Just because you dislike capitalism here, doesn’t mean you
necessarily dislike capitalism everywhere. Have a problem with the American way
of doing things? Well, there are other options. Elizabeth Warren, for instance,
favors an “accountable capitalism” based on the German model of corporate
governance and trade policy. Critics of Big Tech point to the more aggressive
EU on issues such as competition and privacy. And, of course, Scandinavia
remains the go-to example for politicians arguing for more expansive social
welfare policy.

But Europe’s various flavors of capitalism have an unpleasant aftertaste in at least one major way. As a new McKinsey Global Institute analysis finds, “Europe is falling behind in growing sectors as well as in areas of innovation such as genomics, quantum computing, and artificial intelligence, where it is being outpaced by the United States and China.”

Among McKinsey’s specific findings: Europe’s share of “superstar” firms — high profit, high return companies — has dropped by 50 percent over the past two decades. R&D spending by software and computer services firms was only about 8 percent of the global total vs. 77 percent for US-based companies in 2018. Europe possesses only half as many unicorns as the United States, and none of the large internet platform companies.

McKinsey offers a number of possible reforms but this one
really jumped out at me:

Third, the EU could address compensation practices for startups by changing taxation on stock options. Currently, startup employees in the United States have twice as much upside exposure as their European peers. Europe could enable workers to participate more fully in the success of their companies by simplifying the rules and taxation framework for stock option remuneration through a common framework, thereby improving the risk-reward profile for startup employees. Startups in countries such as Germany and Spain report that current taxation schemes make it difficult to set up stock option schemes.

This seems like exactly the sort of thing — taxes and compensation practices at startups — that gets overlooked here in America as politicians call for massive revamps of the tax code to more heavily tax higher incomes and wealth. Such calls seem based on the idea that incentives don’t really matter much when it comes to entrepreneurial risk taking.  But check out these comments earlier this year from the CEO of the German travel platform GetYourGuide:

During Silicon Valley’s ascent, employee stock ownership in startups like Google, PayPal and Facebook produced thousands of millionaires when those businesses went public. Those alumni, endowed not only with investable capital but with an appetite for risk and innovation, then went on to found companies of their own. The next generation of top talent followed them, attracted by the prospect of sharing in future success in the same way, and the world’s most influential community of entrepreneurship was born. …  In Germany, due to restrictive legal and tax regulations, stock programs in the mould of Silicon Valley are simply not possible. These regulations exist under the outdated pretence of “protecting workers from risk”, but are more than just relics of the past. They severely prohibit German growth companies from recruiting the best and brightest from the global talent pool, and they are inflicting real economic damage in the present. Employees that have made money from working for a successful start-up are most likely to become founders of their own and use their proceeds to fund the next venture. But instead of supporting this virtuous cycle, as the US, UK, France or Israel do, Germany’s centre-left government refuses to allow employee stock ownership.

The post Europe’s tech entrepreneurs tell America: ‘Don’t be like Europe’ appeared first on American Enterprise Institute – AEI.