Advanced Diploma in European Studies (ADES) Master in European Policies and Institutions (MIPE)

1. Advanced Diploma in European Studies (ADES)Master in European Policies and Institutions (MIPE) Franco Mosconi Jean Monnet Professor University of Parma Fondazione Collegio Europeo di Parma Spring term, 2004-2005 The New EU Industrial Policy

2. This presentation is based on the European Commission’s official documents on industrial policy, all unveiled between December 2002 and April 2004. In particular, I will make reference to the following four documents: • Industrial Policy in the economic literature: Recent theoretical developments and implication for EU policy (Enterprise Papers No 12, 2003) • Industrial Policy in an Enlarged Europe, COM(2002), 714 final of 11.12.2002 • Some Key Issues in Europe’s Competitiveness – Towards an Integrated Approach, COM(2003), 704 final of 21.11.2003 • Fostering Structural Change: an Industrial Policy for an Enlarged Europe, COM(2004), 274 final of 20.04.2004.

3. My paper, ‘The Age of “European Champions”’(forthcoming in “The European Union Review”, 1/2006) offers a more comprehensiveexplanation of the new approach to industrial policy that has been emerging in the EU.

4. Industrial Policy in the Economic Literature: Recent Theoretical Developments and Implications for EU Policy (by L. Navarro, 2003)

5. THE TRADITIONAL MARKET FAILURE JUSTIFICATION Market failure can take the form of: • EXTERNALITIES • MARKET POWER • INFORMATION PROBLEMS • PUBLIC GOODS The most widely accepted rationale for public action are externalities in R&D and knowledge creation. Firms cannot appropriate all the benefits of their investment in R&D and knowledge creation because some of these accrue to other firms or sectors.

6. ECONOMIC GROWTH THEORIES AND TECHNOLOGY POLICY 1980s Technological change is linked to the new accumulation of physical, human and capital resources. Romer and Lucas, 1988 1990s Innovation is a product of deliberate efforts of firms. The main determinant of long-term growth is no longer capital accumulation but investments in R&D and the degree of to which innovations are appropriate.

7. STRATEGIC TRADE POLICY Spencer and Brander (1983) . The concept of strategic trade and industrial policy is linked to the market failure of imperfect competition. Leahy and Nearly (2001) . A robust case for sectorial industrial policy. Another argument for governments to subsidise national producers is the infant-industryargument. The case for strategic or infant-industry policies is subject to a number of criticisms.

8. NETWORK EXTERNALITIES AND STANDARDISATION Markets with network externalities provide a further rationale for industrial policy of the form of standard setting. Standardisation may bringpositive effects, such as: • Reducing inefficiencies linked to inertia • Reducing consumers’ search and co-ordination costs • Providing stronger incentives to invest in commercially viable innovations. But standardisation may also entail some potential inefficiencies. Recently, the emphasis has been placed on the flexibility of standards, so that these can be adapted to rapid technological changes.

9. Evolutionary Economics Nelson and Winter Evolutionary Theory of Economic Change (1982) The evolutionary theories on growth and innovation are an alternative to the neo-classical mainstream thinking.

10. DISRUPTIVE CHANGE AS A DYNAMIC PROCESS OF EVOLUTION SCHUMPETER The economy is a system that is continuously “disrupted” by technological change. This model of growth based on disequilibria led to the concept of “creative destruction”. Evolutionary theory has provided the implicit basis for the framework concepts of innovation systems and clusters.

11. KNOWLEDGE 2. TACIT KNOWLEDGE… … is accumulated through experience and learning by doing, and can only be transferred through social interaction. 1.CODIFIED KNOWLEDGE… … is formalised and can be stored, copied and transmitted. 3. SOCIAL TECHNOLOGIES… … are knowledge on how to co-ordinate and combine the elements needed in a process.

12. INNOVATION Innovation is the result of complex and interactive learning processes through which firms tap into complementary knowledge from other organisations and institutions.

13. THE MOST SALIENT FEATURES OFINNOVATION • Innovation is not driven only by a small set of high-technology industries. • Non-technological innovation is important. • Technological co-operation and collaboration among firms is essential. • Innovative firms draw largely on the science system and science base. • Innovation processes are uncertain and non-linear. • Innovation processes have a cumulative nature. • Innovation takes place in firms of any size.

14. THE SYSTEM OF INNOVATION APPROACH A System of Innovation (SI) has been defined as: ‘the all important economic, social, political, organisational, and other factors that influence the development, diffusion and use of innovations.’

15. THE CLUSTER APPROACH Economic clusters are seen as: ‘networks of production of strongly interdependent firms (including specialised suppliers) linked to each other in a value-adding production chain.’

16. PORTER’S SCHOOL:“THE COMPETITIVE ADVANTAGE OF NATIONS” PORTER (1990) Emphasises the role of the microeconomic environment in country-specific industrial clusters • Cluster activity is shaped by 4 main factors (thediamond): • Factor conditions • Demand conditions • Related and supporting industries • Firm strategy, structure and rivalry

17. POLICY IMPLICATIONS ?

18. Industrial Policy in an Enlarged Europe, COM (2002)

19. INDUSTRY AS THE SOURCE OF EUROPE’S WEALTH MANIFACTURING INDUSTRY The share has decreased from 30% in 1970 to 18% in 2001. SERVICES SECTOR The share in EU output has increased from 52% in 1970 to 71% in 2001. The widespread, but erroneus, assumption is that in an knowledge economy and an information society the manufacturing industry no longer plays a key role.

20. THE INTER-DEPENDENCE BETWEEN MANUFACTURING AND SERVICES • The inter-dependence between the service and the manufacturing sectors has increased over time. • Manufacturing companies have been outsourcing activities not central to their business. • The growing complexity of knowledge has led to increased industry specialisation and lies behind the outsourcing trend. • The intertwining of manufacturing and service goes far beyond outsourcing.

21. EUROPEAN INDUSTRY IS MODERN AND COMPETITIVE European industry remains a dominant force in international trade: The EU’s share fell from an average of 19.3% over the 1991-95 period to 18.4% in 2002. Over the same period, the US share went down from 15.1% to 12.1%. Over the same period, Japan’s share went down from 12.2% to 8.2%. In some key sectors, such as automobiles, aeronautics or TLC equipment, EU companies have achieved global leadership.

22. EUROPEAN INDUSTRY DISPLAYS SLOW PRODUCTIVITY GROWTH (1) In the 1990s, productivity growth in the European manufacturing industry has been below the US levels. In the second half of the decade (1996- 2000), the EU displayed a rate of 3.2%. Over the same period, the US displayed a rate of 5.5%.

23. EUROPEAN INDUSTRY DISPLAYS SLOW PRODUCTIVITY GROWTH (2) The EU as a whole is lagging behind in most of the 17 innovation indicators. EU’s research investment, at 1.9% of GDP in 2000, as against 2.7% in the US and 3% in Japan, is still far too low. This gap is reflected in the number of European high- tech patents, at 28 per million inhabitants.

24. EUROPEAN INDUSTRY DISPLAYS SLOW PRODUCTIVITY GROWTH (3) The EU tends to specialise in medium- and high-technology and mature capital-intensive industries. The EU should seek to reinforce its position in enabling technologies such as ICT, electronics, biotechnology or nanotechnology.

25. SMEs PLAY A CENTRAL ROLE:THE IMPORTANCE OF CLUSTERS AND NETWORKS SMEs are the backbone of European Industry. New organisational patterns, under which large firms often operate through EU-wide production and subcontracting networks, have enhanced the importance of SMEs. Innovative clusters are also increasingly involved in supranational knowledge and production networks. Companies in such cluster, mostly SMEs, are becoming the dynamic part of Europe’s industrial landscape and a source of innovative ideas.

26. Some Key Issues in Europe’s Competitiveness – Towards an Integrated Approach, COM (2003)

27. De-industrialization is a process of structural change. PRODUCTIVITY GROWTH AND DE-INDUSTRIALIZATION (1) • The decline in the relative presence of the manifacturing sector in national income, primarly during the post-WWII years, mirrors the decline in the share of the primary sector in earlier days. • Developments in the EU industry competitiveness in recent years show considerable diversity. • Productivity developments would play a key role in any process of de-industrialization because they influence the competitiveness of enterprises. • De-industrialization is the long-term (not cyclical) decline of the manufacuring sector.

28. PRODUCTIVITYGROWTH AND DE-INDUSTRIALIZATION (2) • International trade linkages ensure that such relocations do no benefit exclusively the host countries. • The share of imported manifactured goods from host countries will continue to be only a small fraction of total expenditure in the EU. • Finally, it is important to recall that the nation towards which industries are likely to migrate are invariable less wealthy, developing, nations. Relocation of industrial activities is a reflection of changing comparative advantages: In conclusion, there is no evidence that the EU economy is showing signs of de-industrialization. Nevertheless, it is possible that during a period of slow growth and poor productivity and innovation performance, conditions contributing to such a process might emerge.

29. DE-LOCALIZATION (1) Delocalization concerns the transfer of production and of other manufacturing activities to locations outside the home country. De-localization has already taken place within the EU and reflects the changing comparative advantage of different location and/or different policies.

30. Better cost conditions abroad inevitably attract industries that are unable to produce in the high-wage environment of modern industrial economies. DE-LOCALIZATION (2) De-localization has been limited to low technology, labour-intensive activities. However such re-location is often accompanied by the retention of, or creation of new, jobs in Europe in service areas such as design, marketing and distribution.

31. Europe must further develop and strengthen its competitive manufacturing base. To achieve this, it is necessary to raise its R&D and innovation performance, to strengthen its human capital base and to develop conditions supportive of enterprises and of productivity growth. DE-LOCALIZATION (3) Other aspects of de-localization, such as the migration of R&D activities, constitute genuine threats to Europe’s future. A further enlarged EU, with its increased variety of wage structures and technological skills, will provide European industry with opportunities for competitive reorganisation

32. Fostering Structural Change: an Industrial Policy for an Enlarged Europe, COM (2004)

33. THE PROCESS OF STRUCTURAL CHANGE The process of structural change requires three types of action: • THE “BETTER LAWMAKING” APPROACH • OTHER COMMUNITY POLICIES WHICH CONTRIBUTE IN THEIR OWN WAY TO THE COMPETITIVENESS OF INDUSTRY • THE SPECIFIC NEEDS OF THE VARIOUS INDUSTRIAL SECTORS

34. INSTRUMENTS TO SUPPORT THE PROCESS OF STRUCTURAL CHANGE (1) A regulatory framework favourable to industry • Better law-making Optimising synergy between different policies • Using knowledge for the benefit of business • Investing in research – an action plan for Europe • Innovation policy • Thinking about the future of research in the manufacturing industry • Investing in human capital • ICT in the service of competitiveness • The contribution of competition policy to developing and spreading knowledge

35. INSTRUMENTS TO SUPPORT THE PROCESS OF STRUCTURALE CHANGE (2) Optimising synergy between different policies • Improving the operation of the markets • Improving the free movement of products and services • Promoting competitiveness through an efficient competition policy • Reconciling energy constraints with competitiveness • Abolishing certain fiscal barriers to the completion of the internal market

36. INSTRUMENTS TO SUPPORT THE PROCESS OF STRUCTURAL CHANGE (3) Optimising synergy between different policies • Using cohesion policies to promote industrial and structural change • Supporting the process of industrial change and regional innovation system • Putting the European employment strategy at the service of competitiveness • Developing trans-European networks and major European projects

37. INSTRUMENTS TO SUPPORT THE PROCESS OF STRUCTURAL CHANGE (4) Optimising synergy between different policies • Reconciling better sustainable development with competitiveness • Creating the conditions for sustainable production • Promoting clean energies and technologies • Encouraging social dialogue, including sectorial issues

38. INSTRUMENTS TO SUPPORT THE PROCESS OF STRUCTURAL CHANGE (5) Optimising synergy between different policies • Allowing European businesses to develop internationally • Facilitating access to markets outside the EU • Guaranteeing compliance with international trade rules (anti-dumping, anti-subsidy and safeguard measures) • Extending single market rules and EU standards to neighbouring countries • Developing the international dimension of environmental policy Application of industrial policy tailored to the needs of each sector

39. THANK YOU FOR YOUR ATTENTION! Homepage: www.cattedramonnet-mosconi.eu E-mail: franco.mosconi@unipr.it