Industrial policy, resource allocation and wealth creation; perspectives and experiences.

1. Governance for Economically Sustainable Competitiveness and Catching-up Christos N. Pitelis Launch Conference Knowledge Intelligence and Innovation for a Sustainable Growth Palermo, Nov. 30th- Dec. 1st 2010 Industrial policy, resource allocationand wealth creation; perspectives and experiences. PETER NOLAN and CHRISTOS PITELIS University of Cambridge Industrial policy, resource allocationand wealth creation; perspectives and experiences. PETER NOLAN and CHRISTOS PITELIS University of Cambridge

2. The Issue • Governance and policies for economically sustainable competitiveness and catching-up, in the context of • Knowledge-based economy, importance of “intangible assets” • Semi-globalization

3. Competitiveness • Superior performance vis-à-vis a peer group with shared objective • Firms: superior sustainable competitive advantages (SCA) –profits • Countries: superior SCA – per capita income • Requires looking at both demand-macro, but also supply-micro-entrepreneurial environment (focus usually on former)

4. Determinants of Value/Wealth Creation: Firm Level • Innovation and technology • Resources, especially human • Firm infra-structure and strategy • Unit cost economies/increasing returns to scale

5. Determinants of Value/Wealth Appropriation: Firm Level • Positioning • Efficiency and market power • Firm-level differentiation-identity • Integration, diversification, inter-firm cooperation

6. Creating and Appropriating Nationwide Value/Wealth • Similar factors as at firm level, appropriately reinterpreted and applied (plus institutional, macroeconomic and regional-sectoral milieu) • Require appropriate public-private-civil society interactions and co-ordination

7. The Determinants of Value Creation at the Firm, Meso and National Levels (“The Wheel of Value”) NATION Institutional and Macroeconomic Environment Governance– Policy Mix SECTOR-REGION Industry Conduct- structure and regional - locational milieu FIRM Infra-Structure& Strategy Unit CostEconomies, Returns to Scale Value Added- Creation Human and other Resources and Capabilities Technology &Innovativeness Page 7

8. Main ‘Actors’ of Value Creation • Firms, for example through – Large size and foreign direct investment (FDI) by multinational enterprises (MNEs) – Clusters of small and medium-sized enterprises (SMEs) – agglomeration effects • Government policies (such as anti-trust, innovation, education, competitiveness) – May impact on all determinants of value creation

9. Actors of Value Creation Large firms, FDI SMEs, Clusters NATION Institutional and Macroeconomic environment - Governance and Policy mix SECTOR-REGION Industry Conduct- structure and regional - locational milieu FIRM Infra-structure& Strategy Human and other Resources and Capabilities Unit Cost Economies, Returns to Scale Value Added- Creation Technology & Innovativeness Government Policy Page 9

10. Locally-based Value/Wealth Creation and Clusters • Location is of critical importance for value and wealth creation • Geographical clusters can impact on wealth creation • Clusters are geographical agglomerations of firms and other organizations-institutions, linked horizontally and/or vertically, intra- and/or inter- sectorally, in a facilitatory socio-institutional and cultural milieu, which compete & co-operate (co-opete) in national and inter-national markets

11. Advantages and Disadvantages of Clusters • Disadvantages • Clusters are history-specific, thus hard to ‘transfer’ • ‘Success’ can breed failure (through ‘congestion’, institutional sclerosis, etc.) Advantages • Clusters improve innovation, productivity & competitiveness at the regional & national levels, they create employment and can lead to convergence • Clusters are more bottom-up, thus help deepen democracy

12. Despite Problems, Clusters are Important • Alternative to clusters is large MNEs and FDI. Despite advantages in wealth creation, the poor record of MNEs with sustainability and democracy, implies that despite ‘problems’, clusters are important – However, clusters and FDI by MNEs can complement each other

13. Critical Factors for “Upping the Game” • Resources, which are Valuable, Rare, Inimitable, Non-substitutable, Appropriable (VRINA) • Appropriable innovations • Specialized education • Entrepreneurship

14. National (and/or Region-wide) Strategies for Competitiveness-Directions • Create competitive advantages, building on existing and emerging strengths • Improve operational and dynamic efficiencies – innovation capabilities • Adopt positioning strategies (low relative cost, high relative quality) • Improve “national image” • Consider integration (within EU, other?) and diversification (RICs, North Africa), economic and political power

15. National and/or Regional Positioning

16. National and/or Regional Competitiveness and Catching-Up: Instruments and Policies • Improved competitiveness and catching-up can be effected though: • Horizontal measures (soft and hard infrastructure) • Technology transfer – FDI • Clusters • Inter- and intra-firm and sectoral restructuring for innovative, ‘value for money’ products and services • Acquisition of System Integration Capabilities • ‘Regions of Excellence’ (‘mega-clusters’) that can encapsulate all aspects, thus serve as strategy for competitiveness and catching-up

17. Policy Compatibility • Between macroeconomic and supply-side policy • Institutional context – removal of anti-incentives – institution building – culture • Competition (co-opetition for innovativeness) and regulation policy • Environmental protection • Compatible distribution of income (intra- and inter-country)

18. Economic Sustainability (Sustainable Global Value Creation) • Sustainability: The condition where the satisfaction of an objective in the present does not undermine the longer-term satisfaction of the same objective, and/or where the pursuit of one group’s interests does not undermine the pursuit of system-wide interests – the two often related • Dimensions: Economic (our focus), Social, Environmental

19. Constraints on Sustainability • A Key Constraint - Differing objectives (such as pursuit of value appropriation) by different groups, organisations, nations => ‘agency’ and need for objective alignment. ▫ Also time inconsistencies, mistakes. • Instances - Intra-County: Monopoly, Regulatory capture – corruption - Inter-Country: Protectionist and strategic trade policies, especially by more powerful countries, market power as a condition for FDI by MNEs

20. A Hierarchy of Agencies • Sustainability requires addressing hierarchy of agencies between (at least): • Firm and its shareholders-stakeholders • Nation and firm • Individuals nations and the world

21. Some Requirements General • Put in place requisite governance structures at all levels (firms, nation-wide) Specific • Intra-Country • Fight corruption (e.g., regulatory capture, MNEs capture, rent seeking) • Supra-National • Recognise ‘infant’ entrepreneur, industry, firm and ‘cluster’ argument – promoters of longer-term value creation • Tolerate ‘strategic trade’ by emerging economies, not by developed ones • ▫ Recognise that need for ‘level playing field’ requires tolerance of apparent inequities in favour of worse-off

22. Possible Solutions to Governance for Economic Sustainability • Enlightened self-interest by agents (e.g. firms, nations)-but at short supply • Public policy-regulation (but regulatory capture) • Global hegemony (but failures of hegemony – challenge to democracy, top-down, thus limited sustainability) • Pluralism and diversity-stakeholding – more bottom-up, democratic and sustainable (thus preferable) – but adequate? • An accountable global monitor (international organization) – but capture?

23. Public-Private-Civil Society Nexus-based Governance • Private – comparative advantage to capture (profit) from value creating advantages • Public – comparative advantage in legitimacy, institutional, macroeconomic and overall context for value creation (subject to satisfying value appropriation needs of state principals – functionaries) • ‘Civil Society’ (e.g. NGOs, consumer associations) – comparative advantage in pursuit of sustainability?

24. Proposition In the context of • Innovation-knowledge promoting governance, and • Recognition of the ‘hierarchy’ of agencies - Institutional and organisational diversity and pluralism, to include networking and (mega-) clusters, may help generate ‘mutual stewardship’ and ‘monitoring’ and serve as a policy for global and local (glocal) governance for sustainable value creation ▫ This requires a new type of ‘governance’ and government – an active orchestrator, knowledge-broker, conductor and public entrepreneur

25. Summary-Conclusion • Enlightened self-interest and national government regulation policies, helpful, but not sufficient (given self-interest – value appropriation) • Diversity and pluralism, to include networking and clusters, can help engender ‘mutual stewardship’ and can serve as an approximation for governance for sustainable global value and wealth creation • Accountable ‘global monitor’, might be useful to mould and enable the process to marry direction to democracy – these could include an ‘International Agency for Economic Sustainability’ - In the long term, however, the critical factor for regional success is investment in Dignity, Culture and Civilization.