Europe s Unexploited Potential Jan Svejnar March 2004 Everett E Berg Professor of Business Administration and Professor of Economics at the University of Michigan This paper benefited from valuable research assistance provided by Patricia Loh The electronic version of this paper can be obtained at www wdi bus umich edu 2 The Main Issues The European economy has been getting a bad reputation There is a broad perception that American businesses do better than those located in Europe in part because they operate in a more flexible and less burdensome institutional and legal setting New ideas and initiatives come mostly from America and Europe at best follows While many indicators support this view on the whole this picture may be seriously misleading Between the late 1940s and early 1990s Western Europe experienced an extended period of gradual catching up with the United States US in productivity technological sophistication and living standards A number of analysts including Nelson and Wright 1992 even predicted that Western Europe would catch up and start overtaking the US in the late 1990s or early 2000s For a number of reasons related primarily to rapid globalization and a wave of technological and financial innovations that originated in America in the 1990s these prophecies have not materialized at least not yet But one should not be despondent about Europe s potential Its firms and economies have a number of important strengths and unexploited potential that can be converted into superior corporate and overall economic performance In sum the race for competitiveness is Europe s to lose It is true that since the early 1990s European Union s EU s position relative to the US has weakened in terms of the rate of growth of the gross domestic product GDP What is less advertised is the fact that in terms of GDP per capita and labor productivity in the business sector the EU and the US achieved comparable rates of growth between 1990 and the early 2000s The US experienced a major wave of immigration with the new labor force entrants serving as an important driver of the increase in American GDP Europe s population remained roughly constant and GDP increases corresponded more closely to the rise in productivity 1 Moreover sweeping generalizations also ignore the fact that Europe is quite heterogeneous with productivity and employment growth in a number of the smaller states increasing more rapidly than in the larger ones Finally Europe has carried out major structural changes notably the introduction of Euro and the ongoing enlargement which will have beneficial economic effects over time For most practical purposes by the early 1990s the United States and Western Europe hadachieved similar levels of development and the US was more the first among equals than a leader that was substantially ahead of others In business the US and Japan led in some sectors and Europe started leading in others e g the GSM technology civil aircraft production specialty chemicals and areas of biotechnology Moreover during the 1990s acquisitions such as that of Chrysler by Daimler Benz and Random House by Bertelsmann illustrated the fact that substantial transatlantic investment flows went in both directions Finally the European Commission s decisions notably its disapproval of GE s acquisition of Honeywell projected EU s regulatory might even to seemingly external business activities such as mergers between non EU companies 1 It should be noted however that the economy of the European Union was slower in creating jobs thus generating higher unemployment rates than the United States 3 What has allowed the US to pull ahead and generate the impression that it has done so is the fact that in the increasingly global world the US spearheaded and made use of several important developments Identifying them is useful for the design of an effective business strategy and successful public policy Entrepreneurship and Venture Capital The financial bubble of the 1990s generated larger amounts of venture capital risk taking and innovation in the US than Europe Venture capitalists and entrepreneurs in Europe moved in the same direction but they were less numerous and proceeded slower As a result when the financial bubble burst and the availability of venture capital shrank in the early 2000s US firms were ahead in terms of reaping the benefits of accumulated inventions and innovations Going forward it is important for business leaders in Europe to recognize and exploit new entrepreneurial opportunities Regulation Cost of Doing Business Businesses in Europe have also suffered because the traditionally heavier government regulation in Europe became more burdensome in the increasingly competitive global environment High and rising labor costs combined with relatively rigid labor market employment protection regulations made large parts of the European Union less competitive relative to the US and contributed to the rise in unemployment in Europe This constituted a major departure from the 1970s when the unemployment rate was almost twice as high in the United States than in Europe Since the 1970s the US labor markets and their institutions became more flexible as trade unions diminished in importance and real wages rose very slowly US capital market deregulation was also substantial especially in the 1990s These developments were much less pronounced in Europe Moreover stricter product market regulations in Europe have slowed down firm entry and exacerbated the effects of labor and capital market regulation The inability of the EU to implement agreed upon reforms such as the introduction of a single community patent and recognition of professional degrees exemplify the burdens and restrictions that Europe has been imposing on its firms and workers The establishment of the European Union while enhancing the functioning of the common market generated additional red tape associated with the need to coordinate national and Community wide jurisdictions At the same time the US government pursued policies conducive to business and growth including the development of internet 2 Important steps have already been taken to make the EU and national government institutions more conducive and less restrictive for business More needs to be done however in further developing financial markets reducing and reorienting government 2 Started as a government activity the development process was gradually shifted through the government s
View Full Document
Unlocking...