Europe has a less dynamic business environment than the US,
underlying long-held concerns about Europe"s productivity gap,
according to study published this month by the UK's National
Endowment for Science, Technology and the Arts (NESTA). European
firms grow and shrink at a slower pace than American
most detailed analysis to date of the growth characteristics of
six million businesses across Europe, the US, Canada and New
Zealand between 2002 and 2005, the report
Growth Dynamics finds that European firms grow and
shrink at a slower pace than their American counterparts. This
lack of dynamic movement in Europe means that innovative, high
growth businesses find it harder to penetrate the market whilst
companies which stop innovating continue to exist.
The key patterns of firm expansion and contraction across
Europe and the US revealed by the research show that:
- Europe has fewer high growth firms
than the US (4.3% vs. 5.9%). The three-year employment
growth rate of a firm at the 95th percentile of
the growth distribution (i.e. a business that grows faster
than 95% of businesses in its country) is 86% in the US,
compared to only 71% in the average European country.
- The shortfall is not limited to only the fastest
growing firms. The share of medium-growth firms
in European countries is also lower. Firms at the 75th
percentile of the distribution grow 19% faster in the US
than in Europe (18% vs. 15%)
- There are more steady-state businesses in Europe.
Almost half of European firms with ten or more employees are
effectively stable (46% of all surviving companies), neither
growing nor shrinking. This compares with 37%
in the US.
- Greater dynamism also means more failure.
US firms at the 25th percentile of the growth
distribution shrink 27 per cent faster than in Europe (-24%
vs. -19%). The analysis also shows that the faster the firms
at the top grow the faster firms at the bottom shrink.
The study says this has implications for both innovation and
productivity since a more dynamic business landscape allows for
experimentation, new products, services, and processes to rise
to prominence, and for resources to be relocated from less to
more productive businesses.
Jonathan Kestenbaum, chief executive of NESTA, says:
"Whilst large established firms are critical to any economy, our
research shows that innovative growth businesses are responsible
for the majority of job creation. European markets need to be
more open and nimble to these businesses if we are to achieve
Kestenbaum added: "Zara, Autonomy and Skype demonstrate
the power of European ingenuity but if we want to see more of
these businesses then we have to make sure that we have the
right environment to allow them to flourish".
Bruegel, a European economic policy think-tank based in
Brussels has shown that the US and Europe have a similar number
of companies in the world's 500 largest companies by market
capitalisation. However, only 2% of the European companies were
founded after 1975, in sharp contrast with 14% in the US.
The growth of companies differs significantly
between Europe, the US and emerging markets.
Europe’s corporate landscape is dominated by
older, established companies. Few large companies have emerged
in Europe since the second world war. Of the world’s 500 largest
companies only three were started in Europe after 1975, compared
with 23 in the US and 21 in emerging markets. Many new firms are
created in Europe, but after creation they tend to grow less
briskly than in other economies. As OECD research has
illustrated, among those firms that survive in the years
following their creation, the pace of growth is much quicker in
the United States. While in Europe the largest companies are
likely to stay long at the top of their world, in the US they
are vigorously challenged by new entrants, and by their own
shareholders who often force them to divest non-core activities
or to split into separate entities.
Bruegel says the US financial system has evolved
quickly to provide such new corporate finance solutions. More
research is needed to prove how much of the difference in the
growth of emerging firms between the US and Europe is due to
differences in financial systems, rather than other factors
(such as barriers to entry and imperfect competition in markets
for goods and services, as well as labour market constraints
that discourage hiring in a risky environment).
However, there is no contradiction between
recognising the undeniable impact of non-financial factors and
emphasising the importance of adequate corporate finance. The
academic literature in the last 10 years has established a solid
causal link between an economy’s financial development and its
Where Will Europe's Next
Champions Come From? (pdf)
The NESTA research has important implications for
policymakers across Europe, suggesting the need to combine an
improved venture capital climate to support high growth firms
with reforms to encourage competition, entrepreneurship and
labour market flexibility. It would also need to remove barriers
to entry, expansion and contraction; and remove barriers that
stop businesses, especially in service industries, operating
NESTA says it and its partners will examine the specific
drivers of business growth, with a view to providing more
detailed evidence to support policymakers in tackling Europe"s
better at exploiting IT; Better managers
Research published by the Centre
for Economic Performance at the London School of Economics in the UK in 2005 showed
that the US productivity miracle of the previous 10 years was not explained by
the US business environment being better; rather, US companies were simply better
at using computers and other technology to drive productivity higher. The effect
explained most of the gap in productivity growth between the US and the UK and
other European countries over the previous decade.
US output per hour grew by 2.5% a
year on average between 1995 and 2004 compared with 1.5% in the 15 members of
the EU before the 2004 enlargement.
Professor John Van Reenen together with
Nick Bloom and
Raffaella Sadun of the Centre for
Economic Performance (CEP) at the London School of Economics, published a
joint investigation with the UK Office for National Statistics (ONS). The research paper titled It ain't what you do, it's the way that you do
I.T.: testing explanations of productivity growth using US affiliates (pdf)
indicated that investment in new information and communications
technologies (ICT) improves the productivity of UK businesses.
American firms continue to have the best
management practices in the world: only 1 in every 50 can be
described as ‘very badly managed’, compared with roughly 1 in 12
in the UK and more than 1 in 5 in Greece and India. These are
among the conclusions of a 2007 survey of over 4,000 firms
across the UK, continental Europe, the United States and Asia.
The research by the CEP, McKinsey & Company and
Stanford University used an innovative approach to surveying
management practices. The results of the study revealed that:
US firms are on
average the best managed, with Swedish, Japanese and German
firms also very well run. Greek and Indian firms are the worst
managed, and UK firms are in the middle of the pack alongside
France and Italy.
across countries are largely driven by the ‘tail’ of badly
managed firms. Fewer than 2% of US firms are ‘very badly
managed’, while the UK has 8%, and the Greeks and Indians have
Managers are very
poor at self-assessment:
Over 85% of
managers say that their firm is better managed than average.
management has almost no link with actual firm performance
or the management ‘scores’ that the researchers calculate.
Four factors help to
explain management practices:
competition – which weeds out the badly run firms and spur
existing firms to improve.
family firms – those that appoint the eldest son as the CEO
– are usually worse managed.
both workers and managers – which improves management
market regulations impair the ability of companies to
improve their people management.
The UK-US management
gap is driven predominantly by the UK’s high share of
‘traditional’ family firms and lower levels of education of
workers and managers.
There are also
differences across countries in relative management
UK, US and
Indian firms are relatively stronger at people
management (for example, performance rewards and merit-based
German, French, Italian and Swedish firms are relatively
stronger at shopfloor operations management (for
example, monitoring and continuous improvement).
to achieve excellent management practices wherever they are
Professor Nick Bloom commented: "These
results are worrying for US and European firms. While the
typical Indian firm is badly managed, they also have some
extremely well run firms. In fact, the top 30% of Indian firms
are better managed than the average UK firm. Combined with their
cheap labour costs, this makes them formidable competitors."
"Family firms that hand down the CEO position
to the eldest son are typically very badly managed. Imagine
if we picked the England team as the eldest sons of the 1966
World Cup winners - - I doubt we’d ever win a match."
Raffaella Sadun commented: "The US supremacy
in management practices appears to be driven by some simple
ingredients: free markets, low regulation and merit-based
"Private equity owned firms are some of the
best managed while traditional family firms are some of the
worst. So, private equity firms may play an important role in
preserving UK manufacturing when they buy out traditional family
Professor John Van Reenen commented: "It is
surprising just how bad managers are at assessing their own
firm’s management. The average manager’s self-assessment is
"well above average," bearing almost no relation to either their
firm’s performance or actual management practices. Maybe this is
why so many people find David Brent so painfully realistic in
Summary Report: Management Practice and Productivity: Why they
...on the other hand
reported last April that contrary to
the widespread cliché of American
dynamism versus European economic
stagnation, over the past decade
Europe's top companies have beaten
America's (not to mention Japan's) by an
often substantial margin. Despite the
rise of China and the rest, Europe has
held roughly steady, at about 17%,
its share of world exports since 2000,
while America's has fallen by more than
a third, from 17 to 11% - - a crude but
significant indicator of global
competitiveness. Since the early 1990s,
Europe has steadily expanded its share
of the world's 100 biggest
multinationals compiled annually by the
UN Conference on Trade and Development,
from 57 in 1991 to 61 last year, while
the U.S. number has dropped from 26 to
Europe has moved up these and
other corporate rankings with new and
fast-expanding companies in such sectors
as energy (Germany's E.On and France's
GDF Suez), finance (Britain's HSBC and
Italy's UniCredit), and
telecommunications (Spain's Telefónica
and Britain's Vodafone) - - while
America's roster of large global
companies has been mostly static and
declining, with new stars like Google
the exception, not the rule.
What's more Newsweek said, Europe's
growth has been highly profitable.
According to a study of the top 3,000
global companies by the German business
consultancy Roland Berger, the European
companies in the group grew profits at
an average rate of 13% a year over the
decade from 1998 to 2008, almost double
the 7% rate for their US rivals. Berger
CEO Burkhard Schwenker said corporate
Europe now has higher earning power than
America Inc., with gross earnings in the
Berger sample averaging 19.8% of 2008
revenues in Europe, versus 13% in the
US. " Some of these numbers must
obviously be taken with a grain of
salt—for example, 2009 earnings (a
compilation of which Berger plans to
release next month*) show a significant
rebound for U.S. companies versus their
European rivals, who were hit later and
harder by the recession," the report
*We haven't been able to locate an update.
 High growth firms are all enterprises with 10 or more
employees in the beginning of the observation period with
average annualised employment growth greater than 20% over a
three year period.
 Medium growth firms are defined as all enterprises with
10 or more employees in the beginning of the observation period
with average annualised employment growth between 10% and 20%
over a three year period.
 Stable firms are defined as all enterprises with 10 or
more employees in the beginning of the observation period with
average annualised employment growth between -5% and 5% over a
three year period.