Innovation
Growing ICT sector in Europe accounts for 5% of employment
By Michael Hennigan, Finfacts founder and editor
Mar 5, 2015 - 7:24 AM

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The growing ICT sector in Europe only accounts for 5% of employment but it's adding more new firms than other sectors and young firms (defined as up to 5 years old) are key to job creation.

While ICT (information and communications technology) companies constitute a small ratio of all European companies (5.6% of all companies in 2011) and of employment in European national economies (4.8% of employed in these companies in 2011), the ICT sector is, however, growing in terms of number of companies. The share of ICT companies in the economy has steadily increased for two reasons. First, it has increased because the share of new companies that are ICT companies (6% in 2011) is larger than the share of active companies that are ICT companies (4.6% in 2011). Second, newly-created ICT companies.

A new report, 'Birth, survival, growth and Death of ICT Companies - How are ICT companies faring in the European Union: a Macroeconomic Analysis,' published this week by the Joint Research Centre (JCT) of the European Commission, makes an important contribution to understanding the state of innovation in the Union.

The author Garry A. Gabison, who is both  lawyer and economist (LD from University of Virginia School of Law; PhD in economics from Yale University), says that the report investigates "three sectors and three ICT subsectors of the economy: services and ICT services; manufacturing and ICT manufacturing; wholesale and ICT wholesale. ICT service companies drive the observed increase of ICT companies within the broader economy. European economies become more and more tertiary economies and service companies account for more than three quarters of all companies. The ICT subsectors reflect this wider shift toward the tertiary sector: ICT service companies represent three quarters of all ICT companies and almost nine in every ten new ICT companies are ICT service companies."

The majority of European economies have seen a growth in the numbers of new ICT service companies in recent times, though they have on average lost companies in ICT manufacturing and ICT wholesale. Net employment from these newly-created and exiting ICT companies follow the same pattern: births and deaths of ICT manufacturing and ICT wholesale companies led to job tightening, whereas births and deaths of ICT service companies led to job creations.

Last year a report published by the Organisation for Economic Cooperation and Development (OECD) based on research on 18 countries showed that young SMEs (small and medium size firms up to 249 employees) were primarily responsible for the job creation over a decade.

Even though they represented only 17% of employment, they were responsible for 42% of total job creation and only 22% of destruction — making them the net job creators. Older SMEs were generally net job destroyers.

The think-tank for 34 mainly developed member countries said: "Policies to support job creation by SMEs need to distinguish  more clearly the respective roles of firm age and firm size to avoid misleading policy advice."

Poland, based on 2010 data created the third largest number of ICT companies (5,639) and the second largest employment from this net company increase (7,607) and it experienced an increase in all three ICT subsectors. The UK created the second highest number of companies (7,970) and employment from these companies (7,158) using 2011 data; the increase in companies and employment was driven by service companies. Romania had the highest net employment created per ICT net companies with 3.2 net employees per net company.

Austria, Italy, Ireland (2009), and Portugal saw a decrease in the number of companies and in number of people employed by ICT companies.

However, the Irish data was for the worst year of the recession. Nevertheless, there was no jobs growth in the ICT sector in both 2013 and 2014.

Service companies form the largest sector of the economy. The number of service companies is seven times bigger than the number of manufacturing and wholesale companies. The ICT sector accounts for 4.6% of all companies.

However, in 2011, the average manufacturing company created more employment than the average service company: manufacturing companies had on average 13 employees as compared to 5 employees in services companies while ICT service companies employed three quarters of the people employed in ICT companies.

New ICT service companies represented 5.7% of new service companies in 2008 and this share increased to 6.7% in 2011.

Those employed in the ICT service companies represented 3.7% of all employed in 2011; those employed in ICT wholesale companies about 0.5%; and in ICT manufacturing 0.6%.

The share of employed in newly-created ICT companies fell in 2011 as did the overall total but the decrease was concentrated in ICT manufacturing companies. New ICT services and wholesale companies employed an increasing share of individuals employed by ICT companies in 2008 and in 2011.

In Europe in 2011, more ICT service companies were created (108,234) than exited (71,509). About two thirds of ICT service company births compensate for ICT service company deaths. The remaining third increases the number of ICT service companies. In 21 countries, more ICT service companies were created than destroyed.

The three-year survival rates of ICT service companies created in 2008 vary from 29% (Estonia) to 79% (Sweden) with an average of 61%. The survival rate for ICT service companies created in 2008 was higher in 2011 by six percentage points than it was for non-ICT service companies of the same age.

High growth companies are companies with 10 or more employees and 10% or more growth as measured by employment over at least 3 years, and the average ICT rate is 15.8% of ICT companies.  However, the report suggests that the number maybe underestimated.

On average, the overall ratio of high growth companies that are ICT companies is 9.3%.

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