Europe Doesn't Have an Innovation Problem. It Has a Scaling Problem.

A new paper from The Productivity Institute puts numbers behind a reality that anyone working in European venture building already feels in their bones.

Bart van Ark presented the findings at the ECB Forum in Sintra last month. The paper is called "Rewiring Europe's Productivity Framework", and it makes a case that should reshape how we think about innovation, growth, and what venture building is actually for.

Here is the headline number.

The productivity gap between the euro area and the United States has widened from $9 to $21 per hour since 2018. That is a structural divergence, not a cyclical blip. But the more important number is hiding one layer deeper.

Eighty percent of that gap is within the same industries.

This is not a story about Europe specialising in the wrong sectors while America dominates the high-growth ones. It is a story about European firms within those same sectors being less productive than their American counterparts. Same industries. Same types of companies. Different outcomes.

What explains the difference?

It's Not About Ideas

The paper is explicit on this point. Europe does not have a pure innovation deficit. The pipeline of research, patents, and early-stage ventures is not the binding constraint. The binding constraint is what happens after the idea exists.

Van Ark calls it the weak transmission of innovation into broad-based productivity gains. I would put it more bluntly: Europe is good at starting things and bad at growing them.

A 25-year-old European firm employs about 10 people on average. A 25-year-old American firm employs about 70. The American firm is not seven times more innovative. It is seven times better at scaling.

The paper identifies several barriers that explain this gap. Fragmented regulation that makes cross-border growth harder than it should be. Weak business dynamism, with too few new firms entering and too few unproductive ones exiting. Financing constraints that bite hardest at the moment ventures need capital to scale. And something the paper calls "absorptive capacity", the ability of firms to actually absorb and deploy new technologies, which depends on management quality, digital capabilities, and organisational infrastructure.

These are not abstract policy problems. They are the daily reality of trying to build and scale a venture in Europe.

The Money Gap

Then there is the capital. Between 2014 and 2023, European venture capital totalled €89 billion. The United States? More than €1,000 billion. European scale-ups raise about half what their American peers do after 10 years.

This is not because European ventures are half as good. It is because the European venture capital ecosystem is roughly one sixth the size of the American one. The pools of growth capital that allow ventures to cross from early traction to meaningful scale are simply shallower.

The paper frames this as a structural weakness in Europe's financial system. Limited access to market-based financing. Fragmented national financial markets that prevent large pools of capital from forming. An institutional investor base that is underexposed to venture and growth equity compared to American endowments and pension funds.

Again, this is not a theoretical concern. It is the reason promising European ventures routinely look to American investors for their Series B and beyond. The capital exists. It just is not organised to find them.

What the Paper Recommends

Van Ark's policy recommendation is worth reading carefully, because it rejects the simplistic framings that dominate European innovation debates.

He argues for a "both-and" approach. Europe needs to strengthen frontier innovation: more R&D intensity, better commercialisation of research, stronger incentives for breakthrough science. But it also needs to remove the barriers that prevent innovation from spreading once it exists. Horizontal policies that support diffusion across firms and sectors. Vertical industrial policy that is disciplined, selective, and performance-based at the EU level.

The insight is that these are not competing priorities. They are complementary halves of the same system. Frontier innovation without diffusion produces isolated islands of productivity that fail to lift the wider economy. Diffusion without frontier innovation produces incremental improvements that leave Europe permanently behind the global frontier.

Where Venture Building Fits

The paper does not mention venture building once. Not a single reference. And yet it describes, with remarkable precision, exactly the problem venture building exists to solve.

Venture building, done properly, is a diffusion mechanism. It is not a startup factory. It is not an accelerator. It is not a venture capital fund with extra services bolted on. It is a structured system for taking innovation from discovery through commercialisation to scale. It builds the organisational capability, the commercial discipline, and the operational infrastructure that turns ideas into actual productivity inside actual firms.

Every barrier the paper identifies maps onto something venture building addresses when it is done well.

Weak absorptive capacity? That is a management quality problem. Venture building builds management quality, not by teaching it in a classroom but by embedding it in how ventures are structured, how decisions are made, and how resources are allocated from day one.

Fragmented regulation and market access? That is a go-to-market architecture problem. Venture building forces the hard work of understanding customers, distribution, and competitive dynamics before scale, not after.

The scale-up finance gap? That is partly a venture readiness problem. Investors don't fund ventures they cannot assess. Venture building produces ventures that can demonstrate evidence of commercial traction, unit economics, and scalable operations, which is exactly what growth investors need to see before writing a cheque.

None of this is magic. It is just discipline applied early enough to matter.

Our Take at Growth Lantern

We have been building toward this thesis for some time. The venture builder we are developing is designed explicitly as diffusion infrastructure. It exists to solve the transmission problem: the gap between having an innovation and turning it into a productive, scalable, defensible business.

The paper validates something we have believed from the start: Europe's productivity problem is not primarily about generating more ideas. It is about building more ventures that can carry those ideas the full distance. From discovery. Through commercialisation. To scale.

That is not a policy problem, though policy can help or hinder. It is a capability problem. And capability problems are solved by building better systems, not by hoping the market sorts it out.

The paper is dense with evidence. I would encourage anyone working in European venture, innovation, or industrial policy to read it in full. The diagnosis is clear. The prescription is ambitious. And the role of venture building in closing the gap, even if the paper never names it, is right there on every page.

The full paper: Van Ark, B. (2026), "Rewiring Europe's Productivity Framework: Aligning Investment, Innovation, and Diffusion", Productivity Insights Paper No. 096, The Productivity Institute. Available at productivity.ac.uk.