Advanced Diploma in European Studies (ADES) Master in European Policies and Institutions (MIPE)

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Advanced Diploma in European Studies
(ADES)Master in European Policies and
Institutions (MIPE)
The New EU Industrial Policy

• Franco Mosconi
• Jean Monnet Professor
• University of Parma
• Fondazione Collegio Europeo di Parma
• Spring term, 2004-2005

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• This presentation is based on the European
  Commissions official documents on industrial
  policy, all unveiled between December 2002 and
  April 2004. In particular, I will make reference
  to the following four documents
• Industrial Policy in the economic literature
  Recent theoretical developments and implication
  for EU policy (Enterprise Papers No 12, 2003)
• Industrial Policy in an Enlarged Europe,
  COM(2002), 714 final of 11.12.2002
• Some Key Issues in Europes Competitiveness
  Towards an Integrated Approach, COM(2003), 704
  final of 21.11.2003
• Fostering Structural Change an Industrial Policy
  for an Enlarged Europe, COM(2004), 274 final of
  20.04.2004.

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• My paper, The Age of European Champions
  (forthcoming in The European Union Review,
  1/2006) offers a more comprehensive explanation
  of the new approach to industrial policy that has
  been emerging in the EU.

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Industrial Policy in the Economic Literature
Recent Theoretical Developments and
Implications for EU Policy (by L. Navarro,
2003)
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THE TRADITIONAL MARKET FAILURE JUSTIFICATION

• Market failure can take the form of
• EXTERNALITIES
• MARKET POWER
• INFORMATION PROBLEMS
• PUBLIC GOODS
• The most widely accepted rationale for public
  action are
• externalities in RD and knowledge creation.
• Firms cannot appropriate all the benefits of
  their
• investment in RD and knowledge creation because
• some of these accrue to other firms or sectors.

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ECONOMIC GROWTH THEORIES AND TECHNOLOGY POLICY

• 1980s
• Technological change is linked to the new
  accumulation of physical, human and capital
  resources. Romer and Lucas, 1988

1990s Innovation is a product of deliberate
efforts of firms. The main determinant of
long-term growth is no longer capital
accumulation but investments in RD and the
degree of to which innovations are appropriate.
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STRATEGIC TRADE POLICY

• Spencer and Brander (1983)
• . The concept of strategic trade and industrial
  policy is linked to the market failure of
  imperfect competition.
• Leahy and Nearly (2001)
• . A robust case for sectorial industrial policy.
  Another argument for governments to subsidise
  national producers is the infant-industry
  argument.
• The case for strategic or infant-industry
  policies is subject to a number of criticisms.

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NETWORK EXTERNALITIES AND STANDARDISATION

• Markets with network externalities provide a
  further rationale for
• industrial policy of the form of standard
  setting.
• Standardisation may bring positive effects, such
  as
• Reducing inefficiencies linked to inertia
• Reducing consumers search and co-ordination
  costs
• Providing stronger incentives to invest in
  commercially viable innovations.
• But standardisation may also entail some
  potential inefficiencies.
• Recently, the emphasis has been placed on the
  flexibility of
• standards, so that these can be adapted to rapid
  technological
• changes.

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Evolutionary Economics

• Nelson and Winter
• Evolutionary Theory of Economic Change (1982)
• The evolutionary theories on growth and
  innovation
• are an alternative to the neo-classical
  mainstream
• thinking.

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DISRUPTIVE CHANGE AS A DYNAMIC PROCESS OF
EVOLUTION

• SCHUMPETER
• The economy is a system that is continuously
  disrupted by technological change. This model
  of growth based on disequilibria led to the
  concept of creative destruction.
• Evolutionary theory has provided the implicit
  basis for the framework concepts of innovation
  systems and clusters.

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KNOWLEDGE

• 1. CODIFIED KNOWLEDGE
• is formalised and can be stored, copied and
  transmitted.

2. TACIT KNOWLEDGE is accumulated through
experience and learning by doing, and can only be
transferred through social interaction.
3. SOCIAL TECHNOLOGIES are knowledge on how
to co-ordinate and combine the elements needed in
a process.
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INNOVATION

• Innovation is the result of complex and
  interactive learning processes through which
  firms tap into complementary knowledge from other
  organisations and institutions.

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THE MOST SALIENT FEATURES OF INNOVATION

• Innovation is not driven only by a small set of
  high-technology industries.
• Non-technological innovation is important.
• Technological co-operation and collaboration
  among firms is essential.
• Innovative firms draw largely on the science
  system and science base.
• Innovation processes are uncertain and
  non-linear.
• Innovation processes have a cumulative nature.
• Innovation takes place in firms of any size.

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THE SYSTEM OF INNOVATION APPROACH

• A System of Innovation (SI) has been defined as
• the all important economic, social, political,
  organisational, and other factors that influence
  the development, diffusion and use of
  innovations.

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THE CLUSTER APPROACH

• Economic clusters are seen as
• networks of production of strongly
  interdependent firms (including specialised
  suppliers) linked to each other in a value-adding
  production chain.

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PORTERS SCHOOLTHE COMPETITIVE ADVANTAGE OF
NATIONS

• PORTER (1990)
• Emphasises the role of the microeconomic
  environment in country-specific industrial
  clusters

• Cluster activity is shaped by 4 main factors (the
  diamond)
• Factor conditions
• Demand conditions
• Related and supporting industries
• Firm strategy, structure and rivalry

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POLICY IMPLICATIONS

• ?

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Industrial Policy in an Enlarged Europe, COM
(2002)
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INDUSTRY AS THE SOURCE OF EUROPES WEALTH

• SERVICES SECTOR
• The share in EU output
• has increased from 52
• in 1970 to 71 in 2001.

MANIFACTURING INDUSTRY The share has
decreased from 30 in 1970 to 18 in 2001.
The widespread, but erroneus, assumption is that
in an knowledge economy and an information
society the manufacturing industry no longer
plays a key role.
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THE INTER-DEPENDENCE BETWEEN MANUFACTURING AND
SERVICES

• The inter-dependence between the service and the
  manufacturing sectors has increased over time.
• Manufacturing companies have been outsourcing
  activities not central to their business.
• The growing complexity of knowledge has led to
  increased industry specialisation and lies behind
  the outsourcing trend.
• The intertwining of manufacturing and service
  goes far beyond outsourcing.

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EUROPEAN INDUSTRY IS MODERN AND COMPETITIVE

• European industry remains a dominant force in
  international trade

The EUs share fell from an average of 19.3
over the 1991-95 period to 18.4 in 2002.
Over the same period, the US share went down
from 15.1 to 12.1.
Over the same period, Japans share went down
from 12.2 to 8.2.
In some key sectors, such as automobiles,
aeronautics or TLC equipment, EU companies have
achieved global leadership.
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EUROPEAN INDUSTRY DISPLAYS SLOW PRODUCTIVITY
GROWTH (1)

• In the 1990s, productivity growth in the
  European manufacturing industry has been below
  the US levels.

In the second half of the decade (1996- 2000),
the EU displayed a rate of 3.2.
Over the same period, the US displayed a rate
of 5.5.
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EUROPEAN INDUSTRY DISPLAYS SLOW PRODUCTIVITY
GROWTH (2)
The EU as a whole is lagging behind in most of
the 17 innovation indicators.
EUs research investment, at 1.9 of GDP in 2000,
as against 2.7 in the US and 3 in Japan, is
still far too low.
This gap is reflected in the number of European
high- tech patents, at 28 per million inhabitants.
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EUROPEAN INDUSTRY DISPLAYS SLOW PRODUCTIVITY
GROWTH (3)
The EU tends to specialise in medium- and
high-technology and mature capital-intensive
industries.
The EU should seek to reinforce its position in
enabling technologies such as ICT, electronics,
biotechnology or nanotechnology.
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SMEs PLAY A CENTRAL ROLETHE IMPORTANCE OF
CLUSTERS AND NETWORKS
SMEs are the backbone of European Industry.
New organisational patterns, under which large
firms often operate through EU-wide production
and subcontracting networks, have enhanced the
importance of SMEs.
Innovative clusters are also increasingly
involved in supranational knowledge and
production networks. Companies in such cluster,
mostly SMEs, are becoming the dynamic part of
Europes industrial landscape and a source of
innovative ideas.
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Some Key Issues in Europes Competitiveness
Towards an Integrated Approach, COM (2003)
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PRODUCTIVITY GROWTH AND DE-INDUSTRIALIZATION (1)
De-industrialization is a process of structural
change.

• The decline in the relative presence of the
  manifacturing sector in national income, primarly
  during the post-WWII years, mirrors the decline
  in the share of the primary sector in earlier
  days.
• Developments in the EU industry competitiveness
  in recent years show considerable diversity.
• Productivity developments would play a key role
  in any process of de-industrialization because
  they influence the competitiveness of
  enterprises.
• De-industrialization is the long-term (not
  cyclical) decline of the manufacuring sector.

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PRODUCTIVITY GROWTH AND DE-INDUSTRIALIZATION (2)

• Relocation of industrial activities is a
  reflection of changing comparative advantages

• International trade linkages ensure that such
  relocations do no benefit exclusively the host
  countries.
• The share of imported manifactured goods from
  host countries will continue to be only a small
  fraction of total expenditure in the EU.
• Finally, it is important to recall that the
  nation towards which industries are likely to
  migrate are invariable less wealthy, developing,
  nations.

In conclusion, there is no evidence that the EU
economy is showing signs of de-industrialization.
Nevertheless, it is possible that during a period
of slow growth and poor productivity and
innovation performance, conditions contributing
to such a process might emerge.
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DE-LOCALIZATION (1)
Delocalization concerns the transfer of
production and of other manufacturing activities
to locations outside the home country.
De-localization has already taken place within
the EU and reflects the changing comparative
advantage of different location and/or different
policies.
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DE-LOCALIZATION (2)
Better cost conditions abroad inevitably attract
industries that are unable to produce in the
high-wage environment of modern industrial
economies.
De-localization has been limited to low
technology, labour-intensive activities. However
such re-location is often accompanied by the
retention of, or creation of new, jobs in Europe
in service areas such as design, marketing and
distribution.
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DE-LOCALIZATION (3)
Europe must further develop and strengthen its
competitive manufacturing base. To achieve this,
it is necessary to raise its RD and innovation
performance, to strengthen its human capital
base and to develop conditions supportive of
enterprises and of productivity growth.
Other aspects of de-localization, such as the
migration of RD activities, constitute genuine
threats to Europes future.
A further enlarged EU, with its increased variety
of wage structures and technological skills, will
provide European industry with opportunities for
competitive reorganisation
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Fostering Structural Change an Industrial
Policy for an Enlarged Europe, COM (2004)
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THE PROCESS OF STRUCTURAL CHANGE

• The process of structural change requires three
  types of action
• THE BETTER LAWMAKING APPROACH
• OTHER COMMUNITY POLICIES WHICH CONTRIBUTE IN
  THEIR OWN WAY TO THE COMPETITIVENESS OF INDUSTRY
• THE SPECIFIC NEEDS OF THE VARIOUS INDUSTRIAL
  SECTORS

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INSTRUMENTS TO SUPPORT THE PROCESS OF STRUCTURAL
CHANGE (1)

• A regulatory framework favourable to industry
• Better law-making
• Optimising synergy between different policies
• Using knowledge for the benefit of business
• Investing in research an action plan for Europe
• Innovation policy
• Thinking about the future of research in the
  manufacturing industry
• Investing in human capital
• ICT in the service of competitiveness
• The contribution of competition policy to
  developing and spreading knowledge

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INSTRUMENTS TO SUPPORT THE PROCESS OF
STRUCTURALE CHANGE (2)

• Optimising synergy between different policies
• Improving the operation of the markets
• Improving the free movement of products and
  services
• Promoting competitiveness through an efficient
  competition policy
• Reconciling energy constraints with
  competitiveness
• Abolishing certain fiscal barriers to the
  completion of the internal market

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INSTRUMENTS TO SUPPORT THE PROCESS OF STRUCTURAL
CHANGE (3)

• Optimising synergy between different policies
• Using cohesion policies to promote industrial and
  structural change
• Supporting the process of industrial change and
  regional innovation system
• Putting the European employment strategy at the
  service of competitiveness
• Developing trans-European networks and major
  European projects

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INSTRUMENTS TO SUPPORT THE PROCESS OF STRUCTURAL
CHANGE (4)

• Optimising synergy between different policies
• Reconciling better sustainable development with
  competitiveness
• Creating the conditions for sustainable
  production
• Promoting clean energies and technologies
• Encouraging social dialogue, including sectorial
  issues

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INSTRUMENTS TO SUPPORT THE PROCESS OF STRUCTURAL
CHANGE (5)

• Optimising synergy between different policies
• Allowing European businesses to develop
  internationally
• Facilitating access to markets outside the EU
• Guaranteeing compliance with international trade
  rules (anti-dumping, anti-subsidy and safeguard
  measures)
• Extending single market rules and EU standards to
  neighbouring countries
• Developing the international dimension of
  environmental policy
• Application of industrial policy tailored to the
• needs of each sector

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• THANK YOU FOR YOUR ATTENTION!
• Homepage
• www.cattedramonnet-mosconi.eu
• E-mail
• franco.mosconi_at_unipr.it