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Digital Technologies: Inadequacy of the Higher Education and Innovation Ecosystem

Analyses - 20 January 2023

In our previous articles, we discussed how Europe fell short compared to other countries when it comes to digital technologies, as well as the industrial and geopolitical risks resulting from it. We identified a structural and uncommon cause for this gap, the cost of failure specific to Europe, which needs to be a priority going forward. However, we cannot altogether reduce Europe's growing weakness in tech to the previously discussed matter. Eliminating the costs of failure is necessary but won't be sufficient. There are other well-known reasons for Europe lagging behind: weak entrepreneurial culture, the fragmentation of the European market, the lack of funding for innovation, competition policy, industrial policies and funding for defense. In this third part of our When Will Europe Wake Up… series, we focus on a deep-rooted cause specific to France: the relative unsuitability of its higher education system as a driver of tomorrow's newest companies.

Although France has made significant strides in the startup race (creation of the public investment bank Bpifrance, more accommodating regulations for business creation and simplified administrative processes), it still lags far behind, as shown in the graph below. Despite a public effort that is unparalleled in Europe, it only ranks third on the continent - behind the United Kingdom and Germany - in terms of investment and the creation of startups. Worse still, in per capita terms, France ranks below the European average regarding the creation of unicorns. The figures show that France counts about half as many unicorns as the UK (24 versus 47), and their total value is three times lower. In addition, the UK has four unicorns with a valuation of over $10 billion (checkout.com, Revolut, blockchain.com, GlobalSwitch), while France has none.

Part of the explanation might lie in the number of startups initially created. The table below shows that in the period 2010-2015, the UK funded 2.5 times more seed-stage startups than France. Assuming it takes a decade to create a unicorn, this simple difference could partially account for the French deficit. It should also be noted that while this imbalance has now been reduced, the UK still has 50% more seed-stage startups than any of its European competitors.

However, these quantitative facts are insufficient as an explanation insofar as the correlation between the number of seed-stage startups and the number of unicorns is far from perfect. Israel, for example, funds less than half as many seed-stage startups as France, yet it boasts 23 unicorns, i.e. one more than France. Switzerland, on the other hand, funds 2.9 times as many seed-stage startups as France but has "only" 1.9 times as many unicorns per capita. While the number of companies initially created and financed is important, it is not the overriding factor. Other factors seem to be at play, such as the number of higher education institutions that specialize in digital technology. If we take the QS World University Rankings in computer sciences, the top 200 includes the following: 49 institutions located in the US (715 unicorns), 17 in the UK (47 unicorns), 3 in Israel (23 unicorns) and 7 in France (24 unicorns). If we look at institutions that focus on entrepreneurship, the results are even more compelling. Various studies, including one by Times Higher Education, show that a significant proportion of digital company founders come from institutions that offer courses in entrepreneurship.

An analysis showed that in the US, 34 of the 73 unicorns born in 2021 have at least one founder who studied at Stanford, Harvard of MIT - the three institutions at the top of Times Higher Education's "digital entrepreneurship" ranking. In Switzerland, four of the six unicorns have a direct link with the EPFL (Ecole Polytechnique Fédérale de Lausanne) or the ETH (Ecole Polytechnique Fédérale de Zurich), which are respectively ranked 9th and 10th in the computer sciences section of the QS World University Rankings, and both offer entrepreneurship training in their digital technology majors.

More generally, Stanford, Harvard, MIT and Cambridge University (UK) seem to be leading the way in terms of startup creation. MIT is at the origin of about 1,100 startups created by its students or alumni, of which about 100 are directly incubated within the institution ("From the Basement to the Dome"). A common feature of all these schools is that in addition to the technical disciplines they teach, they provide resources of the highest level for aspiring entrepreneurs. These include digital entrepreneurship courses considered among the best in the world, sophisticated incubation strategies, strong ties to venture capital funds and high-caliber events in various technological fields. All of these are important success factors for budding startups. The figures clearly demonstrate the consequences: Stanford is said to have directly created 5,000 companies since 1983 ("Startups and Stanford University"), while 18% of MIT students become entrepreneurs (Entrepreneurship and Innovation at MIT by Edward B. Roberts, Fiona Murray and J. Daniel Kim). University startups in the UK attracted as much as £5 billion in investment in 2021 ("Busting Myths and Moving Forward"), with Cambridge and Oxford likely to account for the lion’s share.

Speaking of - it is important to emphasize just how remarkable the Cambridge (UK) ecosystem is. It has enabled a small city of 125,000 inhabitants to be the birthplace of 12 unicorns (i.e. half of all French unicorns) among a total of 846 startups - 22 of which have the potential to become unicorns - founded by students or alumni of the influential Cambridge University.

France is unique in that despite the establishment of Tech Transfer Acceleration Companies (SATTs) within universities, none of its 24 unicorns came from a university incubator. Moreover, few of the companies that have emerged from these incubators are ultimately financed by venture capital funds. Generally speaking, relations between incubators, investment funds and universities seem to be at an early stage of development. Mutual mistrust is the most frequently cited explanation. The complexity and weakness of university governance are also worth noting. These factors hinder agile management, which is necessary for the development of a startup ecosystem. The mistrust of the academic world towards private actors, whether startups or large companies, also plays a role.

As a result, and as revealed by the data of the Deontology Commission, the movement of researchers from public laboratories to companies is still very rare. Less than 10% of these transfers are aimed at the creation of companies by researchers. This means France is depriving itself of an important pool of potential start-up founders, particularly in deep tech. 

Finally, if we look at the EU as a whole, we see that university funding is lower in major European countries than in countries that are leaders in the digital sector (Figure 8). This leads to chronic pressure on resources. It becomes mechanically more difficult to incubate and develop entrepreneurial projects, which are structurally subject to a high risk of failure (as we have seen in a previous article, one out of every ten start-ups actually succeeds). This situation is particularly grave in France, where the incubation mechanisms - the SATTs - have been underfunded and a SATT manager with an entrepreneurial background is the exception rather than the rule. In this light, the recent announcement by the Ministry of Higher Education, Research and Innovation that it is releasing €500 million to fund university incubation is welcome.

Nevertheless, on a macroeconomic scale, the inequalities in funding between countries are glaring: the United Kingdom invests over €10,000 more per higher education student than France or the European average.

If we consider the composition of the funds, we see that public funding is dominant in the EU. The model of free higher education that exists in most European countries would require significantly higher public funding if we hope to come close to the British or American model. The following graph shows the different approaches to university financing in European countries.

Where France is highly dependent on public funding, other countries such as the Netherlands rely more heavily on private funding. The UK has a completely different model that relies on more diversified sources of funding.

Europe's dependence on public funding limits the agility of governments to spend a significant part of their wealth on research. Yet R&D investment seems to be partly correlated with the emergence of new startups.

Israel, which has sharply increased its R&D spending, is a clear example. In five years, Israel increased the share of GDP allocated to R&D by 30%. The country has been able to double its number of seed-stage startups and now has 23 unicorns. The UK seems to be an exception to the rule, given the low and stagnant share of its GDP devoted to research, but this is largely due to the fact that the traditional sector hardly innovates anymore. Research and development nevertheless remain dynamic in the field of computer sciences: the UK is the world’s second most active publisher of scientific articles in this domain.

In a future article, both authors will return to the causes usually mentioned of Europe's weakness in tech: the culture of entrepreneurship, the fragmentation of the European market, industrial policies, competition policy and the financing of innovation... so that policymakers can select the most effective actions to let Europe become again a continent at the forefront of industrial revolutions, as it was from the Renaissance to the early twentieth century. We will see that Europe has major assets, that this ambition is achievable, and that, by addressing the right issues, it will be even less difficult than the prevailing pessimism suggests.

 

 

Copyright image: JOAQUIN SARMIENTO / AFP

 

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