Policy Brief - Cost of Failure and Competitiveness in Disruptive Innovation
We find that the profitability of high-risk tech companies, associated with high rates of failure, is very dependent on the cost of restructuring, which itself is driven by employment protection legislation.
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FilePB24_ Coatanlem, Coste (1).pdf (1.82 MB)
Executive Summary
We find that the profitability of high-risk tech companies, associated with high rates of failure, is very dependent on the cost of restructuring, which itself is driven by employment protection legislation. Leveraging a combination of financial analysis, empirical observations, and limited existing literature, we estimate that restructuring costs (that include much more than severance packages) are approximately 10 times higher in countries with high labor protection, such as in Western Europe, than in countries with low labor protection such as in the United States.
We show that this cost differential translates into lower returns on capital in tech industries and confirm that impact empirically. We explain that the cost of failure is a first order factor of Europe’s lag in tech, with major consequences for its competitiveness and its standard of living.
A key insight is that restructuring costs matter even if they apply only to larger enterprises because the high return from the few winners materializes only once they become larger. We propose reforms that do not endanger the European social model.
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
