The Value Gap: Europe Cannot Scale

In 2008, the aggregate market value of U.S.-listed firms was roughly one-third higher than that of European-listed firms. By 2023, it was more than 300% higher, a difference of $34 trillion. The valuation gap is broad-based, rather than concentrated among a few superstar firms, and is driven by differences in firm values, not in the number of listed firms. Across sectors, the gap is larger in R&D-intensive industries and in industries with high returns to scale. European firms’ size is strongly correlated with home-country GDP, whereas U.S. firms’ size is unrelated to home-state GDP. Smaller European firms also face a particularly large cost-of-capital gap and do not appear able to substitute debt for limited access to equity financing, including venture capital. Taken together, these facts suggest that financial and product-market frictions constrain European firms’ ability to scale.