Arnold, Claveres, and Frie argue the EU lags the US on productivity growth and R&D investment specifically because it remains harder to finance and scale promising, innovative startups there, and that many of the EU's most successful startups end up relocating elsewhere for financing, causing the bloc to lose both direct growth benefits and positive spillovers from those firms. They recommend accelerating development of the EU's venture capital ecosystem primarily by reducing regulatory frictions that currently deter pension funds and insurers from investing in VC, paired with well-designed tax incentives for R&D investment, alongside broader Capital Markets Union initiatives like consolidating fragmented stock markets and harmonizing insolvency regimes across member states. Given the slow pace of those structural reforms, the authors propose an interim step: giving public financial institutions like the European Investment Fund a more active and expanded role in kickstarting VC markets where private capital is scarce and in familiarizing institutional investors with venture capital as an asset class before broader legislative changes take full effect.

This directly connects to and provides the policy backdrop for Klingler-Vidra's work on VC state policy already in this archive, since it applies a similar question of how governments can accelerate VC ecosystem development, but focused specifically on the EU's current Capital Markets Union reform agenda rather than the Silicon Valley diffusion story more broadly. European founders and investors get an authoritative, IMF-backed diagnosis of exactly why so many successful EU startups relocate for financing, tying the phenomenon explicitly to specific regulatory frictions around pension fund and insurer participation in VC, which is a more actionable explanation than a vague sense that Europe simply lacks a startup culture. Policymakers get a concrete, sequenced set of levers, near-term public institution intervention through vehicles like the European Investment Fund, alongside slower structural reforms like insolvency harmonization and stock market consolidation, giving them a realistic roadmap rather than a single all-or-nothing policy prescription.