EUROPE'S TECHNOLOGY GAP

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87-00462R000100110010-3
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 7
• Document Creation Date: December 22, 2016
• Document Release Date: December 30, 2009
• Sequence Number: 10
• Publication Date: February 19, 1985
• Content Type: OPEN SOURCE

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THE DIRECTOR OF
CENTRAL INTELLIGENCE
National Intelligence Council
19 February 1985
Dr. George A. Keyworth
Office of Science & Technology Policy
Jay,
This piece from a recent issue of the
Economist offers an exceptionally good insight
to Europe's problem. You get an equally
fascinating, but more philosophical insight,
from The World After Oil, by a buddy of mine
at Business Week named Bruce Nussbaum. You
might just turn to Chapter 3, which deals
with Germany. It's probably the best chapter
in the book.
Herbert E. Meyer
Attachments:
Economist article
The World After Oil
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EUROPE'S TECHNOLOGY GAP
The old world's new fears
Europe often looks for safety first-wars, recession and old age have
made It that way. But this natural caution may prove suicidal now that
the world is in the midst of a deep technological and economic change.
America and Japan have been racing to meet this challenge-and seem
to be prospering. Europe has held back, and now seems to be faltering.
Is a technology gap opening up between Europe on the one hand and
Japan and America on the other? What should Europeans do about it?
Western Europe's economies have been
growing feebly. Their ability to provide
jobs has been weaker still: in the decade
after the 1973 oil shock, the United States
created 14m jobs and Japan 3m; the
countries of the European community
lost almost 2m. Most predictions are that
the last half of the 1980s will continue the
tale of European stagnation.
The problem has outgrown its econom-
ic dimension and now has political conse-
quences. Mr Lawrence Eagleburger, who
was America's undersecretary of state for
political affairs until he retired last spring,
fears that an economically uncompetitive,
western Europe would be an increasingly
unconfident, protectionist, and eastward-
looking Europe. He stirred controversy
by musing out loud about this last winter.
He now says, with admitted exaggera-
tion, that western Europe could find itself
in 40 years in the top tier of third-world
countries.
The words would be less shocking if
they did not come from a friend of
Europe. Europeans should take some
time to listen to the rude thoughts of
those indifferent to it. The Californians in
Silicon Valley, who have done so much to
remake America in the past 15 years,
simply wave talk of Europe aside: Europe
does not matter, except as a good market;
etr comee i wve antennae are tuned
across the Pacific, to Japan. It is a compli-
STAT
ment the Japanese return.
Europessimism is a' fashion that comes
and goes. The difference this time is that
many of the fears about Europe have
been collecting around a single broad
notion: the apparent inability of Europe-
ans to compete with the Americans and
Japanese in high-technology industries.
Europe has been losing (along with the
rest of the advanced world) the old heavy
industries like steel that used to underlie
its prosperity. But it seems unable to
follow America and Japan into the new
science-and-technology-based industries
that will generate the wealth of advanced
nations for the next 50 years.
The idea of a technology gap, with an
uncompetitive Europe on the wrong side
of it, deserves a very cold eye. First, high
technology is a dubious concept: nobody
knows how to define it. America's bureau
of labour statistics tried its hand at a few
definitions. One of them turned up such
well-known high-tech industries as
"soaps, cleaners, and toilet preparations"
and "hydraulic cement".
Even on a definition of high tech that
feels right-such as the bureau's one that
produced drugs, computers, telecom-
munications, electronic components, air-
craft, and missiles and spacecraft as high-
tech industries-there are wide variations
in performance. Europe's nuclear power
industry is better off than America's,
Airbus competes (sometimes) successful-
ly with Boeing for American aircraft
orders, and the Ariane rocket has been
beating Nasa's space shuttle as a commer-
cial satellite launcher. Western Europe's
share of the worldwide pharmaceuticals
market is some 30%; its share of telecom-
munications equipment in 1982 was 27%.
Both exceed Europe's share of gross
world product.
Nor is it fair to speak of western
Europe as a single place. Performance in
high-tech industries varies a lot from one
country to another. France, for instance,
is strong in nuclear power, rocket launch-
ers and miltary technology; Britain excels
in software writing, which France has
lately been lagging in.
Despite these reservations, few doubt
that Europe is in real trouble. There are
two reasons, one specific, the other much
broader. The specific worry is Europe's
poor performance in the information in-
dustries-the constellation of electronics-
based industries which produce the hard-
ware and software used to process 93
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EUROPE'S TECHNOLOGI-.OAP - `~
information. The general worry is Eu-
rope's inability to innovate: its sluggish-
ness in creating the new businesses, high-
tech and low, which alone can generate
growth and jobs.
T e. uninformed:
Europe has a bad record, which is getting
worse, in electronics. The unpretty pic-
ture painted by the chart below shows a
worsening European trade balance for
th!e!past two years in every line of elec-
tronics. This has happened despite a sky-
hi gh dollar that should have been sending
Europe's-balance of electronics trade in
the other direction.
This poor showing is important because
the manufacture of information technol-
ogy'~ is already one of the world's biggest
industries. IBM's director of market re-
seaich, Mr -Peter Schavoir, reckons that
th!e industry's annual American revenues
now exceed $110 billion; that accounts for
3.3% of the American gnp' and is about
equal in size to the car industry. Mr
Schavoir predicts that in 1994 the infor-
mation industry's annual production will
be worth some $330 billion, 6% of Ameri-
can:gnp. Mr Ian Mackintosh of the British
market consultancy Mackintosh Interna-
tional reckons that the comparable world-
wide figures are, nearly $300 billion in
198'4.-and more than a trillion dollars in
tlie,mid-1990s. Before 2990, information
technology wi a t a wor s biggest
manufacfiinn in ustry. -
EE counfnes balance of elec-
tronics trade was already more than $9
billion in deficit last year. On present
trends that will lead to a shortfall of some
$26jbillion a year by 1994. In itself this is
not'a crisis. Electronics will make up a big
chunk of manufacturing industry, but like
all manufacturing businesses will contin-
ue to employ fewer and fewer. people to
produce each unit of output. Mr Schavoir
expects that, even with compound annual
growth rates of 15% for the next 10 years,
the information technology industry will
generate only lm new jobs in the United
States by 1994.
iFar more disturbing news for Europe
comes on the other side of the equation:
thei application of electronics. Most of
that information technology is being
bought either for incorporation into other
products or for use by people who are
employed to process information. Vis-
count Etienne Davignon, who retires as
EEC industry commissioner at the end of
this year, guesses that the use of electron-
ics"has important effects on some 80% of
industrial production in an advanced
about 27% of the money spent by the
Pentagon on procurement went for elec-
tronics; 34% was spent on electronics in
1980, and by one estimate the figure will
exceed 40% by 1990.
.TheIother way in which the economy
absorbs electronics is by increasing the
number of workers who use information
technology. Everybody is familiar with
the shift that has been going on in ad-
vanced economies from manufacturing to
services. A similar shift has recently been
occurring between production workers
(those who stand on assembly lines, pilot
aeroplanes or serve food) and informa-
tion workers (those like secretaries, bank
presidents and software writers, whose
job is to create or distribute information)..
Fewerithan 45% of American workers in
1960 were information workers; by last
year more than 56% were.
Why can Europe not simply buy its
information technology from America or
Japan,I incorporate it into its own prod-
ucts and' processes and prosper as they
do? It already does this to some extent.
The West German firm Robert Bosch,
which makes electronic controls for cars
such as fuel-injection devices and anti-
skid braking systems, depends heavily on
integrated circuits for its products, but it
buys only a third of its chips within
Europe. It has its own integrated-circuit
design centre and contracts with Ameri-
can firms such as Texas Instruments to
turn the designs into silicon. Mr Hans
Merkle, the chairman of the company's
supervisory board, says Bosch has never
had a problem getting the chips it needed
at the right time and the right price.
But the incorporation of electronics is
not happening nearly fast enough in Eu-
rope. European consumption of semicon-
ductorlchips, which are the foundation for
The chips are down
Electronics trade balance
the; American defence budget: in 1970. So,n. Mackintosh,n,e,ne?ona,
unttad
States
Computers a
office
automation
Components
Consumer
electronics
all other electronics production, has fall-'
en in the past 10 years froth 30% to' 19%
of the world's total; per-capita consump
tion is only one third of America's and
one quarter of Japans. Production has
fallen apace: Europe supplied 14.5% of
the, world's semiconductors 10 years ago,
and now suppliesionlyl9.5 . If the rela-
tion between production and consump-
It,
tion holds, the futur
e) looks even more
'
chilling:. Europe
s market , share for the
supply of advanced metal-oxide-semicon-
ductors, which will dminate chip-making
for the net few ye'ars') is only 6%. !'
Europe's already limited ability to ab-
sorb electronics bi buying it from abroad
is further threatened) by the shortening
life'of electronics products. A sophisticat-
ed one takes 8-10 years to be brought
from conception to market. The immense
investment this requires must then be ij
recouped within I two! years. Take the
public telephone switch: the old electro-'
l
mechanical kind had
a sales life of at least
10 years; the new `electronic switches,
which cost $500m' 1 billion to develop, are
obsolete within five years of the first sale:
This does not makes those who develop
a new technology'eager to license it to
anybody else. Moreover, the increasing
complexity of the technology, combined
with its brief life, makes it harder for
those who eventuallyi do get licences to
master it in time toi make a product
somebodywants to buy.
There is another; technological, prob=
'lam.. More and more 'of the :design of an
entire electronics .1 system is being
squeezed on to al single piece of silicon.
Mr Pasquale Pistorio~ the head of the
Italian chip-making firm SGS-Ates, says
that this demand's close co-operation be-
tween those who incorporate chips into
their products and the people who are
making the chips:I It is naive to think that
IBM and several" ibttier ;American corn=
puter-makers arelnot.jcarefully consulted
by Intel (for example')iwhen it is making
tomorrow's microprocessor chip. What
this means for European computer com-
panies is that they understand the basic
workings 'of their next-,generation ma-
'
chines far later thantlieir
competitors (as
much as 18 monihs,I by one reckoning).
Set this delay against the background of,a
continually shortening product cycle.
... and fh'e
unadverit d ;sous
Europe's weakness in information tech-
nology is a symptom of a more dee-
rooted failing. One comparison. provides''
a clue to l it. Of I the I ;top .10 . American
semiconductor firmsin 1957, only one or
THE ECONOMIST NOVEMBER 24. 1984
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~_UROPE'S TECHNOLOGY GAP
two were still on the list in 1982; in
Europe eight of the same firms were.
Europe has been dangerously stable.
Why dangerously? It has become obvi-
ous first in electronics, but is true of most
industries, that the world is in one of its
great economic transitions. The last one
of this size happened a century ago, with
the birth of the chemical, electrical and
car industries. These creative bursts have
characteristic features. One is the unpre-
dictability of demand (and uselessness of
any central planning). For instance, 10
years ago there were no personal comput-
toda they account for a market
y
sure, but it seems clear that Europe has
less of it than America or Japan do. Mr
Henry Ergas, of the Organisation for
Economic Co-operation and Develop-
ment (OECD), has made rough estimates
of birth and death rates for manufacturing
firms (firms respectively created and ter-
minated as a percentage of total firms):
Births
Deaths
96
UapS an
4.0
3.7
3.6
3.6
West Germany
3.4
1.2
France
1.9
1.2
The thing that distinguishes the two Euro-
pean countries is their slow turnover.
Europe's problem is that it is attached
to stability in an age when stability is a
comparative disadvantage. This applies
to people as well as ideas: nearly 30% of
Americans in 1981 changed job's at least
once in the previous year, compared with
10% who did likewise in the European
ers,
worth $14 billion, served by some 160
manufacturers. A second characteristic is
the creation of large numbers of new
companies, which explode thousands of
new ideas over the commercial land-
scape; most die off fast, while many of the
survivors grow quickly into big firms. A
third quality is that nobody is safe: well-
established companies that try to remain
stable are even more likely to go bust
than the experimenters.
America is thriving in this creative
chaos: 600,000 companies were formed in
the past year, 40,000 failed. Mr David
Birch of the Massachusetts Institute of
Technology has made a study of innova-
tion in the United States. He found 16
exceptionally innovative businesses (mea-
sured by how fast companies in each
sector grew). The high-tech industries are
there-but so are the unfashionable
trades of coal mining and department
stores *
Innovation was more popular once
community in 1977. Olivetti s chairman, domestic markets are practised in
Mr Carlo de Benedetti, says that his tiny
fellow industrialists worry about the this. Mr Geoffrey Taylor, who heads the
wrong thing when they complain about venture capital unit of the British invest-
the Scala mobile: his own business is not ment firm 3i, says that he forces the new
constrained at all by the cost of labour, companies he finances to think from the
but it is severely hampered by the immo- start about selling into America.
bility and inflexibility of labour-manag- rope u the burd n snph ar cation inf Eu-the
ers and workers alike. buyers. In the cruel words of Salford
University's vice-chancellor, Mr John
f
No novelty, please
High-tech innovation creates opportu-
nities for new industries that are not
themselves high tech. Mr Bruce Mem-
field, an assistant secretary in the United
States commerce department (and one of
the winners this year of the Nobel prize
for chemistry), believes that every new
high-tech job creates between six and
eight low-tech ones. But it is more impor-
tant for growth that the habit of innova-
tion is strong in the far-bigger to -tech
sectors. It is small, young comp
which create jobs: half of America's net their toll on trade between EEC coun-
These obstacles add as much as 20%
tries
.
employment growth in 1977-81 came
from firms with 20 or fewer employees, to the cost of goods in intracommunitY
and 80% from firms with fewer than 500. trade. They impede companies just start-A More than created the new jobs that America or Japan can est its strength in a
period were e by firms younger
than five years. What studies there are for market big enough to bring it to medium
n and Europe show that their small, size before it takes on foreign .tales a
J
apa
new LAI - F.-J - -
r-----
innovation is a hard quality to mea- fects o uro
are getting worse all the time: as develop- The other discrimination in European
Birch's complete list: coal mining. dried ment costs rise and product lives contract, public procurement is in favour of big
and nd frozen fruits and vegetables, oil refining, it becomes even harder to recoup invest- companies. Government contracts can be
steel, computers, household appliances, com- ment in a single national market. a lifeline for small firms and new indus-
munications equipment, colleges and universi- One solution, which requires a lot of tries. The United States uses various.
ties, electronic components, motorcycles and disci line, is for a company to begin with devices to encourage government P
bicycles, railroads, airlines, department stores, p
medical and health care, insurance, holding the idea of selling to the wider world. chases of products from small firms. A
Scandinavian and Dutch firms with their recent study found that almost half the
companies.
THE ECONOMIST NOVEMBER 24.1984
Ashworth, "You can sell any sort o
rubbish in Britain". This sounds like a gift
to sellers; it is not. A sophisticated public
The constraints on innovation in western forces sellers to innovate-and toughens
from
Europe come in many forms. These are abroad. them t world-wise lVir Ashworth- pehao become
the most important ones.
? Markets. Young, innovative Europe- Britain's innovation gadfly, says that the
an firms labour under crippling burdens government should be spending its R&D
that their American and Japanese coun- money not on fancy research projects, but
terparts do not have. One-the uncom- instead on teaching businessmen to be
mon market-is well known, though the more demanding.
extent of the damage it does is not. ? Government spending. Government
Testing and certification requirements, procurement accounts for an immense
differing standards, border delays and market--equal
odno some
ocean governments
ill in two ways. The first is by discriminat-
ing in favour of domestic producers. This
has been most flagrant in telecommunica-
tions, but it happens with all high-tech
products. In October . the EEC commis-
sion issued a declaration which feebly
"urged" member states to open 10% of
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EUROPE'S TECHNOLOGY GAP
first-year sales of small firms in its sample
were made to the federal government.
Not so in Europe. Past European or-
thodoxy was that each country could
compete best with the Americans by
backing a big "national champion" to
take them on. The bureaucrats continue
to put their (taxpayers') money where
their mouths are. Six firms in France
receive more than half the money the
French government transfers to industry;
some 80% of the British government's
support for microelectronics has gone to
five firms, and Ferranti alone raked in
half the total.
Government support for R&D is a vital
stimulus to innovation. The table shows
recent data for R&D spending in OECD
countries. America's federal government
is due to spend some $53 billion on R&D
in the fiscal year that began in October;
about $34 billion is to be spent by the
defence department. It is hard to over-
state the benefits the American electron-
ics industry received from defence and
space spending on R&D in the two de-
cades following the mid-1950s. (It is less
important now, in chips at least, because
military and civilian electronics have di-
verged so much.) Much of the benefit has
come from the skilful deployment of
rather small sums by the Defence Ad-
vanced Research Projects Agency.
So Europe's recent fit of government
projects to support electronics R&D is
not misconceived. In the past two years,
three major European projects have got
under way. The EEC's Esprit programme
is due to cost 1.5 billion ecus (half sup-
plied by the community, half by industry)
over five years. Britain's Alvey pro-
gramme is spending #150m over five years
to support advanced artificial-intelligence
research. West Germany has a five-year
programme to spend DM3 billion ($1
billion) on electronics research.
The trouble is that these programmes
are repeating the same old European
mistakes. The big boys are nosing into the
trough first, as usual. Big firms are head-
ing almost every Alvey project. The West
German minister for research and tech-
nology, Mr Heinz Riesenhuber, is a pas-
sionate admirer of the revolution Silicon
Valley- has wrought; but DM300m of his
budget has just been given to Siemens,
Germany's cash-rich and biggest elec-
tronics firm, for a joint development
R&D spending
Government % Private% $ billion
Defence Other Total
US (1984)
32
16
52
100
Japan (1981-82
1
26
73
26
W. Germany (1983)
4
37
59
17
UK (1981.-82)
24
25
51
12
France (1982)
21
38
41
11
Italy (1982)
2
47
51
4
SowM OECD. Ewnwniu dM=1 s
programme with the giant Dutch firm,
Philips-and this for a single product.
? Capital. America's venture capitalists
give both early cash and management
help to firms starting out. This system has
provided an extremely efficient mecha-
nism for launching small firms. In 1983
$2.8 billion in venture capital was com-
mitted to start-ups ,in America. Once a
firm has outgrown the venture capital
phase, moreover, there is a smooth up-
ward path to other kinds of equity capital.
The situation is different in Europe.
Europeans have mistakenly tended to use
government subsidies instead of market-
based risk capital to finance young firms.
By one estimate, venture capital invest-
ment in western Europe runs at only 10-
Human capital
Research scientists and engineers'
per 1,000 manufacturing employees,
1981
0 % 5 10 15 20 25
21 new companies got stock-exchange
listings in Germany between the end of
the war and. 1977, when the law was
changed to make it easier; since then
another 40 or 50 have joined them.
? Universities and training. In the late
nineteenth century West Germany's
young chemical industry took off partly
because of its close and successful col-
laboration with the universities. Those
were the days. West German professors
today are tenured civil servants who re-
ceive 14 monthly salaries a year and think
of businessmen as philistines when they
do not think of them as class enemies. Dr
Karl Gareis, who is in charge of the
biotechnology programme at the chemi-
cal giant Hoechst, thought Hoechst need-
ed a close tie to an academic laboratory.
After failing to find a European partner,
he scandalised the German establishment
by making a $50m transatlantic deal with
Massachusetts General Hospital.
The highest-tech American industrial
centres all benefit from important nearby
universities such as Stanford, Berkeley,
MIT and the University of Texas. But the
links between universities and business
range throughout America's extensive
higher educational system. Mr Ergas at
the OECD-estimates that some 7% of
American university research is paid for
by industry: much more than in Europe.
The atmosphere may be improving: the
high-tech firms springing up around Cam-
bridge University are the best example.
But the anecdotes can still be discourag-
ing. Mr Axel Ullrich, a West German
who is one of the principal scientists with
the Californian biotechnology firm Gen-
entech, is thinking of returning to univer-
sity life and has been negotiating with
both German and American universities.
The Americans have been enthusiastical-
ly outbidding one another. Not the Ger-
mans. The University of Heidelberg of-
fered him a five-year contract, with a
salary 30% less than he is getting now and
less lab space: not for want of resources,
but because he could not be given any
more than other professors at his level in
the lock-step promotional system.
Europe has lagged, too, in its produc-
tion of engineers and scientists. The chart
shows that America and Japan are ahead
of western Europe in the number of
research scientists and engineers per
manufacturing employee. Europe's prob-
lem is aggravated by a continuing brain
drain. This is most destructive in the early
stages of an industry, and the signs for
European biotechnology are already
alarming. Britain's Science and Engineer-
ing Research Council thinks that as many
as 10% of British biotechnologists are
working overseas.
? Laws. Three kinds of western Europe-
an laws hamper the development of inno-
20% of the American level.
There are large variations within Eu-
rope. Britain has the best-developed ven-
ture capital and follow-on public markets.
Ms Sue Lloyd, who heads UK Venture
Capital Journal, reckons that #83m in
venture capital was committed in Britain
in 1983. Outside Britain there is still little
risk capital available to entrepreneurs.
There are signs, however, that things are
improving. West Germany's Siemens, for
instance, has set up a venture capital unit
to help employees establish entrepre-
neurial businesses of their'own.
Those who want to take the step from
start-up to mid-size firm also face frustra-
tions. Mr Mads Ovlisen, head of the
Danish drug company Novo Industri,
says his firm was held back in the 1970s by
the lack of a good European capital
market. He finally managed to raise some
convertible debt in London in the early
1980s-a process that then took 18
months and could, he says, have been
done in three months in the United
States. West Germany's record in follow-
on financing for new firms is dismal: only
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EUROPE'S TECHNOLOGY GAP
vative firms. The first is tax. European
income taxes are too high; the EEC
commission has just called on European
governments to start lowering them by
1% a year. Other taxes bear more heavily
on start-ups. There was a spurt in Ameri-
can venture-capital investment after capi-
tal gains taxes were lowered in 1978. One
of the most stimulative American devices
America calling
Telecommunications will be Europe's
next big test. The market is large and is
about to expand substantially. Data-
quest, the Californian market research
firm, estimates that the combined Amer-
ican and European markets for customer
equipment will nearly double between
1983 and 1988, to some $16.5 billion; for
data communications, will more than
triple, to $5.6 billion; for cellular radio,
will jump from less than $200m to more
than $2 billion.
The telecommunications industry is
important for two reasons: it is an ad-
vanced electronics industry whose
growth has the potential to resurrect
basic European electronics sectors such
as semiconductors; and it is at the centre
of the next stage of computer and office-
systems development. European tele-
communications companies have held
their own so far against American and
Japanese competition. Will they contin-
uetodoso?
The main challenge to Europe's tradi-
tional telecommunications habits comes
from America's swift and radical deregu-
lation of its own telephone system. The
settlement of the federal government's
antitrust case against American Tele-
phone & Telegraph (AT&T), which the
federal judge Mr Harold Greene ap-
proved in 1982, has resulted in AT&T
being stripped of seven regional operat-
ing companies, each of them slightly
larger than the telephone monopolies in
the biggest European countries. AT&T
itself is left with long-distance and inter-
national services, telephone equipment
and data networks; it is free go into any
other business anywhere.
Each of the regional companies has a
partial-monopoly over local services in
its own area, but is free (subject to Judge
Greene's approval) to go into related
businesses, such as selling computers.
The result is that telecommunications in
the United States has become entirely
market-driven. This change, says Judge
Greene, was inevitable because technol-
ogy has destroyed the idea of the "natu-
ral" telecommunications monopoly.
But it was not inevitable that America
would remove the obstacles to a market-
driven system as swiftly or completely as
it did. The result has been an extraordi-
nary flourishing of competition, not only
among the heirs of Ma Bell, who are
fighting-hard for permission to enter all
has been something called an R&D limit-
ed partnership: people with income to
shelter from tax invest it in a partnership
which gets tax breaks through putting
money into high-risk industrial R&D.
Other laws restrict the incentives that
entrepreneurs can be offered for going
into a start-up. Tate backbone of the
American system it the share option.
kinds of markets, but among hundreds of
new entrepreneurs who make equip-
ment, connect telephones to computers
and lease and re-lease lines to provide
communications services of their own.
Echoes of this tumult can be heard in
Europe. Britain is part-privatising Brit-
ish Telecom and is allowing some limited
competition for the rest of this decade.
Even these timid steps have changed the
British atmosphere. The rest of the EEC
has not done even that much.
Western Europe suffers from re-
straints on innovation even more in tele-
communications than it does in other
lines of electronics. The most serious is a
severe division by national markets. It
has been nearly impossible for public-
switch makers in one EEC member state
to sell their equipment in another
(though outsiders, such as Sweden's
L.M. Ericsson or America's ITT, have
managed to do it through local subsidiar-
ies and joint ventures). One reason the
markets have been closed off is that each
country has specified a slightly different
standard for equipment. Another is the
close and unhealthy relationships that
developed between each country's tele-
coms monopoly and one or two dominant
national equipment suppliers (Siemens in
West Germany, CIT-Alcatel and Thom-
son in France, GEC, Plessey and STC in
Britain).
The growth of private telephone
equipment makers has been stifled for.
similar reasons. Mr James Carreker,
who analyses telecommunications for
Dataquest, reckons that having to rede-
sign a private office switching system
(PBX) adds 12-15% to the product's
R&D cost and 8-12 months of extra
development time- for each European
country the PBX is introduced into. In
the United States anybody who wants to
sell a PBX can have the product certified
within about two months at any regis-
tered testing agency. It took the West
German computer firm Nixdorf some
two years to get Bundespost approval for
the PBX it wanted to sell in competition
with one from Siemens.
Lastly, there has been almost no open-
ing in Europe for the kind of competition
in business communications services that
is commonplace in America. Even in
sort-of-deregulating Britain, it is still
illegal for a company to lease lines from
British Telecom and resell them to third
Anybody starting a firm or joining it in a
high position shortly after start-up re-
ceives shares for a low price and share
options that entitle him to buy large
blocks of shares very cheaply. If the
-company takes off, the option holders can
cash in-and become millionaires. In
most European countries this is impossi-
ble. A provision in Britain's 1984 budget
parties.
Europe's fragmented markets have
been the cause of an appalling waste of
resources. Japan, North America and
western Europe are similar-sized mar-
kets. Japan's total R&D expenditures on
the latest generation of public digital
switches (by two companies) was $1.5
billion-2 billion; North America's (by
three companies) some $3 billion; west-
ern Europe's was more than $10 billion,
spent on 10 different switching systems.
The profligacy with human resources.
has been worse. Mr Malcolm Ross, with
the management consultant firm Arthur
D. Little in Wiesbaden, estimates that
western Europe used three times as
many hardware and software engineers
as either North America or Japan in
developing its switches. He says that
25% of all European systems software
engineers-the most sought-after people
in the computer business-were kept
busy designing public switches, com-
pared with 10% in Japan.
Europe has got away with this so far
because, until digital switches came in, it
was possible to recoup R&D costs for a
switch in a single national market the
size of (say) Britain's. Big sales to the
Middle East postponed the day of reck-
oning for the first generation of digital
switches. Europe now faces problems:
not all of its three-times-too-many pub-
lic-switch makers can stay in business.
A more basic challenge comes from
the 'merging of computers, office systems
and telecommunications and by the deci-
sion of America (and, more mildly, Ja-
pan) to let a free market determine how
it will develop. Mr Bjorn Svedberg, the
president of Ericsson, has no doubt
about the response that western Europe
must make. America's market-driven in-
dustry, he says, will quickly find itself on
an upward spiral constantly fed by new
ideas. If Europe does not break its
telecommunications monopolies-for
both equipment and business services-
European industry will suffer badly in a
few years when it faces American com-
panies armed with marketing experience
and strength from competition.
Time is much shorter than most Euro-
peans realise. Mr Luigi Montella, the
deputy general manager of the Italian
telecommunications holding company
Stet, gives a precise and grim timetable.
If there are not big changes in European
attitudes within three years, he says,
western Europe's telecommunications
industry is in trouble.
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EUROPE'S TECHNOLOG'., ,AP
makes it half-possible in Britain, but it is
still far too restrictive.
The biggest category of bad laws are
the mobility-inhibitors. Non-portable
pensions and tied council flats are British
examples. Much of the "job-security"
legislation enacted in western Europe in
the first two thirds of this century is now
having the effect of destroying jobs. Like
rent-control laws, such legislation gives a
windfall to people who are already in
place and hurts newcomers.
Minimum-wage legislation and other
restrictions on wage flexibility do dam-
age, but they may not be the worst.
Innovative firms have to be able to hire
and fire people quickly. Most European
industrialists look down the road at indus-
trial tribunals and' fat redundancy pay-
ments if they hire somebody they might
have to let go a year or two later. That is
awful for firms just getting started.
Europe's bankruptcy laws are another
impediment. Going bust has always been
easier in America, and a change in the
bankruptcy law in 1978 made it easier
still. Bankruptcy in Europe is still, in Mr
Riesenhuber's words, thought of as a
moral defect; punitive laws enforce that
view. That has to change. A lot of failed
young businesses is a sign of economic
health, because it means that a lot of
experiments are being made. The experi-
menters who crash should be allowed to
dust themselves off and try again, not be
thought of as "failures".
Out of the gap
This article has made depressing reading
for Europeans. But it has also diagnosed
ills that are curable. Europe's trouble is
not some mysterious ineptitude in infor-
mation technology or biotechnology. It is
instead that these new industries live and
breathe innovation-and quickly register
a lack of it.
Europe can profitably learn more
about this from its cultural cousin in'the
United States than from still-too-un-
known Japan. Silicon Valley is a great
American achievement, but it is placed in
a more modest perspective by an econo-
my that has lavishly rewarded people
who: learned how to mass-market choco-
late-chip cookies (Famous Amos and Mrs
Fields); dreamt up a way of delivering
packages overnight (Federal Express);
and worked out how to target political
contributors with a direct-mail campaign
(Mr Richard Viguerie).
A sluggish approach to information
technology can do an advanced economy
considerable damage, because the tech-
nology affects so much else. But high-tech
98 innovation is only the most visible evi-
dence of a general culture of innovation.
And low-tech and no-tech innovation by
thousands of small new businesses is what
pumps out the new jobs that can more
than replace the ones lost by the applica-
tion of high-tech labour- saving devices to
old industries.
Europe's worst. response to its predica-
ment would be an attempt to resist
change by protecting itself from it. Some
dangerous murmurings can already be
heard about the need for protection from
American competition in telecommunica-
tions. This course would be foolish. There
used to be some natural protection for a
region's industries, thanks to the cost of
transporting bulky goods long distances.
That hardly exists for the new ones. Mr
Ross of Arthur D. Little points out that
last year's worldwide production of semi-
conductors could have been carried in 10
Boeing 747 aircraft. When the competi-
tion is in information itself, it will be
global and instantaneous. It would be
futile to try to build walls against the open
market this will create.
There are three general areas of inno-
vation policy that Europe should tend to.
The first is the uncommon market. Euro-
pean firms will never have an even chance
of competing with their American and
Japanese rivals so long as western Europe
remains sliced up into a dozen or more
semi-separate markets. Governments
have wrongly tried to shove responsibility
for correcting this on to the shoulders of
technocrats, who have only arcane and
weak devices such as standardisation and
harmonisation at their disposal: It is not a
technical problem; it is political. Solving
it will require an exercise of political will
at least as strenuous as the one which
produced the EEC in the first place.
Backbone will be needed. Several big
European companies will be forced out of
the electronics and telecommunications
businesses: an open and unified market
will not support them all.
The second policy concerns informa-
tion technology. Europe need not yet
despair over being behind America and
Japan. The pace of change in the industry
means that another train shows up soon
after the one you just missed. Nor should
Europe be afraid of relying on a lot of
small firms (along with big ones) to com-
pete with Americans and Japanese. The
successful small ones grow big very fast,
and they produce the fresh ideas that
keep established rivals on their toes.
But time is short for Europe to get back
into the semiconductor game (another
five years, perhaps, because of the level
of systems integration there will then be
on each chip). Europe needs to emulate a
Japanese habit in electronics. There is no
point in trying to catch up in technologies
that already exist. What Europe should
Optical fibre: Information-age highway
do is to absorb as much existing American
and Japanese technology as they are
willing to license, and use the learning to
create its own products for the next
round. This is why ds -operation..agree-
ments between.. Euijppean firms and
Americai partners should be. welcome.
So should hefty multinational investment
in Europe that involves technology trans-
fer. Instead of wringing their hands over
IBM's marketing muscle, governments
should be enthusiastically stealing whole
teams of IBM-trained European employ-
ees to set up small entrepreneurial busi-
nesses of their own.
The third area which needs attention is
immobility of people. The last thing any
country should have in a time of intense
innovative activity like this is a harness to
prevent old businesses' from shrinking or
new ones from growing. Job-security,
minimum-wage and restrictive-bankrupt-
cy laws all hurt, but so do many other
market blockers that at first seem unrelat-
ed to labour mobility. The innovations
(and new jobs) that Pepple Express intro-
duced into America's airline industry, for
example, would never,have come without
the deregulation of air transport.
It is strange that Europe should be
feeling depressed now, when the world is
bursting with possibilities that nobody
even dreamed about a hundred years ago.
The most exciting thing about the new
technologies is the freedom they are cre-
ating: people now have a much better
chance of starting businesses of their own
with next-to-no-capital' and no connec-'
tions. It is encouraging that in America's
great entrepreneurial boom the number
of women-owned businesses has been
rising even faster than the number of
businesses. The new technologies, in Mr
de Benedetti's pretty phrase, are taking.
the drags off the wheel of human activity
and letting it move as fast as human
imagination can spin it. Won't Europe
jump on board?
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