Industrial Policy: The Experience of Developed Countries

Université Libre de Bruxelles

Industrial Policy:Industrial Policy:The Experience of Developed The Experience of Developed

CountriesCountries

Khalid SekkatKhalid Sekkat(University of Brussels)(University of Brussels)


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


Reference for the presentationReference for the presentation

The book:The book:

Provides a comparison of industrial policies (IP) in five countries Provides a comparison of industrial policies (IP) in five countries (France, Germany, the UK, the USA and Japan) . (France, Germany, the UK, the USA and Japan) .

Covers the amounts, mechanisms and effectiveness of IPCovers the amounts, mechanisms and effectiveness of IP


Preliminary remarksPreliminary remarks

IP is an old theme which is gaining renewed interest e.g. IP is an old theme which is gaining renewed interest e.g. Rodrik (Rodrik (MEDJMEDJ, , 2009) “2009) “Industrial Policy Industrial Policy : Don’t ask why, ask how: Don’t ask why, ask how” and Greenwald ” and Greenwald and Stiglitz (and Stiglitz (AERAER, 2006):“, 2006):“Helping Infant Economies GrowHelping Infant Economies Grow””

Caves (1987): IP covers all government interventions aimed at changing Caves (1987): IP covers all government interventions aimed at changing the distribution of resources between economic sectors and activitiesthe distribution of resources between economic sectors and activities


Preliminary remarksPreliminary remarks

In general, economists distinguish two types of IP:In general, economists distinguish two types of IP: Horizontal (non-selective). Horizontal (non-selective). Vertical (targets specific activities) Vertical (targets specific activities)

and tow main objectives:and tow main objectives: Support to structural change to enhance welfareSupport to structural change to enhance welfare Equality and social cohesionEquality and social cohesion


Plan of the presentationPlan of the presentationFive questions Five questions

What are the main theoretical arguments pro and against IP? What are the main theoretical arguments pro and against IP?

What is their empirical validity?What is their empirical validity?

What is the quantitative importance of IP across countries?*What is the quantitative importance of IP across countries?*

How IP is implemented across countries?How IP is implemented across countries?

Main lessonsMain lessons

* * Focuses on two instruments of IP: subsidies and public Focuses on two instruments of IP: subsidies and public procurements.procurements.


Arguments pro and against IPArguments pro and against IPIP should seek to best tradeoff Market against Government failures.IP should seek to best tradeoff Market against Government failures.

Pro: Market failuresPro: Market failures Information (Imperfect, uncertainty and spillovers): e.g. uncertainty Information (Imperfect, uncertainty and spillovers): e.g. uncertainty

about profitability of a project might result in under-investment like about profitability of a project might result in under-investment like for R&D, expenses to acquire information benefit to others who for R&D, expenses to acquire information benefit to others who don’t bear any cost (i.e. self-discovery)don’t bear any cost (i.e. self-discovery)

Externalities (Network and spatial): e.g. network externalities might Externalities (Network and spatial): e.g. network externalities might justify public intervention to pick up the right standard, industries justify public intervention to pick up the right standard, industries with economies of scale might have incentives to concentrate with economies of scale might have incentives to concentrate production geographically to benefit from external economies.production geographically to benefit from external economies.

Imperfect competition: e.g. Strategic trade and mergerImperfect competition: e.g. Strategic trade and merger


Arguments pro and against IPArguments pro and against IP

Against: Government failuresAgainst: Government failures Information: Does the bureaucrat have better information than a Information: Does the bureaucrat have better information than a

businessperson to identify the problem and choose the right businessperson to identify the problem and choose the right instrument of intervention? instrument of intervention?

Conflicts with other policies: e.g. competition policy bans restrictive Conflicts with other policies: e.g. competition policy bans restrictive economic practices, merger, state aid etc, trade policy aims at freeing economic practices, merger, state aid etc, trade policy aims at freeing exchange through reduction of barriers to trade, macroeconomic exchange through reduction of barriers to trade, macroeconomic policy targets stability while excessive interventions might create policy targets stability while excessive interventions might create budget deficit and risk of stabilitybudget deficit and risk of stability

Political Economy: use of IP for electoral purposes, lobbing and Political Economy: use of IP for electoral purposes, lobbing and capture of bureaucrat , corruption and favoritism capture of bureaucrat , corruption and favoritism


Empirical validity of the Empirical validity of the arguments pro and against IParguments pro and against IP

Reviewed around 200 papers published in international journalsReviewed around 200 papers published in international journals

Reminder: The focuses is on two instruments of IP: subsidies and Reminder: The focuses is on two instruments of IP: subsidies and public procurements.public procurements.



Market failuresMarket failures

The existing literature focuses on externalities, physical investment, The existing literature focuses on externalities, physical investment, R&D, productivity growth and firms' location and shows that IP:R&D, productivity growth and firms' location and shows that IP:

Helps addressing network externalities and support R&DHelps addressing network externalities and support R&D Is complementary to Is complementary to private R&Dprivate R&D expenditures expenditures Crowds out private physical capitalCrowds out private physical capital Has no clear effect on TFP growthHas no clear effect on TFP growth Fails to influence Fails to influence firms’ locationfirms’ location



Government failuresGovernment failuresThe existing literature is much more limited than on market failures’. The existing literature is much more limited than on market failures’.

It focuses mainly on political economy issues and shows:It focuses mainly on political economy issues and shows:

Weak evidence of the role of electionsWeak evidence of the role of elections Strong risk of state captureStrong risk of state capture Strong risk of corruptionStrong risk of corruption


Quantitative importance of IPQuantitative importance of IP

Based on National Accounts and Governments’ expenses by function, Based on National Accounts and Governments’ expenses by function, we computed the amount of subsidies and public procurement we computed the amount of subsidies and public procurement targeted toward IP as % of GDP.targeted toward IP as % of GDP.

To give a rough idea of their effectiveness, we compare these amounts To give a rough idea of their effectiveness, we compare these amounts to countries’ rank from The to countries’ rank from The Global Competitiveness IndexGlobal Competitiveness Index


Quantitative importance of IPQuantitative importance of IP

There are large differences in term of IP expenses with the USA and 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 UK disbursing the least and Japan the most (3 times the UK and the USA)the USA)

The ranks is term of IP expenses don’t reflect in the ranks in term of The ranks is term of IP expenses don’t reflect in the ranks in term of per capita incomeper capita income

Industrial Policy expenses (% of GDP)

Average 1998-2004

GDP per capita (PPP, US constant dollar)

Average 2000-2008 United Kingdom 2.6 32090 United Sates 3.6 41673 France 4.6 29519 Germany 6.2 31693 Japan 9.8 29838


IP implementation across IP implementation across countriescountries

The difference in the amounts targeted toward IP doesn’t seem to The difference in the amounts targeted toward IP doesn’t seem to explain the difference in performanceexplain the difference in performance

We, therefore, looked at the difference in implementation as a We, therefore, looked at the difference in implementation as a possible explanation possible explanation

We conducted 5 country studies.We conducted 5 country studies.

For each country we examined the:For each country we examined the:

ObjectivesObjectives Organization Organization Efficacy.Efficacy.



ObjectivesObjectivesThe objectives are broadly the same : science and technology, The objectives are broadly the same : science and technology,

development SMEs, regional policy and energy efficiency.development SMEs, regional policy and energy efficiency.

However they are given different priorities: However they are given different priorities: Germany: Regional policy gaining priority (e.g. reunification)Germany: Regional policy gaining priority (e.g. reunification) The USA there is almost no regional policy at the national level. The USA there is almost no regional policy at the national level. The UK, regional policy is a part of a more comprehensive scheme The UK, regional policy is a part of a more comprehensive scheme

including support to R&D, SMEs and investment. including support to R&D, SMEs and investment. In the USA and UK competition policy is highly emphasized In the USA and UK competition policy is highly emphasized



Organization: Degree of centralizationOrganization: Degree of centralization

Germany, the UK and the USA: highly decentralized but in Germany, the UK and the USA: highly decentralized but in different sensesdifferent senses

In Germany, the largest part of public support is coming from the In Germany, the largest part of public support is coming from the Länders (Federal System)Länders (Federal System)

In the USA, the set up of IP is the outcome of interplay between In the USA, the set up of IP is the outcome of interplay between the President, the Congress, individual States and the private the President, the Congress, individual States and the private sector sector

In the UK, IP (not only regional policy) is managed by the In the UK, IP (not only regional policy) is managed by the Regional Development Agencies (RDAs).Regional Development Agencies (RDAs).



Organization: Degree of centralizationOrganization: Degree of centralization

France and Japan: highly centralizedFrance and Japan: highly centralized

In both countries there is a recent tendency toward more In both countries there is a recent tendency toward more decentralizationdecentralization

The French system remains highly centralized: 90% of IP is The French system remains highly centralized: 90% of IP is provided by the state and only 10% by regional or local provided by the state and only 10% by regional or local authorities. authorities.



Organization: “Soft” or “hard” interventionsOrganization: “Soft” or “hard” interventionsIn the UK and the USA*, IP is mainly 'soft‘ relying less on providing In the UK and the USA*, IP is mainly 'soft‘ relying less on providing

(hard) money and more on(hard) money and more on Advisory support Advisory support Gateway servicesGateway services Dissemination of best practicesDissemination of best practices Facilitation of collaborations (large/small firms, private Facilitation of collaborations (large/small firms, private

sector/university)sector/university)

* * Caution due to the role of the DoDCaution due to the role of the DoD



Organization: “Soft” or “hard” interventionsOrganization: “Soft” or “hard” interventions

But, the UK and the USA administrations:But, the UK and the USA administrations:

Perform regular evaluations of the effectiveness of the subsidy Perform regular evaluations of the effectiveness of the subsidy programs and adopts a "value for money" approach. programs and adopts a "value for money" approach.

Abandon those programs that were not bringing value for money Abandon those programs that were not bringing value for money Concentrate funding in few schemes.Concentrate funding in few schemes.



Organization: “Soft” or “hard” interventionsOrganization: “Soft” or “hard” interventions

The French system relies on “hard” interventions: High involvement of The French system relies on “hard” interventions: High involvement of the public authorities in corporate research and and heavy reliance on the public authorities in corporate research and and heavy reliance on subsidies.subsidies.

It is also very complex (too many public agencies and mechanisms It is also very complex (too many public agencies and mechanisms competing for the same objective). competing for the same objective).

For instance, there are 120 different mechanisms for starting a company, For instance, there are 120 different mechanisms for starting a company, but only 10% of new business ventures actually benefit from any of but only 10% of new business ventures actually benefit from any of them.them.



Organization: Types of IPOrganization: Types of IP

Germany, the UK and the USA are mainly relying on horizontal Germany, the UK and the USA are mainly relying on horizontal measures and give a clear priority to R&D, science and technology measures and give a clear priority to R&D, science and technology and development of SMEs. and development of SMEs.

In France, the approach has been mainly vertical. The government’s In France, the approach has been mainly vertical. The government’s support was focused on a few key sectors (aerospace, nuclear, support was focused on a few key sectors (aerospace, nuclear, defense) and helped mainly large firms.defense) and helped mainly large firms.

This was also the case in Japan but in both cases the tendency is now This was also the case in Japan but in both cases the tendency is now toward a more horizontal approachtoward a more horizontal approach



EfficacyEfficacy

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



EfficacyEfficacy

In the UK, available evidence concerns jobs creation, FDI, In the UK, available evidence concerns jobs creation, FDI, productivity and R&D. productivity and R&D.

OECD (2006): IP was very effective in terms of R&D. OECD (2006): IP was very effective in terms of R&D.

Wren (2005): IP helps job-creation.Wren (2005): IP helps job-creation.

Harris and Robinson (2004): IP induces little improvement in Harris and Robinson (2004): IP induces little improvement in productivity. productivity.

Devereux et al. (2007): Installation of firms’ new plants in the UK Devereux et al. (2007): Installation of firms’ new plants in the UK is less sensitive IP than to economic factors such as the pre-is less sensitive IP than to economic factors such as the pre-existence of other firms in the entrants' industry, infrastructure or existence of other firms in the entrants' industry, infrastructure or availability of human capital. availability of human capital.



EfficacyEfficacy

The German Council of Economic Experts* The German Council of Economic Experts* praised praised the measures in the measures in favor entrepreneurship and R&D; Germany becoming among the favor entrepreneurship and R&D; Germany becoming among the leading innovators in the EUleading innovators in the EU

The experts criticized, however, the lack of effort to create more The experts criticized, however, the lack of effort to create more competition between universities. competition between universities.

* * An independent academic body with a mandate to assess economic An independent academic body with a mandate to assess economic performanceperformance



EfficacyEfficacyCohen (2007), France still lags behind in terms of innovation and Cohen (2007), France still lags behind in terms of innovation and

R&D is not sufficiently productive .R&D is not sufficiently productive .

The number of innovative companies is very small. The number of innovative companies is very small.

French SME are characterized by the low percentage of them French SME are characterized by the low percentage of them carrying out industrial R&D and they cooperate with others at carrying out industrial R&D and they cooperate with others at much lower level than the EU in innovation leaders.much lower level than the EU in innovation leaders.

The specialization of the French economy in the high-tech sector The specialization of the French economy in the high-tech sector is relatively lowis relatively low



EfficacyEfficacyThe evaluation of Japanese IP is mixed. The perception of its The evaluation of Japanese IP is mixed. The perception of its

effectiveness has been highly sensitive to Japan’s economic effectiveness has been highly sensitive to Japan’s economic performance (Porter at all, 2000 and Nolland, 2007).performance (Porter at all, 2000 and Nolland, 2007).

Economist Intelligence Unit ranks Japan, Switzerland, the United Economist Intelligence Unit ranks Japan, Switzerland, the United States and Sweden as the top four innovators among the 82 States and Sweden as the top four innovators among the 82 economies observed from 2002 to 2006. economies observed from 2002 to 2006.

As for SMEs, studies shows that IP plays a positive role in helping As for SMEs, studies shows that IP plays a positive role in helping firms to obtain loans especially in high-risk high-tech SMEs. firms to obtain loans especially in high-risk high-tech SMEs.


SummarySummary

There are There are theoreticaltheoretical arguments arguments pro and againstpro and against IP. IP.

IP should seek to best tradeoff IP should seek to best tradeoff Market against Government failuresMarket against Government failures

Empirical testsEmpirical tests pertaining to the validity of these arguments show that pertaining to the validity of these arguments show that IP:IP:

Is Is effectiveeffective in addressing in addressing network externalitiesnetwork externalities and supporting and supporting R&DR&D

Crowds outCrowds out private physical private physical investmentinvestment, has , has no effect on TFPno effect on TFP growth and fails to influence growth and fails to influence firms’ locationfirms’ location..

It induces serious It induces serious risks of state capture and corruptionrisks of state capture and corruption


SummarySummary

The differences in the The differences in the amountsamounts devoted to IP expenses devoted to IP expenses don’t reflect in don’t reflect in the economic performancesthe economic performances. .

The The differences in implementationdifferences in implementation seem to offer a seem to offer a better explanationbetter explanation

Comparison across five countries (France, Germany, the UK, the USA Comparison across five countries (France, Germany, the UK, the USA and Japan) shows that IP follows two models: and Japan) shows that IP follows two models:

One is “soft” and decentralizedOne is “soft” and decentralized The other is more interventionist, centralized and in some cases the The other is more interventionist, centralized and in some cases the

state is a shareholder in many enterprises.state is a shareholder in many enterprises.

The former seems to be more successful than the latter. The former seems to be more successful than the latter.


Thanks for your attentionThanks for your attention

Industrial Policy: The Experience of Developed Countries

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