Small and stagnant. Why European businesses are struggling to scale up

In 2008, US listed companies were valued at $11,590 billion on the stock market, compared with $8,640 billion for European ones. The gap between the two markets was around $3,000 billion. In 2023, however, the difference had skyrocketed to 34,000 billion, a figure comparable to US GDP. This is according to a recently published NBER paper entitled “The Value Gap: Europe Fails to Catch Up”.

To find an explanation for this gap, the three authors of the study (Böbecker, Efraim Benmelech and João Monteiro) analysed the two markets. And for them, the easy answers do not hold up. Removing the top 1 per cent of companies, such as Big Tech firms, leaves the gap intact. Within the same sector, an average American company is still worth 50 per cent more than a European one. This is because, in Europe, the size of a company depends on that of its country and its market. In the EU, a 1 per cent increase in GDP in the home country is associated with a 0.8 per cent rise in sales, but in the United States no such link emerges. “This leads us to believe that for many European companies, selling in another country is still more difficult than selling within their own national borders. Integration works better for goods than for services: one limitation is certainly language, followed by differing regulations and tax systems, which increase administrative burdens. “Our data indicate that these borders are holding back growth,” Bo Becker, professor of finance at the Stockholm School of Economics and one of the study’s authors, tells Il Foglio. And on the subject of services, he emphasises: “A product approved in Belgium can also be sold in Spain, whereas for a bank, every border introduces a new set of rules. If I open a bank in Denmark, can I take deposits in the Netherlands? No.”

Added to the size of the market is the scarcity of capital needed to make the leap. In 2023, venture capital investment accounted for 0.5 per cent of US GDP, but in Denmark – the most active European country – it was just 0.15 per cent. “We were surprised by the size of the companies and the huge difference in the cost of capital for smaller firms,” explains Becker. For smaller European firms, the cost of capital implied by valuations exceeds 60 per cent, compared with around 40 per cent in the United States. “If a company worth one billion has an idea that could increase its value to one hundred, it is much easier to realise that in the United States, because capital costs less,” reflects the economist. And much of that capital comes from pensions: US pension funds are worth 153 per cent of GDP, whilst in Europe contributions are used to pay for current pensions rather than being invested. “Much of the US capital comes from pensions. This is something that is decided on a country-by-country basis; Brussels cannot dictate it. But, for example, it is one of the reasons why Sweden performs better than others in this regard.”