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Why is Europe lagging behind in high tech sectors? The role of institutional and regulatory quality

Author

Listed:
  • Bothner, Jonathan
  • Lopez-Garcia, Paloma
  • Momferatou, Daphne
  • Setzer, Ralph

Abstract

This paper investigates the relationship between institutional and regulatory quality, and high-tech sector investment. Using data from 25 European Union (EU) countries from 2004 to 2019 (extended to 2023 for artificial intelligence-specific analyses), the study examines how institutional governance, labour market regulations, and business regulations influence investments in innovative, high-tech, and artificial intelligence-intensive sectors. The findings reveal that better institutional quality and less burdensome regulations are associated with higher investment shares in innovative, high-tech, and artificial intelligence industries. Raising EU countries’ institutional and regulatory quality to the level of the current EU frontier could raise the share of investment in high-technology sectors by as much as 50%, hence notably narrowing the existent EU-US investment gap. These results highlight the importance of effective governance and efficient regulations in fostering investment, innovation, and therefore long-term productivity growth. JEL Classification: C23, E02, L51, O38

Suggested Citation

  • Bothner, Jonathan & Lopez-Garcia, Paloma & Momferatou, Daphne & Setzer, Ralph, 2026. "Why is Europe lagging behind in high tech sectors? The role of institutional and regulatory quality," Working Paper Series 3185, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20263185
    Note: 2648086
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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