Europe's tech woes but digital sector creates wealth and few jobs

Venture capital investments in Europe fell sharply in the third quarter of this year and this week the Financial Times reported on a speech in London which put Europe's tech woes in stark terms. However, while policy makers should give attention to innovation in economies, just focussing on the tech/ digital sector is a road to economic and political failure.

Two-thirds of the world's top 50 innovative companies are in sectors other than tech according to the Boston Consulting Group — 29 companies are from the US, 11 from Europe and 10 from Asia. Besides, the small number of high growth firms that account for 50% of new jobs in the US, are not typically in high tech. The Kauffman Foundation entrepreneurship think-tank says "high-tech is not a prerequisite for high-growth: Firms in diverse industries, from food & beverage to retail to government services are growing."

During the Great Recession, the McKinsey Global Institute warned: "While many policy makers see innovative technologies as the answer to the challenge of job creation, our analysis indicates that governments are likely to be disappointed in such hopes.”

An Oxford Martin School study published in 2014 showed that less than 0.5% of US jobs had been created by new technology industries in the 21st century, ushering in an era of wealth rather than job creation.

Industrial Renewal in the 21st century: evidence from US cities, published in Regional Studies, was written by Dr Carl Benedikt Frey and Thor Berger as part of the Oxford Martin Programme for Technology and Employment. The study examined jobs that did not exist in official classifications in the 20th century, using data on 1.2m workers in the US and updates of official industry classifications to identify new technology industries.

The study found that:

Only 0.5% of the US labour force is employed in industries that did not exist in 2000;
Even in Silicon Valley, only 1.8% of workers are employed in new industries;
The majority of the 71 new ‘tech’ jobs relate to the emergence of digital technologies, (such as online auctions, video and audio streaming and web design) but also include renewable energy and biotech;
New jobs cluster in skilled cities, making economic activity increasingly concentrated and contributing to growing regional inequalities.

Dr Frey said that the report should herald a warning for policy makers: “Because digital businesses require only limited capital investment, employment opportunities created by technological change may continue to stagnate as economies become increasingly digitized. Major economies like the US need to think about the implications for lower-skilled workers, to ensure that vast swathes of people don’t get left behind.”

In April 2000 President Bill Clinton spoke at a White House conference celebrating what was called the new economy. He said:

Now, one of the things that I think is important to focus on is just some basic facts. Information technology today represents only 10% of American jobs, but is responsible for about 30% of our economic growth. It accounts now for about half of business investment. And just as Henry Ford's mass-produced cars and the assembly line itself had broad spillover effects on the productivity of the American economy, these new technologies are doing the same thing, rifling through every sector of our economy, increasing the power of American firms and individuals to share broadly in its prosperity...How do we close the digital divide? Can poor areas in the United States and entire developing nations leapfrog an entire stage of development, jumping ahead to cutting-edge technologies, avoiding not only the time it takes to go through the industrial economy, but also the unpleasant side effects, particularly of pollution and global warming. How can we best make that happen?

Despite further technological advances, sixteen years later following the biggest financial crisis since the Great Depression and stagnant incomes for most Americans, the New York Daily News warns that a failed businessman who is a "liar, thief, bully, hypocrite, sexual victimizer and unhinged, self-adoring demagogue" is in contention to become the 45th president of the United States — Daily News Editorial: Bury Trump in a Landslide.

The expected continued rise in productivity in advanced countries failed to materialise. In the US it may have been negated by ageing of the population and a decline in business dynamism with a plunge in startups and young firms while older firms became more entrenched. The Organisation of Economic Cooperation and Development (OECD), has concluded that there are still frontier firms but the majority of firms, about 80%, are laggards in gaining advantages from new systems.

Last January Citibank and the Oxford Martin Programme for Technology and Employment published a study exploring the varying impact that automation of jobs will have on countries and cities around the world, in the near future and the coming decades.

Technology at Work v2.0: The Future Is Not What It Used to Be builds on 2013 research by Carl Benedikt Frey and Michael Osborne which found that 47% of US jobs were at risk of automation over the next two decades, and on the first Technology at Work report, published in 2015.

Harnessing new World Bank data, the authors consider the risks of job automation to developing countries, estimated to range from 55% in Uzbekistan to 85% in Ethiopia, with a substantial share of jobs being at high risk of automation in major emerging economies including China and India (77% and 69% respectively). While manufacturing productivity has traditionally enabled developing countries to close the gap with richer countries, automation is likely to impact negatively on their ability to do this, and new growth models will be required.

Analysis of cities in the US found that those most at risk included Fresno and Las Vegas, with those least at risk including Boston, Washington DC and New York. In relatively skilled cities, such as Boston, only 38% of jobs are susceptible to automation. In Fresno, by contrast, the equivalent figure is 54%.

The authors of Technology at Work v2.0: The Future Is Not What It Used to Be, say:

This downward trend in new job creation in new technology industries is particularly evident starting in the Computer Revolution of the 1980s. For example, a study by Jeffery Lin suggests that while about 8.2% of the US workforce shifted into new jobs during the 1980s which were associated with new technologies; during the 1990s this figure declined to 4.4%. Estimates by Thor Berger and Carl Benedikt Frey further suggest that less than 0.5% of the US workforce shifted into technology industries that emerged throughout the 2000s, including new industries such as online auctions, video and audio streaming, and web design.

Despite these low numbers to date, a number of forecasts suggest good opportunities for future job creation in the information technology, industrial (i.e. robot engineers and technicians) and green sectors. In addition, the health sector is set to create the largest job openings, estimated at more than 4m new jobs in the US from 2012 to 2022. 　

A.T Kearney's top 100 global tech companies. European companies are in red.

Europe's tech woes

The Financial Times reported this week that Ben Robinson, chief strategy and marketing officer at Temenos, a Swiss fintech firm, told a meeting in the East London tech hub of Shoreditch that "in the US, the value of the three biggest listed internet companies, businesses whose creations have become platforms in their own right, is $1.3tn. In Asia, it’s $583bn, In Africa (yes, Africa) it’s $76bn. In Europe, however, our top internet companies, including Russia’s Yandex, are worth $20bn."

Beyond the tech sector, the Economist reported last July that of the 50 most valuable firms in the world, only seven were European, compared with 17 in 2006. No fewer than 31were American, and 8 were Chinese (few other emerging-market firms are really big yet) — the divergent performance of stockmarkets is a factor here and while Europe and the US have economies of a similar size, the total market value last June of the top 500 European firms was half that of the top 500 American firms. Of the seven European firms 3 were Swiss while another, AB InBev, a beer firm, is run by Brazilians who chose Belgium for their main share listing.

The Economist said that European firms occupied the top spot in only one out of 24 global sectors (Nestlé of Switzerland in food).

A.T. Kearney, a US consultancy, reported last February that only eight of the global top 100 companies in high-tech were headquartered in Europe. Compared to the year before the decreasing share of global high-tech revenues continued.

Finfacts reported in 2013 that according to the Joint Research Centre (JRC) of the European Commission, over 50% of all US firms in the Top 1,000 global R&D spenders in 2009, were founded after 1975, in Europe the figure was 18% and in Japan just 2%.

From 2000-2010, Japan's electronics production plummeted 41%, exports tumbled 27%, and the sectoral trade surplus dived 68% according to The Wall Street Journal. Counting only exports by high-income OECD countries (to avoid the impact of China), Japan's global market share of electronics goods and services exports fell by nearly half, to 10% in 2009, from 19% in 1996.

Nokia, Europe's only global consumer electronics champion, massively outspent Apple on R&D but was routed, as was Canada's Research In Motion whose BlackBerry gave it a brief time in the sun.

Better funding and one big market gives US firms an advantage while high earnings and tax avoidance provide them with cash troves to buy innovation via startups.

Google has bought about 200 young companies since 2001 while in Ireland the sale of tech firms created 300 millionaires in 15 years but not one scaleup — it's a problem for Irish public policy makers that is currently ignored.

The FT quotes CB Insights data that there are 176 unicorns (young companies with a valuation of at least $1bn) globally, of which 101 are in the US, 52 in Asia and 19 in Europe.

Ben Robinson calls unicorn-munching giants “lions,"  the internet businesses at the top of the food chain — the likes of Google, Facebook and Microsoft.

Data from Dow Jones VentureSource show that European companies raised approximately €2.1bn from 464 deals in 3Q 2016, a 32% decrease in the amount raised as well as a 3% decline in the number of deals when compared to the previous quarter. Compared with the same period last year, the amount companies raised decreased by 39%, whereas the number of deals grew by 9%. VC firms headquartered in the UK raised just $58.2m in the third quarter, according to Dow Jones, a sharp drop from the $281.5m invested in the second quarter and an even steeper decline compared to the $656.1m in the third quarter of last year.

Meanwhile 956 US based companies raised $11.7bn in the third quarter, down 28% from the previous quarter.

Europe should focus on innovation in sectors, including tech, that will provide skilled jobs in future years.

Eurostat reported last February that:

In 2014, about 34m people were employed in the manufacturing sector across the EU-28, representing 15.4 % of total employment. Among these workers, 2.3m were employed in high-tech manufacturing, corresponding to 1.1 % of total employment. In the same year, there were more than twice as many jobs in the high-tech knowledge-intensive services than in high-tech manufacturing, and they accounted for 2.8 % of total employment.

High-tech manufacturing including pharmaceuticals, was led by Ireland at 3% of total employment; 1.7% in Germany and 1% in the UK. Ireland also led the knowledge-intensive services at 4.3% but about half of the 85,000 employed, are in mainly American-owned companies and work in administration functions. Germany was at 2.5% and the UK was at 3.7%.

It was estimated last year that in 2014 6.5m worked in the US tech sectors, which accounted for 4.4% of total employment.

A UK study of creative industry workforces in 6 European countries reported that Sweden has the highest proportion of its workforce (8.9%) employed in the creative industries, followed by Finland (8.2%) and then the UK. Sweden also has the highest proportion of its workforce employed in the creative economy (12%) compared to 9.5% in the UK. A Google supported study in Europe also had a wider net than Eurostat for high-tech.

Israel is the only country to successfully clone the Silicon Valley model and in 2013 9% of employment was in high-tech down from about 11% in 2006-2008.

Civilian research and development (R&D) spending is over 4% of GDP — nearly twice the OECD average — and the country has about 250 foreign-owned R&D centres.

However, scaleups are hard to achieve, while productivity growth in the rest of the Israeli economy has been poor.

Irish venture capital in 2016 — more Leprechaun Economics