European Industry and Innovation: Impact on Economic Growth and Competitiveness

In advanced economies, the growth of the factors of production - labour and capital - is limited, and economic growth is determined by the productivity growth of these factors. The difference in growth rates between the United States and Europe in the 1990s, in favour of the United States, is largely due to stronger growth in labour productivity, made possible by the development of information and communication technologies (ICTs) and their rapid diffusion in the economy. Despite the excesses of the financial bubble, the overall balance sheet over this period remains positive for the US economy.

The situation in Europe is less favourable, with many countries falling in the GDP per capita ranking over the last twenty years, highlighting the need for structural reforms to make better use of the economy's strengths. The development and diffusion of innovation is particularly important, as ICTs represent the new industrial revolution. The creation of companies and start-ups is a key tool to achieve these goals.

Shaping the new industrial revolution

New information and communication technologies have been compared to previous industrial revolutions, such as the electricity revolution, which radically changed the conditions of industrial production. They enable even greater growth in information consumption by reducing the associated costs:

• Data processing costs: the cost of microprocessors is halved every 18 months for a given performance;
• Data transmission costs: advances in fibre optics reduce the cost of bandwidth and data compression techniques reduce the amount of information transmitted;
• Data storage costs: halving every 3 years.

At the same time, standardisation of software and procedures for encoding, accessing and transmitting data enables mass production of hardware and software. The development of low-cost and accessible communications infrastructures reduces the cost of market access for new entrants and accelerates the diffusion of innovation. With falling costs, information has become an important factor of production, with a number of favourable economic consequences:

• Reduction of invested capital: integrating suppliers, production and customer demand into a real-time system allows DELL to run as little as 5 days' worth of inventory, reducing inventory-related capital and improving supply;
• Increasing labour productivity: information sharing and decision aids accelerate prototype development and enable remote customer work;
• Creation of new services: auctions, instant bids and virtual communities create new opportunities for collaboration;
• Increased competition, lower margins and lower prices: instant access to remote bids by buyers makes it easier to compare prices, especially in air travel, tourism and identifiable goods.

Start-ups and innovation

Large companies have significant advantages in investing in and benefiting from information and communications technology (ICT). They have the financial capacity for risk and long-term investment, as well as a diversity of professions that favours innovation. They also have the distribution power, brand image and sales and logistics networks needed to make new products and services widely available and profitable.

However, new companies have their own advantages: speed of decision-making, organisational flexibility and the ability to financially motivate the team to make the project a success. Having large companies with a portfolio of products and customers whose profitability must be maintained can slow innovation. This is why startups that started less than twenty years ago have been able to grow into major players such as Cisco and Oracle.

The importance of startups is not measured only by the number of giants like Cisco or Microsoft. Many of them come under the control of larger groups, which accelerates their development. Even failed startups contribute to the progress of the industry, so it is important to ensure a constant flow of new entrepreneurs to multiply and spread innovation.

Conditions for the development of startups

Three key conditions are necessary for the emergence and development of information and communication technology startups. Firstly, a dense and dynamic scientific, technical and industrial structure with enough scientists and specialists capable of generating ideas and building teams to realise them. An example of the success of this approach is Silicon Valley, which has formed around Stanford University and other technology clusters.

Second, a system of social values and administrative and legal norms that support entrepreneurial activity, including positive attitudes towards business and financial success, is important. Tolerance for failure and favourable taxation also play a significant role, providing motivation for investors and employees. The United States is in a more favourable environment in this regard, which explains its leading position in the technology sector.

Startup funding

Funding for startups in Europe starts with the support of founders and their loved ones, as well as ‘business angels’ who provide initial investment and strategic assistance. As capital needs grow, institutional investors step in, setting minimum investment thresholds and managing specialised funds with high risk-adjusted returns.

Despite the development, the gap between Europe and the US in venture capital remains significant. In Europe, investment in startups is much lower due to the smaller scale of private wealth and less developed stock markets. However, the European industry is adapting, offering new funding opportunities and strengthening its position on the global stage.

Conclusion

European industry needs stronger support for start-ups and innovation to improve competitiveness. The introduction of new technologies and improved financing conditions play a key role in this process. These measures will help to strengthen economic development and adapt to global changes.