Europe's technology gap affects the competitiveness of the region – up to 2–4 trillion euros per year until 2040 are at stake
Europe has been experiencing a crisis centered on the region’s technological capabilities and the competitiveness of its firms. Europe has many high-performing companies, but, in aggregate, they are overall weaker than their counterparts in the US – the growth, profitability, innovation and R&D investments of large European companies are not at the level of global competitors. This is largely because they lag behind on tech, according to a new McKinsey Global Institute (MGI) report “Securing Europe’s competitiveness: Addressing its technology gap”. If Europe can close its technology gap, it has the opportunity to capture value of 2–4 trillion euros a year by 2040.
Europe has had a strong record on sustainability and inclusion. On inclusion, Europe leads on most dimensions including equality, social progress, and life satisfaction. On sustainability, Europe has 2.4 times lower CO2 emissions per capita than the United States, and its emissions are declining at between 30 and 50 percent faster than them, respectively. Nevertheless, European companies perform worse than those in the United States. This is largely due to technology-creating industries, specifically information and communications technologies (ICT) and pharmaceuticals. Together, these sectors account for 90 percent of the ROIC gap, 80 percent of the investment gap, 60 percent of the growth gap, and 75 percent of the R&D gap. However, recent signs indicate that Europe’s new company formation, including in tech industries, is starting to pick up.
"In Europe, the number of billion-valuation companies, so-called unicorns, increased the most in 2021 since 2014, when 98 new unicorns were also created. In 2021, Europe also attracted a record amount of venture capital funding ($110 billion), exceeding China’s tally. Nevertheless, Europe’s capital investment is still nearly three times lower than that of the United States," says Kari Kulojärvi, McKinsey & Company's Managing Partner in Finland and the Baltics.
Europe leads on only two of ten technologies
McKinsey's report takes a closer look at ten technologies in which Europe leads in only two – in next-gen materials and future cleantech. As tech spreads across sectors, increasingly determining competitive dynamics, European players appear increasingly vulnerable, even in traditional strongholds such as automotive. Unless tackled, this slow-motion crisis will handicap Europe on many dimensions, including growth, inclusion, and sustainability, as well as its strategic autonomy and voice in the world.
"Europe is now in an energy crisis that has been in the making for decades. We must work hard now to not face a similar situation in technology one to two decades from now. Fortunately, there is a great momentum among European leaders to take decisive action, let’s extend it from energy to technological capabilities," says Kari Kulojärvi.
According to McKinsey’s report, up to 2–4 trillion euros a year could be at stake by 2040 if no action is taken. This is equivalent, for example, to 30–70 percent of Europe’s forecast GDP growth between 2019 and 2040, or around 90 percent of all current European social expenditure, or 500 euros per month for every European citizen.
To improve its competitiveness and scale, Europe must take action
McKinsey's report presents ways that enable European companies to play with scale and speed, level the playing field with other regions and established companies. Europe can, and should, continue to leverage its many strengths, including high-quality education systems and the fact that it is the most open and connected large economy. Europe should especially invest in activities that would support innovation development. For example, Europe could consider combining public innovation procurement and R&D support from defense to healthcare. Europe could also consider accelerated development of the official approval and decision-making process.
"We need to get the ambition level right. In Finland, for example, we have new, highly innovative, breakthrough technologies under development and world-class competencies and capabilities, which is why we must have enough ambition not only to follow, but also to lead technological development worldwide", says Kari Kulojärvi.
More information:
Kari Kulojärvi
Press contact:
Mari Muoniovaara
External Relations Specialist
+358 40 728 1550
mari_muoniovaara@mckinsey.com
About McKinsey & Company
McKinsey is a global management consulting firm committed to helping organizations accelerate sustainable and inclusive growth. We work with clients across the private, public, and social sectors to solve complex problems and create positive change for all their stakeholders. We combine bold strategies and transformative technologies to help organizations innovate more sustainably, achieve lasting gains in performance, and build workforces that will thrive for this generation and the next. More information: www.mckinsey.com/fi & www.mckinsey.com/mgi
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