Online platforms create “more perfect” markets. Online platforms are a market-driven cure to the imperfections of the EU’s incomplete Single Market. Platforms provide well-functioning technical infrastructures that allow users to easily deal with country-specific legislation in the EU, e.g. VAT and invoicing requirements, consumer protection laws, sector-specific licenses and the particularities of national contract law.
Modern online platforms have “skin in the game”. They have an intrinsic motivation to create value for, and trust between, users and to enforce high and widely accepted standards for business conduct. In the EU, therefore, platforms encourage value-adding interactions that would not emerge without platforms when markets are locked by regulations and barriers that effectively protect insiders and deter new entrants. By doing so, platforms help consumers and businesses to “bypass” the effects of rent-seeking activities in the EU, which are at the root of significant differences in Member State regulations – and which for a long time have been known for being harmful to cross-border trade and economic integration and convergence in the EU.
The EU and some Member State governments are neither unique nor extreme in their political calls to restrict or even ban certain platform businesses from operating. Yet, Europe’s persistent hesitation – sometimes outright hostility – to platforms has to be seen in a broader perspective of political power and control. In the EU, old-fashioned national regulators have an organisational incentive to stick to and defend old approaches to regulation. In many cases, they have an intrinsic incentive to respond to vested interests in business and civil society.
At the same time, through a bottom-up trial-and-error process, online platforms culturally appropriate customs and practices of governments and regulatory authorities in regulating markets and commercial behaviour, which are often “unacknowledged” by policymakers or considered “inappropriate”. However, policymakers’ hostilities towards modern online platforms disincentivise innovative companies to invest, grow and expand within and beyond the EU, with adverse implications for the Single European Market.
Regulatory heterogeneity: the “rent-seeking” disease of the Single Market
In China and the US, traditional businesses and start-ups have immediate access to hundreds of millions of potential customers. Not so in the EU, where regulations of digital and non-digital industries still differ substantially across individual countries and often even within EU Member States. Since the creation of the Single European Market in 1993, attempts to harmonise national laws that regulate businesses and the markets for products and services across the EU have been a cat-and-mouse game: when old national approaches have been knocked down, new ones have risen elsewhere in the economy. Especially, with the structural change of the economy – leading to a greater role for services and digital output – the result became a European market that remains fragmented and that still comes with high costs of doing business across borders. Unsurprisingly, cross-border commerce by all those that are sensitive to regulatory differences, particularly small-, medium and micro-sized businesses, have failed to grow across intra-EU borders (see, e.g., Eurobarometer 2015).
Regulatory heterogeneity is a subsidy to big business. It generally reduces the willingness of smaller firms to engage in cross-border commerce. For market regulations in the EU, survey data show substantial differences in both the scope and the restrictiveness of sectoral regulations, indicating an enduring resistance of Member State governments to give up control over many legislative and regulatory powers. Evidence on intra-EU variation in the OECD’s market regulation data shows that regulatory heterogeneity within Europe’s Single Market is still substantial. Widely differing national approaches to taxation, investment, market entry and entrepreneurship regulations limit the scope and economic significance of the Single Market. Given highly diverse sets of national rules (in different languages) for a wide range of services sectors – including transport, postal, retail and professional services (see Figure 1), the EU lacks the gravitation of large markets such as the US and China. Accordingly, the EU has – by default – a comparative disadvantage in attracting investors and innovative start-ups wishing to roll out and expand new business models.
In addition to legal fragmentation, many EU regulations are still highly restrictive for both digital and traditional (or less digital) business models. In many areas of regulation, EU Member States apply regulations that are more restrictive than in other comparable jurisdictions, and often without providing more benefits to consumers, public health, the environment or public safety. Healthcare services are a case in point, but the same case could be made for transportation services, professional services, education services and construction services. Some of these regulations have clear negative effects for intra-EU competition and quality and innovation in these industries and up- and downstream sectors. While they nominally seek to achieve non-market objectives, a key feature of different national regulations is that they effectively protect industry incumbents, decrease the contestability of markets, and reduce economic opportunities for many in the EU.
Figure 1. Cross-country regulatory heterogeneity in the EU
Source: OECD. Indicators of Product Market Regulation, 2013 (most up-to-date indicators). Own calculations. Numbers represent calculated variation coefficients based on national regulatory restrictiveness indices in 2013. The measure reflects the dispersion in national regulations for different regulatory areas. Countries in sample include Sweden, Finland, Belgium, Netherlands, United Kingdom, Germany, Italy, Austria, France, and Spain.
The problem of regulatory fragmentation is widely recognised. A study commissioned by the European Parliament (2016), points to significant market access barriers, which continue to prevail across the EU, for example:
- national technical restrictions and de facto discrimination based on country of residence,
- anticompetitive conduct and unfair trading practices,
- a lack of access to information and redress mechanisms, and
- frictions in cross-border payments and deliveries,
- national taxation rules imposing by far the greatest administrative burden for businesses.
For these reasons, the European Parliamentary Research Service (European Parliament 2017, pp. 12) highlights the “urgent need to bring EU single market rules up to date, in particular as regards online payments, e-invoicing, the protection of intellectual property rights, data protection and privacy, as well as value added tax (VAT) requirements [and points out] that measures in these areas would generate trust in e-commerce and provide more adequate protection for EU consumers, who are still more inclined to shop online at domestic shops rather than with a seller in another country.” The authors of this study indicate that the potential gain in Gross Domestic Product (GDP) from a more complete Digital Single Market could amount to up to 500bn EUR per year, which corresponds to up to 3.6 per cent of EU GDP.
On current trend, however, the Digital Single Market is held back by numerous horizontal and vertical barriers hampering EU-wide commercial activities in the digital sector and the wider economy. In addition, many EU countries are among the most restrictive as regards regulations that affect digital services, while many apply highly diverse policies (Digital Trade Estimates Project 2018). Regarding the adoption of digital business models and new technologies such as algorithms and artificial intelligence (AI), there is a growing concern among policymakers that the EU is falling behind compared to other jurisdictions that have already adopted much more innovation-friendly policies (DigitalEurope 2018; Springford 2015).
High levels of regulatory heterogeneity in the EU increase businesses’ fixed cost
High levels of regulatory heterogeneity in the EU increase businesses’ fixed cost of market entry because they need to devote resources to comply with diverse country-specific provisions. As a result, private-sector business activity, particularly that of SMEs, and levels of competition still differ substantially across sectors within the EU. Survey data from Eurobarometer (2015) points to a number of systematic legal and transactional problems that SMEs face in cross-border trade within the EU. Major findings are:
- Only three out of ten SMEs in the EU either imported from or exported to another EU country.
- For SME exporters, the local market still represents the largest proportion of sales.
- Complicated administrative procedures and high delivery costs are the most common problems faced by SMEs when exporting.
- 51 per cent of EU SMEs find resolving cross-border complaints and disputes too expensive.
- 49 per cent find that that identifying business partners abroad too difficult.
- 49 per cent find dealing with foreign tax law too complicated.
- 45 per cent lack the language skills to deal with foreign countries.
- 41 per cent do not know where to find information about the potential foreign market.
Due to different regulatory regimes, low levels of competition and rigid market structures are a common feature of many industries in many Member States. As a consequence, national legal borders still exert much more negative effects on commerce within the EU than sub-federal policies do in the US, even if differences in language are taken into consideration, with adverse implications for economic diversification and economic convergence (see, e.g., Kommerskollegium 2015).
By contrast, online platforms have ushered in greater opportunities for businesses to engage in cross-border commerce. By creating more competitive level-playing fields for businesses in many sectors, modern online platforms empower regional businesses, particularly SMEs and micro businesses, which benefit most from the lower cost of doing business with other countries. Against this background, it is no surprise that almost half (42 per cent) of SME respondents to a recent Eurobarometer (2016) survey on online platforms already use online marketplaces such as Amazon to sell their products and services. At the same time, a great majority (82 per cent) of those firms that sell online rely on search engines to promote their products and/or services.