Pierre-André Buigues

Industrial policy in Europe, Japan and the USA : amounts, mechanisms and effectiveness

Introduction PART I: THEORY AND EMPIRICAL EVIDENCE Public Support to Business: An Overview Cases for Public Support: Market Failures Argument Against Public Support: Government Failures Instruments of Support: Subsidies and Public Procurement Effectiveness of Public Support PART II: QUANTITATIVE ASSESSMENT Subsidies and State Aid Public Procurement PART III: COUNTRY STUDIES Public Support in Germany Public Support in France Public Support in the United Kingdom Public Support in the United States Public Support in Japan Conclusion List of Acronyms References

Public Support in the United States

’We don’t do industrial policy,’ asserted John Sununu, former White House Chief of Staff and now member of the US Senate (Fong, 2000). This statement illustrates the difficulties one has to face when studying public support (to use a softer term than industrial policy) to industry in the US.

Public Support in Japan

The OECD report on public support to industry (OECD, 1998) presented specific features of industrial policy in Japan for the period 1989–93. Japanese industrial policy, in this period was based on the principle of providing incentives to firms to strengthen their economic performance. The focus of public support policies was on promoting ‘technological fundamentals’, such as advanced information and telecommunication systems and ‘intangible fundamentals’ as education and training.

Public Support in France

Since the late 1990s, industrial policy has remained a very sensitive issue in France and has been very much present in economic and political debate, despite the fall in the volume of funding. Thus, the Economic Analysis Council set up by Prime Minister Lionel Jospin in July 1997 to provide decision support for the government on economic issues, devoted one of its first reports to ‘industrial policy’ (Cohen and Lorenzi, 2000). The report came in the wake of the recognition that Europe had fallen behind the United States in terms of R&D, innovation (number of patents), and industrial renewal, and it was produced in the perspective of the main Lisbon Summit resolution, to make Europe ‘the most competitive and dynamic knowledge economy in the world’. This report highlighted, within a historical perspective, certain specificities of French industrial policy.

Cases for Public Support: Market Failures

Market failures refer to situations where market forces fail to fulfil their ‘responsibility’ of the optimal allocation of resources. They may be due to information imperfection, externalities, or imperfect competition and may justify public intervention. In this chapter we discuss the three kinds of market failures.

Public Support to Business: An Overview

It is difficult to find a precise and unambiguous definition to public support to business (see Aiginger, 2007 for a discussion). Economists often use the term ‘industrial policy’ instead of ‘public support’. In this book we use interchangeably the terms industrial policy and public support policy. In general, any economic policy which influences industry can be referred to as public support to business. In the broad sense, such a support encompasses public sector intervention aimed at changing the distribution of resources between economic sectors and activities (Caves, 1987). However, the concept of public support to business agreed upon by economists since the early eighties also includes issues linked to innovation, economic growth, technological progress, and entrepreneurship. Public support policy is, therefore, a sort of complement to market forces that reinforce or counteract the allocation that market forces would otherwise produce.

Public Support in the United Kingdom

In the United Kingdom, public support to business, supervised by the Department of Trade and Industry (DTI),1 was for a long time dominated by regional development concerns. Indeed, regional policy has been the mainstay of industrial policy in the United Kingdom postwar, based on a recognition of the need to reduce regional disparities in employment, earnings, and the cost of living. Regional policy itself has undergone a number of incarnations but to date its most enduring feature has been the Regional Selective Assistance (RSA) scheme, which was introduced in 1972. Designed as a discretionary capital subsidy linked to the creation and safeguarding of employment, it operates in Assisted Areas only and is primarily directed towards manufacturing (often foreign-owned) companies. Although RSA is explicitly designed to assist certain regions of Great Britain, it also implicitly helps to build up the science and technology base of industry in those regions. A significant proportion of aid goes to small firms (Harris and Robinson, 2004). In contrast to the RSA scheme, two programmes (SMART, SPUR) are explicitly aimed at encouraging innovative activity in the Small and Medium Enterprise (SME) sector. They were launched in 1986 but became fully operational in 1988, and since then have undergone various transformations and amalgamations.

Instruments of Support: Subsidies and Public Procurement

In practice, there is no commonly accepted definition of subsidy and state aid, and existing definitions differ in the scope of policy which they consider (OECD, 2001). Schwartz and Clements (1999) define a subsidy as any government assistance that allows consumers to purchase goods and services at prices lower than those offered by a perfectly competitive private sector or that raise producers’ incomes beyond those that would be earned without intervention. The authors proposed a list of government assistance that can be considered as subsidies.

Effectiveness of Public Support

In Chapters 1 to 3, the discussion focused mainly on the theoretical arguments in favour of and/or against public support to industry as well as on the instruments of support. The latter includes state aid, public procurements, strategic trade policy, provision of public goods, regulations, policies directed towards factor markets, and so forth. The arguments in favour of public support are related to information issues (imperfect information, uncertainty and information spillovers), externalities (network and spatial externalities), strategic trade and merger (incomplete markets, oligopolistic competition) and the new growth theories (in particular R&D issues). The arguments against public support put forward the conflict with other policies (competition, trade and macroeconomic policies), political economy issues (elections, lobbying and capture, corruption and favouritism) and the difficulties of choice of appropriate instruments.

Subsidies and State Aid

In Chapter 4, we discussed the issues raised by the multiplicity of definitions and measurements of subsidies and state aid. This section combines the various sources to try to get the more reliable data for a comparison between public supports. It also examines whether national public support reports are the best way to approach economic reality.