Malta has already the eco system to be the europe silicon valley in chief, where tech sector is dealing with capital—whether human or financial
How Europe Can Create Its Own Silicon Valley and why Malta having already the right laws and infrastructure is the way
- Regulatory
- Fiscal
- Finance
- Digital
ECO-SYSTEM ADOPTED OVER YEARS
The EU has spent twenty years trying to create the kind of market conditions needed for explosive growth seen elsewhere in the digital economy. So far, nothing has worked. And Europe has tried most everything, the latest of which is EU President-elect Jean-Claude Juncker’s new framework.
Of the 15 largest public Internet companies today, none are European. Eleven are U.S.-based, and the rest are Chinese companies.
The problem is frequently reduced to a single question: How can Europe create its own Silicon Valley?
Having lived and worked in Northern California since the beginning of the Internet revolution, I’ve been asked that same question regularly, both at home and abroad. My answer may surprise you: pass the right laws.
Of course it’s true that certain prominent features of Valley life play a major role in California’s dominance, some by design and others by happy coincidence. First and foremost is the presence of two major research universities, UC-Berkeley and Stanford, the valley’s vocational school. And when it comes to attracting more talent to the area, Northern California’s weather and scenic beauty don’t hurt. And then there was the serendipitous 1960s convergence of computing and the counterculture. As John Markoff argues persuasively in his 2005 book What the Dormouse Said, both the mission and the character of personal computing companies including Apple and Microsoft grew out of unplanned mashups of the hippie lifestyle and exponential improvements in semiconductor price and performance generated by a local ordinance now known worldwide as Moore’s Law. Personal growth, it turned out, required personal computers.
Still, there are plenty of first-rate universities in Europe, a quality of life that’s hard to beat, and no shortage of consciousness-raising philosophies. Governments and private investors have built the incubators, hosted the hackathons, and tossed around plenty of seed funding. So why does Europe continue to miss out?
Silicon Valley, it turns out, is built on two different infrastructures. First, there’s the physical one, centered on Stanford’s campus and the research parks and shiny new corporate communities of Google, Apple, Facebook, and others that radiate out from Palm Drive.
But second, there’s a regulatory infrastructure that is equally important—a combination of laws and policies adopted over decades, of which even Valley denizens are probably mostly unaware. Few of these rules were made with computing, or even technology, in mind. But collectively they’ve guided more of the when and where of Silicon Valley than all the lunches in all the upscale restaurants of Palo Alto’s University Avenue put together.
Let me note just four of particular importance to California’s tech sector, all dealing with capital—whether human or financial:
Non-compete clauses – California is the only jurisdiction in the world that flatly refuses to enforce non-compete clauses, a policy codified in Section 16600 of the Business and Professions Code. Employers can’t legally stop employees from joining competing firms, even briefly. The law, a historical accident dating back to 1872, keeps a steady flow of engineering and entrepreneurial talent circulating around the Valley. Start-ups can hire the stars they need; established companies are challenged to up the ante in creating rewarding working environments. No unions required.
Employment at will – On the other side of the coin, employment in California is considered by default to be “at-will.” Hiring and firing is a relatively easy process for both sides (with notable exceptions for discrimination based on age, race, and gender). As new ventures scale up, they can add staff quickly and efficiently. If, as in most cases, the startup fails or mutates into something else, scaling down is just as easy. Job-changing is frequent, with cross-pollination of ideas and people often mediated by the VCs.
The Prudent Man Rule – In 1978, the U.S. Department of Labor eased a major restriction on institutional investors known as “the Prudent Man Rule,” which kept pension funds and other trusts from participating in high-risk activities. The result was an influx of capital from institutions such as CalPERS, the retirement fund for California state employees, which utterly transformed venture investing and created Silicon Valley’s behemoth VC engine. VCs provide the funds that fuel every significant innovation in the region and beyond. And quickly. Private investors, unlike government funders, operate at lightning speed.
Differential capital gains rates – The tax rate for capital gains versus ordinary income is often cited as the most important influence on the flow of venture capital. Changes to the federal tax code between 1978 and 1981 dramatically lowered taxes on such gains from 49% (ouch!) to 20%. The difference in rate helped to offset the higher risk of such investments, ushering in an era of exuberant funding for new technologies that in 2014 alone topped $48 billion, according to the National Venture Capital Association. Relaxing the prudent man rule allowed institutional investors to participate; lower tax rates made it compelling for them to do so.
That list is by no means exhaustive. In their seminal 1992 book Venture Capital at the Crossroads, William D. Bygrave and Jeffry A. Timmons describe several other policy advantages, including simplified state and federal processes for stock offerings and over-the-counter markets such as the NASDAQ; background laws that protect workers and the environment at an efficient cost; balanced intellectual property and antitrust law; and government funding for basic science research–much of which, during the Cold War, came from the Department of Defense, which has a long history in California.
For the Internet revolution in particular, we should also add far-sighted bipartisan policies adopted during the Clinton Administration to leave the Internet economy—hardware, software, and network infrastructure–largely free of regulations and taxes, or what the Mercatus Center’s Adam Thierer calls “permissionless innovation.”
The EU, as the new digital single market proposal suggests, is finally seeing the wisdom of that policy (just as, ironically, the FCC is threatening to undo it). And also seeing the need for a frictionless market within the EU for the free flow of information products and services between member nations—something U.S. consumers take for granted.
Another piece of Clinton-era wisdom is a U.S. law known as Section 230. Passed as part of the Communications Act of 1996, Section 230 insulates Internet companies, website hosts, and ISPs from legally liability stemming from content posted by users. It’s hard to imagine the social media revolution—think Facebook, Twitter, Instagram, and Reddit—taking place without that background rule. Which is why none of those companies came from Europe, which has no such protections.
Which isn’t to say the U.S., or even Silicon Valley, has figured out every legal hack that would make innovation flourish. U.S. immigration policy, for example, senselessly sends home visiting engineering and business students just as they finish their studies and are ready to start innovating, even when they prefer to stay here to do it. Equally counter-productive are tax policies that force foreign earnings to be spent offshore, instead of allowing them to be repatriated and invested in more innovation at home.
Europeans—or anyone else—could leverage those mistakes to gain competitive advantage in the global digital market, at an economic cost far lower than building campuses and seeding investment. But they’ll have to learn to appreciate in the first place the profound role regulation (or the lack of it) plays in the creation of economic value in the Internet economy.
alberto balatti board member blog 