Europe must join forces to groom powerhouse start-up sector

22 December 2023 3 min. read

Despite being one of the world’s economic powerhouse regions, Europe has fallen behind the United States in recent years, particularly in technology and innovation. Part of a European approach to reassert dominance will need to include boosting the start-up landscape by uniting to create a more business-friendly environment for entrepreneurs.

If Europe were to unite to stimulate entrepreneurship, it could potentially unlock $3.3 trillion in additional market capitalization, according to a report from McKinsey & Company. Besides that, it could also add an estimated 3.6 million to 8.1 million additional jobs.

The ecosystem for start-ups in Europe could be drastically improved, both in early-stage entrepreneurial activity and in scaling up existing start-ups. Some individual countries have proven to be success stories for start-up activity, but in order to compete globally, Europe must join forces to boost the environment for start-ups.

The economic gap between Europe and the United States has grown in recent years

The existing economic gap between the US and Europe is larger than it has been in the past. There is a 20% gap between the combined GDP of the EU-27, Switzerland, and the UK (approximately $21.1 trillion) and the $25.5 trillion GDP of the US. That reversal of the two regions’ financials from twenty years ago, when in 2012, Europe’s combined GPD was greater than that of the US.

Part of what is lacking in the European start-up scene is technology and innovation. Europe is currently falling behind the US in areas like next generation automation, innovations in connectivity like 5G and the Internet of Things, quantum computing, and composite materials (used in many areas of manufacturing).

European countries differ in their ability to enable the foundation and scale-up of start-ups

There is incredible diversity in the business environments of Europe’s different countries – all with their own regulations (sometimes red tape), access to funding, and diverse labor pools – and the diversity in the range of start-ups is no different. 

Countries like Sweden, Luxembourg, Poland, and Denmark are home to the most scale-ups, while Ireland, the Netherlands, and Portugal are home to more start-ups. Other countries including powerhouses Germany, France, and the UK represent a sweet spot in the middle, where both start-ups and scale-ups are thriving. Interestingly, the countries with more scale-ups generally have less entrepreneurial activity, though those fewer initiatives are more often succeed at scaling up. 

Significant economic potential exists in Europe’s start-up ecosystem relative to its status quo

That diversity in range of size and influence of start-ups to scale-ups is part of the problem. According to McKinsey’s report, one main focus for Europe should be to unite in order to standardize rules on taxation, incorporation, labor laws, and other important issues for start-ups. If these areas of business were more standard across Europe, it could do a lot to stimulate growth in start-ups and allow more companies to scale up.

Additionally, an “orchestrated European strategy can support the success of European start-ups in competing internationally,” stated McKinsey’s authors.

Compared with the current status quo, a business environment that is more friendly to start-ups could see the creation of an additional 200,000 new start-ups, which allow economies in Europe to create a huge increase in new jobs and immense value.