Industrial Policy for National Champions

1. Arguments for and against Policies to Promote National Champions

1 Arguments for and against Policies to Promote National Champions Oliver Falck, Christian Gollier, and Ludger Woessmann Governments around the world, and particularly within the European Union, are deeply divided about the proper role of industrial policy, with preferences ranging from neoliberal approaches to strong government support for national champions. Some politicians argue that hands-off governance facilitates the sellout of national economies, while others suggest that interventionist governments only hurt themselves when creating huge and inefficient corporations. Some arguments are based on national interest that comes at the detriment of foreign interest, which would call for a transnational coordination and supervision of industrial policies that foster national champions. Others argue that the world as a whole may be better off if national industrial policies succeed in spurring innovative firms that increase productivity and spark economic growth worldwide. The chapters collected in this volume provide new perspectives on these issues and discuss the pros and cons of government support for national champions. The issue of government support for national champions derives added momentum from the recent financial and economic crisis. In the aftermath of the failure of the large US-based bank Lehman Brothers, which hit the gobal financial sector and threatened the existence of other banks, many politicians were happy to justify the subsidization of large banks with reference to their system-relevant role in a tightly interweaved financial sector. Following the same rationale, politicians feared that the bankruptcy of firms in other sectors that are characterized by a dense network of input–output relations, such as automotives , might hurt national interests and initiate a bandwagon effect and hence cause further bankruptcies that affect the labor market. Beyond the innovative contributions of each chapter, with this combined volume we aim to add to the existing literature in three distinct areas. First, most contributions in this volume take a European 4 Oliver Falck, Christian Gollier, and Ludger Woessmann perspective, which involves issues emerging from the European Union’s substantial market integration. The volume thus extends on collections on industrial policy that focus on the United States (Krugman 1986) or Japan (Itoh et al. 1991). Second, this volume primarily studies industrial policy for national champions with the rigor of economic models and thus complements more qualitative overviews such as Bianchi and Labory (2008) or Sekkat and Buigues (2009). Third, given the recent topicality of government bailouts, this volume chooses to explore the specific theme of promotion of national champions rather than the broader topics of industrial policy. Most arguments in favor of or against policies to foster national champions can be grouped under three types of models (see Gollier and Woessmann 2009 for a policy-oriented review): “classical” models that discuss market imperfections in static equilibrium, models that stress the dynamic nature of an economy characterized by constant change through innovation, and models that depict the political economy of the decision-making process. The contributions in this volume cover all three types of arguments. Given the multiple dimensions of the arguments, there is no single definition of what constitutes a “national champion,” and we allow each chapter to put forward the most suitable operationalization in its particular context. In the view of many observers, arguments in favor of championspromoting policies are most persuasively made in a dynamic context, so we start our collection with three chapters taking a dynamic economy view. In reality, though, most champions-promoting policies may be best understood from a political-economy perspective, so we next turn to two chapters that stress the political-economy view. The final three chapters are in the more classical tradition suggesting that national champions could conceivably have emanated from deviations of perfectly competitive markets. 1.1 Analyses in Dynamic Settings In chapter 2, Philippe Aghion revisits the traditional case for protecting “infant industries.” In such a setting the argument involves learningby -doing effects that lead to downward-sloping cost curves, and government intervention at the industry’s birth can be justified as a mean of speeding up production externalities. Government intervention could take the form of subsidizing or protecting national production. Aghion suggests an innovation-based model of economic growth to depict the effects of protection on domestic innovation and growth in Policies to Promote National Champions 5 such a setting. In his model, industrial policy is beneficial only in “extreme” situations, namely by offering temporary protection in small countries that are behind the...