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

Jonathan Bothner, Paloma Lopez-Garcia, Daphne Momferatou and Ralph Setzer

No 3185, Working Paper Series from European Central Bank

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

Keywords: artificial intelligence; innovation; institutional quality; investment; regulatory frameworks; risky technology (search for similar items in EconPapers)
Date: 2026-02
New Economics Papers: this item is included in nep-eec, nep-eur and nep-sbm
Note: 2648086
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263185

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