Young American firms surge while Europe stagnates, says Draghi report
None of the 25 largest European publicly traded companies were established in the last 50 years. In the US, half of the major firms, including all of the largest ones, are relatively young. This is one reason that Europe has lagged 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 European Central Bank President Mario Draghi in a prominent report on Europe's competitiveness.
"In the European Union, there is not a single company with a market capitalization exceeding $106 billion that was founded from scratch in the past 50 years. Meanwhile, all six American companies with a market capitalization over $1.06 trillion were founded during this period," the authors of the report endorsed by Draghi wrote.
Economists from Deutsche Bank, assuming a picture is worth a thousand words, decided to illustrate the thesis of the former ECB president and former Italian prime minister. They considered the 25 largest publicly traded companies from both the European Union and the United States. The chart showed the date of their founding and their market capitalization.
European companies lack scale
As it turns out, the youngest of the large European companies is Germany's SAP, a producer of enterprise management software. The company was founded in 1972, 52 years ago. In 1984, less than half a century ago, ASML, the third-largest EU company, was established. However, it was born from the merger of two much older firms: ASM and Philips.
In comparison, of the 25 largest American companies, 12 were founded after 1974. Among them are six companies with a market capitalization exceeding $1.06 trillion. 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 with Deutsche Bank.
Why is the lack of young, large firms 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 companies operating in new industries. And even if they spend a lot, they achieve poorer results. For example, in 2003, both in Europe and the US, automotive companies were the biggest spenders in this area. In Europe, this remains the case today. Meanwhile, in the US, in 2012 the biggest spenders on innovation were software and hardware producers, and in 2022 companies from the broadly defined digital sector (Alphabet, Meta, Microsoft).
Fragmented markets and capital shortage
Spending on R&D is clearly correlated with the pace of productivity growth. According to the authors of Draghi's report, EU countries allocate on average about 2.3% of GDP to this purpose, while the US allocates 3.5% of GDP. This is the main reason why, while labor productivity was 5% lower than in the US in 1995, it is now 20% lower (as shown in the chart below).
Economists from Draghi's team identified several reasons why Europe hasn't achieved large companies in modern sectors. The most important is that new, innovative enterprises are unable to scale up their operations. This is mainly due to the still fragmented European markets for goods, services, and capital.
In Europe, many start-ups emerge, but their growth is often blocked by non-uniform regulations in EU countries and difficulties in accessing financing. At some stage, many of them move to the US where it is much easier to find investors. The effect is such that in 2023, only 8% of "unicorns," or new companies valued at over $1.06 billion, came from the EU. By comparison, the US produced 66% of "unicorns," and China 26%.
