‘Home-grown’ innovation has costs as well as benefits

Burdens for workers

Quickly growing tech firms with young founders often hire rapidly without establishing proper human resource practices. Disproportionately often, managers are young, male, have no training in management and need to grow the firm quickly; this combination can result in employee harm. Activision, a video game publisher, made headlines in 2021 for its ‘frat bro’ culture that facilitated sexual harassment and workplace discrimination toward women ⁶ Liz Lanier, ‘Cube Crawls and Frat Bro Culture: California’s Huge Activision Blizzard Lawsuit Alleges Yet Another Toxic Workplace in the Video Game Industry’, Time, 4 August 2021, https://time.com/6086010/activision-blizzard-california-lawsuit-sexual-…. . In 2022, Google agreed to a $118 million settlement in response to a class action lawsuit alleging that the tech giant systematically underpays female employees ⁷ Nico Grant (2022) ‘Google Agrees to Pay $118 Million to Settle Pay Discrimination Case’, The New York Times, 12 June 2022, https://www.nytimes.com/2022/06/12/business/google-discrimination-settl…. . In September 2023, the US Equal Employment Opportunity Commission filed a lawsuit accusing Tesla of discriminating against Black employees, who are allegedly given worse assignments than white workers and fired if they complain ⁸ Jack Ewing, ‘Federal Lawsuit Accuses Tesla of Racial Discrimination’ The New York Times, 28 September 2023, https://www.nytimes.com/2023/09/28/business/tesla-eeoc-discrimination-b…. .

The intense pressure to perform creates working conditions that are unacceptable for many. Since his 2022 acquisition of Twitter, Elon Musk has slashed the tech giant’s staff by 80 percent and rolled back its work-from-home policy, with the expectation that the remaining employees work upwards of 84-hour weeks to compensate ⁹ Pete Syme, ‘Elon Musk Told Twitter Staff to Expect 80-hour Work Weeks and Fewer Office Perks, Report Says’, Business Insider, 11 November 2022, https://www.businessinsider.com/elon-musk-twitter-staff-expect-80-hour-…; Michelle Toh and Juliana Liu, ‘Elon Musk Says He’s Cut About 80% of Twitter’s Staff’, CNN, 12 April 2023, https://edition.cnn.com/2023/04/12/tech/elon-musk-bbc-interview-twitter…. . Long work hours are standard at Musk’s companies, with SpaceX workers known to joke that a 60-hour week is working ‘part-time’ ¹⁰ Abby Jackson, ‘SpaceX Worker Reveals a Brutal Company Motto Helped Him Survive All-nighters Working for Elon Musk’, Business Insider, 10 November 2017, https://www.businessinsider.com/former-spacex-employee-working-for-elon…. . Silicon Valley tech firms are known to offer employees free meals and other benefits designed to keep them in the office for as long as possible. Although benefits such as free meals may be innocuous, tech firms including Meta, Google, Netflix, Uber and Apple may even have begun covering the cost of elective egg freezing for employees to avoid the immediate costs of parental leave ¹¹ Kathleen Hammond, ‘The Problems with Employer-Funded Elective Egg Freezing’, Bill of Health Blog, The Petrie Flom Center for Health Law Policy, Bioetechnology, and Bioethics, 6 September 2023, available at https://blog.petrieflom.law.harvard.edu/2023/09/06/the-problems-with-em…. . Many of the startup behaviours Americans view as normal – and which may be necessary to succeed – are not compatible with European norms or laws.

‘Consumption costs’

As well as these ‘production costs’, the US model of innovation may have ‘consumption costs’ associated with being an innovation producer of this type. Citizens in a society that venerates these firms and their accomplishments may be the first users of the new technologies. Meanwhile, the leadership of the jurisdiction may be slower to act to mitigate harms from a home-grown product. It is a well-known problem that the political power of corporations is often deployed against regulation that would limit their profits. Big tech platforms have spent large sums on US lobbying to ensure that effective regulations governing user health and safety, as well as market competition, are not adopted in their home country ¹² Cat Zakrzewski, ‘Tech Companies Spent Almost $70 Million Lobbying Washington in 2021 as Congress Sought to Reign in Their Power’ The Washington Post, 21 January 2022, https://www.washingtonpost.com/technology/2022/01/21/tech-lobbying-in-w…; Taylor Giorno, ‘Big Tech Lobbying Push Helped Block Bipartisan Bills That Aimed to Curb Alleged Anti-Competitive Behavior’, Open Secrets, 20 December 2022, https://www.opensecrets.org/news/2022/12/big-tech-lobbying-push-helped-…; Inci Sayki, ‘Big Tech Lobbying On AI Regulation as Industry Races to Harness ChatGPT Popularity’, Open Secrets, 4 May 2023, https://www.opensecrets.org/news/2023/05/big-tech-lobbying-on-ai-regula…. .

Often the benefits of a new digital technology are at least superficially clear: the services are convenient and ‘free’ to consumers. The risks to individuals and society can be harder to see at first, particularly if they arise from business models and market power that develop over time. Instagram is now known to harm teenage girls’ mental health, Facebook is alleged to have enabled genocide and vaccine denial while Twitter has permitted threats to the physical security of citizens ¹³ https://www.buzzfeednews.com/article/charliewarzel/twitter-is-still-dis…. ">  . Despite the growing evidence of harms from social media, regulators in the US have taken zero steps to make these services safer ¹⁴ Adi Robertson, ‘The California Age-Appropriate Design Code Act probably violates the First Amendment’, The Verge, 18 September 2023, https://www.theverge.com/2023/9/18/23879489/california-age-appropriate-…; Mathew Ingram, ‘In Europe, a Regulatory Vise Tightens Around Big Tech’ Columbia Journalism Review, 31 August 2023, https://www.cjr.org/the_media_today/eu_dsa_dma_regulations_big_tech.php. . Europe, by contrast, has adopted the Digital Services Act which came into force in September 2023. 

Consumption benefits

Of course, there are significant benefits to being the host country for innovation. These benefits, however, do not include investment opportunities and consumption opportunities, because global capital markets and trade allow people globally to participate in these aspects of big tech. For example, many non-Americans own US corporations, both public and private. Consider the Norwegian or Saudi sovereign wealth funds, pension funds around the world, and wealthy individuals from every continent. Foreign investors owned approximately 40 percent of total US equity (Rosenthal and Burke, 2020). The Saudi sovereign wealth fund alone owns nearly $10 billion in US-listed stocks, including minority stakes in Boeing, Facebook and Citigroup ¹⁵ Saeed Azhar and Kanishka Singh, ‘Saudi Wealth Fund Boosts U.S. Holdings with Stakes in Citi, Boeing, Facebook’, Reuters, 16 May 2020, https://www.reuters.com/article/us-saudi-pif/saudi-wealth-fund-boosts-u…. . Finally, the consumers of the innovation created by these American technology platforms are spread around the world. A company that physically started its existence in the United States can, because of the nature of digital technologies, benefit consumers anywhere.

The consumption benefits from technological innovation can be increased in Europe with carefully-designed rules that protect citizens from the harms experienced in the US, and indeed the European Union has been quick to regulate the safety of new technology, through the General Data Protection Regulation, the Digital Services Act and other rules. By controlling the environment so that individual and public health are protected by rules on product design and mis-information, businesses are protected from exploitation by platform conduct rules, and democracy is protected from degradation, Europeans can obtain a greater net benefit from consumption of digital innovation.

Policy implications

European politicians who want Europe to have its own digital platforms are missing a great deal of nuance. The costs of the US model seem inconsistent with European values as revealed through norms and regulations. This suggests that any attempt to copy the US in Europe will not work.

This leaves Europe with two basic options. The first is to outsource high-tech innovation to the US while benefiting from consumption, investment and access to the US labour market for talented Europeans. Europeans can gain from allowing American society to shoulder the significant negative externalities of growing these tech firms, while European savers take advantage of the investment opportunities and European consumers take advantage of the innovations. Europe would not be free-riding because the US does not perceive itself as sacrificing for the common good when it innovates. The better analogy is the gain from enjoying the view of your neighbour’s garden when they are keen gardeners: they do not want your help, and yet you benefit.

The second option is to develop European policies that will solve specific problems faced by innovative firms that are trying to start up and grow quickly. Policies that acknowledge and manage the riskiness of innovative firms would be helpful. If a young firm fails (even in a case when there has been no misbehaviour of management) it is efficient to shut down the firm. Moreover, investors will be less inclined to invest if they are required to pay workers after the firm no longer has a reason to exist. If labour-market regulations in Europe remove all flexibility, Europe will not be a good location to build a risky venture that requires human capital. Policymakers who want innovation but dislike it when employment costs are borne by workers should consider whether there is an incentive-compatible policy that allows society to bear some of these costs in return for the benefits of hosting the innovative company.

Policies that permit immigration of talented entrepreneurs are another area to consider. The leadership of many American digital platforms is often in the hands of immigrants. A 2018 study found that 55 percent of America’s startups valued at or above $1 billion had at least one immigrant co-founder, and that immigrants were key members of management or product development teams in 80 percent of those startups (Anderson, 2018). For every Jeff Bezos and Mark Zuckerberg, there is a Pierre Omidyar, Sergey Brin, Sundar Pichai or Elon Musk ¹⁶ Other notable immigrant executives in Silicon Valley include the current CEO of Microsoft, the founder of eBay, and co-founders of Facebook, Yahoo, Uber and Stripe. See Maya Kosoff, ‘12 Immigrants Behind Some of Silicon Valley’s Biggest Companies’, Vanity Fair, 3 February 2017, https://www.vanityfair.com/news/photos/2017/02/12-immigrants-behind-som…. .

Regulations that protect incumbents from market entry by disruptive startups can slow growth or block it entirely. Rent-seeking incumbents often lobby hard to create and then maintain such barriers to entry (Mukoyama and Popov, 2014). US regulators generally did not block Uber from entering to compete with taxis while many cities in Europe did ¹⁷ Sam Shead, ‘Uber’s Rocky Road to Growth in Europe: Regulators, Rivals and Riots’, Forbes, 10 May 2019, https://www.forbes.com/sites/samshead/2019/05/10/ubers-rocky-road-to-gr…. . The nuanced middle ground that would have benefited consumers in both jurisdictions would harmonise regulatory requirements of the two business models, enable part-time work, protect workers and ensure sufficient capacity to meet consumer demand.

Europeans would benefit greatly if Europe’s politicians developed their own distinctive model of growing innovative firms. European policymakers who want innovation at home could improve the innovative capacity of the single market in ways consistent with European social norms and laws. Options include improvements to education, creation of straightforward paths to citizenship for talented entrepreneurs, reform of labour markets to allow for the practical needs of risky startups, progress towards a more unified capital market and, perhaps most importantly, reductions in regulatory barriers to entry. These types of reforms would significantly improve the innovative climate in Europe and likely lead to more home-grown tech companies.

However, jurisdictions that are willing to accept more harms are likely to attract more harm-creating startups. This may be a very effective strategy for generating innovation in those countries, and it may lead to them out-innovate Europe or any other jurisdiction that better protects workers and citizens. But if a difference in innovation production reflects a conscious choice on the part of European society in terms of the way it implements its values, then there is no problem to solve. Europe will not have ‘lost’ against the US or China, despite what politicians may say. Carefully crafting policies that promote homegrown innovation while reflecting European values is the best that can be done.

References

Anderson, S. (2018) ‘Immigrants and Billion-Dollar Companies’, NFAP Policy Brief, October, National Foundation for American Policy, available at https://nfap.com/studies/immigrants-and-billion-dollar-startups-2/

Mukoyama, T. and L. Popov (2014) ‘The political economy of entry barriers’, Review of Economic Dynamics 17(3): 383-416, available at https://doi.org/10.1016/j.red.2013.11.002

Pontikes, E.G. and W.P. Barnett (2016) ‘The Non-consensus Entrepreneur: Organizational Responses to Vital Events’, Working Paper 3003, Stanford Graduate School of Business, available at https://www.gsb.stanford.edu/faculty-research/working-papers/non-consensus-entrepreneur-organizational-responses-vital-events

Rosenthal, S. and T. Burke (2020) ‘Who’s Left to Tax? US Taxation of Corporations and Their Shareholders’, mimeo, Urban-Brookings Tax Policy Center, available at https://www.taxpolicycenter.org/taxvox/who-owns-us-stock-foreigners-and-rich-americans