On many metrics, the European economy and its businesses have been struggling for years to capture the full potential of current and even previous generations of digital tools. A successful digital transformation is more important for Europe at a time when new digital technologies, such as artificial intelligence (AI) are increasingly being adopted.
European companies are not standing still on AI. They are slowly using those technologies, motivated by the judgement that automation and AI are likely to drive the largest growth opportunities in the region. However, Europe may risk falling further behind as the world’s AI leaders, the United States and China, continue to adopt and diffuse AI. Moreover, the countries competing in the AI race are increasing, including Canada, Japan, and South Korea.
Europe is adding an AI gap to its digital gap
Europe already lags behind the world leader, the US, on the supply, as well as the adoption and diffusion, of digital technologies. Now that digital gap is spilling over into an AI gap. The way that companies are developing digital tools and using them in their organizations is one of the most important preconditions for the spread of AI. Therefore, Europe’s digital gap affects its ability to leverage fully the promise of AI.
As previously said, Europe took initiative and started moving towards a digital and AI transformation. Some metrics confirm this pattern, for instance, four times more capital invested than five years ago in tech, and with close to six million professional developers.
Although Europe’s GDP is comparable to that of the United States and just ahead of China’s, the digital- and AI-based portion of Europe’s ICT sector today accounts for around 1.7 percent of GDP, rather lower than the share in China at 2.2 percent and only half the 3.3 percent share in the United States. This low portion of GDP invested in the ICT sector, underlines how the digital gap is still strongly present, in spite of the efforts made in the EU.
To sustain this, we can consider that at the end of 2017, Europe, despite the high GDP, was not home to any of the ten largest internet companies worldwide. We can find the same pattern by looking at start-up companies; in fact, in the United States the capital invested was about €220 per capita, whereas in Europe per capita investment was at lower level, for example, €3 in Italy, €58 in Finland, and €123, the highest share in Europe, in Sweden, highlighting how the lack of investment is still significant.
One of the main reasons for this gap can be found in the different digital ecosystems in Europe and in the US. The latter – largely based in hubs such as Silicon Valley, Seattle, and Boston – is large, innovative, and diverse, encompassing research institutions, universities, and private companies while the European one is still not fully integrated in the economic and social environment.
In addition, one encouraging but not sufficient element is that large Western European companies are continuing to expand their use of early digital technologies, but the pace of diffusion remains low, with the share of fully digitized companies increasing by less than 10 percent a year between 2010 and 2016. Recent technological waves such as cloud-based technologies have only been adopted by a majority of large companies in Western European countries; other technologies, such as the Internet of Things or big data, remain niche.
In addition, in 2016 European countries were capturing only 12 percent of their full digital potential, two-thirds of the captured potential in the United States.
Europe’s disadvantage in the digital diffusion is likely to spill over into AI, where a new gap is appearing. However, it needs to move faster and on a greater scale or risk being left further behind the world’s AI leaders as it happened with digital technologies.
To contrast this problem, Europe has deep tech talent, with top university centers in AI and computer science. Europe is steadily adding science, technology, engineering, and mathematics (STEM) graduates to its workforce in order to fill the above-mentioned gap and give a boost to each country’s productivity.
Europe’s investment in, and its use of, AI already lags behind that of the world’s AI leaders.
AI initiatives remain fragmented and isolated in Europe, and the investment in this new technology is nothing like what is happening in the United States or China. For instance, the €2.6 billion investment in AI and robotics announced by the European Commission is only slightly larger than the amount that China is spending ($2.1 billion) on a single AI technology park in a western suburb of Beijing.
In the provision of AI, Europe attracted only 11 percent of global venture capital and corporate funding in 2016, with 50 percent of total funds devoted to US companies and the balance going to Asia (mostly China). Two years later – in 2018 – Europe may not have increased its share, according to data from CB Insights. China is now attracting almost 50 percent of global investment in AI start-ups, ahead of the United States, which has so far attracted 38 percent of total funding. So, we can see how the percentage of funding shifted from the United States to Asia, with the EU’s inability to capture part of it.
Moreover, European AI is yet to be used broadly in enterprises rather than in one or only a few functions. In fact, companies in the EU tend to focus on specific benefits of AI like automation in specific corporate functions instead of a full integration in the systems of the company.
To support this, we can notice how a strong “power curve” (figure below) is present among European firms with only a relatively small subset of companies that already adopted significantly AI technologies: the so-called full adopters, or front-runners. By contrast, there is a long “tail” of companies that are focusing only on a rather narrow set of AI and automation technologies, even if their potential is much wider.
Competition, innovation, and new skills acquisition: will AI scale up?
Why are some companies absorbing AI technologies while many others are not? Two factors that might answer to this question are their pre-existing digital tools and capabilities and whether their employees have the right skills or knowledge to interact with AI and machines.
In fact, one of the largest elements that slows down the adoption of AI is the development of complementary human skills, especially since AI technology advances at a fast pace.
Moreover, a survey from McKinsey showed how the two biggest barriers to AI adoption in European companies are related to having the right workforce. The first barrier refers to the ability to use ICT tools in everyday job activities. This is particularly true in some European countries while in others is a smaller problem. For instance, countries such as Finland have a more abundant supply of workers with the skills that are likely to be in demand than Italy and Spain. The second barrier relates to companies’ need for skills to provide new AI applications and services, such as AI coding and analytic expertise.
If compared to other continents, Europe would still lag behind world AI leaders in terms of the potential on offer. In fact, it has been estimated that the United States are 31 percent ahead of Europe in the AI-enablers frontier. Europe is lagging behind the United States for at least two reasons.
The first is that the European countries stays behind the US on digital technologies, with a deficit in digital and ICT services of around $50 billion. Indeed, The United States has been able to generate 1.5 to 2 times more patents per capita than has Europe in sectors like digital, quantum computing, and big data. Moreover, the ratio of AI-related patents granted in the United States vs. Europe has grown from less than 2.0 in 2005 to more than 2.5 in 2015. This last comparison is giving us more evidence of how the gap is widening.
The second reason Europe may end up lagging further behind the United States is a diffusion effect. Europe is already 20 percent slower than the United States in terms of corporate adoption of AI. The gap will not close automatically because diffusion dynamics are network based and, as we observed in Silicon Valley in the United States, and tech hubs tend to create an accumulation effects in skills, capital, and education.
Conclusion
Overall, therefore, Europe’s current relative position is in danger and it is deteriorating. A plausible deterioration of 10 percent on two key variables like innovative ability and skills might lead to a loss of 16% of the potential, equivalent to €400 billion. Likewise, and everything else being equal, if Europe reached the current frontier with the United States, it would potentially create an additional boost to GDP of €900 billion by 2030 and would close Europe’s employment gap. The latter effect arises because of a general improved innovation and because of higher capture of profit pools linked to artificial intelligence ecosystems.
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