Europe Trails the United States in Innovation

In September 2024, Mario Draghi—the former Italian prime minister who also served as president of the European Central Bank—unveiled a European Commission assessment that reviewed the bloc’s slowing productivity and its capacity for innovation. The conclusions were striking.

Across the last five decades, Europe produced zero homegrown firms that started from scratch and reached a market capitalization above 100 billion euros ($116.7 billion), while in the same period six American companies now valued at over $1 trillion had emerged. Since 2013, 137 venture-capital funds larger than $1 billion had been established in the United States, whereas only 11 such funds had formed in the European Union. And in the realm of cutting-edge technologies, 61 percent of global funding for artificial intelligence startups flowed to American companies, while a mere 6 percent went to EU-based firms. This disparity persists even though the EU’s population surpasses that of the United States by more than 100 million people.

Taken together, these figures sketch a portrait of a stagnating European economy where the conditions essential for innovation and growth trail far behind those in the United States and China. Europe does generate a substantial number of startups, yet almost none manage to evolve into globally dominant companies. In technology-heavy sectors, this phenomenon is especially pronounced. The EU’s slice of global corporate R&D expenditures dropped from 25 percent in 2004 to 17 percent in 2024, with the decline notably steep in the electronic equipment and technology hardware sectors, according to calculations by Italian economist Andrea Dugo. So how did Europe fall so far behind, so quickly?

One variable that some economists tracking Europe’s sluggish technology sector highlight is the absence of a true single market and the regulatory fragmentation that accompanies it. Variations in national regulations, taxes, and legal frameworks mean that a business attempting to expand across Europe often confronts several different rulebooks.

“Europe is like a very slow elephant,” Adriana Hoyos, an adjunct economics professor at IE University in Spain, told The Dispatch. “You have European regulation, then you have the national regulations, then you have state regulations with all these completely different ways of behaving.”

The Draghi report noted that the EU oversees roughly 100 tech-focused laws and more than 270 regulatory authorities regulating some aspect of digital networks across the bloc, including regulators for telecommunications and data protection. For instance, the AI Act—the EU’s comprehensive regulatory framework for artificial intelligence enacted in 2024—imposes distinct compliance burdens on AI models depending on the risk category they fall into. While these safeguards are critical to preventing abuses in fields such as law enforcement, recruitment, and education, certain provisions could impose outsized costs on budding technology enterprises.

Grasping Europe’s market segmentation is especially crucial when assessing its venture-capital deficit relative to the United States. In a January piece, Harvard Business School investment banking professor Josh Lerner pointed out that Europe lags markedly behind the U.S. in both the total amount of venture-capital spending and the returns on that investment. Although venture backing covers only a tiny share of total U.S. firms, half of all American companies that have gone public in the last twenty years relied on venture funding, and nearly 90 percent of R&D spending by young publicly traded firms is undertaken by venture-backed entities. “All the innovation in the United States is essentially generated by dynamic, young, recently public companies that are backed by venture capital,” Lerner told The Dispatch.

While American tech firms looking to scale and raise capital can turn to the broad Nasdaq market—a reliable pathway for young ventures aiming to go public—European IPO markets remain dispersed across smaller national exchanges. In the late 1990s, a group of venture investors launched a Pan-European exchange called EASDAQ to serve as a Europe-wide market, but a succession of competing regional exchanges soon sprang up and, by 2003, EASDAQ had failed to become impactful and was shuttered.

The absence of a continent-wide exchange along the lines of Nasdaq makes promising European firms seeking scale more likely to relocate to the United States for superior access to capital, to stay private, or to be acquired by larger players. Between 2008 and 2021, nearly 30 percent of European startups that eventually attained valuations above $1 billion moved their headquarters overseas, with the majority relocating to the United States, according to the Draghi report.

Europe’s challenge in retaining its most entrepreneurial citizens and their firms is not simply a matter of market fragmentation but also a more onerous tax climate. For instance, Lerner cites Norway, where, per a recent study by doctoral candidate Christine Blandhol, a rise in wealth taxes preceded a jump in the out-migration rate from 0.2 percent to 2 percent among affected households—and 40 percent of those leaving households owned active businesses. And between 2014 and 2024, the number of American millionaires grew by 78 percent, while Germany’s and France’s millionaire populations expanded by only 10 percent and 7 percent respectively, and the United Kingdom’s share of resident millionaires fell by 9 percent.

Further strengthening its innovation edge, the United States attracts a considerable flow of international students into its university system, many of whom eventually become founders and business leaders. In an article published in April, Hoyos noted that roughly 75 percent of European Ph.D. students at American universities stay in the United States for at least five years after graduation. “I have students I teach at IE, and I have students from all nationalities, and … the ones who are interested in technology, basically all of them want to go to the U.S. to work or to study” for advanced degrees, Hoyos said.

Although tax and regulatory frameworks can influence a region’s capacity for innovation, some observers contend that differing notions of productivity also play a role. Nicolai Tangen, the chief executive of Norway’s sovereign wealth fund, stated bluntly in a 2024 Financial Times interview, “We are not very ambitious. I should be careful about discussing work-life balance, but the Americans simply work harder.” Indeed, labor is more stringently regulated in the EU, with the Working Time Directive guaranteeing every member state’s workers at least four weeks of paid leave annually, a stipend that cannot simply replace with money. In the United States, by contrast, 31 percent of workers have no paid time off, and the typical American enjoys about 11 days of paid vacation each year—roughly half of Europe’s mandated minimum.

Although the United States has traditionally drawn the world’s leading minds to fuel its innovation advantage, whether this edge will endure remains uncertain. President Donald Trump’s restrictive immigration measures, coupled with his “America First” approach to trade and foreign policy, could present Europe and other regions with an opening to narrow the gap.

The Wall Street Journal recently reported that the administration is weighing a $100,000 fee for all foreign students who intend to work in the United States after graduation, following a court ruling in June that struck down a policy imposing a fee on employers seeking H-1B visas. In July, the Trump administration also issued a final rule scrapping what it called the “duration of status loophole,” which allowed F-1 visa holders to stay in the U.S. for the duration of their academic program without a defined end date.

Lerner recalled a quip he used to share with Canadian policymakers he advised: “My joke about them is that the first Trump administration did more for Canadian entrepreneurship and venture capital than thirty years of Canadian government policy ever achieved,” he said. “In other words, when you consider the great successes the U.S. has enjoyed, a large portion of that comes from immigrants—people who are extraordinarily creative.”

Moreover, Trump’s ongoing push for NATO allies to augment their own defense capabilities could spur European innovation, particularly as the war in Ukraine continues. The European Commission has signaled as much in its Readiness 2030 plan, which could unlock up to €800 billion ($935 billion) in added defense spending over the next five years, including by mobilizing “private capital.”

Yet, Hoyos warns, European leaders must adopt a more fundamental shift in mindset regarding artificial intelligence and other technological advances before the continent can arrest its long-running decline in economic influence. “I think Europe is clearly lost [in the] technological world,” Hoyos stated. “They don’t see the priority, they don’t see how fast this is going, and they think it’s something that’s optional.”