During the pandemic, the tech sector grew tremendously due to low interest rates and increased demand for software and digital devices. However, the good years for the tech sector seem to be over, with thousands of layoffs in the sector. Patrick Verwijmeren, professor of Corporate Finance at Erasmus School of Economics, explains what is going on in De Volkskrant (Jan. 27, 2023).
The professor explains that most tech companies are based in the United States. And in the United States, shareholders are in control. Now that the stock price has fallen sharply due to higher interest rates and increased regulation, shareholders are demanding cuts. Still, he does not expect mass layoffs because it will generate too much negative publicity. What Verwijmeren does note is that tech companies are taking advantage of the current momentum of general layoffs in all sectors to lay off their employees, blaming the layoffs on a general trend in the market.
The higher price of money leads to harsher judgments from shareholders. Therefore, investment in research and development has declined. Still, the professor does not expect innovation to drop dramatically. He notes that large investments are still being made. For example, Microsoft recently announced it was expanding its collaboration with OpenAI, which requires billions in investment. Verwijmeren sees this as a general trend. In the development phase of the tech sector, profitability was not paramount, growth was. Now shareholders will increasingly demand that investments lead to profitability.
Verwijmeren notes that it is more difficult to lay off employees in the Netherlands because of relatively strict labor regulations. Moreover, layoffs occur mainly in research and development departments, which are often located in the United States. However, economic uncertainty will lead to layoffs in the Netherlands as well. Already we are seeing layoffs at players such as Bol.com and Messagebird.
