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«Original citation: Owen, Geoffrey (2012) Industrial policy in Europe since the Second World War: what has been learnt? ECIPE Occasional paper, 1. ...»

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2.5.1. THE RISE OF JAPAN When the Japanese economic miracle began in the 1950s it was first attributed to low labour costs. Then, as companies such as Sony and Toyota increased their share of Western markets, attention focused on Japanese management practices – lean production, continuous improvement, just-in-time supply systems. But there was also a perception that, in catching up with the US in high-technology industries, the Japanese had developed an industrial policy that avoided the mistakes made in the UK and France.91 In computers, for example, the Japanese authorities, instead of creating a single national champion, had encouraged the established companies in the industry to cooperate in pre-competitive research but to compete fiercely against one another in the market. This policy, known as controlled competition, had originated before the war in telecommunications, and was applied after 1945 to other high-technology industries.92 Japan’s experience, and that of other late-industrialising East Asian countries which partially imitated Japan, suggested that industrial policy could be a source of competitive advantage if it was well designed and skilfully implemented. A distinctive feature of the East Asian approach, especially in Korea and Taiwan, was the focus on exports both as an objective and as the criterion which determined whether or not companies would receive support from the state. In Europe governments tended to continue supporting their national champions in the hope that they would become competitive but without making support contingent on performance.

The rise of Japanese industry seemed unstoppable at the end of the 1970s, prompting some extravagant predictions such as those contained in Ezra Vogel’s best-seller, Japan as Number One. In the blurb to this book a former US ambassador to Japan wrote: “Japan has a more smoothly functioning society and an economy that is running rings round ours”. The supposed advantages of the Japanese model prompted several initiatives in European industrial policy during the 1980s.

3. THE SECOND PHASE: FROM THE 1980S TO THE EARLY 2000S In the early 1980s the term “eurosclerosis” came into common use. Most European countries were suffering from rising unemployment and high inflation; it was clear that new policies were needed to inject greater dynamism into the European economy. This period coincided with a shift in macroeconomic policy away from Keynesian demand management towards a stronger focus on monetary stability and low inflation. In microeconomic policy the disappointing results of direct intervention in industry in the earlier post-war decades strengthened the argument for a greater reliance on markets.

At the European level the change in thinking about how economies should be organised was reflected in a series of measures aimed at removing the remaining barriers to the crossborder movement of goods and capital. But alongside the drive for a more integrated European market there was also a revival of interest in European industrial policy. While the “technology gap” with the US was still a matter of concern, Japan seemed to have evolved an approach to industrial competitiveness which could usefully be imitated in Europe. In high-technology industries, in particular, Japanese-style inter-company collaboration was seen as one of the ways in which European industry could recover lost ground.

Admiration for Japan was not confined to Europe. During the 1980s several economists in the US, worried about the inroads which Japanese companies were making in industries

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previously dominated by American firms, argued that an industrial policy along Japanese lines was essential if a continuing decline in high-technology sectors was to be avoided.93 In 1987 the Department of Defense agreed to fund a consortium of semiconductor producers, known as Sematech, in the hope that through cooperative research the industry could develop cutting-edge technologies which would put them ahead of their Japanese competitors.

Sematech did not achieve what its sponsors had hoped, partly because the participants could not agree on what the research programme should consist of.94 The organisation continued to exist, but its role became one of encouraging closer cooperation between semiconductor producers and their equipment suppliers. The subsequent revival of the US semiconductor industry owed little to inter-firm collaboration or to support from the federal government. 95 Whether industrial policy contributed significantly to Japan’s economic success in the 1970s and 1990s remains a matter of controversy96, but by the early 1990s the attractions of the Japanese model were in any case fading as that country entered a period of economic stagnation that was to last for more than a decade. The pendulum swung back to the US. From the mid-1990s onwards there was a remarkable surge in US productivity growth, and the principal source of the improvement was the speed at which American firms were exploiting the latest advances in information technology, including the internet. After a long period in which Europe had been getting steadily closer to US productivity levels, the gap began to widen; Europe seemed stuck in the slow lane while the US was roaring ahead.97 The strength of the US was now seen to lie, not in the existence of giant companies such as IBM or General Motors, but in a set of institutions and policies that encouraged the exploitation of new technologies and the rapid redeployment of resources from low-growth to high-growth sectors of the economy.





Although the enthusiasm for the “new economy” went too far, creating a stock market bubble in the shares of internet-related companies which collapsed in 2000, this did not undermine the attractions of the US model. In the years leading up to the financial crisis of 2008-09 the US lead in high-growth, high-technology industries seemed unassailable, prompting European governments to try to reshape their institutions along American lines.

3.1. THE UK Margaret Thatcher, who became Prime Minister in May 1979, is generally seen as the standard-bearer for the “neo-liberal” philosophy which had a profound influence on economic policy, in developing countries as well as in the industrial world, during the 1980s and 1990s. Although the continuities with previous British administrations were greater than is often supposed, it is certainly true that in some key areas “Thatcherism” involved a reordering of economic priorities. The focus was on controlling inflation and on keeping public expenditure under control, even at the expense of higher unemployment. At the micro-economic level, competition was to be the principal instrument for improving industrial efficiency. Most of the industries that had been nationalised by Labour, including steel, shipbuilding and aerospace, were privatised. More striking was the decision to privatise and deregulate state-owned utilities which had previously been regarded as natural monopolies and unsuitable for private ownership. The most spectacular success was the privatisation of British Telecom in 1984.98 An important consequence of privatisation was that the utilities were no longer obliged to buy equipment from British suppliers; what had been a cosy supplier/customer relationship became a much more competitive market. In telecommunications, for example, British Telecom 24 No. 1/2012

ECIPE OCCASIONAL PAPER

brought in a Swedish company, Ericsson, to compete against the British suppliers of switching equipment. After electricity privatisation in 1990, Siemens and other Continental power engineering companies became major suppliers to the newly privatised generating firms.

Whereas Labour had sought to nurture and protect British-owned firms in supposedly strategic industries, the Thatcher government was only too pleased to sell off loss-making national champions to foreign acquirers. The Prime Minister raised no objection when Ford bought British Leyland’s Jaguar subsidiary in 1984, and two years later she might have sold the rest of British Leyland to Ford and General Motors had there not been a sudden upsurge of patriotic fervour on the Conservative back benches which forced her to withdraw the proposal. 99 Rover, the successor company to British Leyland, was sold to British Aerospace and later re-sold to BMW of Germany in 1994.100 The Leyland truck business was bought by Paccar of the US in 1998.

Mrs Thatcher wanted to make the UK more attractive to foreign investors, and she was indifferent as to whether their investment took the form of building new factories or acquiring British companies. There was a warm welcome for the three Japanese companies, Honda, Toyota and Nissan, when they decided to build factories in the UK as the base for supplying European markets. Thanks to Mrs Thatcher’s reforms the labour relations climate had become more stable and the Japanese companies achieved productivity levels in their British factories comparable to their domestic plants.

The government also sought to encourage home-grown ventures, but to do so not by supporting particular industries or firms but by creating an environment that would be more supportive of entrepreneurs. The growth of the venture capital industry was stimulated by tax changes, and the government persuaded the London Stock Exchange to improve the supply of equity finance for young, fast-growing firms. A partial success was the rise of new biotechnology firms, seeking to commercialise the results of academic science. (This group included Celltech, now wholly owned by private investors.) Although none of these firms were as successful as their counterparts in the US, they reflected a shift away from the earlier focus on creating bigger industrial groups. In information technology the 1980s saw the emergence of a promising cluster of innovative firms around Cambridge University, in the area that became known as Silicon Fen.101 The hands-off policy towards industry did not preclude some continuing support for investment in advanced technology. In information technology, for example, the government accepted the argument that some injection of public funds might be necessary to strengthen a sector in which British firms were lagging behind their American competitors. The Alvey programme, aimed at encouraging collaborative projects between industry and academia, was set up in 1983 with a budget fixed at £350m over five years of which £200m was to come from the taxpayer.102 The programme increased the amount of spending on information technology research, in both public and private sectors, but did little to improve the international competitiveness of British companies.103 The Thatcher government sold the NEB’s shareholding in ICL soon after taking office, but it was still willing to support the company, on a strictly limited basis. ICL was faced with a widening gap between its profits and the amount of R & D expenditure that was necessary to keep its products competitive. With private investors reluctant to put up more funds, the government agreed to provide a two-year guarantee for a £200m loan which ICL had negotiated with the banks.104 The loan was subsequently repaid without the guarantee having to be used, and the government was not involved in ICL’s subsequent decisions. In 1984 Standard 25 No. 1/2012

ECIPE OCCASIONAL PAPER

Telephones and Cables (STC), a telecommunications equipment company, took over ICL, which thereby became part of a diversified electronics group. The merger did not work well, and in 1990 STC sold 80 per cent of ICL to Fujitsu of Japan. Under Japanese control the company shifted the balance of its business towards information systems and services, with only a limited involvement in hardware.105 Several other branches of the electronics industry passed into foreign control during this period. In consumer electronics, several TV set producers had formed alliances during the 1970s with the increasingly dominant Japanese manufacturers, and the National Economic Development Office had hoped that these alliances might provide the basis for a modern, competitive industry with a substantial British component. By the end of the 1980s, however, these joint ventures had passed into the control of the Japanese partners, while ThornEMI, the largest British manufacturer, sold its TV set business to Thomson, the state-owned French electronics group. “The prospect of a government-backed and subsidized modernisation programme which NEDO had envisaged in 1978 had given way to a non-interventionist policy in which the Thatcher government left adjustment almost entirely to the firms”. 106 In semiconductors, as noted earlier, Inmos was sold to SGS-Thomson, the Franco-Italian group, leaving GEC as the only significant British-owned producer. GEC did not compete in the high-volume segments of the semiconductor market, specialising mainly in devices used in military applications. The bulk of the market was supplied either by imports, principally from the US and Japan, or by the local subsidiaries of non-British firms such as Siemens and Fujitsu. The argument on which the creation of Inmos had been based, that the UK needed a nationally-owned producer of semiconductors competing in the mainstream of the industry, no longer carried weight with the government.

The only industry where the Thatcher government deemed national ownership to be essential, on grounds of national security, was aerospace. British Aerospace and Rolls-Royce were privatised, but they were protected from foreign takeover by special provisions in their articles of association. The government did not seek to influence their strategy, but they continued to enjoy close links with Ministry of Defence and to receive launch aid for civil projects.

Outside aerospace, the government was content to allow the structure and ownership of industry to be determined by the market. Some observers criticized this approach on the grounds that it neglected “the central importance of building durable technological capabilities”.107 Not only was government spending on R & D cut back, but “by privatising hightechnology producers (mainly in aerospace) and users (utilities) the government lessened, by choice, its direct influence over technological decisions”. Its acquiescence in the sale of Inmos and ICL to non-British companies reflected “a growing reluctance to play a part in identifying and supporting the technologies that may have strategic value, whether in terms of supply security or their potential economic importance in the future”. These arguments carried no weight with the Thatcher government.



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