Industrial Policy: The Experience of Developed Countries

1. Industrial Policy:The Experience of Developed Countries Khalid Sekkat (University of Brussels)

2. Reference for the presentation The presentation is based on the book: Buigues and Sekkat (2009), Palgrave-McMillan.

3. Reference for the presentation • The book: • Provides a comparison of industrial policies (IP) in five countries (France, Germany, the UK, the USA and Japan) . • Covers the amounts, mechanisms and effectiveness of IP

4. Preliminary remarks IP is an old theme which is gaining renewed interest e.g. Rodrik (MEDJ, 2009) “Industrial Policy : Don’t ask why, ask how” and Greenwald and Stiglitz (AER, 2006):“Helping Infant Economies Grow” Caves (1987): IP covers all government interventions aimed at changing the distribution of resources between economic sectors and activities

5. Preliminary remarks In general, economists distinguish two types of IP: • Horizontal (non-selective). • Vertical (targets specific activities) and tow main objectives: • Support to structural change to enhance welfare • Equality and social cohesion

6. Plan of the presentation • Five questions • What are the main theoretical arguments pro and against IP? • What is their empirical validity? • What is the quantitative importance of IP across countries?* • How IP is implemented across countries? • Main lessons * Focuses on two instruments of IP: subsidies and public procurements.

7. Arguments pro and against IP IP should seek to best tradeoff Market against Government failures. Pro: Market failures • Information (Imperfect, uncertainty and spillovers): e.g. uncertainty about profitability of a project might result in under-investment like for R&D, expenses to acquire information benefit to others who don’t bear any cost (i.e. self-discovery) • Externalities (Network and spatial): e.g. network externalities might justify public intervention to pick up the right standard, industries with economies of scale might have incentives to concentrate production geographically to benefit from external economies. • Imperfect competition: e.g. Strategic trade and merger

8. Arguments pro and against IP Against: Government failures • Information: Does the bureaucrat have better information than a businessperson to identify the problem and choose the right instrument of intervention? • Conflicts with other policies: e.g. competition policy bans restrictive economic practices, merger, state aid etc, trade policy aims at freeing exchange through reduction of barriers to trade, macroeconomic policy targets stability while excessive interventions might create budget deficit and risk of stability • Political Economy: use of IP for electoral purposes, lobbing and capture of bureaucrat , corruption and favoritism

9. Empirical validity of the arguments pro and against IP Reviewed around 200 papers published in international journals Reminder: The focuses is on two instruments of IP: subsidies and public procurements.

10. Empirical validity of the arguments pro and against IP Market failures The existing literature focuses on externalities, physical investment, R&D, productivity growth and firms' location and shows that IP: • Helps addressing network externalities and support R&D • Is complementary to private R&D expenditures • Crowds out private physical capital • Has no clear effect on TFP growth • Fails to influence firms’ location

11. Empirical validity of the arguments pro and against IP Government failures The existing literature is much more limited than on market failures’. It focuses mainly on political economy issues and shows: • Weak evidence of the role of elections • Strong risk of state capture • Strong risk of corruption

12. Quantitative importance of IP Based on National Accounts and Governments’ expenses by function, we computed the amount of subsidies and public procurement targeted toward IP as % of GDP. To give a rough idea of their effectiveness, we compare these amounts to countries’ rank from The Global Competitiveness Index

13. Quantitative importance of IP There are large differences in term of IP expenses with the USA and the UK disbursing the least and Japan the most (3 times the UK and the USA) The ranks is term of IP expenses don’t reflect in the ranks in term of per capita income

14. IP implementation across countries The difference in the amounts targeted toward IP doesn’t seem to explain the difference in performance We, therefore, looked at the difference in implementation as a possible explanation We conducted 5 country studies. For each country we examined the: • Objectives • Organization • Efficacy.

15. IP implementation across countries Objectives The objectives are broadly the same : science and technology, development SMEs, regional policy and energy efficiency. However they are given different priorities: • Germany: Regional policy gaining priority (e.g. reunification) • The USA there is almost no regional policy at the national level. • The UK, regional policy is a part of a more comprehensive scheme including support to R&D, SMEs and investment. • In the USA and UK competition policy is highly emphasized

16. IP implementation across countries Organization: Degree of centralization Germany, the UK and the USA: highly decentralized but in different senses In Germany, the largest part of public support is coming from the Länders (Federal System) In the USA, the set up of IP is the outcome of interplay between the President, the Congress, individual States and the private sector In the UK, IP (not only regional policy) is managed by the Regional Development Agencies (RDAs).

17. IP implementation across countries Organization: Degree of centralization France and Japan: highly centralized In both countries there is a recent tendency toward more decentralization The French system remains highly centralized: 90% of IP is provided by the state and only 10% by regional or local authorities.

18. IP implementation across countries Organization: “Soft” or “hard” interventions In the UK and the USA*, IP is mainly 'soft‘ relying less on providing (hard) money and more on • Advisory support • Gateway services • Dissemination of best practices • Facilitation of collaborations (large/small firms, private sector/university) * Caution due to the role of the DoD

19. IP implementation across countries Organization: “Soft” or “hard” interventions But, the UK and the USA administrations: • Perform regular evaluations of the effectiveness of the subsidy programs and adopts a "value for money" approach. • Abandon those programs that were not bringing value for money • Concentrate funding in few schemes.

20. IP implementation across countries Organization: “Soft” or “hard” interventions The French system relies on “hard” interventions: High involvement of the public authorities in corporate research and and heavy reliance on subsidies. It is also very complex (too many public agencies and mechanisms competing for the same objective). For instance, there are 120 different mechanisms for starting a company, but only 10% of new business ventures actually benefit from any of them.

21. IP implementation across countries Organization: Types of IP Germany, the UK and the USA are mainly relying on horizontal measures and give a clear priority to R&D, science and technology and development of SMEs. In France, the approach has been mainly vertical. The government’s support was focused on a few key sectors (aerospace, nuclear, defense) and helped mainly large firms. This was also the case in Japan but in both cases the tendency is now toward a more horizontal approach

22. IP implementation across countries Efficacy In the USA, available evidence concerns mainly R&D since it is the main focus of the national public support policy. They show that the IP was very effective in stimulating private R&D, that its benefits extend beyond the impact on the individual recipient firm and that they reinforced fruitful collaborations between business and universities (e.g. Lerner, 1999; Audretsch, 2003 and Nail and Brown, 2006).

23. IP implementation across countries Efficacy In the UK, available evidence concerns jobs creation, FDI, productivity and R&D. OECD (2006): IP was very effective in terms of R&D. Wren (2005): IP helps job-creation. Harris and Robinson (2004): IP induces little improvement in productivity. Devereux et al. (2007): Installation of firms’ new plants in the UK is less sensitive IP than to economic factors such as the pre-existence of other firms in the entrants' industry, infrastructure or availability of human capital.

24. IP implementation across countries Efficacy The German Council of Economic Experts* praised the measures in favor entrepreneurship and R&D; Germany becoming among the leading innovators in the EU The experts criticized, however, the lack of effort to create more competition between universities. * An independent academic body with a mandate to assess economic performance

25. IP implementation across countries Efficacy Cohen (2007), France still lags behind in terms of innovation and R&D is not sufficiently productive . The number of innovative companies is very small. French SME are characterized by the low percentage of them carrying out industrial R&D and they cooperate with others at much lower level than the EU in innovation leaders. The specialization of the French economy in the high-tech sector is relatively low

26. IP implementation across countries Efficacy The evaluation of Japanese IP is mixed. The perception of its effectiveness has been highly sensitive to Japan’s economic performance (Porter at all, 2000 and Nolland, 2007). Economist Intelligence Unit ranks Japan, Switzerland, the United States and Sweden as the top four innovators among the 82 economies observed from 2002 to 2006. As for SMEs, studies shows that IP plays a positive role in helping firms to obtain loans especially in high-risk high-tech SMEs.

27. Summary There are theoretical arguments pro and against IP. IP should seek to best tradeoff Market against Government failures Empirical tests pertaining to the validity of these arguments show that IP: • Is effective in addressing network externalities and supporting R&D • Crowds out private physical investment, has no effect on TFP growth and fails to influence firms’ location. • It induces serious risks of state capture and corruption

28. Summary The differences in the amounts devoted to IP expenses don’t reflect in the economic performances. The differences in implementation seem to offer a better explanation Comparison across five countries (France, Germany, the UK, the USA and Japan) shows that IP follows two models: • One is “soft” and decentralized • The other is more interventionist, centralized and in some cases the state is a shareholder in many enterprises. The former seems to be more successful than the latter.

29. Thanks for your attention