Industrial policy is set to remain a dominant theme in economic discussions, especially following last year’s Draghi report. Paul de Bijl, Chief Economist at the Dutch Authority for Consumers and Markets (ACM), explores the intricate relationship between industrial policy, scale, innovation, and strategic independence in a recent blog post. His insights highlight the challenges and opportunities for Europe in maintaining competitiveness on the global stage.
The Role of Scale in Innovation
Scale is a key ingredient in economic power, allowing European companies to compete with industry giants from the United States and China. It contributes to productivity growth, attracts investment in research and development (R&D), and facilitates capital access. However, scale also poses a challenge for competition authorities, as market concentration can stifle competition and innovation unless carefully managed.
De Bijl suggests that competition regulators should consider innovation as part of their decision-making process in mergers and acquisitions. The concept of ‘innovation defense’—where companies justify mergers by demonstrating potential innovation benefits—could offer a pathway for balancing competition with the need for scale.
Beyond corporate expansion, scale can also be achieved through industrial clusters and value chains. These ecosystems foster collaboration, enabling start-ups and established firms to engage in cross-pollination and technological advancements. Such an approach ensures that market dynamism is preserved while mitigating risks associated with excessive market power.
Europe’s Middle-Technology Trap
Europe faces a strategic challenge in its R&D focus. Research suggests that European firms disproportionately invest in mid-tech sectors, such as the automotive industry, which have lower R&D intensity and growth potential than high-tech industries. This focus places Europe at a disadvantage compared to China, which aggressively invests in high-tech innovation.
De Bijl emphasizes the need for European coordination in developing advanced technologies. He points to initiatives such as the feasibility study for an ‘AI factory’ in Groningen, Netherlands, as examples of how Europe can create critical mass in cutting-edge sectors. Such efforts require strong guidance at the EU level, allowing member states to contribute meaningfully to strategic projects.
Strategic Independence and Technological Sovereignty
Industrial policy is not just about economic growth but also about geopolitical power. Europe’s reliance on major U.S. cloud service providers (CSPs), including Amazon Web Services (AWS), Microsoft Azure, and Google Cloud, illustrates a critical vulnerability. These three companies control approximately 70% of the European cloud market, leaving European firms with minimal presence.
To mitigate this dependency, De Bijl proposes leveraging European-based cloud providers. One example is Schwarz Digits, a cloud service launched by the Schwarz Group (owner of Lidl), which ensures data is stored within European borders. Additionally, smaller cloud providers in the Netherlands and other EU countries could be supported to increase technological self-sufficiency.
A practical step toward reducing dependence could involve European governments committing to purchasing a portion of their cloud services—potentially five to ten percent—from European providers. This policy would not only strengthen Europe’s bargaining position but also stimulate local technological development and security capabilities.
A Unified European Approach
For Europe to maintain competitiveness and strategic independence, a coordinated policy approach is essential. Scale can drive innovation and economic resilience, but it must be managed to prevent over-reliance on powerful European firms. By investing in innovative clusters and leveraging local technology providers, Europe can enhance its global standing while ensuring long-term economic security.
De Bijl’s analysis underscores the need for EU-wide coordination to foster both innovation and independence. Whether through industrial policy, technological investment, or procurement strategies, a collective European effort is necessary to navigate the challenges of global competition and technological sovereignty.
