Europe’s innovation no man’s land
I recently wrote that the European Commission’s new Start-up and Scale-Up Strategy contains some great measures for increasing the supply of start-ups and products in Europe, but it should be bolder in how to stimulate the customer demand needed for these companies to scale.
Two regulatory approaches spring to mind for building the demand-side of a market:
Generating ‘organic’ demand: Removing regulatory barriers that prevent new technologies from coming to market, which customers would voluntarily switch to and demand more of, because they are superior to the incumbent offerings. (Some novel drug-device combinations could be such as examples).
Generating ‘forced’ demand: Regulating out incumbent – but functionally necessary – technologies, thus obliging customers to demand alternatives (e.g. certain fuel additives); or regulating in new technologies (e.g. setting percentage shares for renewables in a country’s energy mix, which force them to buy more solar, wind etc.).
Clearly, much of the above is domain-specific, so outside the scope of the sector-agnostic Strategy. But it does highlight a problem with the EU’s regulatory playbook: while needing a mix of ‘forced’ and ‘organic’ approaches, Europe seems stuck in a no man’s land between the two.
On the first approach: the Start-Up Strategy acknowledges the need to reduce regulatory burden for strategic sectors, to create regulatory sandboxes for approving novel technologies, and to stress-test planned national innovation policies. While these are supply-side in the sense that they remove barriers for innovative technologies to come to market, they are also demand-side, in the sense that ‘If you build (better products), they will come’.
The problem is, Europe’s track record isn’t great here, partly because it is held-back by its preference for the precautionary principle. Taking a recent example, by over-emphasising (and over-regulating) hypothetical risk in the AI Act, we have kneecapped Europe’s nascent artificial intelligence industry, pushing the potential economic benefits for developers – and the productivity gains for users – elsewhere. The Commission will soon bring forward legislative proposals in other ‘must-win’ industries: biotech, space, quantum etc. where it cannot afford to make the same mistake.
(A fun variation on this theme is when regulators don’t just lock out superior technologies, but lock in inferior ones, like the mandatory USB-C “Common Charger”. It will almost definitely be technologically obsolete in a few years. An innovator will soon make a superior (and a fortune), but not in the EU. Why would a European innovator create something that builds in regulatory-mandated duplication and/or redundancy?)
On the second approach, generating forced demand: as part of its competitiveness drive, the EU is watering down plans to regulate out certain technologies which, while serving a purpose, come with high environmental externalities. The EU market for one such product was estimated at over 5 billion euro in 2023, with a CAGR of over 3.5% to 2028.
In 2023, Europe was the world-leading investor in cleantech start-ups. But by keeping such products and their drawbacks on the market indefinitely rather than, say, phasing them out over several years, Brussels is undermining the business case for start-ups and investors to even try and quickly bring better, cleaner alternatives to market, capture some of that enormous and growing market, create competition, and move the technology down the cost-curve.
Last week I argued the Strategy focused on supply-side measures because it has a stronger mandate to do so. The EU definitely has a legal basis to ‘preserve, protect and enhance the quality of the environment … and protect human health’. If that means opening markets for innovative, home-grown technologies in the process, all the better.
The European Commission took office in late 2024 on a semi-explicit pledge to slam the brakes on its ambitious sustainability regulatory agenda. It would be interesting to identify if this can, in part, explain why Q1 2025 then saw the worst quarter for European clean tech investment since Q3 2020.
Mixed signals
If we are aiming for innovation and productivity, Europe risks getting lost in regulatory no man’s land. It is not regulating out inferior, but incumbent, products for fear of disrupting the status-quo (and what is innovation, if not disrupting the status-quo?). It has not succeeded in clearing a path for some gamechanger technologies for fear of risks that may not even exist.
I have written about the excellent thesis from Byrne Hobart and Tobias Huber in their book, Boom. On innovation and progress, they argue that “the likelihood that a futuristic vision will be realised is partly a function of how many people believe in it and how strongly”, and that hype (in the form of ‘inflection’ bubbles) is needed to increase the number, and conviction, of those who will realise this future.
I argued there that it is the job of policymakers to a send signal to the would-be innovators that the Institutions are willing to backstop their commercial risk-taking, and hype them and their technologies up.
The Start-up and Scale-up Strategy sends a clear signal that Europe wants would-be founders to start and incorporate here. But to show Europe wants to create the demand needed for these innovators to scale in Europe, the Commission may have to send up flares elsewhere.