The EU has much to learn from Sweden and Finland about innovation — but their model is not scalable EU-wide and no answer to U.S. superdominance

There are many numbers that show just how miserably the EU and its member states have failed in economic policy. You can find some charts and facts in this section of a January 3, 2025 ip fray article. On top of that, there are more and more examples that illustrate the situation, such as on Tuesday (January 28, 2025):

The CEO of the European DIGITAL SME Alliance, Sebastiano Toffaletti, expressed in a LinkedIn post his understandable misgivings of the fact that the European Parliament (EP) contracted Anthropic, a leading U.S. AI startup backed by Amazon and Google, for an AI tool that makes the EP’s history more accessible. As he accurately noted, it would be unthinkable in the U.S., regardless of which party is in power, that such a contract would go to a foreign company. And he is right that it is not so much about the monetary aspects of the deal as it is about the signal that it sends out. Mr. Toffaletti does not name any EU companies that could have done this, but at least Mistral AI (from France) comes to mind.

The EP’s AI system was “merely” a stupidly missed opportunity to advance European interests in a critical area of innovation. In some other policy areas, the EU is actually harming its own companies. The SEP Regulation has been criticized for that reason, as have the AI Act and some other digital regulations (of which the DMA would actually be a good one, if only it worked). And BMW has joined Tesla in suing the EC over tariffs on cars made in China (January 28, 2025 euronews article).

One of the current problems in the EU innovation policy debate is that some member states with far less successful tech sectors (relative to population size) are the ones who believe they should be the EU’s thought leaders on the subject, while the two most successful ones, Sweden and Finland, are rather quiet (maybe because it is in their nature).

What is working out better in Sweden and Finland than other EU member states?

I experienced the difference between Nordic and Continental European startups in the 2000s when I became an adviser to, stock optionee of and small shareholder in MySQL AB, a company headquartered in Uppsala, Sweden, and founded by Finns and Swedes. The MySQL database was created by a Swedish-speaking Finn. The company was sold to Sun Microsystems in a $1B deal (the European Venture Deal of the Year 2008) while it was in the process of preparing for a U.S. IPO.

My first meeting with the two main founders took place at a kitchen table (literally) in Uppsala. They had global ambitions. No one was talking about the Swedish or Finnish markets. And a year later I noticed that their secretaries were more articulate in English than 99% of German CEOs at the time.

Florian Mueller
(Founder & Publisher of ip fray)

Relative to population size (Sweden: 10-11 million; Finland: 5-6 million), those two countries are very productive patent filers, and they produce more tech startups of the very successful kind. Klarna and Spotify (Sweden) as well as Oura (Finland) come to mind. Oura, for instance, just raised a $200M round at a $5B valuation, and a couple of other Finnish startups are also regarded as “unicorns” (billion-dollar valuation startups) while two more have meanwhile been acquired (December 23, 2024 BeBeez article).

The World Intellectual Property Organization’s (WIPO) Global Innovation Index (GII) uses a set of partly IP-centric criteria. Its weakness is that it focuses on certain activities and investments rather than market outcomes. An economy in which lots of people work in a low-margin field of technology and obtain lots of patents there would get a high rank, while an economy with powerful online platforms developed by a small number of people could rank at the bottom despite making tons of money. But even the activity- (not success-)focused GII ranks Sweden as the #2 innovation economy in the world, and Finland as #7, ahead of all other EU member states than Sweden, albeit by a seemingly narrow margin.

An article like this cannot exhaustively explore all the reasons. The quote you find here mentions some observations. There is this theory that the dark winters lead people to spend more time working than in the sunny south. Finland’s school system has a particularly good reputation.

Swedes are particularly pragmatic people who prefer to focus on solutions where. for example, Germans surrender to problems. Finns are somewhere in between. German venture investors reportedly still expect startups that don’t even have a product on the market to present a five-year financial plan. No one has made that claim about the Nordic countries.

Many people convincingly attribute part of the success of Nordic startups to the fact that their domestic markets are so small that they are forced to think global from the beginning. In Germany, by way of contrast, venture investors used to tell startups (at least in the 1990s and 2000s, two critical decades, and probably longer than that) that they should maximize their market share and profitability at home to then conquer the U.S. market “from a position of strength.” That was completely idiotic. By the time any German startup would have been ready for U.S. prime time, U.S. startups (or maybe even Nordic startups) would already have grown so much faster in the world’s largest market that it was too late.

In the Nordic countries, people are more fluent in English at all levels of a company. Traditionally, they did not get synchronized movies: just subtitled ones. Here, again, small country size may have been a virtue.

Nokia and Ericsson exited the end-user device business, and they are much smaller now than they would be if they had remained major handset makers. But their presence in those countries indirectly enabled and led to many startup creations, such as in mobile gaming. They remain very important to those economies not only in terms of their own contributions, but because many startups will continue to be founded by people who “learned the trade” at one of those companies.

Sweden and Finland are the one-eyed among the blind: stronger than the rest of Europe, weak compared to the U.S. and China

Even if (in an unrealistically optimistic scenario given structural issues in the rest of Europe) the entire EU reached, relative to population size, those two countries’ level of success in innovation and in the startup ecosystem, it would not close the innovation gap with the U.S. and China.

Finnish per-capita GDP in 2023 was below $54K and Swedish per-capita GDP slightly above $56K. Oddly, Denmark, which does have startups like Klarna, Spotify or Oura, but which has Novo Nordisk (and large no-tech companies like Maersk Group and Carlsberg), is well ahead of Sweden and Finland at $68K.

Even Finland and Sweden are merely between the two poorest U.S. states: Mississippi at $51K and West Virginia at almost $58K. They may even be surpassed by Mississippi in a few years’ time.

Those numbers show that the level of innovative startup activity found in Sweden and Finland puts those countries ahead of the rest of the EU, but is far from sufficient to close the gap between Europe and the U.S. economy.

As for digital sovereignty, it is a good thing that European telecommunications carriers have two European vendors they can rely on (even if not exclusively). In many other important fields of technology, however, Europe has no digital sovereignty and is not going to have it in the foreseeable future.

Some strategically important opportunities in tech, particularly in the age of AI, require critical mass. The lack of Big Tech companies is a huge problem for Europe. Even SAP is not a Big Tech company by U.S. standards. Compared to the likes of Microsoft, it’s a relatively small player.

As of today, these are the market capitalizations of the “Magnificent 7”:

Apple	$3.55 trillion
Microsoft	$3.09 trillion
Nvidia	$2.94 trillion
Alphabet (Google)	$2.51 trillion
Amazon	$2.50 trillion
Meta (Facebook)	$1.74 trillion
Tesla	$1.27 trillion

By contrast, the most valuable European company at the moment is the world’s 25th-largest by market cap: Novo Nordisk (Denmark) at $0.37 trillion, followed by LVMH (#27 worldwide) at $0.36 trillion and SAP (#31 worldwide) at $0.32 trillion.

The Magnificent 7 have a collective market cap of (as of today) more than $17.5 trillion. That is approximately 5 times as much as the collective market capitalization of all 50 companies in the Eurostoxx 50 index (Europe’s 50 most valuable companies). Apple alone is worth about as much as the entire Eurostoxx 50.

Market caps are volatile, but

• they indicate where the market believes there is value (i.e., valuable assets and future profits);
• they are relevant from an exit value perspective (all other things being equal, U.S. tech companies get higher valuations, which is why investors give U.S. companies higher valuations than European startups even in (rare) all-other-things-being-equal scenarios);
• they matter in the war for talent when companies incentivize employees through stock options and stock awards (it makes a huge difference whether a potential employee gets an option package controlling $50K or $500K);
• when employees cash in, they will spend and invest that money; and
• they determine where a company is in the M&A (mergers and acquisitions) food chain (for example, Microsoft could — if it wanted and if it was prepared to pick a fight over it with competition watchdogs — acquire SAP, and Microsoft’s current shareholders would own more than 90% of the combined company).

The chart below is three to four years old and the situation has further exacerbated, but it shows how the European economy, in terms of value, is almost literally gettin suqeezed between the U.S. and China:

Europe has no realistic chance of ever having its own Big Tech. The most that Europe can achieve is that SAP stays independent, and even that is not a given. Network effects at the corporate and cluster levels are just too strong. American startups scale much faster, and investors are more prepared to place bets on big and bold ideas. Europe would have had to change its mentality and create a true single market (not one with dozens of languages) and a more entrepreneurial, less security-minded culture several decades ago. That would not have been possible at the time even if someone had explained that (and why) it was necessary.

Nokia ($26 billion) and Ericsson ($23 billion) are not even 10% as large as SAP (which in turn is not even 10% as large as Apple). But again, in their field they are strategically important to Europe as a whole and to innovation ecosystems in certain parts of Europe. It’s just key to understand that even if all of Europe became (which is unrealistic) became as innovative as the Nordic countries, the U.S. would be way ahead.

European knee-jerk reactions to inconvenient economic truths

Douglas Carswell, a former member of the British House of Commons (for 12 years) who left the UK for the U.S. and serves as president and CEO of the Mississippi Center for Public Policy wrote on LinkedIn that he never had to block as many people on a single day as when he highlighted that his states — the poorest in the U.S. — not only has a higher per-capita GDP than the EU or eurozone averages, the UK, France, Italy etc., but will surpass Germany this year based on projected growth rates.

Many Europeans are understandably uncomfortable when their way of life is viewed in the harsh light of economic realities. But irrational reactions won’t improve the situation. If anything, they show some of the underlying problems, such as economic illiteracy being extremely widespread in Europe even among “educated” people.

Here are some typical reactions one can see on X as well as LinkedIn, and why they are wrong:

“I don’t care about having large companies just so some CEO can buy a larger yacht.”

That was seriously said by someone on X. As explained in the previous section, the Magnificent 7 are extremely important as only they (and companies not much smaller than them, but the largest European one is dwarfed by them) can afford certain investments and certain acquisitions.

European technology companies are not at the top of the food chain. Most of them are at the bottom. They’re just acquisition targets. This way, Europe never really gets to build a major tech industry of its own.

“The cost of living is also a lot higher in the United States.”

Yes, on average (though not necessarily for a “cheap” state like Mississippi) that is true, but the difference between U.S. per capita GDP far exceeds the cost difference.

The tech sector is simply the most important one of our times, and talented people in that field often make three to five times as much in the U.S. (not even factoring in lower taxes, perks and stock options) as in Europe. For example, Uber pays a Security Engineer II up to approximately $350K/year (which can be researched on the web). Similar jobs in the EU are paid at only about 20% that rate. No one can realistically be worried about the difference in costs of living when making hundreds of thousands of dollars more per year than they would in the same job in Europe.

Even in some non-tech jobs, the difference is huge. For example, American Airlines pilots earn up to approximately $600K/year as compared to half of that for the best-paid Lufthansa pilots. The advertised salary of a Walmart trucker is roughly at a level with that of a German doctor at the start their career at a German hospital.

“Europeans live longer (on average).”

Yes, there are reasons for that. The higher the income, the less of a difference there is in life expectancy. A large part of the problem is widespread obesity, which one may reasonably attribute (at least to some degree) to societal issues, but it is a personal choice at the end of the day.

“Europeans get longer vacations, are better protected at work (not just ‘hire and fire’) and there are fewer people living below the poverty line. As the Gini index shows, income inequality is far greater in the U.S. than in Europe.”

Europeans also pay far higher taxes (especially if one includes all sorts of charges that amount to taxes as there is no choice), but that is not even the key point. The biggest problem with this is that it means switching the subject.

Whoever starts by discussing Europe’s economic weakness is not necessarily against long vacations and job security, or in favor of poverty or inequality. But in this global economy the U.S. and China are not going to hold back only to allow Europe to preserve its model. They compete really hard. Even if the world would theoretically (in some people’s opinion, which is not unreasonable) be a better place if everyone adopted the European way, Europe’s competitors simply don’t.

All those social welfare benefits that people like about Europe must ultimately be paid for. The European approach is increasingly becoming unsustainable. There is not even a snow flake’s chance in hell that Europe could catch up with the U.S. or China. What Europe increasingly has to focus on is how to stay ahead of some emerging economies, such as in Latin America.

It is irrational to switch from a discussion of competitiveness to one of social aspects. That is another discussion to be had. The first question is how Europe is going to pay for all of those benefits.

“Mississippi is just one state and not a good point of reference.”

Numerous people responding to Mr. Carswell or others made the mistake of focusing narrowly on Mississippi. The point is not that Mississippi should leave the U.S. and become an independent country. It’s not that Europe should become Mississipi. And it would of course be unfair to compare the District of Columbia to Europe, given that D.C. has all those high-paying jobs in law and lobbying firms and other industries that want to be close to the federal government.

But the same ones who think one can’t company a country like Germany to a state like Mississippi appear to have less of a problem comparing the supranational structure called European Union to a federal state like the United States.

At any rate, the key thing is simply that if even the poorest U.S. state is ahead of almost all of Europe, and far ahead of the European average, it shows that the problem is really terrible. It means Europe is far, far away from the level of prosperity of, say, California or New York state.

“Europe has a better education system.”

That assessment is highly subjective at best and incorrect at worst. For example, TIMSS is an international math and science test, and the single most interesting metric is the percentage of fourth-graders who are top math performers. In Singapore, that one is on the order of 50%, and other Asian countries follow. Countries like Germany, France, Italy and Spain reach low to medium single-digit percentages. Compared to them, even the U.S. has far more top performers.

The EU does not have a single top 10 university. If there are any universities of world renown in Europe, they are in the UK or (one of them) in Switzerland, and they are not at a level with the top U.S. universities either.

“Europe has about half a billion people and so much potential. It can turn this around.”

Theoretically, there should be a lot of people among that huge European population to have a strong tech sector. But their average level of skills (see the previous item) may be overrated. The bigger problem is the brain drain, which is not just a question of how many leave but also of how many take jobs at European research centers belonging to Big Tech. As the IP-savvy readership of this website knows, those people produce IP that will belong to American companies, even if they physically work in Europe.

Recently someone noted on LinkedIn that there are many French people working on major AI projects. They’re just not working for French companies (apart from a few people working at Mistral).

“Europe missed everything from PCs and video game consoles to e-commerce, social networks, smartphones, cloud, crypto, AI and quantum computing, but when the next wave comes, Europe will play a major role.”

European politicians and mainstream media have only recently begun to talk about Europe’s economic weakness. From 1989 until about 2009, the S&P 500 and the Eurostoxx 50 delivered similar returns. Then Europe underperformed the U.S. by a wide and increasing margin.

The root causes are much older. It was foreseeable that at some point the technology sector would become more and more important, and that it would effectively absorb (or, as some put it, suck all the air out of) other industries. Just think about how multifunctional today’s smartphones are. They replace a whole list of devices one would have had to purchase separately in the old days.

Europe lacks the powerful players, the deep-pocketed investment funds and the entepreneurs and executives that make America’s innovation ecosystem so strong. Even if Europe had that, its companies wouldn’t be able to overcome network effects. And why would people who are smart and want to perform stay in Europe? Yes, some will stay and pay the price of not fully exploiting their potential, either because they don’t realize how much greener the pastures are in the U.S. or because they deliberately forgo greater opportunities. But there are enough who will leave. For example, a relatively small number of French citizens who left for the U.S. have created far more market value by (co-)founding U.S. startups than the many who stayed home.

That is also one of various reasons for which any reference to the fact that Europe managed to rise from the ashes on a couple of earlier occasions is not instructive in the current situation. The industries that made Europe strong again after World War II were not characterized by network effects anywhere near the level of the current technology industry.

The European Commission with its “Competitiveness Compass” is not going to make any significant difference. Whatever initiatives the EU will take, the wealth gap between the U.S. and Europe is only going to grow. As a result, the brain drain will get worse. This article is already long enough without discussing what Europe’s options are, and that will not be a topic for ip fray. In short, the most realistic strategy would amount to intelligent degrowth. But damaging some of the last major technology companies Europe has left is degrowth of the unintelligent kind.