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The objective of this report is to establish state-of-the-art industrial policy at EU level: why is it attracting renewed interest, what is its form, instruments and underlying thrust and what are its expected and recorded effects? In the following, we look at ideas, interests and institutions shaping industrial policy at EU level. “Ideas” refer to the scholarly and public policy discussions, “interests” are about the gainers and losers from policy shifts, and the “institutions” are the forums in which negotiations take place, with the resulting policy arrangements forming an EU industrial policy. Chapter 1 presents the nature and extent of the challenges facing Europe in terms of competitiveness, together with different options justifying the activation of an EU industrial policy and a set of available instruments; it reviews ideas at the basis of the development of an EU industrial policy. Chapter 2 establishes the contours and contents of the current initiatives, programmes and policies that contribute (or could contribute) to the formulation of an EU industrial policy: as such it deals with the institutional and policy framework where an EU industrial policy could develop. Chapter 3 draws a conceptual map of the positions of stakeholders on the merits and weaknesses of the present arrangements and desired improvements; it tries to determine where interests could sway policy developments. A concluding chapter sums up the main findings and puts forward some suggestions for the future.

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 Industry is the backbone of the European economy. Although declining in the overall economy, manufacturing accounts for a disproportionate share of exports and R&D.

 The decline in manufacturing’s share of GDP is a worldwide trend that has undergone rapid deterioration following the financial crisis. This is especially true in some European countries.

 Member States are characterised by marked differences in terms of overall level of competitiveness as well as share of manufacturing in GDP. Regional variations are also pronounced.

 An industrial policy could in principle deal with negative trends in industrial employment and output. International practices show that there is a range of objectives assigned to industrial policy, there are multiple orientations, and many different policy instruments are available.

 A new paradigm of industrial policy is emerging. It emphasises the role of the public-private partnership and blurs old dichotomies such as the opposition between horizontal and vertical/sectoral industrial policies, top-down and bottom-up policy designs, and manufacturing vs. broader targets.

This chapter is intended to set the scene in which the debate about an EU industrial policy takes place. It examines factual evidence on the nature of the challenges that an EU industrial policy needs to tackle in terms of growth and competitiveness, opens the toolbox available in principle to policymakers wishing to develop an industrial policy at EU level, and reviews different arguments in literature on the need for an industrial policy that could be used to justify an EU industrial policy.

2.1. The challenges at stake This section provides concise and up-to-date evidence on the state of EU competitiveness in general, and of that manufacturing in particular.

As reported by several studies, industry 1 is the backbone of the EU economy and a driver for its international competitiveness. It significantly contributes to economic growth, employment and innovation activities and, thanks to its spillover effects on other sectors, it benefits the overall economy2.

The role of industry as the hub of the European economy and competitiveness is underlined by the fact that the manufacturing sector accounts for 49% of intermediate input transactions in the EU economy, while its shares of the total EU value-added and For the purpose of this study, a broad definition of industry is adopted, which means that it is defined not only as manufacturing, but it covers a broader set of activities, including mining, quarrying and energy activities.

Business Europe (2014), Industry Matters: Recommendations for an Industrial Compact, Brussels. Institute der deutchenWirtschaft Köln (2013), Industry and a Growth Engine in the Global Economy, Cologne. European Parliament (2014) How can European Industry Contribute to Growth and Foster European Competitiveness?, Study for the ITRE Committee.

PE 536.320 11 EU Industrial Policy: Assessment of Recent Developments and Recommendations for Future Policies employment amount to 15% and 14%, respectively.3 Regarding employment, manufacturing directly provides 32 million jobs in the EU and indirectly accounts for an additional 20 million jobs in related sectors.4 The productive level of the manufacturing sector is about 15% higher than in the service sector (an hour generates nearly €32 of added value). Moreover, it is responsible for 65.3% of R&D and 49.3% of innovation investments and, accounting for 75.6% of merchandise exports and 57% of total exports, industrial companies clearly drive Europe’s international economic performance.

Several indicators show unfavourable or negative trends, which are particularly worrying given the importance for the EU of industry in general, and manufacturing in particular.

However, the picture is variegated. First, as far as measurement of competitiveness is concerned, the WCYB2014 results5 show that EU28 countries such as Sweden, Germany and Denmark are significantly competitive by ranking 5th, 6th and 9th, respectively, among the 60 countries considered.6 Conversely, there are countries such as Croatia, Slovenia, Greece, Hungary, Portugal and Italy, which still lag behind in the WCYB competitiveness ranking. Interestingly, there is also a regional dimension to differences in competitiveness levels.

The 2013 edition of the Regional Competitiveness Index (RCI) developed by the European Commission reveals substantial differences in competitiveness within some countries. The map below shows a polycentric pattern with strong competitive capital and metropolitan regions in many parts of Europe. With the exception of the less developed Member States in Central and Eastern Europe, some capital regions are surrounded by similarly competitive regions.

Figure 1: Figure 1: Regional Competitiveness Index, 2013. Results across EU Regions Note: The higher the class, the higher the level of regional competitiveness.

Source: Annoni P. and Dijkstra L.(2013) Calculations by Institute der deutchenWirtschaft Köln (2013) on the basis of Eurostat (2013), OECD (2013), WIOD (2013), WTO (2013).

Including Agriculture (3,737), Mining (180), Utilities (513), Communication (362), Financial Services (405), Private and Public Services (6,483), Business Services (4,092), Logistics (4,339) and Construction (293).

Calculations by Institute der deutchenWirtschaft Köln (2013) on the basis of Eurostat (2013) and WIOD (2013).

IMD World Competitiveness Centre (2014), IMD World Competitive Yearbook 2014, Lausanne, Switzerland.

60 countries are ranked from the most to the least competitive.

12 PE 536.320Policy Department A: Economic and Scientific Policy

In what follows several key features characterising the added value of the EU industry sector, and manufacturing in particular, are briefly presented.

A first remark concerns the continuing long-term shift from agriculture and manufacturing towards services. This is a worldwide trend, which has accelerated in the last decade, but the largest decline is recorded in the EU. Market services have grown to a point where they account for nearly half of the EU gross value-added. The share of non-market services7 increased in 2013 to 23% of EU28 GVA, while manufacturing activities declined to around 15%. Construction, and mining and quarrying remained roughly stable at 6% and 1%, respectively.

Figure 2: Growth in value-added, by sector (2000-2013) 100% 90% 21.1 23.0 80%

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Data from the World Input-Output database (WIOD) allow for a comparison between the European economies and those of other countries. They show that Asian economies (China and Japan) and BRII countries (Brazil, Russia, Indonesia and India) are more specialised in manufacturing than European countries (see Figure 3 below).

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They include branches covering general public services, non-market education, research and health services provided by general government and private non-profit institutions, domestic services and other non-market services.

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Source: Eurostat As far as openness to international trade and the ability to integrate in global value chains are concerned, there is evidence that smaller countries tend to be more integrated in international trade, whilst the larger ones normally have lower trade-to-GDP ratios.

European Commission (2013), Competing in Global Value Chains: EU Industrial Structure Report 2013, DG Enterprise and Industry.

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Source: European Commission (2013)9 As shown in Figure 6 below, a rise in labour productivity occurred in Ireland, Sweden and Austria. Conversely, decreases were recorded for the Netherlands, France, Italy and Belgium.

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Source: Authors based on Eurostat data.

Note: Data are not available for Croatia or Luxembourg.

Over the last decade investments in R&D have significantly increased across Europe, but, overall, the volume of human and financial resources devoted to R&D in European countries is relatively smaller than that of the EU’s main competitors (see Figure 7 below).

European Commission (2013), Commission staff working document, Industrial Performance Scoreboard and Member States’ Competitiveness Performance and Implementation of EU Industrial Policy: A European 2020 initiative, Brussels.

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Source: OECD, Eurostat.

R&D volumes in million 2005 US$ - constant prices and PPP.

Generally, the EU as a whole faces considerable challenges in terms of competitiveness, mainly arising from a worrying trend characterising the evolution of its manufacturing basis, which is so important as a source of growth and development. That said, there appear to be considerable variations within the EU at country and regional levels, which show distinct diagnoses and would possibly call for distinct remedies.

2.2. An industrial policy: what is it for and how does it work?

Against the background depicted above, what could an industrial policy do? What are its main objective(s)? Is it competitiveness, growth, jobs? What are the intermediate objectives to reach these main objectives? Is it a new specialisation profile, structural changes? What are its targets? Is it just manufacturing? And what are its main instruments? This section reviews different possibilities and options – as identified empirically through an examination of international practices – to establish a sort of ideal toolbox at the disposal of policymakers wishing to develop an EU industrial policy.

A valid starting point is to acknowledge that no generally accepted definition of industrial policy exists in literature. Some definitions are very broad, like “all policies designed to support industry” (Pinder, 1982) 10, while others are quite narrow, such as “set of Including fiscal and monetary incentives for investment, direct public investment and public procurement programmes, incentives for investment in research and development, major programmes for the creation of

16 PE 536.320Policy Department A: Economic and Scientific Policy

governmental actions designed to support industries that have major export potential and job-creation capacity, as well as the potential to directly support the production of infrastructure” (Reich, 1982)11. Differences can be found in the definitions adopted by international organisations. For instance, the UNCTAD 12 defines industrial policy as a “concerted, focused, conscious effort on the part of government to encourage and promote a specific industry or sector with an array of policy tools”; 13 the World Bank considers industrial policy as “government efforts to alter industrial structure to promote productivitybased growth”14.

A commonly used and widely cited definition is that of Pack and Saggi (2006), 15 which is adopted and slightly revised by the OECD in order to encompass the variety of uses that are commonly made of the term industrial policy. In the spirit of a broad and inclusive definition, the OECD identifies industrial policy as “any type of intervention or government policy that attempts to improve the business environment or to alter the structure of economic activity towards sectors, technologies or tasks that are expected to offer better prospects for economic growth or societal welfare than would occur in the absence of such intervention”16.

Bearing in mind this definition, a large number of variations are observed. For a start, it is possible to classify industrial policies on the basis of objectives such as a) economic objectives: improving the efficiency; b) social objectives: enhancing equity; c) environmental objectives: ensuring sustainability; and d) political objectives: protecting specific interests (Pianta 2009). However, policies often have multiple aims and may not fit neatly into one category or another. A useful classification looks at whether the instruments used for industrial policy operate mainly on the product market or whether they are focused on factor markets – labour, capital, land and technology. Other differences are found in the orientation of the policies: whether they are horizontal/functional or vertical/selective, time-constrained or longer term, strategically targeted or in response to market pressure, conditional or unconditional, dealing with comparative advantages or exploring new areas, etc.

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