renowned universities provide scientific research and a trained workforce.
But Europe cannot rest on its laurels, as Meissner reminds us: “We need to utilise these strengths much more than in the past. We need to make sure the great research results are also successfully commercialised, and we need to offer prospects for graduates to stay in Europe to work or build their own businesses here.”
There are strong incentives to do so, not least that Europe is in close proximity to Africa, which our expert calls “one of the largest growth markets of this century”.
With 100 cities with more than a million people, Africa is quickly developing into a major new consumer market with huge potential also in the BtoB sector. “This is an opportunity that should be much more in the focus of politicians and businesses alike,” Meissner stresses.
Adopt new approaches to avoid disruption
In capitalising on these opportunities, growth finance is going to be vital to Europe’s digital innovation. And happily, venture capital has flourished, with funds flowing into start-ups from London to Paris and Berlin.
These include highly disruptive companies such as Revolut and Raisin in financial services, as well as Booking.com and Amadeus in travel. Such companies have created digital business models from a blank sheet of paper, but incumbent businesses will need to adopt new approaches or risk being disrupted in their industries, our expert warns:
“For many companies, the hardest part of digital innovation is the mindset change. Digital business models require a fundamental rethink of products or services, which may have been successful for a long time but are no longer fit for the digital age,” Meissner says.
“These new business models often require entirely new competencies around technologies such as AI, software development or digital marketing. Companies need to build these digital competencies and attract new digital talent in these fields. However, there is no one-size-fits-all approach. It varies significantly depending on where the respective company stands in their transformation process.”
Embrace change, don’t strangle it
With that said, our expert is clear that for all the ingenuity of businesses in Europe, the fate of digital innovation on the continent may, ultimately, be decided by policy. He urges policymakers to embrace change, not strangle it: “I am deeply worried that Europe will overregulate new digital technologies and thus prevent new future industries, jobs and wealth from developing in the EU.”
For example, he points to lab-grown meat. Singapore became the first country to sell lab-grown meat, and the US is already carrying out inspections before approval is likely to be granted, but European regulators have been slow to plot a path to commercialisation.
This adds to concerns that European growth companies are lured to the US or Asia to expand. As Meissner says: “Entrepreneurs in Europe cannot prepare for their market launch and might move away to the US or Asia to scale their businesses there.”
Finally, our expert points to Europe’s heavy-handed approach to regulating uses of AI, in contrast to China and the US which have been the innovators. “I believe that Europe needs to start thinking about less and more open regulation for new technologies and thus be at the forefront of enabling new markets and innovation ecosystems.”
This article was first published on ESCP Business School's media, The Choice.