Europe and the challenge of technological backwardness

T + T – normal size

Europe is proud of its track record of sustainability and inclusion, and the current social and economic model has so far paid dividends. But given the prevalence of technological disruption, policymakers need to reevaluate past considerations. Europe must now harness the cooperative momentum unleashed by the war in Ukraine, and embrace the cutting-edge technologies that are critical to building its competitiveness and future prosperity. However, Europe seems to be changing in a very decisive way as a result of crises. The European Union was created in the aftermath of World War II, and the 2008 global financial crisis and the eurozone crisis that followed led to greater financial cooperation between European countries. The COVID-19 pandemic has led to improved financial coordination by the EU Next Generation Recovery Fund. Now the war in Ukraine is lifting Europe’s energy strategy and sparking a new defense debate.

In this context, policymakers should not forget another slow-moving crisis, which is the significant delay in technological proficiency at the level of European companies, compared to their counterparts in other leading economies. Due to the proliferation of technology in all sectors, and the reform of competitive dynamics, innovation and technical leadership taking It plays a crucial role in the EU’s strategic autonomy, as it does energy supplies or defense, especially in the face of increasing geopolitics unrest.

The overdue technology largely explains why large European companies underperform compared to their US counterparts, as new research by the McKinsey Global Institute between 2014 and 2019 reported that the revenues of large European companies increased at a slower pace of 40% compared to their US counterparts. He reduced his investments by 8% (measured by capital expenditure relative to the balance of invested capital), and reduced his research and development budget by 40%. ICT and pharmaceuticals accounted for 80% of the investment gap, 75% of the R&D teams, and 60% of the difference in revenue growth.

Europe has always been aware of its shortcomings in technology and has recently launched a series of initiatives aimed at putting the region on a path to better performance. These include the provision of € 95.5 billion ($ 100 billion) to the European Union’s Horizon Europe program, the launch of the Smart Specialization initiative, and the development of a framework for key projects of European common interest. The UK is also investing £ 800 million ($ 1 billion) over four years in renewing the Advanced Research and Invention Agency.

These moves are welcome, but they may not be enough. Today, European companies do not have the size and speed of their peers in the United States and China. Our new analysis examines ten categories of “transversal technology”, such as artificial intelligence, cloud and biotechnology, which are spread horizontally across sectors. Our analysis concludes that Europe is ahead of the United States and / or China in only two categories.

Let’s take clean technology, for example. Europe has more ambitious goals to reduce carbon dioxide emissions than other countries, and performs better than the United States in clean technology patents by 38% (more than twice the number in China) and in clean technology proven per capita by mature technologies . But China leads in almost all areas of clean technology production, often with a market share of more than 50%. The United States leads in advanced technology, including nuclear fusion, carbon capture, use and storage, smart grids, next-generation batteries, and long-term energy storage.

This technological delay limits the ability of European companies to compete and grow, with a negative impact on the economic situation in Europe. In our estimation, corporate value addition of € 2-4 trillion per year could be at stake by 2040, a value that can generate investment, employment, wages, goods and public services.

The challenge is urgent. Unless Europe is given the opportunity when it comes to transversal technology, its companies may even falter in sectors in which they usually excel. Although Europe is a world leader in the automotive industry, European companies should be able to expand and at a faster pace pace to function. in a technology-disrupted world. It gives importance to size and agility. This will require addressing a set of constraints that negatively impact the performance of European companies, and this manifests itself in four manifestations: fragmentation and undersize, scarcity of established technology ecosystems, less sophisticated venture capital financing, and a regulatory environment that further support disruption and innovation.

* Partner at the McKinsey Global Institute

** Partner and Director of the Central European Office of McKinsey & Company


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