«Original citation: Owen, Geoffrey (2012) Industrial policy in Europe since the Second World War: what has been learnt? ECIPE Occasional paper, 1. ...»
The wider question that arises from the Finnish case is how far governments can steer their national industries towards particular technologies and what instruments of policy are available for them to do so. Some writers believe that the state can and should play an entrepreneurial role. Mariana Mazzucato uses US experience to support her argument that the government, far from stifling innovation and being a weight on the system, has “fostered innovation and dynamism in many industries, with the private sector often taking a back seat”.198 She points to the contribution made by the Defense Advanced Research Projects Agency (DARPA) to the development of the US computer and semiconductor industries. A similar role, she thinks, could be played by the Technology Strategy Board in the UK if it was given sufficient resources.199 It is true that US success in some high-technology industries stems in part from investments made by the Federal government. But many of these investments were aimed at military rather than commercial objectives, and the subsequent success of US companies in nonmilitary markets was not the direct consequence of government support.
The US economy has benefited from government support for basic research and from effective arrangements for the diffusion of technology from publicly financed research into industry. But the dynamism of America’s high-technology industries is underpinned by other institutions and policies, including a stringent antitrust policy and a financial system that facilitates new entry. The fact that most of the world’s leading internet firms are based in the US is partly due to the earlier development of the relevant technologies within the Department of Defense, but, as Shane Greenstein has written, the commercial era of the internet played to the strength of US-style market-based innovation. “Once released to commercial interests, the internet became the springboard for a dizzying area of applications that were not envisioned by the sponsoring government agencies”. 202 48 No. 1/2012
ECIPE OCCASIONAL PAPERA feature of the US innovation system is that the supportive institutions have for the most part remained in place over a long period. In analysing the sources of US success in pharmaceuticals and biotechnology Iain Cockburn and Scott Stern point out that the returns to life sciences investments by both private and public entities have taken decades to pay off and are only now coming to occupy a central role in the delivery of new therapeutics. “These payoffs reflect the slow-and-steady evolution of a complex set of institutions and technologies, supported by sustained and relatively stable public investments”.203 Industrial policy cannot be a “quick fix” for short-term economic or political problems. As decisions taken during and after the recent financial crisis have shown, governments come under pressure during recessions to protect employment in failing companies, and to bend the rules on public procurement in order to favour national suppliers. At the European level there are some indications that the rules on state aid for industrial restructuring are being applied more flexibly in order to give member states more freedom of action. Although there is no sign of a general retreat into Fortress Europe, some of the new financial regulations appear to discriminate against non-European firms. There is also some concern about the Commission’s proposals for a new policy on public procurement, which include the suggestion that access to EU markets will be made more difficult for countries that do not themselves have reciprocal open tendering systems.204 At the national level the recent controversy in the UK over the closure of the Bombardier train-making factory in Derby – attributed by some critics to an over-rigid application by the British government of the European Union rules on public procurement – reflects a resurgence in protectionist sentiment as the economic crisis persists.
The principal lesson from the events described in this paper are that industrial policy should be horizontal rather than sectoral, and embedded in a broader set of institutions and policies which promote competition, encourage innovation and facilitate industrial change. The ability of governments to steer the process of change in a way that favours their national companies is limited, and intervention of this kind can have damaging consequences. In the drive to create a more innovative Europe, public policy has a role to play but governments should be wary about trying to predict which particular technologies are more “promising”, and more worthy of support, than others. If industrial policy is used to channel resources into favoured sectors and away from less favoured ones, politicians and bureaucrats will be assuming a degree of foresight which they do not possess, and taking on a task which they are ill-suited to perform.
1. Henry Ergas, The importance of technology policy, in Partha Dasgupta and Paul Stoneman (eds), Economic policy and technological performance, Cambridge, 1987.
2. A further distinction can be made between technology policy and innovation policy, with the latter often linked to the concept of national systems of innovation, embracing all the policies and institutions that affect a country’s innovative capacity. The term “science policy” covers measures taken by governments to support scientific research in universities and public laboratories, and the training of scientists. See Bengt-Åke Lundvall and Susana Borrás, Science, technology and innovation policy, in Jan Fagerberg, David C. Mowery and Richard R. Nelson (eds), The Oxford Handbook of Innovation, Oxford, 2005.
3. Kenneth J. Arrow, Economic welfare and the allocation of resources for invention, in Richard R. Nelson (ed), The rate and direction of inventive activity: economic and social factors, Princeton University Press, 1962.
4. Ruggero Ranieri, The wide strip mill in Western Europe after 1945: transferring American technology, in Dominique Barjot (ed), Catching up with America: productivity missions and the diffusion of American
economic and technological influence after the Second World War, Presse de l’Université de ParisSorbonne, 2002.
5. This was discussed in a series of reports by the OECD, starting in 1966 with a general report on the technological gap, followed by studies of particular industries, including computers and electronic components. The danger that European industry would soon be dominated by giant US corporations was the theme of a best-selling book by Jean-Jacques Servan-Schreiber, Le Défi Américain, Ếditions Denoel, Paris, 1967.
6. In the case of steel, these problems stemmed in part from ill-judged decisions by governments to expand capacity in the late 1960s and early 1970s.
7. Jean-Pierre Dormois, France: the idiosyncrasies of voluntarisme, in James Foreman-Peck and Giovanni Federico (eds), European industrial policy, the twentieth-century experience, Oxford, 1999.
8. Henry Ergas, Europe’s policy for high technology: has anything been learnt? OECD, Paris, 1993.
9. The steel industry remained in the public sector for little more than two years; it was privatised by the Conservative government in 1953.
10. A second state-owned airline, British European Airways, was set up in 1946. The two companies were merged in 1974 to form British Airways, which remained in state ownership until privatisation in 1987.
11. Martin Chick, Industrial policy in Britain 1945-1951, Cambridge, 1998.
12. Keith Hayward, The British aircraft industry, Manchester University Press, 1989.
13. For an analysis of the Concorde project and the almost equally disastrous Advanced Gas-Cooled Reactor programme, see P.D. Henderson, Two British errors: their probable size and some possible lessons, Oxford Economic Papers, 29, 2, July 1977.
14. Timothy F. Bresnahan and Franco Malerba, Industrial dynamics and the evolution of firms’ and nations’ competitive capabilities in the world computer industry, in David C. Mowery and Richard R. Nelson (eds), Sources of industrial leadership, Cambridge, 1999.
15. John Hendry, Innovating for failure, government policy and the early British computer industry, MIT Press, 1989.
16. Martin Campbell-Kelly, ICL a business and technical history, Clarendon Press, Oxford, 1989, p189.
17. The three principal reactor types competing for the nuclear power market were light water, heavy water, and gas-graphite. Robin Cowan, Nuclear power reactors: a study in technological lock-in, Journal of Economic History, 50, 3, September 1990, pp541-567.
18. John Beath, UK industrial policy: old tunes on new instruments? Oxford Review of Economic Policy, 18, 2, 2002.
19. M. W. Kirby, Supply-side management, in Nicholas Crafts and Nicholas Woodward (eds), The British economy since 1945, Oxford, 1991, p250.
20. David Edgerton, The ‘White heat’ revisited: the British government and technology in the 1960s, Twentieth Century British History, 7, 1, 1996, pp53-82.
21. Martin Campbell-Kelly, ICL, a business and technical history, Oxford, 1989, pp249-250.
22. English Electric was one of the UK’s three leading electrical/electronics groups, the others being Associated Electrical Industries (AEI) and the General Electric Company (GEC).
23. The two largest private-sector shareholders in ICL were English Electric (later acquired by GEC) and Plessey, each of which held 18 per cent.
24. The Concorde entered service in 1976 with the two state-owned airlines, Air France and British Overseas Airways Corporation. Only twenty aircraft were built.
25. Keith Hayward, British aircraft industry, Manchester University Press, 1989, p50.
26. Robin Cowan, Nuclear power reactors: a study in technological lock-in, Journal of Economic History, 50, 3, September 1990.
27. Douglas Hague and Geoffrey Wilkinson, The IRC, an experiment in industrial intervention, George Allen & Unwin 1983.
28. Edward Heath, The course of my life, the autobiography of Edward Heath, Hodder & Stoughton, 1998.
29. Jim Tomlinson, Government and the enterprise since 1900, Oxford, 1994, p301.
30. Martin Campbell-Kelly, ICL, a business and technical history, Oxford, 1989, p299. Despite its protective attitude towards ICL, the Heath government was generally eager to encourage inward investment, especially from Japan, as a means of strengthening weak British industries.
31. The regeneration of British industry, Department of Industry, White Paper Cmd 5710, August 1974.
32. Daniel C. Kramer, State capital and private enterprise, the case of the UK National Enterprise Board, Routledge 1988.
33. British Leyland: the next decade, The Ryder report, March 1975.
34. Rolls-Royce is one of the few British companies which appears to have improved its performance during the period when it was controlled by the state. Following privatisation in 1987 it has done well both in profitability and in market share.
35. N.K.A. Gardiner, The economics of launching aid, in Alan Whiting (ed), The economics of industrial subsidies, HMSO, 1976.
36. Simon Taylor, Privatisation and financial collapse in the nuclear industry, Routledge, 2007, p32.
37. Inmos was set up in 1978. Celltech was conceived in that year, but the formation of the company did not take place until after Margaret Thatcher’s victory in the 1979 election.
38. W.B.Willott, The NEB involvement in electronics and information technology, in Charles Carter (ed), Industrial policy and innovation, Heinemann, 1981.
39. A successful British industry in the 1960s and 1970s was pharmaceuticals, where the government made no attempt to create a national champion. When Boots and Beecham made rival bids for Glaxo in 1972, the Monopolies Commission ruled that all three companies were large enough to compete profitably in the industry, and that a reduction in the number of competing sources of innovation would be against the public interest. Beecham Group and Glaxo Group, Boots and Glaxo Group, A report on the proposed mergers, Monopolies Commission, HMSO July 1972.
40. One example was the abortive attempt to rejuvenate the machine tool industry; none of the policy instruments, including grants for developing new machines and the promotion of mergers, prevented the continuing decline of the industry. Anne Daly, Government support for innovation in the machine tool industry;