Europe’s consumers embrace digital technologies just as much as their American counterparts. But when it comes to business, there is a large gap between the level of digitalisation among European companies compared to those across the Atlantic. This matters: how businesses use digital technologies will determine the size of the economic pay-off of the digital revolution.

Europe operates at only an estimated 12% of its digital potential, compared with the United States’ 18%. But there is large variation among Europe’s countries, industries, and companies within each industry. Some countries, mostly in Scandinavia, already capture twice the potential of others (largely in southern Europe).

There is a large gap between sector and company digital leaders and laggards, a pattern captured by MGI’s Industry Digitization Index. This index uses dozens of indicators to provide a snapshot of digital assets, users, and workers by sector. In Europe and the United States, the information and communications technology (ICT) sector is at the digital frontier, and media and finance close behind. In Europe, the financial sectors of the Netherlands, Sweden, and the United Kingdom all perform strongly, reflecting the emerging native “fintech”, “edutech”, and other tech sectors of Amsterdam, Stockholm and London. Over the past decade, the major driver of the digital frontier has been the digitalisation of workforces: this has been the area where successful digital firms have pulled away from the pack.

But large traditional private- and public-sector activities, including manufacturing, mining, healthcare and education, lag far behind. Companies in these areas tend to focus on only some aspects of digitalisation: for example, manufacturing and mining companies use digital tools to engage customers, suppliers and partners, but digital penetration in their physical assets remains relatively low. In the retail sector, supply chains have been highly digitalised; small and medium-sized retailers less so. Overall, Europe’s performance is being held back, with only five percent of Europe’s asset base digitalised, and workplaces only nine percent digitised.

In Europe, digitalisation is less of a game-changer than it is in the United States, where the most digitalised industries have experienced the fastest profit growth over the past two decades. This dynamic is not seen in Europe – possibly because Europe’s economy is not as digital as that in the US.

American companies also benefit from hyper-scale opportunities. Broadly internationalised European internet companies remain rare: Spotify, which is present in more than 60 countries, is relatively unusual. By market capitalisation, there are no European firms among the world’s largest digital companies. Europe is clearly making progress in the creation of “digital unicorns” in new areas such as the Internet of Things or big data, but start-ups with billion-dollar valuations are still not sprouting up to the extent that they have in the United States. This matters because large firms tend to lead smaller firms in terms of digital adoption. The fact that venture capital and growth investment in Europe is significantly lower as a share of GDP than in the United States casts doubt on how quickly Europe can travel toward its full digital potential.

Europe’s relative lack of scale is one reason why it generates relatively few digital assets at home, and relies heavily on US (Europe runs a digital trade deficit of nearly 5.6% of total EUUS services trade). Europe does not rival the United States as a producer of global content, a developer of major platforms, or as an incubator of successful internet companies. But there are bright spots in Europe. Like for like, our “‘Digital Quotient” analysis suggests that one-fifth of European companies are faring better than the average US company. The Netherlands is a net exporter of digital services to the rest of Europe. Sweden’s venture capital investment as a share of GDP is four times that of the United States. Stockholm is producing more than three digital unicorns per million inhabitants – double the rate of Boston.

But Europe has much to do to foster innovation, scale up, and capture more of its digital potential. The Digital Single Market envisaged by the European Commission may help. Estimates suggest that the DSM could add €375bn to €415bn to European GDP each year by providing a common platform for domestic firms to achieve scale. But such a gain would be dwarfed if sectors that need to catch up to the digital frontier were to double their digital intensity – something that could add €2.5 trillion to GDP by 2025, with GDP growth of one percent per year over the next decade. In reality, the potential boost to GDP is likely to be much greater as the digital frontier moves forward rapidly with waves of innovation.

Governments have a major role to play to ensure that Europe reaps the potential economic benefits from completion of the DSM. It can help unlock higher investment and develop the skills needed to power the digital revolution (helping the many workers whose jobs will be lost to automation). But the onus is squarely on companies to do more to adapt their business models and digitalise their operations.

They need to assess why and how a market might be disrupted by digital, and work out whether to engage or withdraw. Thinking about digitalisation within a supply and demand framework can help: digital technologies can reveal sources of supply that were previously unknown or uneconomic to provide, while digital gives consumers more complete information and unbundles or rebundles products and services in new ways, as streaming services have done with music. The dynamics on both sides create an opportunity for companies to play the role of market maker, particularly if they can find a way to lower transaction costs. The most successful digital platforms are particularly adept at this market-making function.

Innovation in companies’ own operations is vital. In research and development, data-sharing initiatives, crowdsourcing, and virtual collaboration can all raise productivity. To deepen their engagement with customers, companies need an online presence that goes well beyond a passive corporate website. They need the right capabilities to accelerate their digitalisation, from infrastructure to processes. And they need to put digital tools in the hands of their employees to ramp up productivity – from online talent platforms to screening tools using sophisticated algorithms during the hiring of new people. Companies that have made digital a central component of their human resources have set themselves apart from the rest.

The time to act is now. Even those sectors and businesses near the digital frontier have to perform superlatively to keep up as the frontier moves ahead at an accelerating speed. Those that are already a distance from the frontier will need to work even harder – and quickly.

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