Why US Companies are Larger than EU Counterparts

After some time in Europe, you may notice the difference in the size of business there compared to the United States. While some may claim it is the difference between capitalism and socialism, this is not true. According to World Population Review, Ireland and the United Kingdom surpass the United States in economic freedom while Ireland has a mixed economy. The common market economy in Europe began in 1957 after the signing of the Treaty of Rome. It was signed by 6 countries and established the four fundamental freedoms, which call for the “free movement of goods, services, capital and workers.” This is similar to what we have in the US under the Dormant Commerce Clause. There are many different factors in the world today that bring about changes between the US and the European Union that grow and hinder the companies within their economies in different ways, but the type of economy isn’t one of them. 

While the US has a population of 329 million people spread out over 9,833,517 km², the EU has a greater population. With 513 million people in just 4 million km², the EU has an advantage of the more compact area which is broken up into 28 countries. The US is 174th by population density. The language barrier within these countries is much higher than that of the US, where the majority of people speak English, although there is no official language. The EU has 24 official languages spoken between the countries and over 60 indigenous languages. There is also the issue of multiple currencies, since just 19 of the 28 countries in the EU use the Euro. The remaining countries have mixed plans, with a minority of the group planning on a transition to the Euro in the medium term. In the US we just have the US Dollar. 

When it comes to government regulation, there are different approaches that might help or hinder in certain areas. The US tends to pass laws for specific industries while the EU has overarching laws. For example the General Data Protection Regulation (GDPR) “regulates the processing by an individual, a company or an organisation of personal data relating to individuals in the EU”. In the US, our privacy laws are hundreds of laws passed by both the federal and state levels of government. Specific industries are individually governed such as how the Health Insurance Portability and Accountability (HIPPA) governs the health industry and the protection of patient data. 

The EU prioritizes the sharing of wealth much more so than the US through higher taxes. While this is better for everyone in the country, it does decrease the income of corporations. The corporate income tax rates in the EU vary by country but the highest one is France’s 34.4%.  However, “Europe’s average CIT rate” of “(22.5 percent) is slightly higher than the global average (21.4 percent)” and only slightly greater than the corporate income tax at the federal level of the United States which is 21%. This does not tell the true story though that the new tax overhaul passed by Trump “has left most of the old tax breaks intact while cutting the rate by almost half, resulting in a ‘continued decline in our already low corporate revenues.’ Revenues from the corporate tax fell by 31 percent in 2018 to $204 billion from $297 billion.” This has led to the number of profitable Fortune 500 companies paying zero taxes to go from 30 to 60.

Industry specialization may also play a factor in why companies based in the US have larger revenues. The EU has over 28,000 companies employing over a million people in the chemical industry which makes up 64.4% of the economy.   

This is a big difference compared to the United States, where only 11.4 % of the economy is manufacturing and the largest industry is just a mere 20.7%. 

As the US is focused more on technology and the services sector as a whole, the focus tends to be on growth instead of margins. This plays well into the demographics of the US, which is a large single market for businesses to target. Companies in the EU tend to focus on higher margins and value. Although this book looks at the man-made fiber industries between the economies specifically, it is a good example that comes to the same conclusions. This idea can also be seen in the typical goods and consumerism culture we think of each country possessing. The US is known for a rapid consumerism culture and cheaper products, while Europe is known for more rugged and durable products that last longer.  

Before businesses are even given the chance to grow in the EU, they are stopped by multiple factors. One of those is that there is a lack of funding in Europe that the US does not suffer. “The biggest American and Asian tech firms created since 2000 raised an average of about $7.3 billion, while the European equivalent was $1.6 billion” giving the US a large advantage. This greatly limits the amount of capital on hand for these companies to use to their advantage to grow in the early stages. Startup companies within the United States use stock options as a way to compensate employees who bring value to the company but can’t afford to fully pay them. Not only is this a benefit, because it lowers cash burn early on,  but it also encourages the employees to work harder and stay with the company. This is recognized as a major issue in the EU, and 500 startup CEOs signed a letter to policy makers asking for them to reform the rules of stock options. This would help startups acquire better talent by competing against what the US and China may offer. 

The culture and ideals between the two economies play a major role in why companies can grow to such enormous sizes in the US. The overall idea of entrepreneurship is much more prevalent in the US, which can be seen through the American Dream. This is the belief that America is a place where anyone can start with nothing and still achieve their dreams. The startup culture is much more acceptable here than in the EU. There are mentors all over the place willing to help. Part of this may be due to the fact that failure in the US is acceptable and even seen as a way of showing your strength when you overcome failure. The EU, on the other hand, has launched a campaign called the FACE (Failure Aversion Change in Europe) in order to promote entrepreneurship. This is a deep rooted value that people in Europe have and are slowly overcoming. Labor unions in the EU are much stronger and people there have a greater sense of finding a job and sticking with it longer. This can be seen in the employee turnover rate being around 18% in the US compared to just 7% in the EU. There is also the concept of the protestant work ethic. This is the idea that people in protestant areas place higher values on hard work, as this is the way to get to heaven, as opposed to Catholicism. Europe’s protestant population is 12% of the continent compared to the US with almost 50% of people claiming to be protestant. 

There are many differences between the European Union and the United States that bring about the vast size difference of their largest corporations. The size of the US market and parallels across the country make it a much easier target than the divided EU. Take Spotify for example. That was originally a Swedish company founded in 2006 that expanded into the US in  2011. Since then it has seen rapid growth which is in large part due to the US. Following the cultural barriers between countries in the EU, the government intervention in business policy varies greatly between the economies, leading to differences in the businesses capabilities within the law and overall performance. Before this, businesses in the EU are limited due to a lack of funding and ease of offering stock options along with the culture that encourages people to find a job and stick with it. Until the EU changes it’s perception of big business and makes it easier to grow, American companies will lead the market for years to come.