European Central Bank working paper finds stronger institutions and lighter regulation could lift EU high-tech investment by up to 50%

The European Central Bank published a working paper on why European Union economies invest less in high-tech sectors than the United States, focusing on the role of institutional governance and regulatory burdens. Using data for 25 EU countries, the study finds that better institutional quality and less burdensome labour and business regulation are associated with higher investment shares in high-tech, patent-intensive and artificial intelligence-intensive sectors, implying that reforms could materially narrow the EU–US investment gap. Institutional and regulatory quality is measured via an Institutional Delivery Index (rule of law, control of corruption, regulatory quality and government effectiveness), the OECD Employment Protection Legislation index on dismissals, and the World Bank Starting a Business score, with additional analysis using the World Bank Resolving Insolvency score. Sector innovativeness is captured using Eurostat’s high-tech taxonomy, sector patent intensity based on United States Patent and Trademark Office filings, and an AI-intensity taxonomy (with AI analysis extended to 2023). Back-of-the-envelope simulations using 2021 as a reference year estimate that raising each EU country’s indicators to the EU frontier could increase the high-tech investment share by about 4.6 percentage points (Institutional Delivery) and around 7.6 to 7.9 percentage points (employment protection and business start-up measures), while the implied increase for AI-intensive sectors ranges from roughly 2.1 to 7.6 percentage points depending on the indicator.