Contributor Post Created with Sketch. Europe’s Tech Entrepreneurs to America: ‘Don’t Be Like Europe’

 

Just because you dislike capitalism here, doesn’t mean you necessarily dislike capitalism everywhere. Have a problem with the American way of doing things? Well, there are other options. Elizabeth Warren, for instance, favors an “accountable capitalism” based on the German model of corporate governance and trade policy. Critics of Big Tech point to the more aggressive EU on issues such as competition and privacy. And, of course, Scandinavia remains the go-to example for politicians arguing for more expansive social welfare policy.

But Europe’s various flavors of capitalism have an unpleasant aftertaste in at least one major way. As a new McKinsey Global Institute analysis finds, “Europe is falling behind in growing sectors as well as in areas of innovation such as genomics, quantum computing, and artificial intelligence, where it is being outpaced by the United States and China.”

Among McKinsey’s specific findings: Europe’s share of “superstar” firms — high profit, high return companies — has dropped by 50 percent over the past two decades. R&D spending by software and computer services firms was only about 8 percent of the global total vs. 77 percent for US-based companies in 2018. Europe possesses only half as many unicorns as the United States, and none of the large internet platform companies.

McKinsey offers a number of possible reforms but this one really jumped out at me:

Third, the EU could address compensation practices for startups by changing taxation on stock options. Currently, startup employees in the United States have twice as much upside exposure as their European peers. Europe could enable workers to participate more fully in the success of their companies by simplifying the rules and taxation framework for stock option remuneration through a common framework, thereby improving the risk-reward profile for startup employees. Startups in countries such as Germany and Spain report that current taxation schemes make it difficult to set up stock option schemes.

This seems like exactly the sort of thing — taxes and compensation practices at startups — that gets overlooked here in America as politicians call for massive revamps of the tax code to more heavily tax higher incomes and wealth. Such calls seem based on the idea that incentives don’t really matter much when it comes to entrepreneurial risk-taking. But check out these comments earlier this year from the CEO of the German travel platform GetYourGuide:

During Silicon Valley’s ascent, employee stock ownership in startups like Google, PayPal and Facebook produced thousands of millionaires when those businesses went public. Those alumni, endowed not only with investable capital but with an appetite for risk and innovation, then went on to found companies of their own. The next generation of top talent followed them, attracted by the prospect of sharing in future success in the same way, and the world’s most influential community of entrepreneurship was born. … In Germany, due to restrictive legal and tax regulations, stock programs in the mould of Silicon Valley are simply not possible. These regulations exist under the outdated pretence of “protecting workers from risk”, but are more than just relics of the past. They severely prohibit German growth companies from recruiting the best and brightest from the global talent pool, and they are inflicting real economic damage in the present. Employees that have made money from working for a successful start-up are most likely to become founders of their own and use their proceeds to fund the next venture. But instead of supporting this virtuous cycle, as the US, UK, France or Israel do, Germany’s centre-left government refuses to allow employee stock ownership.

Published in Economics
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There are 2 comments.

  1. James Gawron Thatcher

    JimP,

    Your article is good news for Americans who are losing their faith. However, it is rocket fuel to the Brexiteers. The election is very soon. If Farage and Boris can work out a minimal working relationship for the election the majority for Brexit in Parliament could be large enough to push it through. Team USA is the team Britain should want to be on. Team EU is a loser.

    Very timely article.

    Regards,

    Jim

    • #1
    • November 12, 2019, at 11:04 AM PST
    • 3 likes
  2. Zwingli Coolidge

    As a European, albeit from a non-EU nation, the state of affairs is getting quite frustrating for entrepreneurs and employees alike. Taxation has become cumbersome on small businesses and it just feels like we are being punished for being ambitious. America does have its flaws but the overall dominance of American firms in nearly all fields does make me wonder why the likes of Warren or AOC are taken so seriously on these issues.

    • #2
    • November 12, 2019, at 3:59 PM PST
    • 3 likes