Europe lags behind: Young companies missing from top tiers
None of the 25 largest European publicly-traded companies were founded in the last 50 years. In the USA, half of the big firms are relatively young, including all the largest ones. This is one of the reasons that Europe has fallen behind the United States in terms of economic development.
The fact that Europeans have lost the ability to build large enterprises capable of conquering the global market was highlighted by former President of the European Central Bank Mario Draghi in a noted report on Europe’s competitiveness.
In the European Union, there is not a single company with a capitalization exceeding 106 billion CAD that was created from scratch in the last 50 years. Meanwhile, all six American firms with a capitalization above 1.06 trillion CAD were founded in this period,” the authors of the report endorsed by Draghi wrote.
Economists from Deutsche Bank, based on the premise that a picture is worth a thousand words, decided to illustrate the thesis of the former ECB president and former Italian prime minister. They took into account the largest 25 public companies from the European Union and the USA. The graph showed their founding dates and market value (capitalization).
European companies lack scale
As it turns out, the youngest of the large European companies is German SAP, a software producer supporting enterprise management. The company was founded in 1972, which is 52 years ago. In 1984, which is less than half a century ago, the company ASML, third on the list of the largest EU enterprises, was founded. However, it was born from the merger of two companies with much longer histories: ASM and Philips.
For comparison, of the 25 largest American companies after 1974, 12 were founded. Among them are six companies with a capitalization exceeding 1.06 trillion CAD. These are Apple, Microsoft, Nvidia, Amazon, Alphabet, and Meta.
"So indeed, European companies lack scale and innovation, which results in weak productivity growth," concludes Jim Reid, an economist at Deutsche Bank.
Why is the lack of young, large companies a problem? Draghi’s team explains that companies with a long history usually operate in industries where technological progress is slow. This in turn means they spend less on research and development than younger enterprises operating in new industries. And even if they spend a lot, they achieve worse results. For example, in 2003, both in Europe and the USA, the largest expenditure for this purpose was borne by automotive companies. This has not changed in Europe to this day. Meanwhile, in the USA in 2012, the most for innovations was spent by software and hardware manufacturing companies, and in 2022, companies from the broadly understood digital sector (such as Alphabet, Meta, and Microsoft).
Fragmented markets and lack of capital
Expenditures on R&D are clearly correlated with the rate of labour productivity growth. According to the authors of Draghi’s report, EU countries allocate on average about 2.3% of GDP for this purpose, while the USA allocates 3.5% of GDP. This is the main reason why, whereas in 1995, labour productivity in the EU was 5% lower than in the USA, today it is 20% lower (the graph below shows this).
Economists from Draghi’s team identified several reasons why Europe cannot wait for large companies in modern sectors. The most important is that new, innovative enterprises are not able to scale up their operations. This is mainly due to the still fragmentary nature of European markets, both for goods and services and capital.
Many startups emerge in Europe, but their development is often blocked by non-uniform regulations in EU countries and difficulties in accessing financing. Many of them move to the USA at a certain stage, where investors are much easier to find. In 2023, only 8% of "unicorns," or new enterprises valued at over 1.34 billion CAD, came from the EU. By comparison, the USA bred 66% of "unicorns," and China 26%.
