Working Paper - Cost of Failure, Disruptive Innovation and Targeted Flexicurity: More Evidence Supporting Targeted Reforms
In the European Union, high restructuring costs due to Employment Protection Laws, combined with the high level of failure characteristic of disruptive innovation, make investment in tech and biotech essentially unprofitable. A Working Paper by Yann Coatanlem, and Oliver Coste
Executive Summary
This paper expands earlier work by assembling a larger cross-country sample (250 plans) to measure restructuring costs borne by large firms and to assess links with business R&D in disruptive sectors (tech/biotech).
We estimate employee-related restructuring costs (in months of average salary) using public annual reports, SEC filings, and Eurofound sources. We confirm a wide transatlantic gap, e.g., Germany at 31 months vs the United States at 7 months. We identify outliers with low costs (2 to 3 months) within Europe: Denmark and Switzerland.
High restructuring costs due to Employment Protection Laws, combined with the high level of failure characteristic of disruptive innovation, make investment in tech and biotech essentially unprofitable. Therefore, European companies tend to specialize in marginal innovation, as confirmed by academic literature going back to the late 90s.
Consistent with this, we show a strong negative correlation between restructuring costs and business R&D intensity in tech and biotech, ranging from 0.1% in Italy to 3% of GDP in Switzerland.
We provide two causal probes: (i) a regime-shift study of Denmark’s flexicurity, where private R&D rose sharply following reform; and (ii) a stylized model of the firm with a Monte Carlo simulation (using 20 years of revenue dynamics for 4,200 firms) demonstrating that disruptive sectors display volatile revenue profiles and that high restructuring costs depress profitability in such sectors while having limited impact in mature industries.
Because public disclosures often aggregate costs and omit country-level details, we outline why new firm-level surveys are essential to inform policy.
We conclude with recommendations for targeted EPL reforms, focused on high earners only, which will preserve social protection while restoring agility critical for disruptive innovation, productivity and growth.
This is a joint publication IEP - HEC Paris.
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.
