Industrial Policy Beyond the Crisis

Regional, National and International Perspectives

David Bailey, Helena Lenihan, Josep-Maria Arauzo-Carod

• Publisher: Taylor & Francis
• Year: 2014
• eBook ISBN: 9781317979005
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

After years of official disrepute, industrial policy (IP) is back in vogue at regional, national and international levels driven by concerns over competitiveness, globalisation, de-industrialisation, unemployment and the comparatively slow growth of the EU economy especially in this post-recession phase. At the same time, IP has been seen as a catalyst for designing economic recovery strategies at regional, national and international levels, as well as being a concerted strategy to develop new 'clean-tech' industries to tackle environmental challenges.

If anything, the recent global recession and credit crunch have highlighted the fragility of some states' and localities' economic development paths and the unbalanced nature of their economies, in terms of an over-reliance on sectors such as retail, financial services, and construction, to the detriment of manufacturing. This also suggests an accompanying need for greater economic diversity so as to avoid over-dependencies on certain sectors, and a better balance of ownerships forms.

But what should be the shape of IP in the wake of the crisis and how can IP rebalance economies, help support sustainable development and catalyse new technologies and innovations whilst learning lessons from past experience and debate? This edited volume examines these questions through a wide range of diverse contributions from expert international authors.

This book was originally published as a special issue of Policy Studies.

Industrial policy after the crisis

After years of official disrepute, industrial policy (IP) is back in vogue at regional, national and EU levels driven by concerns over competitiveness, globalisation, de-industrialisation, unemployment and the comparatively slow growth of the EU economy especially in this post-recession phase. At the same time, IP has been a catalyst for designing economic recovery strategies at regional, national and EU levels as well as being a concerted strategy to develop new ‘clean-tech’ industries to tackle environmental challenges.

The EU entered the recent recession already scoring lower productivity growth than the US and with a worrying erosion of its competitiveness with respect to the US and Japan in top-end markets and Asian economies in bottom-end markets. If anything, the recent global recession and credit crunch have highlighted the fragility of some states’ and localities’ economic development paths and the unbalanced nature of their economies, in terms of an over-reliance on sectors such as retail, financial services, and construction, to the detriment of manufacturing. This also suggests an accompanying need for greater economic diversity so as to avoid over-dependencies on certain sectors, and a better balance of ownerships forms (e.g. foreign/domestic, plc/mutual), in part so as to insulate economies better from the contagion spread by financial sector globalisation.

Partly as a result of the recent crisis, IP has been ‘officially’ rediscovered. The European Commission (2010), for example, has proposed an ‘integrated’ IP for an era of globalisation that sees competitiveness and sustainability as core pillars. But what should be the shape of such an ‘integrated’ IP in the wake of the crisis and how can IP rebalance economies, help support sustainable development and catalyse new technologies and innovations whilst learning lessons from past experience and debate? In addition, how could/should such an integrated IP relate to the EU’s regional/cohesion policy?

In part this shift to an ‘integrated’ IP has been informed by developments in the academic and policy making debate and discussion on IP in recent years. This has moved beyond a narrow ‘market failure’ perspective in recent years to consider wider market and systemic failure issues that necessitate a role for IP (information, co-ordination, missing linkages) (Rodrik 2009) as well as a broadening to consider evolutionary/systems-based views, as Glykou and Pitelis note in this issue. And over the last decade, the scholarly debate on regionalism, clusters and systemic innovation (both national and regional) has also shaped the objectives and actions of policy-making. Indeed, interventions have targeted spatially defined sets of networks of firms, attempting to leverage their value chain relationships, systemic innovation processes or their reliance on common services and goods to be delivered through collective public or private actions. Cluster policy, innovation policy and regional policy have all supported the growth and survival of firms and industries by helping them seize the opportunities of increasingly global networks of knowledge, production and demand.

However, the economic recession and the seriousness of global environmental concerns have sharpened the attention of industries and policy-makers to the current technology shift. According to the well-known Kondratiev wave theory, deep economic recessions have historically coincided with radical technological shifts as the economy and society has in effect reset itself. In this scenario, IP comes to the fore to provide a policy framework that is targeted at creating the socio-economic and institutional conditions for the EU - and its member states - to be leading such technological shifts and be on the technological frontier.

The issue contributes to this ongoing debate by exploring the impact of the crisis and policy responses, and longer-term structural trends that have been at work. It starts with a highly topical and much needed look at the state of the financial system, with a piece by Jonathan Michie entitled 'Promoting corporate diversity in the financial services sector'. Michie sets out a detailed and realistic strategy for achieving greater diversity in financial services in the UK. He argues that diversity is critical in that diversity of ownership types and business models creates a corresponding diversity in forms of corporate governance; risk appetite and management; incentive structures; policies and practices; and behaviours and outcomes. It also offers wider choice for consumers through enhanced competition that derives in part from the juxtaposition of different business models. Yet he notes that the UK financial services sector is dominated disproportionately by a single business model, namely the large, shareholder-owned pic, and that this domination of the shareholder ownership model - whose purpose is to maximise financial returns to the shareholders - proved a lethal combination with the financial deregulation, the creation of new financial instruments and the concomitant rising levels of debt over the past twenty years. In a situation of uncertainty and unpredictability, he argues that we cannot know which model will prove to be superior in all possible future circumstances, so we ought to be rather cautious before destroying any successful model, especially in a complex global economy characterised by unpredictability.

The next contribution, by Bernadette Andreosso-O'Callaghan and Helena Lenihan, entitled 'Responding to the crisis: are policies aimed at a strong indigenous industrial base a necessary condition for sustainable economic growth?' also considers the impact of the crisis and responses, in the sense that they examine whether a strong indigenous manufacturing base is a necessary condition for sustainable economic growth in the case of two small, open economies, Ireland and Sweden. They argue that Sweden has been impacted upon by the economic crisis to a lesser degree than Ireland. They examine the reasons for such asymmetric impacts and ask if the nature of the shock is related to the concept of 'economic sovereignty' and to the type of IP. They suggest that Sweden was less affected given its indigenous firms control the highly export-focused and technology-based engineering sector whereas in Ireland high-technology sectors are controlled almost exclusively by foreign firms. In terms of policy implications, they suggest that IP should aim for sustainable economic activity and growth, with a balance - or diversity-of activities and ownership, such that industrial activity within the economy should be able to minimise the impact of asymmetric shocks.

Shifting to a more local level, the contribution by David Bailey and Keith Cowling, entitled ‘Rebuilding the city: a focus for European industrial policy?’ also considers diversity but in this instance in the context of cities. The authors note that while the city offers the potential of dynamic agglomeration economies which can spur the achievement of economic growth and act as an engine that powers the economy, it often appears as a centre of crisis in mature ‘developed’ regions and countries, even before the most recent economic downturn. The authors attempt to reconcile these two seemingly paradoxical observations by bringing in a strategic choice perspective to explain how concentrated strategic decision-making in the corporate entities that dominate our cities has diminished the very diversity that Jacobs identified as being essential for cities to flourish and develop. The IP implications for cities are subsequently explored in terms of building new industrial districts, developing high skill ecosystems, and fostering multinational webs of cities, all with the aim of ensuring the conditions exist in cities for creativity and development to flourish, notably a diverse and democratic economic system.

This issue of creativity is developed further in 'A policy agenda for EU smart growth: the role of creative and cultural industries' by Phil Cooke and Lisa De Propris. They develop the argument that a resilient economy requires a growth agenda that is underpinned by a balanced industrial mix, the development and adoption of new knowledge or technological platforms, and risk taking in radical and incremental innovations as well as in soft and hard innovations. The authors thus argue for a sustainable and endogenous way to 'reset' the economy - borrowing the phrase from Florida (2010) - by endorsing a growth agenda that includes also creative and cultural industries. They proceed to argue that the current policy agenda for the EU's economic growth takes little account of the opportunities and potential of creative and cultural industries, favouring instead hard technologies and services. They point to a growing literature showing the innovation capacity of cultural and creative industries as they intersect the innovation processes of other manufacturing and services sectors with innovative and creative outputs. Overall, they argue that the current indecision of EU policy-makers on how to take advantage of creative and cultural industries for the delivery of a Smart Europe - as part of the Europe 2020 agenda - translates into a lack of commitment to creative and cultural industries as well as the lack of a clear cohesion agenda. The authors finish by making a strong case for EU policy-making to break the deadlock and clearly spell out a policy agenda that has an effective spatial dimension and that directly interfaces with its innovation policy.

The concept of resilience is in turn explored in more detail by Jose-Luis Hervas-Oliver, Ian Jackson and Philip R. Tomlinson in ' "May the ovens never grow cold": regional resilience and industrial policy in the North Staffordshire ceramics industrial district - with lessons from Sassoulo and Castellon'. They note that in the aftermath of the recent global recession, the concept of regional resilience is becoming increasingly important in regional policy circles. The authors explore resilience and recent policy initiatives in the context of the North Staffordshire ceramics district. They identify the economic governance of the district as having had a significant impact upon its current trajectory, and examine the district's 'adaptive capacity' to move onto a new trajectory. In particular, the authors note the importance of district firms developing wider networking opportunities, particularly external ties, taking insights from the relatively successful links between the Castellon and Sassoulo ceramics districts. The latter are also used to identify key IP issues of relevance for Staffordshire. These include diversification, horizontal collaboration and the creation of a solid cross-cluster interaction through global pipelines or even external (to the cluster) linkages.

Continuing at the regional level of analysis, the next paper by Xiaoni Li, Pere Segarra Roca, and Eleni Papaoikonomou (‘SMEs’ response to the financial and economic crisis: analysis of agricultural and furniture sectors in Catalonia, Spain’) analysed the tendencies, responses and evolution of SMEs in the agricultural and furniture sectors in the Catalonian region before and during the current crisis. As well as the traditional problem of obtaining credit, both sectors exhibited weaknesses in terms of a lack of qualified and trained personnel, and in technology innovation, leaving the firms more reactive than proactive in responding to the crisis. The authors identify a number of IPs required to tackle such weaknesses: intensifying employee training, fostering alliances between firms, and promoting technology innovation. In addition, their analysis suggests the need for new funding policies for SMEs to protect them against the effects of possible future economic downturns.

The regional dimension is further explored in ‘Shaping regional policy responses: the design of innovation poles’ by Annalisa Caloffi and Marco Mariani. The authors note that the severe economic effects of the international crisis, in combination with greater constraints on public spending, bring new challenges for the development of IP. They note that policy-makers need to find a balance between short-term measures aimed at counteracting the financial distress of firms and the loss of employment, and long-term strategies in support of innovation. This is, they argue, particularly urgent for manufacturing regions, such as those in Italy, which need to undertake structural change. The paper discusses some of the new IP tools that Italian regions are designing in order to promote this goal, notably innovation poles. Such poles are being designed and implemented in a number of major Italian regions, mostly through a top-down identification of specific technological and territorial targets. Drawing on the evolutionary and local development literature, the paper stresses the importance of a preliminary scouting process so as to identify appropriate policy targets. The latter is applied to an Italian case study. In so doing, the authors pay close attention to the shape and extent of existing patterns of cooperation on innovation, so as to find out where new policies to support networking might be fruitful and desirable.

Italy remains the focus of attention in the paper 'Industrial policy after the crisis: the case of the Emilia-Romagna region in Italy' by Patrizio Bianchi and Sandrine Labory. The authors note that the crisis has if anything shown that myopic views satisfying short-term interests cannot be the basis for sustainable economic policies. Rather, the authors call for a more holistic approach to understanding and developing IP, and they develop a tool to view such policy initiatives. This 'sundial' is based on four main pillars: entitlements (seen here as the right and capability of individuals to take part in the learning processes underlying development); provisions (the tangible and intangible resources necessary for development); innovation (the necessary dynamic character of any action supporting development, adjusting and sustaining learning processes determining development paths); and territory (as learning processes sustaining development are embedded in specific territories). Bianchi and Labory suggest that whatever the territory under consideration, IP action must be coherent at all levels, be it regional, national or supranational. They apply this analysis to the specific case of Emilia-Romagna, and argue that the case shows how a long-term and sustainable vision of industrial development can be effectively defined and implemented if this is undertaken in a process involving local stakeholders and ensuring consensus. The Emilia-Romagna IP model also illustrates a way to develop beyond the 'traditional' Italian model of industrial development based on industrial districts. However, they also argue that regional level initiatives could do with more support from consistent national level IP initiatives.

The scope for and role of IP is further examined by Ajit Singh in the context of developing countries in his paper ‘Comparative advantage, industrial policy and the World Bank: back to first principles’. In particular, Singh provides a critical analysis of the World Bank’s new thinking on IP. After outlining the changing perspectives on IP put forward by the World Bank over the last three decades, he argues that the bank’s economists have taken one step forward (the approval for the enhanced role of the state) but also one if not two steps backward (by strong encouragement to countries to seek their current comparative advantage in pursuing IP). Singh goes on to argue that a critical analysis of the World Bank’s policy stance on IP as on other key issues is essential because of the institution’s hegemony in policy analysis of economic development as well as its conditionality, which may now well include what this paper regards as its inappropriate IP. The analysis in the paper combines classical contributions on international trade and the world economy, relevant economic history, as well as Krugman’s comments on these issues in terms of modern economic analysis. The paper concludes with reflections on the appropriate IP for developing countries that the World Bank should support. As opposed to emphasising current comparative advantage, Singh makes a compelling case for the World Bank instead assisting developing countries in pursuing an optimal degree of economic openness according to their individual circumstances. Rather than close integration with the world economy, he argues that developing countries should seek strategic integration which enables them to integrate up to a point where it is in their interests to do so, as was the strategy followed by the East Asian Miracle countries. Singh concludes by arguing that the World Bank’s new IP would be a definite step forward if it assists developing countries to achieve similar strategic integration with the world economy.

The issue is rounded off by Ioanna Glykou and Christos N. Pitelis in their paper ‘On the political economy of the state, the public-private nexus and industrial policy’. Glykou and Pitelis discuss the political economy foundations of IP, with an eye to unearthing its nature, objectives, scope, constraints, limitations and possible new directions. They suggest that extant conceptual economic foundations of IP involve an underconceptualised theory of the state and the public-private nexus, and aim to address this limitation. They propose the concept of ‘national economic strategy’, and try to embed IP in its context. In so doing, the authors also propose that IP could draw on business strategy to expand the arsenal of concepts and measures that can help effect the objectives of the national economic strategy. Glykou and Pitelis claim that this would still leave a number of unresolved issues which need to be addressed, but that some such issues and concerns have begun to be recognised by policy-makers (e.g. the European Commission, 2010). Overall, the authors suggest that extending the underconceptualised economic theories of IP to account for the role of the state and the public-private nexus, and developing a generic national economic strategy, within which IP can be embedded, leaves numerous challenges, limitations and scope for extension. Given the emphasis of the issue on ‘Industrial Policy after the Crisis’, the authors emphasise the issue of sustainable global value creation. In particular, they stress that an emphasis on competitiveness without regard to the sustainability of value and wealth creation at all levels (global, supra-national, national, intra-EU), is unlikely to help engender longer-term viable solutions, and call for supra-national governance for economic sustainability.

We would like to thank Mark Evans for the opportunity to compile this special issue. We are especially grateful to referees who gave freely of their time and who provided much constructive comment on the papers in this issue. Several earlier versions of the papers in this issue were presented at conferences organised by the Regional Studies Association, the European Network on Industrial Policy and the Regional Science Association International British and Irish Section, and we are grateful to the organisers of these events.

References

Rodrik, D., 2009. One economics, many recipes: globalization, institutions, and economic growth. Princeton: Princeton University Press.

European Commission, 2010. An integrated industrial policy for the globalisation era putting competitiveness and sustainability at centre stage. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Brussels: COM (2010) 614.

David Bailey
Coventry University Business School, UK

Helena Lenihan
Kemmy Business School, University of Limerick, Ireland

Josep-Maria Arauzo-Carod
Faculty of Economics, Universitat Rovira i Virgili, Spain

Promoting corporate diversity in the financial services sector

Jonathan Michie
Department for Continuing Education, and President of Kellogg College, University of Oxford, UK

This article sets out a detailed and realistic strategy for achieving the diversity in financial services to which the UK Government's Coalition Agreement is committed. Diversity of ownership types and business models creates a corresponding diversity in forms of corporate governance; risk appetite and management; incentive structures; policies and practices; and behaviours and outcomes. It also offers wider choice for consumers through enhanced competition that derives in part from the juxtaposition of different business models. However, the UK financial services sector is dominated disproportionately by a single business model, namely the large, shareholder-owned plc. This domination of the shareholder ownership model - whose purpose is to maximise financial returns to the shareholders - proved a lethal combination with the financial deregulation, the creation of...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Notes on Contributors
• 1. Industrial policy after the crisis
• 2. Promoting corporate diversity in the financial services sector
• 3. Responding to the crisis: are policies aimed at a strong indigenous industrial base a necessary condition for sustainable economic growth?
• 4. Rebuilding the city: a focus for European industrial policy?
• 5. A policy agenda for EU smart growth: the role of creative and cultural industries
• 6. 'May the ovens never grow cold': regional resilience and industrial policy in the North Staffordshire ceramics industrial district — with lessons from Sassoulo and Castellon
• 7. SMEs' responses to the financial and economic crisis and policy implications: an analysis of agricultural and furniture sectors in Catalonia, Spain
• 8. Shaping regional policy responses: the design of innovation poles
• 9. Industrial policy after the crisis: the case of the Emilia-Romagna region in Italy
• 10. Comparative advantage, industrial policy and the World Bank: back to first principles
• 11. On the political economy of the state, the public-private nexus and industrial policy
• Index