Industrial Policy for National Champions

3. National Champions and Economic Growth

3 National Champions and Economic Growth Kathy Fogel, Randall Morck, and Bernard Yeung 3.1 Introduction Schumpeter’s (1912, 1942) view that economic growth arises through an ongoing process of creative destruction, as developed in the New Endogenous Growth Theory of, for example, Aghion and Howitt (1998), is increasingly solidly validated by empirical work. Bower and Christensen (1995), Christensen (1997), and others painstakingly document numerous case studies of the disruptive effects on existing businesses of many new technologies that nonetheless ultimately advance overall productivity. Fogel et al. (2008), noting that creative destruction implies the more extensive destruction of staid established firms by creative upstarts, find faster long-term economic growth in countries where large firms’ long-term survival odds are lower. Chun et al. (2008) note that intensified creative destruction implies a widening gap between winner and loser firms, and find faster productivity growth in US industries exhibiting larger firmspeci fic performance variance. An economically significant association between creative destruction and economic growth, at least in developed economies in the later twentieth and early twenty-first centuries, is now widely accepted. Precisely how the process of creative destruction works is, however, less certain. Even Schumpeter permitted a degree of ambiguity: Schumpeter (1912) argues that key innovations are best created and developed by entrepreneurs capitalizing new firms in financial markets, but thirty years later Schumpeter (1942) posits that R&D departments in large quasi-monopolistic firms have better access to the risk-tolerant capital creative destruction requires. The theoretical importance of new firms to an economy’s overall growth rests critically on the microeconomics of property rights. An 32 Kathy Fogel, Randall Morck, and Bernard Yeung employee in a large corporation has difficulty ensuring that her innovations belong to her, rather than her employer. For example, Shuji Nakamura invented the blue LED, which made flat screen full color displays possible, while working for Nichia Chemical Industries. To reward him, Nichia raised Nakamura’s salary to US$140,000. Had he founded a new firm to develop his insight, Nakamura would be a multibillionaire . In frustration, he quit and moved to the United States, a country with a long tradition of innovators founding new giants. For example, Alexander Graham Bell offered his telephone patents to Western Union, the telegraphy giant, for $100,000. Telephone communication was then feasibly only for local communication, and short-distance telegraphy was an insignificant market. Western Union’s confidently unimaginative management declined Bell’s offer, forcing the discarded inventor to found the tiny upstart that became AT&T. Why were Nichia Chemical Industries and Western Union so illdisposed toward what turned out to be revolutionary innovations? Shleifer and Vishny (1989) develop a model in which incumbent corporate insiders maximize their job security by committing their firms to technologies reliant on the insiders’ particular expertise. Consistent with this, Betz (1993) documents how IBM’s top researchers and managers , with careers built around mainframe computing, delayed moving into PCs to safeguard the value of their human capital. The career concerns of its key decision makers ultimately cost IBM its near monopoly over business computers. Klepper (2007) discusses analogous events in the US auto industry. The model of managerial entrenchment Shleifer and Vishny (1989) develop is microeconomic, but it has implications for economywide growth. A country that protects its large established firms from harsh gales of creative destruction may safeguard entrenched insiders, like those Betz (1993) describes. But if this protection undermines the prospects of potentially rapidly growing new upstart firms and deter innovators, like Nakamura and Bell, long-term economywide growth could be compromised. Schumpeter (1942) suggests that such protection might not have negative economywide consequences, arguing that the creation and successful development of an innovation often requires vast amounts of risk-tolerant capital that large established firms are well positioned to provide. While alternative sources of entrepreneurial capital exist— venture capital funds and public equity markets—the former demand National Champions and Economic Growth 33 sweeping control rights (Gompers and Lerner 2001) and the latter are an expensive source of funds (Ritter 1987). Large established firms could easily provide the funding innovative entrepreneurs need—if only the problems enumerated above could be sidestepped. This suggests the possibility of a “kinder gentler” form of creative destruction, in which large established firms sponsor innovative new ideas and continually renew themselves while augmenting the economy ’s growth. The problems highlighted above that might deter innovation in large firms...