How can Europe’s missing middle be financed

Policy Study

Europe is seeking ways to finance innovation scale-up. Europeans often invent frontier technologies and bring them to the stage of commercial validation, while competitors invest in and industrialise them rapidly and at scale, capturing long-term economic advantages. 

Europe spent decades looking at the USA, seeking to replicate “Silicon Valley” effects. Yet Europe’s key export sector is not digital technology but manufacturing, and manufacturing innovation needs a different kind of finance to scale up than digital innovation does.

The policy study therefore looks for lessons from China – the world’s largest industrial economy and, recently, biggest source of industrial superscalers. It first unpacks China’s innovative approach for deploying innovative and modular forms of state-directed government venture capital, particularly its government guidance funds, to bridge financing gaps at both the early and late stages for industrial startups. 

The policy study then examines Europe’s policies and makes a range of proposals:

• Increase the amount of available capital with sufficiently long timelines to accompany start-ups to internationally competitive companies;
• This has to go hand in hand with stronger coordination from EU to regional level to reduce fragmentation of funding instruments;
• Since the EU does not yield the same amount of capital as China, it must focus its effort on very select sectors in which it wants to become or remain world leader;
• Create a stronger connection between universities and public venture capital to ensure the effective commercialisation of research;
• Leverage state-owned enterprises’ capital for scale-up financing.

This policy study was produced as part of the EU Investment Capacity Group, an initiative by FEPS, in collaboration with Friedrich-Ebert-Stiftung, to stimulate the elaboration of policy proposals within the progressive family around the next MFF.

This paper follows the preliminary presentation and discussion held at FEPS HQ on 9 April 2026.