Business & Economics

The Future of Innovation: Can European-Style Industrial Policies Create Tech Supremacy?

Europe’s fondness for industrial policy and regulatory edicts will keep it an also-ran in the technology sector

Image Credit: Michele Marconi/Synergy

In the race for global technological supremacy, “the European Union is trying to get its groove back,” Politico reported last year. Actually, Europe has been looking for its groove for some time: Ambitious industrial policy schemes have long been a central part of Europe’s effort to compete with the United States and China for leadership in computing, communications and artificial intelligence, among other things.

Thus far, however, the Europeans don’t have much to show for their attempts to produce home-grown tech champions. Despite highly targeted and expensive efforts to foster a domestic tech base, the EU has instead generated a string of industrial policy failures that should serve as a cautionary tale for U.S. pundits and policymakers, who seem increasingly open to more government-steered innovation efforts.

Picking Losers

Industrial policy is often criticized for devolving into a game of picking winners and losers. However, some industrial policy advocates believe that wagering public resources on risky technological bets is worth it if it helps spur the rise of at least a few winners.

In Europe’s case, however, it seems like they’ve picked mostly losers. It also matters little whether these industrial policy initiatives were established at the EU level or by member states; almost all of them have met with failure. Consider a few prominent examples:

  • Minitel & internet access: Minitel was France’s attempt to develop its own early version of the internet in the 1980s and ‘90s. Minitel terminals were distributed free of charge and eventually gave an estimated 25 million French citizens access to bank accounts, the yellow pages and various other services. But Minitel’s centralized and closed network model ultimately could not serve consumers as well as the wide-open global internet.  “It was the whole model that was doomed,” says Benjamin Bayart, the former head of France’s oldest internet provider, French Data Network. “Basically, to set up a service on Minitel, you had to ask permission from France Telecom. You had to go to the old guys who ran the system, and who knew absolutely nothing about innovation.” Users of Minitel also faced steep costs, roughly $22.95 per hour accounting for inflation, which has been noted as a major downside of the technology. As for the French government, the development of the service cost tens of billions of French francs before it was finally discontinued in 2012.
  • Galileo & GPS: In 1999, the EU announced a public-private endeavor to establish Europe’s own global positioning service, called Galileo. Within three years, the project was “almost dead,” but the EU continued on, allocating $5 billion for Galileo. By 2006, the public and private sector partnership had dissolved, and the project was officially nationalized. After billions of dollars of cost overruns and poor strategy, Galileo finally got satellites in the sky in 2011 for a validation test, but it was not until 2019 that satellites became fully operational. The project was 12 years late, triple the original budget and provided virtually no novel technology to the continent.
  • Quaero & search: In 2008, Germany and France teamed up to launch Quaero, a $400 million search engine that was initially hyped as a “Google-killer.” While many in Europe were optimistic about the creation of a service that would rival what was on offer from American tech companies, within a year the Franco-German alliance began to fracture. The project officially ended in 2013, with no semblance of a search engine to show for a boondoggle costing hundreds of millions of euros.
  • GAIA-X & cloud services: GAIA-X represents the latest European push to develop home-grown tech—in this case a unified, interoperable ecosystem of cloud services throughout Europe. In October 2020, EU countries issued a joint declaration to collectively fund a “European Alliance on Industrial Data and Cloud,” to create a “common approach to building the European cloud supply [that] will reinforce Europe’s digital sovereignty and increase the competitiveness of European business and industry.” Founding members of GAIA-X include 22 companies from a cross-section of industries. So far, things are off to a slow start: As of right now, no European states have supplied public funding.
  • France’s Netflix: Meanwhile, other industrial policy efforts are also afoot in France, which recently gave the green light for a group to create their own version of a Netflix-like video streaming service. The project is being taken on by a conglomerate, made up of the TF1 Group, which was founded in 1975 by the French government but went private in 1987; the Groupe M6, a private media conglomerate; and France Télévisions, the state-owned French public broadcasting company. This mélange of the French public and private sector is intended to rival American video streaming giants like Netflix, Disney and HBO MAX. It’s early days, but if history is any indicator, this targeted industrial policy may prove fruitless.
  • France’s Airbnb: A video-streaming service is not the only popular technology the French are trying to emulate. The country’s government said it also plans to develop its own version of Airbnb and Booking.com so as to “regain a link” with tourists. While France obviously wants to push back against U.S.-based tech giants like Airbnb, that desire must be weighed against the benefits that Airbnb has brought to the country and the costs of a French-run accommodations service. In 2015 alone, according to a study conducted by Airbnb, the company contributed 2.5 billion euron total economic activity, supported 13,300 jobs and increased the likelihood of travelers returning to France. Indeed, 23% of Airbnb guests said they would not have visited France had it not been for the option to use Airbnb.

Targeted European industrial policies like these demonstrate the problems associated with state-led efforts to steer technology or incubate certain companies or sectors. Innovation isn’t a precise recipe that can be easily cooked up by the state just tossing money at technology sectors.

And Now It’s AI’s Turn

Undeterred by its long string of costly failures, Europe appears ready to apply the same top-down vision to artificial intelligence technologies, again in an attempt to catch up with the U.S. and China. In early 2020, the European Commission published a White Paper on Artificial Intelligence, which proposed developing “ecosystems of excellence” through “the creation of excellence and testing centres” that will “concentrate in sectors where Europe has the potential to become a global champion.”

A laundry list of impressive-sounding programs followed, including: Digital Innovation Hubs, Enterprise Resource Planning, the Digital Europe Programme, the Key Digital Technology Joint Undertaking and a number of broad-based public-private partnerships. This is all part of a broader official “Coordinated Plan” prepared together with EU member states “to foster the development and use of AI in Europe.”

Europe is essentially circling the wagons and creating what Christian Borggreen, vice president of Computer and Communications Industry Association Europe, calls an “AI Fortress Europe” strategy. For example, Margrethe Vestager, the European Commission’s executive vice president for digital, now advocates the equivalent of a “Europe First” strategy to produce national champions that can compete with the U.S. and China on the global stage. The express goal of GAIA-X, for example, is to reduce European reliance on international cloud companies like Amazon and Microsoft.

The problem with that approach, Borggreen notes, is that it “runs counter to the European Commission’s ambition of becoming a global leader in the data economy.” Europe knows it cannot completely divorce itself from global digital networks, which is why American companies like Microsoft are included in GAIA-X. But the EU appears determined to just keep beating down U.S. tech companies with more regulations and taxes and then hoping that such punitive steps, combined with its industrial policy efforts, will somehow ensure that Europe isn’t left behind in the new technological era.

Industrial Policy Can’t Overcome a Hostile Innovation Culture

However, no amount of centralized state planning or spending will be able to overcome Europe’s aversion to technological risk-taking and disruption. The EU’s innovation culture generally values stability—of existing laws, institutions and businesses—over disruptive technological change. Competition policy scholars Nicolas Petit and David Teece observe that the EU came away from the digital revolution with “the complete absence of superstar companies.”

There are no European versions of Microsoft, Google or Apple, even though Europeans obviously demand and consume the sort of products and services those U.S.-based companies provide. It’s simply not possible given the EU’s current regulatory regime. “Public policy and attitudes explain the relative technological decline and lack of economic dynamism,” Petit and Teech argue, and it has resulted in “weak venture capital markets, fragmented research capabilities, low worker mobility and frustrated entrepreneurs.”

With laws and regulations piling up and discouraging business formation and venture capital investment, most of the important action in digital tech increasingly has been happening elsewhere—primarily in the U.S. and China. European leaders have responded by doubling down on their regulatory efforts (now mostly targeted at U.S. tech companies), as well as with all their industrial policy gambits.

These policies have significant costs. Some of these costs are discrete, like fines for violating the European data protection law—the General Data Protection Regulation (GDPR)—which are levied against companies when they aggregate too much data or do not adequately safeguard aggregated data. These fines, which were recently quadrupled from previous baselines, amount to 20 million euros or 4% of a firm’s global revenue, whichever is greater. For a large company, this can result in fines totaling billions of euros. For Google, for example, 4% of global revenue totals 6.4 billion euros.

Recently, the Digital Services Act proposed large fines for companies like Twitter and YouTube for not effectively scrubbing hate speech and deleting certain content from their websites. With the Digital Services Act, the European Commission seeks ex ante restrictions on large tech firms to supposedly level the playing field between them and smaller businesses and new market entrants.

But as Europe tries to shackle American big business and create an opening for their own home-grown companies, the real costs will be felt not by those companies that are targeted but by the Europeans themselves. A recent study by Belgian think tank ECIPE analyzed the costs of an ex ante approach to regulation of technology companies and calculated that it would cost upward of 85 billion euros in gross domestic product and upward of 100 billion euros in consumer welfare, based on a baseline value from 2018.

In addition, the EU’s regulatory approach is ultimately helping the very companies regulators are hoping to rein in. As the Financial Times recently reported, the GDPR “has had the effect of favouring the companies that have amassed the largest troves of data on their own users, like Google.” A December 2020 study in the European Competition Journal similarly concluded that a growing body of economic literature and commentary shows the GDPR ultimately benefits large online platforms and hurts smaller market actors. In other words, EU regulatory policies aimed at helping smaller, home-grown firms are doing the opposite by favoring large, entrenched American players.

At the end of the day, excessive regulation cuts off the flow of data to innovative upstarts who need it most to compete, leaving only the largest companies who can afford to comply controlling most of the market. Even the most grandiose industrial policy schemes cannot overcome these costly realities. American academics and policymakers with an affinity for industrial policy might want to consider a model other than Europe’s misguided combination of fruitless state planning and heavy-handed regulatory edicts.

This article is third in a series on the future of innovation. The first piece in the series is a dialogue between Adam Thierer and Matt Ridley on the proper role of government in promoting innovation. The second article in the series concerns the future of permissionless innovation. The fourth article is a piece by Matt Ridley on the changing geography of innovation.

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