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

Franco Mosconi Franco Mosconi Jean Monnet ProfessorJean Monnet ProfessorUniversity of ParmaUniversity of Parma

Fondazione Collegio Europeo di ParmaFondazione Collegio Europeo di ParmaSpring term, 2004-2005Spring term, 2004-2005

The The New New EU Industrial EU Industrial Policy Policy

This presentation is based on the European This presentation is based on the European Commission’s official documents on industrial policy, Commission’s official documents on industrial policy, all unveiled between December 2002 and April 2004. all unveiled between December 2002 and April 2004. In particular, I will make reference to the following In particular, I will make reference to the following four documents:four documents:

Industrial Policy in the economic literature: Recent Industrial Policy in the economic literature: Recent theoretical developments and implication for EU policy theoretical developments and implication for EU policy (Enterprise Papers No 12, 2003)(Enterprise Papers No 12, 2003)

Industrial Policy in an Enlarged Europe, COM(2002), Industrial Policy in an Enlarged Europe, COM(2002), 714 final of 11.12.2002714 final of 11.12.2002

Some Key Issues in Europe’s Competitiveness – Some Key Issues in Europe’s Competitiveness – Towards an Integrated Approach, COM(2003), 704 Towards an Integrated Approach, COM(2003), 704 final of 21.11.2003final of 21.11.2003

Fostering Structural Change: an Industrial Policy for an Fostering Structural Change: an Industrial Policy for an Enlarged Europe, COM(2004), 274 final of 20.04.2004Enlarged Europe, COM(2004), 274 final of 20.04.2004..

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

1. Industrial Policy in the Economic

Literature: Recent Theoretical Developments and Implications for EU Policy

(by L. Navarro, 2003)

Market failure can take the form of:Market failure can take the form of:

EXTERNALITIESEXTERNALITIES MARKET POWERMARKET POWER INFORMATION PROBLEMSINFORMATION PROBLEMS PUBLIC GOODSPUBLIC GOODS

The most widely accepted rationale for public action The most widely accepted rationale for public action are are

externalities in R&D and knowledge creation.externalities in R&D and knowledge creation. Firms cannot appropriate all the benefits of their Firms cannot appropriate all the benefits of their investment in R&D and knowledge creation because investment in R&D and knowledge creation because some of these accrue to other firms or sectors.some of these accrue to other firms or sectors.

THE TRADITIONAL MARKET FAILURE JUSTIFICATION

1980s1980s

Technological Technological change is linked to change is linked to the new the new accumulation of accumulation of physical, human and physical, human and capital resources. capital resources. Romer and Lucas, Romer and Lucas, 19881988

ECONOMIC GROWTH THEORIES AND TECHNOLOGY POLICY

1990s1990s

Innovation is Innovation is aa product of deliberate product of deliberate efforteffortss of firms. The of firms. The main determinant of main determinant of longlong--term growth is term growth is no longer capital no longer capital accumulation but accumulation but investments in R&Dinvestments in R&D and the degree of and the degree of to to which innovations are which innovations are appropriate.appropriate.

Spencer and Brander (1983)Spencer and Brander (1983). . The concept of The concept of strategic trade and industrial strategic trade and industrial

policypolicy is linked to the market failure of is linked to the market failure of imperfect competition.imperfect competition.

Leahy and Nearly (2001)Leahy and Nearly (2001). . A robust case for A robust case for sectorial industrial policysectorial industrial policy. .

Another argument for governments to Another argument for governments to subsidise national producers is the subsidise national producers is the infant-infant-industryindustry argumentargument..

The case for strategic or infant-industry policies The case for strategic or infant-industry policies is subject to a number of criticisms.is subject to a number of criticisms.

STRATEGIC TRADE POLICY

Markets with Markets with network externalitiesnetwork externalities provide a further rationale provide a further rationale forfor

industrial policy of the form of industrial policy of the form of standard settingstandard setting..

Standardisation may bringStandardisation may bring positive effects,positive effects, such as: such as: Reducing inefficiencies linked to inertiaReducing inefficiencies linked to inertia Reducing consumers’ search and co-ordination costsReducing consumers’ search and co-ordination costs Providing stronger incentives to invest in commercially Providing stronger incentives to invest in commercially

viable innovations.viable innovations.

But standardisation may also entail some But standardisation may also entail some potential potential inefficienciesinefficiencies..

Recently, the emphasis has been placed on the Recently, the emphasis has been placed on the flexibility offlexibility ofstandardsstandards, so that these can be adapted to rapid technological , so that these can be adapted to rapid technological changes.changes.

NETWORK EXTERNALITIES AND STANDARDISATION

Evolutionary EconomicsEvolutionary Economics

Nelson and WinterNelson and Winter

Evolutionary Theory of Economic Evolutionary Theory of Economic ChangeChange (1982) (1982)

The evolutionary theories on growth and The evolutionary theories on growth and innovationinnovation

are an alternative to the neo-classical are an alternative to the neo-classical mainstreammainstream

thinking.thinking.

SCHUMPETERSCHUMPETERThe economy is a system that is continuously The economy is a system that is continuously “disrupted” by technological change. This model “disrupted” by technological change. This model of growth based on disequilibria led to the of growth based on disequilibria led to the concept of concept of “creative destruction”.“creative destruction”.

Evolutionary theory has provided the implicit Evolutionary theory has provided the implicit basis for the framework concepts of basis for the framework concepts of innovation innovation systemssystems and and clustersclusters..

DISRUPTIVE CHANGE AS A DYNAMIC PROCESS OF EVOLUTION

1.1. CODIFIED CODIFIED KNOWLEDGE…KNOWLEDGE…

… … is formalised and can be is formalised and can be stored, copied and stored, copied and transmitted.transmitted.

KNOWLEDGE

2. TACIT 2. TACIT KNOWLEDGEKNOWLEDGE……

… … is accumulated through is accumulated through experience and learning experience and learning by doing, and can only be by doing, and can only be transferred through social transferred through social interactioninteraction..

3. SOCIAL TECHNOLOGIES3. SOCIAL TECHNOLOGIES……… … are knowledge on how to co-ordinate and are knowledge on how to co-ordinate and

combine the elements needed in a process.combine the elements needed in a process.

INNOVATION

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

THE MOST SALIENT FEATURES OF

INNOVATION

Innovation is not driven only by a small set of Innovation is not driven only by a small set of high-technology industries.high-technology industries.

Non-technological innovation is important.Non-technological innovation is important. Technological co-operation and collaboration Technological co-operation and collaboration

among firms is essential.among firms is essential. Innovative firms draw largely on the science Innovative firms draw largely on the science

system and science base.system and science base. Innovation processes are uncertain and non-Innovation processes are uncertain and non-

linear.linear. Innovation processes have a cumulative Innovation processes have a cumulative

nature.nature. Innovation takes place in firms of any size.Innovation takes place in firms of any size.

THE SYSTEM OF INNOVATION APPROACH

A System of Innovation (SI) has been defined as:A System of Innovation (SI) has been defined as:

‘‘the all important economic, social, political, the all important economic, social, political, organisational, and other factors that organisational, and other factors that

influence the development, diffusion and use influence the development, diffusion and use of innovations.’of innovations.’

THE CLUSTER APPROACH

Economic clusters are seen as:Economic clusters are seen as:

‘‘networks of production of strongly networks of production of strongly interdependent firms (including specialised interdependent firms (including specialised suppliers) linked to each other in a value-suppliers) linked to each other in a value-

adding production chain.’adding production chain.’

PORTER’S SCHOOL:“THE COMPETITIVE ADVANTAGE OF

NATIONS”

PORTER PORTER (1990)(1990)Emphasises the role of the Emphasises the role of the microeconomic microeconomic environmentenvironment in country-specific industrial in country-specific industrial clustersclusters

Cluster activity is shaped by 4 main factors (the diamond):

i. Factor conditions

ii. Demand conditions

iii. Related and supporting industries

iv. Firm strategy, structure and rivalry

POLICY IMPLICATIONS

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2. Industrial Policy in an Enlarged Europe, COM (2002)

INDUSTRY AS THE SOURCE OF EUROPE’S INDUSTRY AS THE SOURCE OF EUROPE’S WEALTHWEALTH

SERVICES SECTORSERVICES SECTOR

The share in EU output The share in EU output

has increased from has increased from 52% 52%

in 1970 to 71% in 2001.in 1970 to 71% in 2001.

MANIFACTURINGMANIFACTURING

INDUSTRYINDUSTRY

The share has decreasedThe share has decreased

from 30% in 1970 to 18%from 30% in 1970 to 18%

in 2001.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.

THE INTER-DEPENDENCE BETWEEN THE INTER-DEPENDENCE BETWEEN MANUFACTURING AND SERVICESMANUFACTURING AND SERVICES

The inter-dependence between the service and the The inter-dependence between the service and the manufacturing sectors has increased over time.manufacturing sectors has increased over time.

Manufacturing companies have been outsourcing Manufacturing companies have been outsourcing activities not central to their business.activities not central to their business.

The growing complexity of knowledge has led to The growing complexity of knowledge has led to increased industry specialisation and lies behind increased industry specialisation and lies behind the outsourcing trend.the outsourcing trend.

The intertwining of manufacturing and service The intertwining of manufacturing and service goes far beyond outsourcing.goes far beyond outsourcing.

EUROPEAN INDUSTRY IS MODERN AND EUROPEAN INDUSTRY IS MODERN AND COMPETITIVECOMPETITIVE

European industry remains a dominant European industry remains a dominant force in international trade:force in international trade:

The The EUEU’s share ’s share

fell from anfell from an

average of 19.3% average of 19.3%

over the 1991-95 over the 1991-95

period to 18.4% period to 18.4%

in 2002.in 2002.

Over the same Over the same

period, the period, the USUS

share went share went down down

from 15.1% to from 15.1% to

12.1%.12.1%.

Over the same Over the same

period, period, JapanJapan’s ’s

share went share went down down

from 12.2% to from 12.2% to

8.2%.8.2%.

In some In some key sectorskey sectors, such as automobiles, aeronautics or , such as automobiles, aeronautics or

TLC equipment, EU companies have achieved global TLC equipment, EU companies have achieved global

leadership.leadership.

EUROPEAN INDUSTRY DISPLAYS EUROPEAN INDUSTRY DISPLAYS SLOW PRODUCTIVITY GROWTH (1)SLOW PRODUCTIVITY GROWTH (1)

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

In the second half of In the second half of

the decade (1996-the decade (1996-

2000), the 2000), the EUEU

displayed a rate of displayed a rate of

3.2%.3.2%.

Over the same Over the same period, period,

the the USUS displayed a displayed a

rate of 5.5%.rate of 5.5%.

EUROPEAN INDUSTRY DISPLAYS EUROPEAN INDUSTRY DISPLAYS SLOW PRODUCTIVITY GROWTH (2)SLOW PRODUCTIVITY GROWTH (2)

EUEU’s research investment, at ’s research investment, at 1.9%1.9% of GDP in 2000, of GDP in 2000, as as

against against 2.7%2.7% in the in the USUS and and 3%3% in in JapanJapan, is still , is still

far too low.far too low.

This gap is reflected in the number of European high-This gap is reflected in the number of European high-

tech patents, at 28 per million inhabitants.tech patents, at 28 per million inhabitants.

The EU as a whole is lagging behind in most of the 17 The EU as a whole is lagging behind in most of the 17

innovation indicators.innovation indicators.

EUROPEAN INDUSTRY DISPLAYS EUROPEAN INDUSTRY DISPLAYS SLOW PRODUCTIVITY GROWTH (3)SLOW PRODUCTIVITY GROWTH (3)

The EU tends to specialise in medium- and The EU tends to specialise in medium- and high-technology and mature capital-intensive high-technology and mature capital-intensive industries.industries.

The EU should seek to reinforce its position in The EU should seek to reinforce its position in enabling technologies such as ICT, enabling technologies such as ICT, electronics, biotechnology or nanotechnology.electronics, biotechnology or nanotechnology.

SMEs PLAY A CENTRAL ROLE:SMEs PLAY A CENTRAL ROLE:THE IMPORTANCE OF CLUSTERS AND THE IMPORTANCE OF CLUSTERS AND

NETWORKSNETWORKS

New organisational New organisational patterns, under which patterns, under which large firms often operate large firms often operate through EU-wide through EU-wide production and production and subcontracting subcontracting networksnetworks,, have have enhanced the enhanced the importance of SMEs.importance of SMEs.

Innovative Innovative clustersclusters are are also increasingly involved also increasingly involved in supranational in supranational knowledge and knowledge and production networks. production networks. Companies in such Companies in such cluster, mostly SMEs, are cluster, mostly SMEs, are becoming the dynamic becoming the dynamic part of Europe’s industrial part of Europe’s industrial landscape and a source of landscape and a source of innovative ideas.innovative ideas.

SMEs are the backbone of European Industry.

3. Some Key Issues in Europe’s Competitiveness – Towards an Integrated

Approach, COM (2003)

PRODUCTIVITY GROWTH AND PRODUCTIVITY GROWTH AND DE-INDUSTRIALIZATION (1)DE-INDUSTRIALIZATION (1)

De-industrialization is a process of De-industrialization is a process of structural change.structural change.

The decline in the relative presence of the manifacturing The decline in the relative presence of the manifacturing sector in national income, primarly during the post-WWII sector in national income, primarly during the post-WWII years, mirrors the decline in the share of the primary years, mirrors the decline in the share of the primary sector in earlier days.sector in earlier days.

Developments in the EU industry competitiveness in Developments in the EU industry competitiveness in recent years show considerable diversity.recent years show considerable diversity.

Productivity developments would play a key role in any Productivity developments would play a key role in any process of de-industrialization because they influence the process of de-industrialization because they influence the competitiveness of enterprises.competitiveness of enterprises.

De-industrialization is the long-term (not cyclical) decline De-industrialization is the long-term (not cyclical) decline of the manufacuring sector.of the manufacuring sector.

PRODUCTIVITYPRODUCTIVITY GROWTH AND GROWTH AND DE-INDUSTRIALIZATION (2)DE-INDUSTRIALIZATION (2)

Relocation of industrial activities is a reflection of Relocation of industrial activities is a reflection of changing comparative advantages: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.

DE-LOCALIZATION (1)DE-LOCALIZATION (1)

Delocalization concerns the transfer of Delocalization concerns the transfer of production and of other manufacturing production and of other manufacturing activities to locations outside the home activities to locations outside the home country. De-localization has already country. De-localization has already taken place within the EU and reflects taken place within the EU and reflects the changing comparative advantage of the changing comparative advantage of different location and/or different different location and/or different policies.policies.

DE-LOCALIZATION (2)DE-LOCALIZATION (2)

Better cost conditions abroad inevitably Better cost conditions abroad inevitably attract industries that are unable to attract industries that are unable to produce in the high-wage environment produce in the high-wage environment of modern industrial economies.of modern industrial economies.

De-localization has been limited to low De-localization has been limited to low technology, labour-intensive activities. technology, labour-intensive activities. However such re-location is often However such re-location is often accompanied by the retention of, or accompanied by the retention of, or creation of new, jobs in Europe in creation of new, jobs in Europe in service areas such as design, marketing service areas such as design, marketing and distribution.and distribution.

DE-LOCALIZATION (3)DE-LOCALIZATION (3)

Europe must further develop and strengthen its Europe must further develop and strengthen its competitive competitive

manufacturing base. To achieve this, it is necessary to manufacturing base. To achieve this, it is necessary to raise its raise its

R&D and innovation performance, to strengthen its R&D and innovation performance, to strengthen its human human

capital base and to develop conditions supportive of capital base and to develop conditions supportive of enterprisesenterprises

and of productivity growth.and of productivity growth.

Other aspects of de-localization, such as the migration of Other aspects of de-localization, such as the migration of R&D activities, constitute genuine threats to Europe’s R&D activities, constitute genuine threats to Europe’s future. future.

A further enlarged EU, with its increased variety of wage A further enlarged EU, with its increased variety of wage structures and technological skills, will provide European structures and technological skills, will provide European industry with opportunities for competitive reorganisationindustry with opportunities for competitive reorganisation

4.4. Fostering Structural Fostering Structural Change: an Industrial Change: an Industrial Policy for an Enlarged Policy for an Enlarged Europe, COM (2004)Europe, COM (2004)

The process of structural change The process of structural change requires three types of action:requires three types of action:

THE “BETTER LAWMAKING” APPROACHTHE “BETTER LAWMAKING” APPROACH OTHER COMMUNITY POLICIES WHICH OTHER COMMUNITY POLICIES WHICH

CONTRIBUTE IN THEIR OWN WAY TO THE CONTRIBUTE IN THEIR OWN WAY TO THE COMPETITIVENESS OF INDUSTRYCOMPETITIVENESS OF INDUSTRY

THE SPECIFIC NEEDS OF THE VARIOUS THE SPECIFIC NEEDS OF THE VARIOUS INDUSTRIAL SECTORSINDUSTRIAL SECTORS

THE PROCESS OF STRUCTURAL CHANGE

INSTRUMENTS TO SUPPORT THE PROCESS

OF STRUCTURAL CHANGE (1)

A regulatory framework favourable to A regulatory framework favourable to industryindustryBetter law-makingBetter law-making

Optimising synergy between different policiesOptimising synergy between different policiesUsing knowledge for the benefit of businessUsing knowledge for the benefit of business

Investing in research – an action plan for EuropeInvesting in research – an action plan for Europe Innovation policyInnovation policy Thinking about the future of research in the Thinking about the future of research in the

manufacturing industrymanufacturing industry Investing in human capitalInvesting in human capital ICT in the service of competitivenessICT in the service of competitiveness The contribution of competition policy to developing The contribution of competition policy to developing

and spreading knowledgeand spreading knowledge

INSTRUMENTS TO SUPPORT THE PROCESS

OF STRUCTURALE CHANGE (2)

Optimising synergy between different Optimising synergy between different policiespolicies Improving the operation of the marketsImproving the operation of the markets

Improving the free movement of products and Improving the free movement of products and servicesservices

Promoting competitiveness through an efficient Promoting competitiveness through an efficient competition policycompetition policy

Reconciling energy constraints with Reconciling energy constraints with competitivenesscompetitiveness

Abolishing certain fiscal barriers to the Abolishing certain fiscal barriers to the completion of the internal marketcompletion of the internal market

INSTRUMENTS TO SUPPORT THE PROCESS

OF STRUCTURAL CHANGE (3)

Optimising synergy between different Optimising synergy between different policiespoliciesUsing cohesion policies to promote industrial Using cohesion policies to promote industrial

and structural changeand structural change Supporting the process of industrial change and Supporting the process of industrial change and

regional innovation systemregional innovation system Putting the European employment strategy at the Putting the European employment strategy at the

service of competitivenessservice of competitiveness Developing trans-European networks and major Developing trans-European networks and major

European projectsEuropean projects

INSTRUMENTS TO SUPPORT THE PROCESS

OF STRUCTURAL CHANGE (4)

Optimising synergy between different Optimising synergy between different policiespoliciesReconciling better sustainable development Reconciling better sustainable development

with competitivenesswith competitiveness Creating the conditions for sustainable productionCreating the conditions for sustainable production Promoting clean energies and technologiesPromoting clean energies and technologies Encouraging social dialogue, including sectorial Encouraging social dialogue, including sectorial

issuesissues

INSTRUMENTS TO SUPPORT THE PROCESS

OF STRUCTURAL CHANGE (5)

Optimising synergy between different Optimising synergy between different policiespoliciesAllowing European businesses to develop Allowing European businesses to develop

internationallyinternationally Facilitating access to markets outside the EUFacilitating access to markets outside the EU Guaranteeing compliance with international trade Guaranteeing compliance with international trade

rules (anti-dumping, anti-subsidy and safeguard rules (anti-dumping, anti-subsidy and safeguard measures)measures)

Extending single market rules and EU standards to Extending single market rules and EU standards to neighbouring countriesneighbouring countries

Developing the international dimension of Developing the international dimension of environmental policyenvironmental policy

Application of industrial policy tailored to the Application of industrial policy tailored to the needs of each sectorneeds of each sector

THANK YOU FOR YOUR ATTENTION!THANK YOU FOR YOUR ATTENTION!

Homepage: Homepage:

www.cattedramonnet-mosconi.euwww.cattedramonnet-mosconi.eu

E-mail:E-mail:

franco.mosconi@unipr.itfranco.mosconi@unipr.it