Europe’s scaling problem

In 2008, the total market capitalization of US-listed firms was about a third larger than the market capitalization of European-listed firms. In 2023, it’s about triple. What happened? A new NBER working paper by Becker, Benmelech, and Monteiro tries to answer that, first by ruling out some potential explanations: it’s not a few lucky superstar firms; it’s not driven by differences in the relative size of different sectors; it’s not about how many firms get listed; it’s not about successful European firms re-listing in the states; and so on.

Instead, they argue Europe’s smaller market cap is downstream of the fact that successful European firms struggle to scale. Part of the explanation here is about financing. While the difference in the leverage of European and American firms did not change much between 2008 and 2023, the venture capital supply gap widened by a substantial level over the same time period. Since VC money supports new high-growth firms, this difference shows up most acutely there. While the largest European and American firms face similar costs of capital, the terms are much less favorable for small firms in Europe than in America.

The other problem is European firms have a harder time tapping into continent-wide markets than American firms do. The size of European firms is more closely related to the size of the national market they are based in, than the size of an American company is to the size of the state-wide market it is based in. The greater integration of American markets means it doesn’t much matter whether a company is based out of Idaho or Texas for its ultimate size, but it does matter in Europe if you’re based in, say, Germany versus Denmark.