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Europe and the Bay Area

Investing in Each Other

Europe’s economic ties to the Bay Area run extraordinarily deep. Current ties date back to California’s Gold Rush and the founding of San Francisco through the present day development of the region as a global epicenter of technology and innovation. The Bay Area’s European ties have evolved throughout this period, and despite the attention that Asia naturally receives as a dynamic and growing region, Europe continues to be an essential partner. Trade is strong, and despite the recent global recession and Europe’s slow recovery, it is also growing.

The larger story, however, concerns two-way investment, where cross investment with Europe is greater than any other global region. The region’s relationship with Europe is remarkable, in fact, for its balance. While the Bay Area’s very substantial trade with Europe is less than with Asia, it is in overall balance. And its value is understated since Bay Area companies manufacture extensively in Europe, reducing the need to export. This cross investment, which includes R&D, reflects deep integration between the Bay Area and Europe as advanced knowledge economies.

Sean Randolph (President & CEO) and Tracey Grose (Vice President) co-authored this report. Alex Foard (Research Associate) and Saori Hamidi (Research Associate) provided extensive research support. A number of interns at the Institute also provided valuable research support: Brad Zukerman, Debbie Yu, Nick Magnuson and Ben Bartlett.

The Bay Area Council Economic Institute would like to thank the European Commission for providing the research grant that enabled this report, and the other sponsors whose generous support made its production possible: Bank of the West, DLA Piper, San Francisco International Airport, Barbro Osher Pro Suecia Foundation, the Consulate General of Sweden, HSBC, United Airlines, Lufthansa, Wells Fargo and Europort.

The Economic Institute also wishes to thank the many businesses, consulates, and civic organizations that gave their time for interviews and provided supporting information. We particularly thank John Zysman (UC Berkeley), Olaf Groth (Emergent Frontiers), Stephen Goodman (Continuum Innovation LLC), and Burton Lee (Stanford University) who served as reviewers. (See Appendix A for a full list of interview partners and reviewers.)

The innovation economies of Europe and the Bay Area are becominc increasingly integrated and spurring new business growth in both regions of the world.

As connections between Europe and the Bay Area continue to increase, and with them, professional and creative networks, new points of innovation are appearing. The result is the emergence of a post-national innovation system, where the frame of reference is not bounded by national or even regional borders but by the diversity and geographic reach of a company or an individual’s network.

Institutional ties reflect a deep history of engagement. Pioneers include Levi Strauss, the builders of San Francisco’s Hetch Hetchy water system and the planners of its streets, and the founders of major technology companies. This rich tapestry is reflected in a wide range of European cultural and community organizations that continue to provide a strong foundation for personal, business and economic interaction.

Europe’s presence is reflected in the region’s diplomatic community, where 30 European countries are represented, the largest European diplomatic presence in the United States after Washington, DC and New York.

It is also reflected in a diverse set of trade and investment offices sponsored by national governments as well as by European cities, states and provinces.

At the private sector level, 14 bi-national business organizations support commerce between the Bay Area and European countries.

European-born residents are an important part the Bay Area’s innovation economy. Throughout its history, the region has drawn residents from around the world and now counts nearly 170,000 residents born in Europe, with the largest number coming from the UK and Germany, followed by France and Italy.

European-born residents have significantly higher levels of education than residents as a whole, with 26 percent having attained a master’s degree or higher. Many play leadership roles in the region’s major companies.

Europe accounts for nine percent of all foreign-born talent in science, technology, engineering and mathematics (STEM) in the region, with a total of 18,300 STEM workers. The UK and Germany together account for 43 percent of European STEM workers, followed by France.

Europe remains an important trade partner. With 500 million consumers, Europe accounts for 20 percent of the world’s exports and imports.

Europe accounts for 18 percent of Bay Area exports, making it the region’s third largest trading partner. Asia accounts for 42 percent and NAFTA (Canada and Mexico) 24 percent. Since 2010, trade with NAFTA countries has overtaken trade with Europe.

Exports to Europe from the Bay Area have been relatively stable since 2005, totaling $9.2 billion in 2012. During the recent economic crisis, exports to Europe fell just 3 percent while exports to Asia dropped 33 percent.

Because of its accessibility, scale and legal transparency, Europe is often the first overseas market that US companies export to.

Trade with Europe is supported by robust air links, with nine carriers providing more than 35,000 seats per week on direct flights through SFO with Europe. Passenger traffic between the Bay Area and Europe through SFO grew 8.3 percent from 2012 to 2013.

International air cargo with Europe increased 4.3 percent in 2013, but with all other global regions fell.

Europe is by far the largest global investor in the Bay Area. European firms, with more than 1,000 affiliates, account for one-third of all foreign companies operating in the region. The UK, Germany, Switzerland and France reflect the strongest presence. An even larger number of Bay Area companies—3,200—have affiliates in Europe.

Cross investment is diverse but led by technology. European companies from a range of sectors are setting up research and development (R&D) operations in the Bay Area in order to tap into research facilities and the region’s world-class talent base.

For example, many European auto manufacturers have R&D centers in Silicon Valley, looking to tap into IT trends that will shape the future of automobiles.

Besides IT, other significant areas of focus include biotech, retail (design and fashion), engineering, financial services, and wine.

Europe is the Bay Area’s most significant global innovation partner. Both are global leaders in research and technology, and they collaborate intensely.

Registered patents with partners outside the country represents a growing share of total Bay Area patents, and collaboration with Europeans has grown at a much faster rate than the number of total patent registrations, particularly in information and communications technology.

Patents co-registered by Bay Area and European inventors total nearly 12,800 and account for 39 percent of all Bay Area patents registered with foreign partners since 1999.

The UK and Germany account for the largest number, but growth rates are strongest with Ireland, Belgium, Denmark, Austria and Switzerland.

While patent activity has been increasing at a faster rate with China, India and Brazil, activity with Europe has increased by an annual rate of 10 percent since 1990.

Europe and the Bay Area actively invest in each other. Private equity investment with Europe is strong, building on market opportunity, shared business practices, and a mutual commitment to transparency and the rule of law.

In 2012 Bay Area private equity (including some venture capital) investment to Europe reached $3.3 billion, exceeding total investment in the rest of the world.

As a percentage of total foreign flows into the region, investment from Europe has increased steadily since 2009, expanding from 19 percent to 49 percent in 2012. In 2012, the Bay Area attracted $4.05 billion in investment from Europe and $4.17 billion from the rest of the world.

While the Bay Area’s investment in China since 2000 has been comparable to its investment in Europe, European investment to the region currently overshadows that from China by a large margin. China’s investment accounted for three percent of total global investment in the Bay Area in 2012.

Technology-based European companies are seeking new opportunities to engage, while European entrepreneurs are increasingly active in the region’s innovation economy. As a global center for technology and innovation, the Bay Area attracts large numbers of entrepreneurs and technology-based companies from around the world. This is particularly the case with Europe.

In addition to R&D centers, many large European companies have technology listening posts in the region to connect with cutting edge technology and other emerging trends.

An array of European-sponsored incubators and accelerators support entrepreneurs coming to the region to learn about Silicon Valley and make business connections.

Whether through incubators and accelerators or independently, large numbers of European start-ups are establishing Bay Area roots. Those who succeed become bi-national companies, with Bay Area headquarters and a European subsidiary, or vice versa. Entrepreneurs come to find venture or angel investment, tap into the region’s unique talent pool, access the US market, and scale their companies globally. Most create jobs in both the Bay Area and at home.

Europe is usually the first market outside the US that new US startups expand to, especially in information and communications technology.

Initiatives in several policy areas can strengthen the relationship further:

negotiation and passage of the Trans-Atlantic Trade and Investment Partnership (TTIP);

immigration reform that enables European and other entrepreneurs from overseas to more easily start companies and stay in the US;

regulatory streamlining to help entrepreneurs and investors from overseas more easily navigate California’s complex regulatory environment;

better support for bi-national start-ups through deeper support in Europe and new US-European models for start-up finance.

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