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Categorized | Economy

Silicon Valley and Europe’s productivity


Posted on May 31, 2016

A cyclist rides past Google Inc. offices inside the Googleplex headquarters in Mountain View, California, U.S., on Thursday, Feb. 18, 2016. Google, part of Alphabet Inc., plans on tapping into existing fiber networks in San Francisco to deliver ultra-fast internet access across the city. Photographer: Michael Short/Bloomberg©Bloomberg

“If you are an entrepreneur, the best thing you can do is move to the US.” This is not the boast of a proud American but the advice one successful German entrepreneur hands out to his compatriots.

I heard this at a recent conference on how to revive growth and jobs in Europe. It is typical of the stories told by frustrated European entrepreneurs. Europe has one of the most skilled workforces on the planet, they say, so why doesn’t it have its own Facebook, Google or Apple?

    They complain that regulators and companies have battened down the hatches as waves of technological change sweep in from the west. Europe seems condemned to be disrupted, rather than to disrupt. That may be so, but I wonder whether a European Silicon Valley is really the answer to the continent’s economic problems.

    That is not to say that innovation is unimportant if you want to generate growth and jobs. Even though big companies are generally more productive than small ones, OECD research shows that there are tight correlations between productivity growth and dynamism in the corporate world: higher corporate “birth” and “death” rates enable resources to move where they can be best used.

    At the same time, new companies come up with novel ideas that force complacent old incumbents to boost their own levels of productivity.

    So, it is not surprising that European entrepreneurs cast jealous glances across the Atlantic, where there are fewer problems to contend with. In Europe, the flow of credit to small businesses has been hampered by the hangover of bad debts from the financial crisis and regulators’ attempts to make the system safer. The US did a better job of flushing out the rotten loans from the system.

    The US is also a true single market, which makes it easier for a small company to expand quickly across a population of more than 300m. In Europe, despite frequent pledges to “complete” the single market for services, companies that want to exploit the scale of the continent must contend with a thicket of regulations that vary from country to country.

    But in spite of all the US’s advantages — in spite of its Elon Musks, its Facebooks and its Ubers — the country is doing no better than the eurozone when it comes to productivity growth. In fact, this year it is doing worse.

    Figures published last week by the Conference Board, a US think-tank, suggest productivity is set to fall in the US for the first time in three decades. American workers are producing about 0.2 per cent less gross domestic product per hour than they were last year. Even workers in the eurozone are doing better than that: their output per hour is about 0.3 per cent higher.

    Productivity growth has slowed across the developed and developing world in recent years. Yet it is particularly puzzling in the country that has produced some of the most innovative companies.

    What is going on? Some argue that today’s innovations are simply not as transformative as those of the past. Others think the “diffusion machine” may be broken: that innovation is simply not seeping out from a handful of groundbreaking companies into the rest of the economy.

    If you look past the frenetic activity around San Francisco, you see the number of business start-ups in the US as a whole has slumped, just as it has in Europe.

    Work published by the OECD suggests that there is a growing divide between “frontier” businesses and the rest of the economy, with some regions and workers left behind in a low-skill, low-productivity trap.

    Indeed, policymakers gathered in Paris for the OECD’s annual meetings this week are starting to explore the possibility that there is a vicious circle between rising inequality and slowing productivity.

    Whatever the origins of the world’s productivity problem, Silicon Valley does not seem to be supplying the solution. While America’s great technology companies have changed the way we live and generated vast wealth for some people, they have not triggered a widespread improvement in US productivity or household incomes.

    Some Europeans may hanker after a Silicon Valley of their own. But the better question is not why Europe cannot emulate America’s brand of innovation but why America’s brand of innovation does not seem to work for the economy any more.

    Sarah.Oconnor@ft.com
    Twitter: @sarahoconnor_