How Attitudes about Risk & Failure Affect Innovation on Either Side of the Atlantic

by on June 19, 2015 · 1 comment

“Why hasn’t Europe fostered the kind of innovation that has spawned hugely successful technology companies?” asks James B. Stewart in an important new column for the New York Times (“A Fearless Culture Fuels U.S. Tech Giants“).

That’s a great question, and one that I have tried to answer in a series of recent essays. (See, for example, “Europe’s Choice on Innovation” and “Embracing a Culture of Permissionless Innovation.”) What I have suggested in those essays is that the starkly different outcomes on either side of the Atlantic in terms of recent economic growth and innovation can primarily be explained by cultural attitudes toward risk-taking and failure. “For innovation and growth to blossom, entrepreneurs need a clear green light from policymakers that signals a general acceptance of risk-taking—especially risk-taking that challenges existing business models and traditional ways of doing things,” I have argued. And the most powerful proof of this is to examine the amazing natural experiment that has played out on either side of the Atlantic over the past two decades with the Internet and the digital economy.

For example, an annual Booz & Company report on the world’s most innovative companies revealed that 9 of the top 10 most innovative companies are based in the U.S. and that most of them are involved in computing and digital technology. None of them are based in Europe, however. Another recent survey revealed that the world’s 15 most valuable Internet companies (based on market capitalizations) have a combined market value of nearly $2.5 trillion, but none of them are European while 11 of them are U.S. firms. Again, it is America’s tech innovators that dominate that list.

Many European officials and business leaders are waking up to this grim reality and are wondering how to reverse this situation. In his Times essay, Stewart quotes Danish economist Jacob Kirkegaard of the Peterson Institute for International Economics, who notes that Europeans “all want a Silicon Valley. . . . But none of them can match the scale and focus on the new and truly innovative technologies you have in the United States. Europe and the rest of the world are playing catch-up, to the great frustration of policy makers there.”

OK, but why is that? Again, it comes down to those different cultural attitudes about risk and the stark differences over the potential lessons to be gained from allowing firms, business models, and entire professions to fail and/or be significantly disrupted.

Stewart quotes German economist Petra Moser on this point. He noted that “Europeans are worried. . . . They’re trying to recreate Silicon Valley in places like Munich, so far with little success,” she said. “The institutional and cultural differences are still too great.” In Europe, stability is prized,” she says. Here’s the key passage from the Stewart piece elaborating on this point:

Often overlooked in the success of American start-ups is the even greater number of failures. “Fail fast, fail often” is a Silicon Valley mantra, and the freedom to innovate is inextricably linked to the freedom to fail. In Europe, failure carries a much greater stigma than it does in the United States. Bankruptcy codes are far more punitive, in contrast to the United States, where bankruptcy is simply a rite of passage for many successful entrepreneurs.

Moreover, he notes, “Europeans are also much less receptive to the kind of truly disruptive innovation represented by a Google or a Facebook.”

And that remains the heart of the problem for Europe. What many leaders there fail to appreciate, as I noted in my earlier essays, is that:

Innovation is more likely in systems that maximize breathing room for ongoing economic and social experimentation, evolution, and adaptation. Societies that appreciate those values—and allow them to influence both social norms and policy decisions—are likely to experience greater economic growth. By contrast, those that deride such values and adopt a more precautionary policy approach are more likely to discourage innovation and languish economically.

The remarkable aversion to failure and its affect on deterring entrepreneurialism and long-term growth in Europe and elsewhere cannot be overstated. As I will argue in a forthcoming book chapter on this topic, we can conclude, paradoxically, that individuals, institutions, and countries that over-zealously seek to avoid the possibility of certain short-term failures are actually far more prone to potentially far more dangerous and systemic failures in the long-term. Put more simply: the more you try to avoid all the little failures, the harder you fail more generally. This is Europe’s fundamental predicament circa 2015.

Of course, changing long-entrenched cultural attitudes toward risk and failure can be challenging and take many years, even decades. But the path forward–at least in terms of legal policy and regulatory reforms–has been charted by Larry Downes in his new Harvard Business Review essay, “How Europe Can Create Its Own Silicon Valley.” EU policymakers, he correctly observes, will “have to learn to appreciate in the first place the profound role regulation (or the lack of it) plays in the creation of economic value in the Internet economy.” Downes then continues on to itemize some of the policy changes that would help put Europe on the right track to unlock the amazing entrepreneurial spirit that lies dormant across the continent.

Whether or not the Europeans are willing to take those steps remains to be seen. Regardless, the lesson for U.S. policymakers should be clear: If you want to continue to produce world-beating tech innovators, you must avoid Europe’s overly precautionary and highly risk-averse approach to policy. “Permissionless innovation” remains the better default policy position toward new entrepreneurs and technologies, no matter how disruptive they may be in the short-term.

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