Innovation and Industrial Policies

Joël-Thomas Ravix, Marc Deschamps

• Publisher: Wiley-ISTE
• Year: 2019
• Print ISBN:
  9781786300720
• Edition: 1
• eBook ISBN:
  9781119681106
• Topic: Business
• Subtopic: Management
• Index: Business

Microeconomic policies – in particular, industrial and innovation policies – are appraised and enforced within the framework of the rules relative to free movement and competition. This book introduces the current wave of innovative industrial policies in France. By giving a historical context to their development, the evolution of key economic concepts and theories are put into perspective. In addition, with the aim of articulating horizontal and vertical interventions, this book analyzes the difficulties for public authorities when it comes to linking these ?matrix? policies.

1
Industrial Policy and Competition

Economic historians generally agree that about nine thousand years ago, the world underwent a first mutation with the beginning of the first agricultural revolution characterized by the domestication of certain animals, which thus allowed mankind to transition from hunter-gatherers into farmers. From the second half of the 18th Century onwards, three industrial revolutions followed one another. The first, generally dated between 1760 and 1840, marked the era of mechanized production with, in particular, the invention of the weaving machine, the steam engine and the construction of the railways. The Second Industrial Revolution, between the end of the 19th Century and the Second World War, allowed mass production thanks to the control of electricity as well as coal and the creation of assembly lines. Finally, from the 1960s onwards, a third industrial revolution took place with electronics and information technology.

It is these developments that make it possible to live better in today’s world than at any other time in history. Today, people are doing better, are richer and live longer, as Angus Deaton (2013) points out. In a striking summary, he notes that “today in sub-Saharan Africa, children are more likely to survive to age 5 than were English children born in 1918” (Deaton 2013, p. 8). The historian David Landes (1988, p. 5) had already marked this progress by indicating the following trait: “The Englishman of 1750 was closer in material things to Caesar’s legionnaires than to his own great-grandchildren”. As an illustration, the correlation between the changing world population and scientific discoveries can be seen in Robert Fogel’s (1999) graph, which is taken up by the World Bank (2008), as shown in Figure 1.1.

Figure 1.1. World population growth and some major events in the history of technology between -9000 BCE and today

(source: World Bank 2008, p. 108)

Yet, despite this prodigious change, the world today faces two major, interrelated facts that began in the 1970s in industrialized countries: the increase in inequality within each country (Bourguignon 2012; Deaton 2016) and the deceleration of economic growth. This second situation had not yet arisen 10 years ago thanks to developments in emerging countries such as BRIC (Brazil-Russia-India-China), which were driving global growth, even though it was generally agreed that they were only catching up with more industrialized countries. However, since the Great Recession, the world economy has grown at a rate of about 3 to 3.5% per year, which is below the post-Second World War average.

In all industrialized countries, the problem of economic growth refers to the question of industry. Once the “engine” of growth, these countries are now experiencing deindustrialization; that is, simultaneously a decline in industry’s share of value-added creation, a decline in the active population in industry and a decline in the market share of exports. France offers a topical example in this regard, with the share of industry decreasing from 24.6% in 1970 to 14.1% in 2016, as shown in the graph in Figure 1.2.

Figure 1.2. Evolution of the share of industry (including energy) in value added for France between 1970 and 2016 (OECD data)

This deindustrialization is also reflected in employment figures, which have declined from 15% to 10% of the working population over the past 20 years, as well as in the trade balance, which has gone from a surplus to a chronic deficit. In other words, in 30 years, French industry has lost about two million jobs and, since the early 1970s, it has lost almost half of its industrial population (between 1975 and 2012, according to INSEE, the population employed by industry – excluding construction – fell from 6,175 000 to 3,180,000, a drop of 48.5%). French deindustrialization is also perceptible, as Jean-Luc Gaffard (2017) points out, in the figures for the number of robots (1.22 per 100 jobs in the manufacturing sector compared to almost twice as many in Germany in 2015) and decommissioning rates, which reveals that the productive apparatus is not being modernized. France would thus have become the least industrialized country in Western Europe, as Pierre-André Buigues (2016) notes.

This phenomenon of rapid deindustrialization, the consequences of which are economic, social, political and cultural, explains why, even though industrial production has continued to increase in volume and added value, the evolution of industry seems to be associated in the minds of the French with plant closures, relocation, job losses, brownfields and the decline of their country.

By consensus, economists agree that this evolution has its origin in the conjunction of three main explanatory factors:

• – rapid progress in industrial sector productivity;
• – the outsourcing by industrial companies of certain activities to companies in the service sector (the so-called “servitization” phenomenon);
• – the loss of industrial activity to other territories due to international competition.

According to Lila Demmou (2010), the first two factors contributed 30% and 25% respectively to the destruction of industrial jobs over the period 1980–2007, with foreign competition accounting for nearly 45%.

While everyone now agrees on the general observation that France is deindustrialized, as evidenced in particular by the reports of Jean-Louis Beffa or Louis Gallois (Beffa 2004; Gallois 2012), the same cannot be said for the assessment of this development. Two blocks face each other, as Cohen and Buigues (2014) point out.

On the one hand, some consider this to be a development similar to that of agriculture. At the beginning of the 19th Century, two thirds of production came from agriculture, whereas it accounted for only 2.16% of value added in 2016. However, no one today believes that it is necessary to launch an agricultural reconquest and return to the place it previously occupied in the French economy. A France composed of fewer but better-equipped farmers corresponds, as Agnès Bénassy-Quéré (2012) points out, to a higher per capita income for farmers and cheaper food. Farmers of the past went to the factory and contributed to the development of a mass manufacturing industry leading to technological innovation and lower prices. From this perspective, deindustrialization would be the product of a “law of economic evolution by which, the richer a country gets, the fewer industrial products and the more services it consumes, the more it abandons routine tasks to keep the sophisticated tasks of creation, design, development, but also marketing and commercialization”, according to the presentation of this argument by Cohen and Buigues (Cohen and Buigues 2014, p. 38).

In support of this position, we can find in particular the analysis of Jagdish Bhagwati (2007), who advocates an agnosticism in terms of specialization; the analysis by Patrick Artus and Marie-Paule Virard (2008) for whom the weight of industry will inevitably decrease in developed countries as a result of capital migration to emerging countries that have lower production costs, increased domestic demand and significant productivity thanks to technological catch-up; or Augustin Landier and David Thesmar’s (2013) analysis, according to which the higher a country’s standard of living is, the less weight industry has.

On the other hand, other authors consider that deindustrialization is a serious and worrying phenomenon because it could not only undermine the potential for innovation, but also lead to a permanent external deficit caused by the difference left over from a deficit in the balance of goods for which the exports of services cannot compensate. This analysis, to which Cohen and Buigues (2014) subscribe, is based on the fact that industry is at the heart of the innovation and R&D process. They cite in particular the analysis developed by Suzanne Berger (2013), according to which deindustrialization can lead, beyond a certain threshold, to the dismantling of a productive ecosystem. Indeed, when it is no longer possible to travel back and forth between scientific laboratories and factories, incremental innovation is prevented. However, if such a spiral starts, France will be marginalized in terms of technological innovation, which will also have an impact on increasing productivity in other sectors, since industry remains the main source of productivity for both agriculture and services.

In view of these elements, Cohen and Buigues (2014, p. 66) clearly oppose the fabless fab strategy (i.e. an industry without a factory) and stress that “there is no autonomous development of high value-added services against a background of complete deindustrialization”. In the same vein, Bénassy-Quéré (2012) points out that deindustrialization raises three problems:

• – services are on average traded less between countries than industrial or agricultural goods;
• – productivity growth in services is slower than in industry;
• – services may not have the same capacity to drive growth as industry or agriculture.

In the face of this disagreement over the seriousness and consequences of deindustrialization for the French economy, questions relating to the need, objectives and modalities of an industrial policy are also clearly the subject of heated debate. However, in many respects, it can be considered that Jean Tirole’s (2016) treatment of these issues provides a synthesis of the current dominant view among economists.

Three points deserve to be highlighted at this level. First, Tirole chooses to address the issue of industrial policy in a chapter entitled “Competition and Industrial Policy”, thus revealing both a link between the latter and a hierarchy. Second, after stressing the virtues of competition and competition policy, he asks whether competition is always a good thing, and writes clearly: “The answer to this question is unequivocally ‘no’” (ibid., p. 477). Third, he points out that “anyone who asks about ‘industrial policy’ must first think about the nature of ‘market failure’; otherwise, one wonders why the State intervenes. But simply analyzing a market failure is not enough” (ibid., p. 481). Then he adds:

There is also evidence that competitively neutral industrial policies appear to be more favorable to growth than other industrial policies (ibid., p. 481).

Then comes the author’s final position on industrial policy, which is set out on the basis of an observation and then provides “guidelines”. The observation, taken from Dani Rodrik, is as follows: “Whether or not we like industrial policy, governments will continue to make it and the subject will not disappear overnight” (ibid., p. 488). In practical terms, Tirole then states that the aim is to “make these initiatives as successful as possible, even if we know that our knowledge in this area will continue to evolve in the future” (ibid., p. 488), and proposes to adopt seven guidelines on this subject:

1. 1) identify the reason for the market failure and respond;
2. 2) use independent and qualified expertise to select projects and recipients of public funds (protected ex ante evaluation of policy intervention);
3. 3) be attentive to supply and not only to demand;
4. 4) adopt a neutral industrial policy in terms of competition;
5. 5) evaluate ex post and disseminate the results of the evaluations;
6. 6) strongly involve the private sector in risk-taking;
7. 7) understand the evolution of our economies.

Tirole’s position on industrial policy may surprise the reader as it contrasts in some respects with the aspirations of industrialists (such as Didier Lombard (2017)), the conclusions of the various official reports on industry over the past 10 years, the positions of political leaders, and the feelings of the French population. However, it seems to us to correspond perfectly to the dominant analysis among economists and reflect developments in industrial policy and competition from the 1970s to the early 21st Century.

Therefore, starting from this conception and all the previous elements, the purpose of this chapter is to demonstrate that if competition policy was initially conceived, until the mid-1970s, as one of the cogs of industrial policy, it gradually came to completely condition the State’s sphere of action by introducing its logic and purpose. As a result, industrial policy today has two characteristic features: on the one hand, it is conceived in a hollow form based on competition policy and, on the other hand, it is fragmented in the sense that it no longer comes under the control of an upstream state source, clearly identified becaus...

Table of contents

• Cover
• Table of Contents
• Acknowledgements
• Introduction
• 1 Industrial Policy and Competition
• 2 Competition and Innovation Policy
• 3 Reindustrialization Through Innovation
• Conclusion
• References
• Index
• End User License Agreement