Sharp, M.; (2003) Industrial policy and European integration: lessons from experience in Western Europe over the last 25 years. (Economics Working Papers 30). Centre for the Study of Economic and Social Change in Europe, SSEES, UCL: London, UK.

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Abstract

This paper seeks to draw together the work undertaken for the EU (Fourth Framework Programme) TSER project on Science, Technology and Broad Industrial Policy with the experience of the countries of East and Central Europe (CEECs) as it has been catalogued through the papers written for this ESRC Programme on the Emerging Industrial Architecture of the Wider Europe. The former project sought to explore developments in science, technology and industrial/innovation policy in six Western European countries - France, Germany, Italy, the UK, Sweden and Ireland - through the last 25 years of the 20th Century and found a process both of integration (in the sense both of a growing together of economies and a coming together of policies) but also of co-evolution, with national policies co-existing with new strong strands of policy emerging at both EU and regional levels of government. What role for industrial policy? The paper begins by defining industrial policy as a mix of institution building and incentive structures. It emphasizes the importance of institutions to the proper functioning of markets, a lesson that has been learned in other contexts in the CEECs, but also the degree to which institutions both reflect and shape cultures. While the process of accession provides an important stimulus to institution building, it is important that each country listens to its own stakeholders and shapes its own institutions. The non-globalisation of institutions in the member states of the EU helps to explain the degree to which national policy still plays such an important role in the industrial policy area, but it also helps to provide for a wealth of experience from which to draw. It is important to promote flexibility, but not too much - change is a good thing, but in moderation; too much change can be destabilising. Globalisation and Integration The paper then continues by examining changing industrial environment and the degree to which, during the last 25 years, the process of European integration has been played out against a background of globalisation. It suggests that while the 1970s might be dubbed 'the age of the national champion', the 1980s was marked by the emergence of a series of large and successful multinational, but European, firms and the 1990s by a series of trans-continental mergers from which a number of truly global companies had emerged. These latter changes had been accompanied by a dramatic shift in control, away from country (and often family) based management systems towards systems run by professional managers and institutional investors. Given global oligopoly in many sectors, these companies operate in a world of intense competition in which costs and innovation are key factors. The search for economy has led to downsizing and outsourcing; the search for new products and new markets had spread operations widely around the globe. Together it makes for a world in which foreign direct investment (FDI) is fickle and seeking to compete on labour costs alone uncertain; in which small and medium sized businesses (SMEs) play an important role in supply chains, but have to be able to meet the quality control and 'just in time' requirements of the MNCs; and in which much hope (arguably too much hope) is centred upon the new, but still small, technology based firms (NTBFs) as potential MNCs for the future. Policy has adapted and will have to go on adapting to this changing environment It is this world in which the CEECs have to make their mark and compete. The paper notes that in response to these trends, policy in Western European countries has adapted. Over the last 25 years a number of clear trends are discernable: from intervention to laissez faire; from policy concentrating on large firms to policy concentrating on SMEs; from policy concentrating on national issues to policy concentrating on regional issues; from mission oriented, often sector based policies to diffusion oriented policies; from subsidies to physical capital to subsidies for human capital. Specific areas of industrial policy The paper then examines developments in a number of different policy areas: * FDI - foreign capital is playing a vital role in opening up and revitalizing the economies of the CEECs, but the lessons from Ireland, in particular, suggest that it pays to discriminate in favour of FDI which brings more than just jobs but also training in skills and management from which indigenous capabilities may emerge; * Competition policy - anti-trust, monopoly and merger control have emerged as three key areas of European policy. While the Commission is keen to see restructuring which makes the most of the advantages of the single market, it is equally necessary to ensure that positions of dominance are not abused. National policy here must play a significant, and complementary role, to EU policy; * State Aids policy - commonly regarded as the main core of industrial policy, this has been one of the areas where the Commission have in fact developed a powerful position, laying down clear guidelines, restricting the use of ad hoc measures and and generally dampening expectations of what national governments may do to help stricken sectors. * Regional policy and the Structural Funds - the paper highlights the growing role of regions in Europe in developing 'bottom-up' support networks linking SMEs not only with each other but also with local universities and technical colleges, local bankers and venture capitalists, local government and local big business. The Structural Funds have played a vital part in encouraging regional self-confidence, but to date too much money is swallowed up in capital intensive developments (roads and bridges) and not enough by innovation and human capital; * Science, technology policy and the Framework Programmes - the paper emphasizes the degree to which collaboration through the Framework Programmes has provided opportunities for scientists from the less developed countries of Europe to learn what world class science and technology means, but also points out that it is excellence in basic science that is the key attractor for high value MNC investments; Some more general policy conclusions The paper concludes by suggesting that there are a number of more general lessons for the CEECs to be drawn from the experience of 'older' member states: * It helps to have a clear vision of where you want to go and how you propose to get there, and the more open a government is about this, involving different 'stakeholders' in the preparation and revision, the more it becomes a shared vision and one that the population as a whole will support and 'buy into'; * Given the importance of creating added value in a knowledge-based economy, government, industry and academe become three complementary players. Their inter-relationship, sometimes referred to as the triple-helix relationship, underpin the process of economic development. * Over time the science base can become the nucleus of a successful economy both in terms of attracting investments bringing high value added jobs and in terms of creating skills and capabilities necessary to generate future investment. But the science base does not come for free. It requires continuous investment, and, while encouraging 1000 flowers to bloom has its attractions, few countries, and especially small countries, can excel at everything. International co-operation and focus of effort complement each other. * Equally university laboratories, firms and government research institutes can only benefit from co-operation if their scientists and engineers are well versed enough in science and technology to be able to understand and make use of modern techniques. Successful technology transfer depends upon person-to-person contact. Both public and private sectors have to invest enough in R&D to develop and maintain sufficient competence to remain members of the 'international club'. * The general maxim of devolving responsibilities to the lowest feasible level both accords with the principle of subsidiarity and helps to create a sense of involvement, shared vision and shared experience. It is vital, however, to have all level of government working in the same direction and complementing each others' policies by their own actions. * While SMEs become a vital part of the economy, it is important to remember that they too learn not from glossy brochures and government pronouncements but by word of mouth and personal contacts. Networking, at all levels is essential. It is futile to have Brussels, the national and regional governments, all vying with each other to develop such networks. In most cases it is simpler, more efficient and more economic to use the regional tier of government to stimulate networks among SMEs, and in a number of instances such a policy has been amazingly successful.

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