From browsing the web using an American search engine to shopping on an American e-commerce site using an American phone, the influence of U.S.-based tech companies is unavoidable.

The seven largest U.S. tech companies, Alphabet (Google), Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, the so-called “Magnificent Seven”, are 20 times bigger than Europe’s seven largest, and generate 10times more revenue. This isn’t because American companies are simply superior to their European counterparts; it’s their ability to innovate, scale, and capture global markets that sets them apart.

While Europe may not host tech titans of the same magnitude as those in the U.S., it is still home to a thriving and innovative technology sector. Take Spotify, the world’s most popular audio streaming subscription service with over 615 million users, or Finland-based mobile gaming company Supercell, whose portfolio of games is played by more than 100 million people every day. Despite this, European firms struggle to ascend to the status of global powerhouses, a domain dominated by the U.S. and China. Stockholm-based music-streaming platform Spotify, for example, is estimated to be worth $58.73bn. In comparison, U.S. e-commerce giant Amazon is valued at over $1.32tn. This disparity highlights a critical issue: Europe is falling behind its global competitors. The question is, why?

When it comes to Europe’s lagging tech sector, the numbers are stark. According to McKinsey, large European companies are much less profitable than their American counterparts, with 90% of this gap attributed to technology-creating industries. The combined market value of the “Magnificent Seven” exceeds a staggering $12tn. Europe’s seven largest tech companies pale in comparison, their combined market capitalization a mere $705bn – 20 times lower.

The performance of the tech sector in 2023 highlights this widening transatlantic divide. The US tech index surged by an impressive 55%, marking its best year since the dot-com boom of 1999. Meanwhile, the Euro STOXX technology index saw a more modest increase of 33%, remaining about 10% lower than its previous highs in 2021. This is true across all the key industries. As of December 2023, Apple’s market value was 175 times greater than that of Finland’s Nokia. Tesla has grown to be 10times larger than Germany’s Volkswagen AG, and Europe’s largest chipmaker, ASML Holding, has only a fifth of the market value of Nvidia Corp. Only 8% of businesses in the EU are classified as ‘leading innovators’ in the European Investment Bank’s latest investment report. In the U.S., this figure is twice as high. Once a tech powerhouse with names like Nokia, Siemens and Ericsson, Europe now faces a steep climb to bridge this growing gap.

The tech industry is unpredictable and fast-moving and those quickest to react reap the biggest rewards. Between 2018 and the third quarter of 2023, US AI companies received €120bn ($130.5bn) in investment, compared to €32.5bn ($35bn) for European companies, according to Eurochamber researchers. Overall, during the period from 2021 to 2027, the Digital Europe Programme plans to spend €2.1bn ($2.3bn) on AI. While this may sound significant, it is dwarfed by the €10bn ($10.8bn) that Microsoft alone plans to invest in OpenAI, having already invested more than $3bn. This investment gap shows what Europe is up against if it hopes to keep pace with the financial commitments seen in the States.

However, simply throwing money at the problem is not enough to solve Europe’s tech industry challenges. The continent’s strict labor laws slow its ability to adapt to rapidly-changing technologies and seizing opportunities in the same way as Americans. As the recent wave of tech layoffs show, for tech companies, restructuring is part of its nature. Companies like Tesla, Amazon, Google, TikTok, Snap and Microsoft have all laid-off large swathes of their workforces in the first months of 2024, with this year already seeing 60,000 job cuts across 254 companies, according to independent layoffs tracker Layoffs.fyi. European companies face far more red tape when it comes to restructuring, with higher severance costs and longer delays hindering their ability to compete. While the system is slower and succeeds in looking out for its workers, the trade off is it diminishes Europe’s overall competitiveness on the global stage.

“To win big, you sometimes have to take big risks,” former CEO of Microsoft, Bill Gates, famously said. European entrepreneurs are generally stereotyped as more “risk-averse” than their US peers. Access to capital, especially for early-stage ventures, is tougher in Europe, pressuring startups to prioritize revenue and profits from the start. In contrast, American companies often focus on growth first, allowing firms like Netflix and Uber to accrue substantial debt in exchange for market dominance. This growth-centric mindset has driven many American giants to success, while European startups, held back by capital constraints, frequently seek financing elsewhere and eventually are pushed to relocate. Skype, for example, although founded in Europe, eventually accepted an $8.5bn takeover bid from U.S.-based Microsoft. This exodus of promising startups further erodes Europe’s potential to nurture homegrown tech talent.

Unsurprisingly, this had led to just 10% of the world’s unicorns – startups with a market valuation exceeding $1bn – finding a home in Europe, with most located in the UK. European companies face a significant struggle to attract the capital necessary to achieve unicorn status, creating a significant barrier to the growth and competitiveness of European startups on the global stage. To improve these numbers and create a more vibrant startup ecosystem, European governments could provide stronger financial incentives for companies investing in research and development (R&D). Potential incentives might include R&D tax relief, which would reduce the tax burden on companies that invest heavily in innovation. They could also offer tax rewards for high-risk investments that would encourage investors to back more daring ventures, or lower tax rates for profits derived from R&D-related activities across Europe. Encouraging businesses to embrace more risk is necessary when you consider the potential rewards. According to Callaghan Innovation, returns on R&D expenditure average between 20-30%, significantly higher than investments in physical assets.

Efforts to crack down on the tech industry are also picking up pace in Europe, with a series of regulations aimed at reining in the dominance of large tech companies introduced over the past few years. One measure currently being rolled out is the Digital Markets Act (DMA), which targets so-called gatekeeper companies – those with a market value of $81.7bn or annual revenue of at least $8.17bn within the EU, and at least 45 million monthly European users. Firms accused of abusing their market power can face fines of up to 10% of their global revenue in the most extreme cases. Currently, the DMA concentrates on regulating the internal app markets of large tech platforms but in the future will need to expand its focus to include cloud computing and artificial intelligence, which are currently excluded from the legislation.

The European Union has already demonstrated its commitment to this regulatory approach. In 2022, it imposed a $2.8bn fine on Google for leveraging its Android system to dominate the market, concluding a lengthy investigation that began in 2015. In 2023, Meta was fined $1.3bn for violating GDPR, the EU’s data protection regulations, and, this year, Apple was hit with a $2bn sanction over allegations it shut out music-streaming rivals, including Spotify, on its platforms. While Europe’s high regulatory standards are something to be celebrated, its critics complain that tighter regulations will stifle innovation for businesses trying to push the envelope with cutting-edge research.

In the meantime, Big Tech has found a solution to placate all parties when it comes to evening the playing field: setting up massive data centers on EU soil. According to a study by consultancy firm Roland Berger, 34 data center transactions were finalized in 2023, with the sector growing at a solid 29.7% annual rate since 2019. Mordor Intelligence, another market analysis company, predicts that the data center market in Europe will grow from $35.4m in 2024 to an estimated $57.7m by 2029. Amazon web services is one company spearheading this growth, with a $8.44bn investment in Germany just announced. However, this is just a drop in the ocean when it comes to shaping the digital economy of the future.

While there is plenty of discussion as to whether the U.S. or China will end up dominating Big Tech in years to come, Europe must ensure it is not left as an afterthought. By ramping up investment in R&D and adopting a more innovative and risk-taking mindset, Europe can ensure it has a seat at the table and is ready to play.