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Cost of Failure: A First Order Issue in Europe Lag in Innovation
"An additional important obstacle to the successful development of innovative companies in Europe is the prohibitively high cost of failure associated with rigid labour market regulations. This can make the high-risk, high-reward nature of disruptive innovation in sectors such as AI and biotech essentially unprofitable for large-scale investment, as analysed by Yann Coatanlem and Oliver Coste. Through an analysis of restructuring costs in large enterprises, the authors estimate that these expenses can be up to ten times higher in Western Europe compared to the U.S. The solution is “targeted flexicurity” based on the models applied in Denmark and Sweden. This includes targeted reforms to employment protection legislation focused on high earners only, which can preserve social protection while restoring the agility that is crucial for disruptive innovation, productivity and growth."
Les coûts de restructuration supérieurs en Europe par rapport aux Etats‑Unis freineraient en outre la prise de risque et le développement du marché du capital‑risque européen.
François Villeroy de Galhau
"Employment Protection Laws (EPL) [...] are a first order determinant of the innovation taking place at the technology frontier (we will often call it “radical innovation” or “disruptive innovation”) and can explain a major part of the gap between the United States and Europe in tech, which has been at the center of most disruptive innovations over the last 4 decades. "
Heading US investors tend to be more cautious about investing in Europe due, in large part, to the significantly higher restructuring costs here compared to those in the US and other regions. Investors are more reluctant to take risks here, even at equal levels of innovation attractiveness. This was the key insight from a study titled ‘The Costs of Restructuring and Competitiveness in Disruptive Innovation’ by O. Coste and Y. Coatanlem, which was discussed at the October session of a working group.
• Cost of Failure is recognized as a Key Factor in the “closing the innovation gap” Pilar
• “Lower growth prospects for EU start-ups and higher costs of failure weaken their attractiveness in the eyes of investors. As a result, many seek funding in the US and relocate there to benefit from a larger market and customer base.”
• “The Commission will thus propose a 28th legal regime, which will simplify applicable rules and reduce the cost of failure, including any relevant aspects of corporate law, insolvency, labour and tax law.”
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