Market Maturity and Innovation

As a macro-economist, I am always interested in how things play out in an economy on the macro economy. I spent the last 5 years of my career diving into the innovation ecosystems. I worked in Venture Capital, worked for a heavily angel-financed start-up and experimented with the Seed financing funnel as entrepreneur on several projects. Never forgetting the macro scape of things.

Key features of Europe

Looking at population, capital base (fixed assets) and gini coefficients, a few things became very clear.

1. Europe is highly hierarchical. Wealth is never talked about. Wealth creation is a tabu. People are not meant to create innovations and wealth and a large set of gate keepers from banks, angels and VC funds is ensuring that is the way things are. The entire system is geared toward keeping low-income classes where they are. The system strongly restricts access to education and capital and the culture demotes innovators. Rejects failed entrepreneurs. And overall keeps networks of high income and wealth families tight and closed.
2. Looking at wealth statistics, most of the wealth in Europe is either in Retail – created after WW2 – or industrial families – created over multiple generations. Before industry and retail became wealthy, Germany was full of networks and guilds with long lists of family names that were contributing to local cities and and long lists of family trees that still stem from aristocratic society. The tradition against innovators model is long and historic. The ones that made it are strongly against these networks. The system is full of shisms, envy, hatred and cataclysms.
3. On top, the European is dominated by post-colonial, German thinking. Hence extensive supply chains within the region, with many suppliers on each stage on the upstream. Margins are controlled by teh gate keepers in the upstream. In automotive, you have OEMs, tier 1 suppliers, tier 2 suppliers. And so forth. The lower you get, the more they have to kiss up to the higher tier suppliers. If the industry dies, the entire supply chain dies. Many jobs are affected and education systems produce low-cost, decent-to-high quality specialists – not able to be generalists – within the supply chain. This creates a strong structural issue that prevents innovation. It will hurt too many margins and too many jobs.
4. On top, Europe is full of private companies. Listings are low. Most profits in any industry go to family owned businesses. This of course drives the wealth gap and deterioriation of the Gini coefficient and increased dependency of employment workers from employers.
5. The network size on the supply chain is still limited and controlled and provides limited space for new entrats within the supply chain. Potential disruptors are killed immediately. Most of the capital supply to innovation is controlled by families. The part controlled by government is controlled by families. The complexity of supply chains makes wealthy families more interested in the survival of the supply chain than building globally competitive businesses.
6. The education system fits this model. Elite education mostly focuses on serving management positions on the supply chain. They are not trained to draw capital from global markets and compete with the local warlords and supply chains.
7. Beyond control over capital and market entry and fierce competition against disruptors, unions and labour protection mechanisms are again under control of the old money networks. And increase the pressure on entrepreneurs. It seems impossible to start or win the fight, and unrealistic to even try.

Coming back from the macro-level: those are all problems of a weak state, a lack of liberalism and failure from capital markets. The failures are caused by strong nepotism that is driven by high gini coefficients – and control of wealthy elites over financial gains -, high level of complexity and protectionism in the supply chain with effects on education and policy.

The existing capital base that originally drove the per capita income is consistently depleted by offshoring and return desires from those elites, leading to a decline in real per capita income. Which in turn increases the leverage of the German government in putting pressure during trade talks with its neighbors. All serving the benefit of a few old industries in life-cycle based decline.

Does this look like the foundation of a desaster? Yes.