The IPL newsletter: Volume 25, Issue 508

Venture capital and the international relocation of startups

Stefan Weik, Ann-Kristin Achleitner, Reiner Braun, Research Policy
Venture capital (VC) in most economies outside the U.S. is still developing and relies heavily on foreign investment. This raises concerns that startups are migrating out of these countries as a consequence. Using a novel large-scale dataset of startup headquarter (HQ) location histories across a heterogeneous set of 17 countries, this article documents novel facts on startup relocation across countries. First, international startup relocation is relatively common: about 6 % of startups move across borders, representing 17 % of the total startup value created. Second, by far, most relocation (85 %) is directed to the US. Third, relocation leads to the majority of startups' workforce ending up in the foreign country. Fourth, foreign VC investment, particularly from the US, is strongly associated with relocation, with the effect implying that one in ten US investments leads to relocation. This foreign VC effect is robust to matching, panel data, and instrumental variable analyses, and is more pronounced when startup financing conditions are poor. These findings shed light on the global movement of startups and suggest that the outflow can be addressed by improving startups' local financing conditions.

Useful Stats: Female-founded companies lag in VC funding, more likely to receive VC deals in earlier than later stages, 2014-2023

Conor Gowder, STTI
This article uses data about female, male, and female and male founders and co-founders, specifically that of the number of companies, deals, and capital invested. Data was filtered down in PitchBook to only pre/accelerator/incubator, angel, seed, early stage, and later stage VC deals. While the growth of female-founded and co-founded companies has increased at a faster rate than those of male-founded and co-founded and mixed gender founded companies, it is still a smaller amount than the other two. Additionally, these companies are more likely to receive a higher proportion of deals occurring earlier in the VC pipeline.

Mario Draghi: An Industrial Strategy For Europe

Mario Draghi, Groupe d'études géopolitiques
Following the publication of the first outline of his forthcoming (July) report on European industrial policy to the President of the European Commission,this post summarizes former Italian prime minister and European Central Bank president Mario Draghi's acceptance speech at the Monastery of San Jeronimo de Yuste (Spain, 14 June 2024) for the Carlos V European Award. The Carlos V award, given to those who contribute to the “enhancement of Europe’s cultural and historical values or to the European Union’s process of integration.”

See here for Politico coverage of the speech, emphasizing how Draghi appears to have embraced French thinking on the importance of a robust industrial policy.

Global Competitiveness Landscape

The speech outlines various aspects of the current global environment that necessitate a more active Eurpean industrial policy in order to preserve competitiveness:

• Productivity gap: Since the early 2000s, Europe's per capita GDP at PPP (adjusted for internal prices) has been about one-third lower than the US’ – and around 70% of this gap is explained by lower productivity.

• Energy costs: Europe's electricity prices that are 2-3 times higher than the US. Last year, around 60% of European companies said that energy prices were a major impediment to investment – more than 20 percentage points higher than the response of US companies.

• Innovation gap: As a share of GDP, European firms spend about half as much as their US peers on research and innovation, leading to an investment gap of around €270 billion a year

• Competition from China: In 2019 China spent around three times as much on industrial policy as Germany or France as a share of GDP, and in dollar terms adjusted at PPP, it spent around ten times as much as both countries combined. Part of China’s progress "owes to sizeable cost subsidies, trade protection and demand suppression."

Policy Recommendations

• Reducing Trade Barriers: Achieving scale requires removing the remaining barriers to cross-border activity within the Single Market, especially those that stand in the way of digital diffusion

• Targeted innovation spending: Compared with the United States, not having a federal budget puts the EU at a disadvantage. For example, publicly funded research and innovation is a similar percentage of GDP in both regions, around 0.7-0.8%, but in the United States the vast majority of spending takes place at the federal level, ensuring that public funds flow efficiently towards national priorities. In Europe, by contrast, financing instruments are split between the European Union and national levels – just one-tenth of R&I, of research and innovation, spending is European – with little prioritisation or coordination.

• Streamlining Regulation: Successive layers of regulation have created a burden on long-term investment, as reported by 61% of the European Union companies last year.

  There is significant scope for improvement simply through setting clearer priorities, streamlining regulation

• Public-private co-investing at the European level: Simplifying the European projects of common interest and expanding their scope would make them a successful tool for increasing investment in critical areas.

• Trade policy: Europe needs a common assessment of the geopolitical risks "to develop a genuine ‘foreign economic policy’ – or as it’s called today, statecraft – that coordinates preferential trade agreements and direct investments with resource-rich nations, the building up of stockpiles in selected critical areas, and the creation of industrial partnerships to secure the supply chain of key technologies." Rules-based multilateral trade is important for the EU, as "the manufacturing sector in Europe employs two and half times as many people as in the United States. And more than a third of our manufacturing GDP is absorbed outside the European Union, compared with around a fifth for the US." The EU should "strive to repair the damage to the multilateral trading order as soon as possible, encouraging all willing partners to re-commit to rules-based trade." The EU should  "encourage inward FDI, so that manufacturing jobs remain in Europe" while also "using subsidies and tariffs to offset unfair advantage created by industrial policies and real exchange rate devaluations abroad" in a "pragmatic, cautious and consistent" fashion that is "distinguishing genuine innovation and productivity improvements abroad from unfair competition and demand suppression."

• Demand-side procurement: Stimulate demand through increasing common European spending, ideally at the European level. But "in the absence of such a centralised approach, we can achieve a lot by coordinating public procurement policies more closely and applying more explicit local content requirements for EU-produced products and components."

EVENTS

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This newsletter is prepared by Travis Southin.
Project manager is David A. Wolfe