Canadian Industrial Policy in Comparative Perspective€¦ · ii Canadian Industrial Policy in...
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Canadian Industrial Policy in Comparative Perspective Matt Wilder A thesis submitted in conformity with the requirements for the degree of Doctor of Philosophy Political Science University of Toronto © Copyright by Matt Wilder 2019
Transcript of Canadian Industrial Policy in Comparative Perspective€¦ · ii Canadian Industrial Policy in...
Canadian Industrial Policy in Comparative Perspective
Matt Wilder
A thesis submitted in conformity with the requirements for the degree of Doctor of Philosophy
Political Science University of Toronto
© Copyright by Matt Wilder 2019
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Canadian Industrial Policy in Comparative Perspective
Matt Wilder
Doctor of Philosophy
Department of Political Science
University of Toronto
2019
Abstract
This thesis utilizes an institutional theory of economic organization and technological innovation
called regime theory to explain the origins, operation, and outcomes of industrial policy in Canada.
The first part of the thesis elaborates the theory using formal logic, spatial modelling techniques,
and game theory. The second part evaluates cross-national quantitative evidence in support of the
theory and undertakes three detailed case studies involving shipbuilding, agricultural
biotechnology, and green energy manufacturing. Consistent with the varieties of capitalism
literature, it is demonstrated that liberal political economies are institutionally-poised toward
radical innovation but struggle with late innovation. The introductory chapter defines industrial
policy, explains why the study of industrial policy is important, details the argument of the thesis,
summarizes the methods used, and lays out how the thesis is organized. The second chapter
engages with the literature on collective action and entrepreneurship to advance three components
of regime theory: a theory of regime origins, a theory of regime operation, and a theory of regime
outcomes. The third chapter introduces the structure of the economy and state of technological
development as situational variables, consideration of which yields four archetypical models of
industrial policy and ten predictive hypotheses about the causes and consequences of industrial
policy coordination. Chapter 3 concludes with a summary of the propositions and implications of
the theory. The fourth chapter analyzes three cases studies —aluminum shipbuilding industrial
policy in British Columbia; federal-provincial biotechnology policy in support of the canola
industry; and Ontario’s green energy industrial strategy— and evaluates the ability of regime
theory to explain industrial policy in Canada. The fifth and final chapter summarizes the theory
and evidence presented in the thesis and discusses the inferences that can be drawn from the
findings.
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Acknowledgments
Tremendous thanks to my senior supervisor, Grace Skogstad, and committee members,
Christopher Cochrane and Rodney Haddow. Special thanks to the examination committee
members, David Wolfe and Michael Atkinson. I am grateful to all the interview participants,
archivists, and FOI officers who made the case studies possible. Additional thanks to Krystina
Wilder, Michael Howlett, Andy Hira, Klara Stanic, Ludovic Rheault, Laurent Dobuzinskis,
Andreea Musulan, David Laycock, Pierre-Olivier Bonin, Jeremy Rayner, Matt Ayling, Carolynn
Branton, and Louis Tentsos for their help along the way.
This research was funded by the Social Sciences and Humanities Research Council of Canada, the
Frank Peers Graduate Research Scholarship, and the A.W. Johnson Graduate Scholarship for the
Study of Canadian Government and Public Administration.
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Table of Contents
Acknowledgments.......................................................................................................................... iii
Table of Contents ........................................................................................................................... iv
List of Tables ................................................................................................................................ vii
List of Figures .............................................................................................................................. viii
Chapter 1 Introduction .....................................................................................................................1
1.1 Industrial policy ...................................................................................................................4
1.1.1 Why study industrial policy? .................................................................................12
1.1.2 The legacy of industrial policy ..............................................................................13
1.1.3 Industrial policy in Canada ....................................................................................18
1.2 Regime theory: a brief introduction ...................................................................................21
1.2.1 Origins....................................................................................................................23
1.2.2 Operation................................................................................................................28
1.2.3 Outcomes ...............................................................................................................29
1.2.4 Summary of the argument ......................................................................................34
1.3 Methods and scope .............................................................................................................37
1.3.1 Rational choice? .....................................................................................................38
1.3.2 Provincial focus .....................................................................................................43
1.3.3 Limitations .............................................................................................................44
1.4 Looking ahead ....................................................................................................................48
Chapter 2 Regime Theory ................................................................................................................1
2.1 The creation of regimes .......................................................................................................2
2.1.1 Means, motive, opportunity .....................................................................................6
2.1.2 Mobilization of bias .................................................................................................9
2.1.3 Agents of change: policy entrepreneurs .................................................................17
2.2 Regime operation ...............................................................................................................27
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2.2.1 The cost of collective action ..................................................................................28
2.2.2 Principals and agents..............................................................................................30
2.2.3 Decision rules and mode of coordination ..............................................................34
2.2.4 Formalization .........................................................................................................46
2.3 Politics, feedback, and the political economy ....................................................................54
2.3.1 Regime outcomes and the macropolity ..................................................................55
2.3.2 Political representation, institutions, and policy feedback .....................................58
2.3.3 Friction, risk, and compromise ..............................................................................60
2.4 Conclusion .........................................................................................................................66
Chapter 3 Industrial Policy Regimes .............................................................................................69
3.1 Capacities for innovation ...................................................................................................69
3.1.1 Radical, incremental, and subsequent wave innovation ........................................70
3.1.2 Competitive advantage and the opportunity niche .................................................74
3.1.3 The knowledge transfer trade-off ...........................................................................79
3.2 Coordination and competition ............................................................................................83
3.2.1 Varieties of capitalism ...........................................................................................84
3.2.2 Innovation systems, clusters, and helixes ..............................................................90
3.2.3 Neo-corporatism and network analysis ..................................................................97
3.3 Hypotheses, models, and preliminary evidence ...............................................................107
3.3.1 Hypotheses ...........................................................................................................107
3.3.2 Modelling structurally-embedded behaviour .......................................................110
3.3.3 Preliminary evidence ...........................................................................................126
3.4 Propositions and implications ..........................................................................................136
Chapter 4 Case Studies ................................................................................................................140
4.1 Aluminum shipbuilding in British Columbia ..................................................................143
4.1.1 Mobilization .........................................................................................................144
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4.1.2 Building competence ...........................................................................................152
4.1.3 The politics of policy termination ........................................................................162
4.2 Agricultural biotechnology: the case of canola ...............................................................164
4.2.1 Polycentric initiation ............................................................................................166
4.2.2 Cultivating knowledge .........................................................................................174
4.2.3 Engineered to maturity .........................................................................................179
4.3 Green energy Ontario .......................................................................................................186
4.3.1 Inside initiation ....................................................................................................187
4.3.2 Mortgaging competence .......................................................................................192
4.3.3 Dimming the switch .............................................................................................196
4.4 Evaluating the evidence ...................................................................................................199
4.5 Conclusion .......................................................................................................................208
Chapter 5 Conclusion ...................................................................................................................209
References ....................................................................................................................................219
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List of Tables
Table 2.1: value creation, distribution, and mode of coordination
Table 3.1: network and policy change characteristics based on size and member preferences
Table 3.2: typology of networks based on institutional characteristics
Table 3.3: structural typology of industrial policy regimes
Table 3.4: least squares estimates, annual per cent change in economic subsidies
Box 3.1: propositions and implications
Table 4.1: major coordination expenses of the BC aluminum shipbuilding regime
Table 4.2: public transfers to entities in the agricultural biotechnology regime
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List of Figures
Figure 1.1: magnitude of industrial policy
Figure 1.2: type of industrial policy
Figure 1.3: Canadian industrial policies, 1989-2013
Figure 1.4: rate of regime mobilization
Figure 1.5: structure of the argument
Figure 1.6: Industry Canada outlays as case observations in a regression model
Figure 2.1: the regime-theoretic division of labour
Figure 2.2: pathways to mobilization
Figure 2.3: the possibility frontier
Figure 2.4: Olson’s paradox of collective action
Figure 2.5: production and policy possibilities
Figure 2.6: welfare losses from monopoly and monopsony rents
Figure 2.7: positive coordination
Figure 2.8: distribution in positive coordination and positive coordination with bargaining
Figure 2.9: coordination as a battle bargaining game
Figure 2.10: winsets under majority and unanimity rule
Figure 2.11: double peaked preferences in battle
Figure 2.12: bargaining as a game of chicken
Figure 2.13: agency slippage as a prisoner’s dilemma
Figure 2.14: coordination as an assurance problem
Figure 2.15: opportunity costs and the price of joint production
Figure 2.16: choice probabilities in a Monte Carlo decision model
Figure 2.17: preference profiles with bias toward less risky alternatives
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Figure 2.18: payoff performance of decision rules as a function of risk
Figure 2.19: the macropolitical friction scale
Figure 3.1: successive waves of innovation
Figure 3.2: competition and technological development
Figure 3.3: innovation and institutional advantage
Figure 3.4: correlation between micropolitical friction and macropolitical friction
Figure 3.5: the triple helix and regime theory
Figure 3.6: levels of corporatism
Figure 3.7: corporatism and intellectual evolution
Figure 3.8: four archetypes of industrial policy
Figure 3.9: hypothetical probability tree model of industrial policy regime structure
Figure 3.10: expected versus successful industrial policy regime configurations
Figure 3.11: cost disparities and regime size as a function of industrial policy type
Figure 3.12: strategies and payoffs in initiation games
Figure 3.13: strategies and payoffs in operation games
Figure 3.14: cost disparities. regime size, and strategy as a function of industrial policy type
Figure 3.15: preferences of government and industry with budget constraints
Figure 3.16: economic indicators and macropolitical friction
Figure 3.17: density of annual change in subsidy expenditure
Figure 3.18: macroinstitutional friction and major punctuations in subsidy expenditures
Figure 3.19: associational membership in coordinated and liberal political economies
Figure 3.20: institutional friction and average annual growth since 1990
Figure 4.1: the British Columbia aluminum shipbuilding regime
Figure 4.2: geography of the BC aluminum shipbuilding regime
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Figure 4.3: production costs by participant in the BC aluminum shipbuilding regime
Figure 4.4: marginal rate of productivity, HSF001-HSF003
Figure 4.5: significant events in canola development
Figure 4.6: the canola regime
Figure 4.7: geographical dispersion of the Canadian agricultural biotechnology regime
Figure 4.8: manufacturing employment in Ontario, 2000-2017
Figure 4.9: the Ontario green energy regime
Figure 4.10: geographical dispersion of the Ontario green energy regime
Figure 4.11: state of technology in three cases of Canadian industrial policy
Figure 4.12: media sentiment toward industrial policies over time
Figure 4.13: balance of trade statistics
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Chapter 1
Introduction
What is progress? Moreover, how is progress achieved? Historically, political economists
have defined progress as the preservation and promotion of civilization against pressures toward
decline. Although that is about the extent of consensus on the matter, three themes have remained
salient over time: technology, distribution, and the administrative state. For instance,
contemplating the vitality of the Greek city-states, Plato considered progress to be a function of
economic production, with advance occurring roughly at the rate by which knowledge is translated
to applied skill. Around the same time, in some of the earliest works of political economy,
Xenophon drafted recommendations for activist export and technology policies in Hiero and Ways
and Means. Not much later, in Politics, Aristotle championed the virtues of private property in a
mixed economy as he mused over how surplus ought to be invested for the benefit of the
community. From the middle ages to the end of the mercantile era, imperial advisers pondered
how states might develop the technological means to compete effectively for the world’s riches.
Subsequently, after recognizing the pathologies of the mercantile system, the classical economists
promoted the distributive benefits of laissez faire but qualified their faith in the market by calling
on the state to provide public goods and coordinate social investment.1 This “markets plus”
understanding of economic growth carried over to the neoclassical era and found expression in
Keynesian theory in the decades following the Great Depression. Although the ascent of
monetarism and public choice theory in the late 1970s cast doubt on the state’s ability to coordinate
economic affairs, mainstream applied economics has always envisioned a positive role for the state
in the economy (Boadway & Wildasin 1984; Burki & Perry 1998).2
1 This early nod to market failure, and the consequent need for the state to finance the provision of undersupplied
goods, was articulated by Adam Smith in An inquiry into the nature and causes of the wealth of nations. Specifically,
Smith (1776: 534) deemed it appropriate and desirable for the state to finance ventures where risk is too great, or rate
return too low, to attract private investment (see also Samuels & Medema 2005). 2 The issue is not that competitive markets fail to produce socially optimum conditions, but rather that markets
virtually always fall short of perfect competition. Perfectly competitive markets are welfare enhancing in the sense
that they “equilibrate,” meaning producers extract no profit from exchange. Desire for profit, however, encourages
entrepreneurship since innovation yields monopoly rents, if only in the short term, in competitive markets. Indeed,
innovation is the only way to obtain profit in competitive markets. Such a world, far from being paradise for the
capitalist, is a consumer’s utopia. Society benefits, on one hand, from markets in equilibrium, in which price equals
2
While the majority of great thinkers, both living and dead, agree some form of intervention
on the part of government is necessary for societal progression, what constitutes appropriate
intervention remains an open question. Should the state be a producer? A financier? Or simply a
coordinator? If the state should be responsible for providing public goods, should it provide them
directly or arrange for their private delivery? The same can be asked of collective goods whose
provision is limited by underinvestment due to non-appropriability or low rate of return (Musgrave
1959; Olson 1965; Picciotto 1995). Incidentally, the generation of knowledge, important as it may
be for progress, suffers from underinvestment in the free market (Arrow 1962). Although it is
possible to solve the appropriability problem by granting property rights to producers (in this case,
patents), knowledge production has considerable barriers to entry. This means the market for
knowledge will be imperfectly competitive in the absence of additional intervention.
Consequently, in the absence of corrective measures, knowledge-based industries will gravitate
toward monopoly; firms of sufficient size will be capable of innovation, but will underproduce it,
extract monopoly rents from proprietary knowledge, and protect their monopoly position by
guarding trade secrets (Boldrin & Levine 2004; Cohen, Nelson & Walsh 2000). While innovation
is intrinsically creative —and thus beneficial to society— it is destructive to established firms,
especially those with substantial sunk costs in productive capital (Schumpeter 1942).3 The
question is then: how best to disseminate knowledge throughout an economy so as to maximize
innovation and social benefit?
In answering this question, many have debated the vices and virtues of industrial policy.4
Industrial policy is an attempt by government to influence the composition of firms within its
cost, and from private entrepreneurship, on the other. Moreover, in such a world, there is no need for state intervention
in the economy. With this, I agree. However, applied economics has always recognized that competitive markets are
extremely rare. Consequently, profit may be easily extracted by engaging in non-entrepreneurial pursuits. In other
words, the profit motive is rendered perverse, promoting profit-seeking behaviour that is not entrepreneurial, which
leads to underinvestment in welfare-enhancing innovations. 3 The extent to which established firms are incentivized to resist restructuring is a function of their “asset specificity”
—the degree to which production is specialized with respect to a particular good or service. As discussed in greater
detail in Chapter 3, firms threatened with obsolescence are inclined to resist industrial restructuring, although this
inclination can be blunted by opportunities for losing firms to benefit from proactive restructuring. 4 The modern literature on industrial policy is amenable to periodization. Mid-twentieth century thought is well
reflected in Hirschman (1958), Hoselitz & Gerschenkron (1952), and Heilbroner (1970). Most detailed analyses were
undertaken in the late 1970s and early 1980s, namely Zysman (1977), McKay and Grant (1983), and Johnson (1984).
For more current discussions, see Krugman (1993), Evans (1995), Cimoli, Dosi and Stiglitz (2009), and Stiglitz &
Yifu (2013).
3
jurisdiction. It involves some combination of regulation, fiscal policy, and, in some cases,
monetary policy instruments. Industrial policy can be highly planned, with government setting
precise production targets: what is known as “vertical” industrial policy. Or it can be arm’s length:
what is known as “horizontal” industrial policy.
Intention is absent from my definition of industrial policy because objectives vary. Many
think of industrial policy as “shelter” or “protectionism.” But already we may discern two
seemingly similar but potentially distinct rationales for pursuing industrial policy: one where the
state shelters infant industries from competition so that they may one day become competitive, and
another where protection is an end in itself. The latter tendency is revealing of the fact that
industrial policy is often employed as an instrument, not of economic policy narrowly-defined, but
of public policy more broadly (Vogel 1987). Indeed, industrial policy is often purely redistributive,
as is the case when industry in depressed regions is kept afloat thanks entirely to government
subsidies. Other times, industrial policy is employed to realize social goals considered otherwise
unattainable, such as environmental sustainability. Occasionally, industrial policy both serves a
redistributive function and is employed in pursuit of social goals, as when producers receive
assistance under the auspices of rural or regional development, for example.
Industrial policy factors large in economic debates because it runs afoul of the simple
assumption that markets are superior to intervention in assuring the efficient allocation of
resources. As will become imminently clear, however, the real debate around industrial policy is
not one of states versus markets. Rather, it is about the appropriate amount and type of intervention
and whether interventions undertaken to serve some functions prevent others from being served
effectively (Brander 2006). Most auspiciously, returning to the question of how society progresses,
considerable debate revolves around whether interventions required for technological innovation
constitute distortions that do more harm to society than good (Leahy & Neary 2009).
This purpose of this thesis is to shed light on three aspects of industrial policy: its origins,
operation, and outcomes. The discussion of origins is concerned with the conditions that give rise
to industrial policy. Operation is about how industrial policy works in practice. Outcomes are
social, economic, and political consequences of industrial policy. By analyzing these three aspects
of industrial policy, this thesis advances a theoretical argument and offers empirical evidence about
which types of industrial policy are beneficial, which are detrimental, and which are likely to
succeed (or fail) in certain contexts.
4
Consistent with Hall and Soskice (2001), the theory and evidence presented in this thesis
suggests institutions typical of Anglo-Saxon liberal democracies yield competitive advantage in
radically innovative “first wave” industries, but disadvantage in incrementally innovative and
“subsequent wave” industries. This is because liberal-majoritarian institutions are relatively
responsive and permissive of risky policies compared to consensual-representative institutions, the
latter of which encourage negotiated, incremental policymaking. Consequently, industrial policy
in liberal political economies is argued to perform best when it is geared toward stimulating
industries that are sui generis. By contrast, industrial policy in liberal political economies is argued
to perform poorly when it is geared toward industrial upgrading, restructuring, or securing late
mover advantage —areas in which more highly coordinated political economies are argued to
excel.
Methodologically, the thesis relies on formal modelling, cross-national quantitative
evidence, and three detailed case studies. Thus, although the empirical focus of original research
in this thesis is Canadian, the theory developed herein and lessons drawn therefrom are
generalizable to industrialized democracies. While the thesis arguably raises more questions than
it answers, I hope readers find it answers many questions very well, and that the questions it raises
for further research are interesting ones.
1.1 Industrial policy
My definition of industrial policy is deliberately simple. Nevertheless, there are several
facets to the definition that warrant clarification. As stated in the introduction to this chapter,
industrial policy involves government influence on the composition of firms within its jurisdiction.
What does it mean to influence the composition of firms? Industries, and the firms that comprise
them, produce goods for consumption. Industrial policy, then, involves effort to alter production.
This involves somehow changing one or more non-fixed factors of production.
The non-fixed factors of production are labour (workers), capital (machines and tools) and
entrepreneurship (innovation).5 Labour and capital can be adjusted both quantitatively and
5 Land is a fixed factor of production. Once land is altered, it becomes capital.
5
qualitatively. When greater quantities of labour and capital are employed, more goods can be
produced.6 Qualitative changes to labour and capital, on the other hand, may result in either or
both quantitative and qualitative changes to goods produced. If workers are trained, or if capital is
upgraded, production may occur at a greater rate. Alternatively, workers can be trained, and
machines purchased, to produce different or improved goods. The factor of production that
determines whether and how a firm’s production changes qualitatively over time is
entrepreneurship: the mix of ingenuity and risk-bearing that corresponds with innovation.
While individual firms can alter their own production by modifying their factors of
production, industrial policy involves collective action: the collective pursuit of gains that cannot
be attained unilaterally. Industrial policy is the non-spontaneous means by which industry changes.
By non-spontaneous, I mean industrial policy stems from a conscious and collective effort by the
actors involved. Industrial policy is therefore extraneous to the “invisible hand” of the market.
Whereas the spontaneous order of the market is said to emerge from economic actors’ non-
cooperative pursuit of their individual self-interest, coordinated production depends upon the
“visible hand” of management (Chandler 1977).
The first step in understanding management is getting a sense of the actors involved. Who
is doing the managing? I have established that industry is comprised of firms. But notice the word
“government” in the definition of industrial policy. What is government and why is it necessary
that government be mentioned in the, supposedly minimalist, definition of industrial policy? The
quick answer is that industrial policy is public policy and public policy is what “government
decides to do or not to do” (Dye 1972).
Why is industrial policy necessarily public policy? Can’t private entities conspire to alter
the local composition of firms? Of course they can. In fact, a great deal of literature on
agglomeration economics, innovation systems, industrial districts, and knowledge clusters
highlights the fact that private firms often coordinate among themselves to effect what might be
called industrial policy. On this point, state theorists note that concerted efforts to solve collective
6 More accurately, the productivity of labour depends on the utilization of capital. When capital approaches capacity,
each additional unit of labour will contribute less and less to output until additional labour detracts from production
(excess workers have nothing to do except get in the way). Economists call this the diminishing marginal product of
labour.
6
action problems actually give rise to governing entities that are state-like, if not officially
recognized states (Jessop 1990; see also Ostrom 1990). I will call such entities regimes.
A major theme in this thesis revolves around whether and how regimes marshal the
resources required to achieve collective objectives. When they cannot, regimes require assistance
from still larger governing entities, presumably official governments. But we need to be careful
about what we call assistance. It is not stated in the definition of industrial policy that government
necessarily be a major or even vocal actor. In many cases, the role of government in industrial
policy is nearly invisible. Instead of being a direct player, the state permits and makes possible
private coordination “in the shadow of hierarchy.”7 Here, despite being nearly invisible,
government’s role is critical.
It would seem government is integral to industrial policy because public entities can
coordinate collective action in ways private entities cannot. Government facilitates collective
action by assuming costs of coordination that would otherwise dissuade private actors from
engaging in industrial policy —or any collective action, for that matter— on their own (Evans
1995; Gerschenkron 1962).8 The costs of coordination are known as transaction costs. Transaction
costs can be assumed by governments in three ways. One way government can assume transaction
costs is by establishing a physical organizational presence as a coordinator. In this case, a
government entity acts as an interface for business coordination. Another way government can
assume transaction costs is by directly absorbing the cost of coordination by offering grants and
subsidies to firms that offset private costs of coordination. The third way government can assume
transaction costs is by offering firms tax incentives to coordinate among themselves, such as
deductible expenses.
In practice, industrial policy usually involves a mix of instruments intended to coordinate
production. At minimum industrial policy involves indirect government incentives to business for
the purpose of influencing the composition of firms in its jurisdiction. Does this mean the
definition of industrial policy is too restricted? I think not. If anything, the definition errs on the
7 In these cases, authority is delegated by government to private entities whose behaviour is governed by the
omnipresent threat of direct government intervention if private actors do not play by the rules, however tacitly
understood the rules may be (Scharpf 1993). 8 More accurately, public entities can coordinate collective action in ways that rationally-behaving private entities
typically will not in the absence of very strong normative incentives.
7
side of being too broad. If one thinks of industrial policy in terms of scale or degree, my definition
encompasses even the most minor industrial policies —e.g., those in which there are very modest
indirect government incentives for firms to coordinate production. Against the charge that the
definition is too broad —that it allows too many things to fall under the ambit of industrial policy—
what matters is that we have conceptual tools necessary to clearly distinguish between otherwise
vague notions of “major” and “minor” industrial policies.
On this point, a good deal of terminological debate surrounds whether all forms of business
support constitute industrial policy (Greenwald & Stiglitz 2013). Many so-called “horizontal”
industrial policies involve little more than government investment in vocational training and the
implementation of tax supports. Whether or not government action constitutes industrial policy or
simply “policy toward industry” depends on whether government seeks to alter the composition
of firms. In most cases, then, “horizontal” policy is industrial policy. Given that industrial policy
encompasses so many different things, for the term to be useful, we require more precise means of
classifying industrial policies.
So far, I have established that, at minimum, industrial policy exhibits some involvement
on the part of government in the coordination of production, no matter how indirect. Aside from
coordination, the other major aspect of industrial policy is production itself: the actual process of
producing goods. According to my definition of industrial policy, it is not necessary that
government be involved in production. All that matters is that government plays a role in
coordinating production among firms. Yet, in practice, government is often involved in the
production of goods as well, either directly or indirectly.
Direct government involvement in production occurs when state entities —namely state-
owned enterprises— produce for the market. Direct government production is much more common
in some countries than others (compare France to the United States, for instance). In general, there
has been a shift from direct government involvement in production to more indirect involvement.
The shift has been far from complete, however, giving rise to joint ventures and partial government
ownership of otherwise private firms (Howse & Chandler 1997). Indirect government involvement
in production occurs when government finances production undertaken by private firms. Usually,
indirect government involvement in production takes the form of cash grants, loans, or tax
incentives. While direct government involvement in production has been on the wane since the
8
late 1970s, indirect involvement of government in production is pervasive across the industrialized
world (Evans 1995; Mazzucato 2013).
Now that we have a basic definition of industrial policy and an appreciation of coordination
and production as its two core elements, we can begin to talk systematically about the different
characteristics industrial policies can take on. At the most basic level, industrial policy varies on
two dimensions: magnitude and type.
Magnitude is the “amount” of coordinated production in an industry. It is a quantifiable
measure of coordinated production, which is facilitated by government either or both directly and
indirectly. These three aspects —coordination, production, and government involvement— are
represented as continuous axes in Figure 1.1. “Major” industrial policy is defined by a high level
of coordinated production; “minor” industrial policy has little coordinated production. Since
government involvement is a necessary feature of industrial policy, the more involvement on the
part of government with respect to coordination and production, the greater the magnitude of
industrial policy.
Figure 1.1: magnitude of industrial policy
9
Figure 1.1 conveys eight general configurations and innumerable possible points along the
three axes. As such, Figure 1.1 is useful for understanding the nuances surrounding the magnitude
of industrial policy. Note, however, that Figure 1.1 conveys only total government involvement;
it does not convey information about which axis —coordination, production, or both—
government resources are directed toward. For this, we require more sophisticated analytical tools,
which are developed in Chapter 3. Nevertheless, one can already imagine dozens of possibilities
besides the two configurations representative of “major” and “minor” industrial policy identified
in Figure 1.1. A point located in the bottom north-west octant, for example, would be a situation
in which there is a lot of production but only moderate amounts of coordination and government
involvement. A point in the top south-east octant, by contrast, would involve much government
involvement and a high level of coordination, but only a modest level of production.
Although possibilities seem endless, it is worth mentioning that, for reasons touched on
above and explored in greater detail in Chapter 2, it is unlikely that we will observe high levels of
coordination in the absence of considerable government involvement. When we do, it will be in
the context of small localized economies with few transaction costs (Olson 1965; Ostrom 1990).
Due to the small scale of these economies, the volume of production will be modest. The
implication is that coordinated production of significant scale requires the involvement of public
entities with substantial discretion over resource allocation —i.e., the official government.
Type of industrial policy refers to its qualitative characteristics. Similar to magnitude, these
characteristics can be displayed on three continuous axes. These axes correspond to questions of
what, how, and when. The axis representative of what —that is, what kind of industrial policy—
is a continuum with sunrise industry at one end and sunset industry at the other. Sunrise and sunset
indicate whether an industry is at the beginning of the product cycle or nearing the end.9 The axis
conveying how industrial policy is formulated is a continuum that ranges from negotiated to
executive. Negotiated industrial policy is formulated according to consensus-based procedures;
executive industrial policy is formulated in policymaking contexts where executive authority is
concentrated. Finally, the when axis denotes timing. It ranges from proactive to reactive. Proactive
9 The product cycle —or product life cycle— is the time period between product inception and obsolescence. It is
generally understood in stages, namely: introduction, growth, maturity and decline. In Chapter 3, I present product
cycles as successive waves of innovation, which take the form of logistic growth functions.
10
industrial policy is anticipatory in the sense that it is “ahead of the curve” with respect to market
demand. Reactive industrial policy, by contrast, is defensive in the sense that it is intended to
hinder or offset changes in market conditions that put domestic industry at a disadvantage.
Figure 1.2: type of industrial policy
Figure 1.2 depicts the eight general types of industrial policy. As with magnitude, there are
also innumerable possible points along the three axes. Notice the value judgements in Figure 1.2:
reactive (defensive) industrial policy toward sunset industries is considered “bad,” while proactive
(anticipatory) industrial policy toward sunrise industries is considered “good.” Why is this?
Virtually all economists agree that protectionism is generally bad for the economy as a whole
(Baldwin & Evenett 2009). Where economists disagree is on the specific circumstances in which
protectionism might be advantageous. Most concede that protectionism should be permitted if it
improves aggregate welfare or if it corrects market failure. Bracketing (for now) the question of
whether government is ever capable of adequately recognizing and correcting market failure,
protectionism can be justified if it facilitates economic activity that would not otherwise occur in
the market (Mueller 2003; cf. Hayek 1988).
An industry specializing in a product nearing obsolescence is, according to the above
logic, most unworthy of government assistance. It is especially ill-advised for government to
11
support declining industries with ad hoc “reactive” assistance in response to changing market
conditions (Davenport et al., 1982). This is “bad” industrial policy. When sunset industry must be
supported, it is better to effect anticipatory policies that facilitate positive transitions, such as
product innovation (Magaziner & Reich 1982).
By contrast, “good” industrial policy accomplishes what the market presumably cannot. It
involves proactively supporting sunrise industries in order to get them through their infancy. By
this logic, the best industrial policies are those that “get in on the ground floor” at the very
beginning of the product cycle. While true for the most part, the story is somewhat more complex.
Developing radically novel technologies is both costly and risky. For one thing, returns to scale
are absent in the experimental and prototype stages of product development. What is more, after
commercialization, first-movers are liable to be out maneuvered by competitors who have opted
to wait and learn from first-movers’ shortcomings in order to effect either incremental
improvements on “first wave” product designs or introduce an entirely new “second wave”
design.10
I explore matters of entry with respect to first-mover, second-mover, and late-comer
advantage in detail in Chapter 3, wherein I outline four archetypical models of industrial policy:
sui generis industrial policy, which involves the proactive pursuit of sunrise technologies;
upgrading, which entails proactive innovation on existing technologies; restructuring, which
implies reactive reorganization of existing industries toward current technological standards; and
late mover industrial policy, which exemplifies reactive attempts to catch up to international
competition in maturing industries. Sui generis industrial policy and upgrading fall under the
heading of good industrial policy, while restructuring and late mover industrial policy fall in the
ambit of bad.
10 My distinction between radical and incremental innovation is based on the extent of capital investment required to
instantiate innovation. Radical innovations involve building capital from scratch; incremental innovations involve
building on existing capital. Second wave (or subsequent wave) innovation involves what Schumpeter (1942) called
“creative destruction” —replacing existing capital with new so as to fashion a novel product design. For instance,
colour television incrementally improved, albeit drastically so, on the tube-based black and white TV design. By
contrast, digital television of the LCD/flat screen variety required entirely new capital to produce. While both
conventional (tube-based) and digital television are one technology (television), digital TV constituted a departure
from the conventional first wave design. Thus, each wave of innovation (represented as a logistic growth curve) can
be divided segmentally into a radically innovative period, an incrementally innovative period, and a maturation period.
See Chapter 3 for a more detailed discussion.
12
Notice the value judgement attached to industrial policy (“good” or “bad”) in Figure 1.2 is
neutral with respect to whether policy is executive (executive-dominated) or negotiated
(consensus-based). Investigating the merits and demerits of executive and negotiated industrial
policy is a major component of this thesis. Both approaches have strengths and weaknesses, which
mirror each other in many ways. As discussed in greater detail in the third section of this chapter,
economies whose institutions facilitate coordinated production —often referred to as coordinated
market economies— tend toward negotiated industrial policy and exhibit competence to effect the
upgrading type of industrial policy. Conversely, economies with more market oriented institutions
—often referred to as liberal market economies— tend toward executive industrial policy and
exhibit competence to effect sui generis industrial policy as well as tendencies (some pathological)
toward restructuring and late mover industrial policies.
1.1.1 Why study industrial policy?
So far, I have established what industrial policy is and introduced some conceptual tools
for studying it. But why is industrial policy worth studying in the first place? The study of industrial
policy is worthwhile for two reasons: one normative and one analytical. If proponents are correct
that industrial policy factors significantly in processes of technological, economic, and social
progression, we ought to study industrial policy so that we may draw lessons about how it may be
best implemented. Conversely, if industrial policy is destructive, as others claim, the more theory
and evidence stacked against it, the better. These are normative rationales for studying industrial
policy. From an analytical point of view, industrial policy is worth studying simply by virtue of
the fact that it takes place. The question is not whether and why industrial policy does or does not
work, but rather how it works.
My purpose is analytical. In my view, normative evaluations should come after the fact.
And since the industrial policy debate remains far from resolved, I leave it to readers to draw their
own (hopefully tentative) conclusions. Readers will find the theory facilitates normative
assessment, albeit unintentionally, by engaging thoroughly with the concepts of Kaldor and Pareto
efficiency (see Chapter 2).
13
1.1.2 The legacy of industrial policy
While many have doubts about the current relevance of industrial policy, few would deny
that industrial policy has an important place in history. The mercantile system, the New Deal in
the United States, its fascist-corporatist counterpart in Europe, and central planning in the war
economy of the late 1930s and early 1940s all point to the fact that industrial policy was integral
to achieving modernity (Dobbin 1997). Indeed, the dawn of each industrial revolution is rife with
opportunity for state investment in sunrise industries (Schwab 2017). The question is whether
industrial policy ever significantly subsided.
Interventionist themes were sustained throughout the Cold War, albeit in different guise
from earlier periods. The latter half of the twentieth century witnessed considerable variation in
national development strategies. In Europe, the ravages of war and the ascent of social democratic
ideology facilitated the proliferation of state owned enterprises. Along with government ownership
of the means of production came industrial planning. In some countries (France, for example)
planning was rather centralized. In others, planning was characterized by a new wave of tripartite
consensus-based policymaking known as neo-corporatism.11 In North America, the rise of the
United States to superpower status brought with it an imperative to invest a significant portion of
the public budget into state of the art technologies ostensibly related to defense, the majority of
research and development for which took place in federal laboratories (Weiss 2014). Canada,
meanwhile, pursued a mild strategy of nationalization and restricted foreign investment. In the
developing world, governments of various ideological stripes pursued “import substitution
industrialization.” As in Europe, intervention in the developing world was characterized by the use
of state owned enterprise and neo-corporatist interest intermediation (Spalding 1981).
Contrary to the predictions of several esteemed twentieth century economists —most
notably Joseph Schumpeter and John Kenneth Galbraith— post-war technocracy was not the end
of history. In the late 1970s, the concomitant rise of monetarism, supply side economics, and public
choice theory quelled enthusiasm for intervention. On one hand, simultaneously high
unemployment and inflation cast doubt on the Keynesian dictum that inflation and unemployment
11 The three “parts” of tripartite negotiations are business, labour, and government. Some, however, refer to bi-partite
arrangements as corporatist, in which case labour or government are weakly represented or missing. Others refer to
corporatism without labour as concertation (compare Atkinson & Coleman 1989b; Pempel & Tsunekawa 1979).
14
mirrored each other as a trade-off, lending credence to monetarist economic theory, which posits
that inflation is a consequence of market distortions (e.g., interventions and “government failure”)
and mismanagement of the money supply (Cagan 1979). On the other hand, economic growth had
not kept pace with the expansion of the public sector, which was hypothesized by public choice
theorists to be plagued by perverse incentives toward “self-aggrandizement” (Niskanen 1971).
Meanwhile, policymakers in the area of trade liberalization made significant strides toward
abolishing tariffs —the prime instrument of protectionism— in the Tokyo and Uruguay
negotiations of the General Agreement on Trade and Tariffs (GATT).
Although the demise of Keynesianism, the rise of public choice theory, monetarism, supply
side economics, and the push toward free trade marked a major sea change in the 1980s, it is
important to keep things in perspective. Public choice theory, although initially skeptical of the
state, has evolved such that public choice theorists now call upon the state to provide a long list of
goods and services (Mueller 2003). As for monetarism, while the inflation-unemployment
anomaly appeared to affirm monetarist economic theory, monetarism never attained status as the
dominant paradigm in public sector economics (Boadway & Wildasin 1984). Monetarist policies,
where they were implemented, did not always yield desired outcomes (Scharpf 1987). The same
can be said for supply side taxation policies (Krugman 1994). Major reforms occurred instead in
the realm of development economics: a field stimulated by trade liberalization and the
establishment of institutions for coordinating international trade and investment. Yet, the so-called
“Washington consensus,” emblematic as it was of skepticism toward intervention typical of the
period, was nevertheless incongruous in its theoretical orientation (World Bank 1991; 1993).12
Moreover, policy prescriptions became increasingly heterodox throughout the 1990s as
development economists returned their focus toward Keynesian principles (Stiglitz 1998).
12 Although Keynesianism appeared to be down for the count in 1979, the “neo-classical synthesis” of Keynes’ and
Marshall’s ideas has remained the cornerstone of mainstream economics since World War II. This is a fact of which
John Williamson seems to have been aware when he coined the term “Washington consensus” (see Williamson 1990:
19). Personally, I am skeptical of the concept’s use value. For one thing, there appears to have been scant consensus
among development economists in Washington on whether laissez faire or more interventionist policies were more
likely to assure growth in the 1990s (World Bank 1993). Moreover, "conditionality" —the conditions upon which
international lending institutions extended financing to developing countries in the 1990s— was much more flexible
than critics allege (see Drazen [2002] on voluntary "ownership" of IMF conditions). By 2000, Williamson himself
was “cautioning that no consensus on a wider agenda currently exists” (Williamson 2000).
15
Empirical reality forced analysts to reorient their thinking. The problem was this: countries
which most closely followed the policy prescriptions of international development organizations
—namely the International Monetary Fund (IMF)— experienced poorer economic performance
throughout the 1990s than countries which most blatantly ignored them (Rodrik 2007). The latter
camp was comprised mostly of East Asian economies —notably, South Korea, Taiwan, and
Singapore— which experienced spectacular growth after the 1980s by pursuing highly
interventionist and often protectionist economic policies, including industrial policy (Wade 2003).
Despite a regional financial crisis in 1997 and some subsequent reforms, the “East Asian miracle”
has left its mark on economists’ thinking.
Given its centrality in the process of industrialization, most active commentators on
industrial policy are rather fixated on the economics of development. This is in no small part due
to the fact that major development organizations have stepped in to coordinate the discourse. For
example, in the spring of 2012, the World Bank hosted a roundtable in Washington, DC devoted
to establishing current issues and themes surrounding industrial policy. Later that summer, the
United Nations sponsored a follow up workshop on the implications of industrial policy for Africa.
These conferences set the agenda for subsequent work headed up by Joseph Stiglitz at the
International Economic Association on the appropriate role for industrial policy in economic
development (Noman & Stiglitz 2015; Stiglitz & Yifu 2013).
The focus of this literature tends to be on very far reaching industrial policy —what might
appropriately be called “industrialization policy.” These policies are, in actuality, complex bundles
of policies which facilitate the development of indigenous investment capital, indigenous
technology, modern infrastructure, or a modern workforce (Amsden 1989; Freeman 1987).
Intervention is presumed to be key to the cultivation of economic advantage. Yet, given that policy
prescriptions are so far reaching, intellectual attention tends to be placed on institutional structures,
broadly defined, not on particular policies and their governing institutions per se (but see Aoki
1997).13 As Rodrik (2007: 27) argues, “there are certain prerequisites and institutional
complements that have to be in place for this approach to make sense.”
13 For instance, Evans (1995) attributes successful industrialization to the proper ratio of bureaucratic autonomy to
bureaucratic “embeddedness” —or the extent to which public sector principals can control private sector agents so as
to exploit private capital for societal benefit without stripping the private sector of incentives that make firms
16
However, as per the discussion surrounding Figure 1.2, there are different types of
industrial policy, each of which functions best under certain institutional conditions —a point to
which I return in the section on regime theory below. The literature on “developmental states”
tends to focus on negotiated industrial policy in coordinated East Asian political economies
(granted, authors occasionally endeavour to impart lessons in institution building from coordinated
economies to those with a dearth of institutions of economic governance [Hira 2007]). Relatively
little has been written on executive industrial policy in liberal political economies (but see
Atkinson and Coleman [1989a], Harris [1985], Johnson [1984], Nelson [1987], Zukin [1985] for
exceptions).
In developed countries, industrial policy appears to gain salience during periods of poor
economic performance (Blais 1986). Here, too, the debate tends to be dominated by big picture
thinking. However, whereas the developmental states literature emphasizes intervention writ large,
current discussions of industrial policy in the developed world emphasize “neutrality” (cf.
Katzenstein 1985). The argument is that, since governments lack the foresight to effectively “pick
winners” —that is, to effectively pick the right sunrise industries— the appropriate role for the
state is to facilitate transactions between business firms and research institutions in a non-
dictatorial fashion (Etzkowitz & Leydesdorff 2000; Trebilcock 1986). This approach has come to
be known as “horizontal” industrial policy. Yet, as Greenwald and Stiglitz (2013) point out,
seemingly neutral policies are seldom indiscriminate. Rather, they tend to favour certain economic
groups and/or seek to accomplish specific goals —usually the cultivation of niche advantage in
sunrise industries. Recalling Figures 1.1 and 1.2, these policies rank high on the coordination,
sunrise industry, and proactive (anticipatory) axes, but low on the production axis.
Beyond lack of faith in government to successfully execute planned ("vertical") industrial
policy, opponents routinely cite negative consequences of industrial policy for trade (Brander &
Spencer 1985). While the progressive abolition of tariffs significantly opened up world trade, the
increased use of non-tariff barriers (namely subsidies) in the 1980s was argued to pit states against
innovative and competitive. In Chapters 2 and 3, I demonstrate that achieving this balance entails walking a very fine
line; on one hand, the state risks being exploited by firms demanding monopoly rents in exchange for their cooperation,
on the other, moral hazard problems that accompany public provision invite cost escalation the likes of which are kept
in check by the market under normal circumstances.
17
one another in wasteful subsidy wars (OECD 1984).14 On this point, it is however important to
note that industrial policy is not necessarily confined to domestic politics. In the international
arena, there was some movement toward “negotiated protectionism” in the 1980s, in which
governments attempted to strike agreements under which specific industries would be sheltered to
the mutual benefit of trade partners while other sectors of the economy were liberalized (Aggarwal,
Keohane & Yoffie 1987). Targeted, vertical industrial policy, therefore, need not be antithetical to
trade liberalization (Diebold 1980; Harris 1985; OECD 1994).
Nevertheless, the failure of many such negotiations led observers to assume that, in the
great free trade debates of the 1980s, advocates of comprehensive free trade won out over
proponents of industrial policy. This view, however, ignores the fact that the heyday of so-called
“neo-liberal globalization” (roughly 1990 to 2008) was characterized by persistent use of non-
tariff barriers (Doern & Tomlin 1996; Hollingsworth, Schmitter & Streeck 1994; Ray 1987). While
the muddle of simultaneously liberal and protectionist policies that followed the flood of free trade
agreements in the 1990s was not what earlier proponents of negotiated protectionism had in mind,
it would be hasty to dismiss protectionist policies following free trade as incoherent. Mariana
Mazzucato’s 2011 book The Entrepreneurial State made waves for confirming suspicions that
vertical industrial policy has persisted after both industrialization and liberalization in even the
most market-oriented economies. It just tends to occur behind the scenes.
Along these lines, this thesis demonstrates beyond a doubt that industrial policy happens.
Moreover, industrial policy has been happening around the world, in some form or another, since
the dawn of civilization. This, of course, is not to say that industrial policy is constant. The extent
or degree of industrial policy intervention is variable within and across jurisdictions and over time.
So too is the character of industrial policy. These variables, representative of magnitude and type,
are useful for understanding the legacy of industrial policy, a subject to which I return in Chapter
3.
14 For a balanced (and very rigorous) evaluation of the desirability of investment subsidies, see Leahy and Neary
(2009).
18
1.1.3 Industrial policy in Canada
Like the rest of the world, industrial policy was integral to Canada’s early economic
development. In both the east and west, monumental strides were taken by the state to make
Canada’s resource and early manufacturing economy viable (Aitken 1959). Yet, in the Canadian
case, too, it is debatable whether governments’ penchant for industrial policy ever faded.
The post-war Canadian economy was amply sheltered by tariffs and other protective
measures, such as quotas, government procurement, and foreign investment review. The post-war
period also witnessed a spectacular rise in the number of state owned enterprises, at both the federal
and provincial levels in Canada (Laux & Molot 1988). Although government ownership of the
means of production is a convenient method for providing collective goods, the rationale for
intervention in Canada differed somewhat from other industrialized countries. In Canada,
policymakers deemed it necessary to avoid as much as possible the staples trap (Smiley 1963).
The staples trap refers to overwhelming short-run economic disincentives for firms to
depart from resource specialization (Innis 1933). Although all economies experience a centripetal
pull toward their areas of absolute advantage, the staples trap in Canada is particularly thorny due
to the geographical expanse of the country which separates products from markets and natural
resources from capital and labour. In the early years, forging the “backward linkages” required to
extract resources from the hinterland was challenging enough, never mind the “forward linkages”
required to upgrade raw materials into value-added manufactured products (cf. Hirschman 1958).
As the Canadian economy matured, governments first used industrial policy to exploit natural
resources, before employing industrial policy as a means of escaping the shackles of the staples
economy (Watkins 1963).
Industrial policy in the resource sector is justified when the costs and/or risks of investment
are prohibitive in the eyes of private capital. Throughout Canada’s history, investment in resources
has involved ample government assistance for this reason (Nelles 1974; Richards & Pratt 1979).
Industrial policy geared toward value-added manufacturing is justified when the resource economy
is sluggish (when prices are low) or when price volatility causes recurrent social disruptions.
Indeed, the omnipresent threat of price collapse in resource sectors has evoked near-constant calls
for Canadian industrial policy over the course of the nation’s history (Drache 1995).
Proponents of Canadian industrial policy generally appeal to two related arguments. The
first is that Canada lacks an indigenous capitalist class. This means, absent state intervention, the
19
fate of the Canadian economy lies in the hands of foreign investors (Clement 1977). The second
argument is that Canada lacks the means for developing indigenous technology. The observation
is as follows. Although protectionist policies may encourage foreign investment in the form of
branch plants, the spinoff benefits that normally accrue from industrialization do not reverberate
throughout the economy but rather are captured by foreign parent corporations (Watkins 1968).
Consequently, even as the Canadian economy industrializes, it remains non-innovative (Levitt
1970).
The above arguments informed what Eden and Molot (1993) call Canada’s “second
national policy” (1940-1982), which sought to enhance Canadian ownership of the economy.
Corresponding as it did with the rise of monetarism, public choice theory, and trade liberalization,
the second national policy was, by most accounts, unsuccessful (Carasco 1983; Globerman &
Shapiro 1999). While there was some enthusiasm for “negotiated protectionism” between Canada
and the United States in the 1980s —and even some policy movement in that direction— the
program was abortive (cf. Canada 1983; Harris 1985). Scholarly attention turned away from
industrial policy, for the most part, with the signing of the Canada-United States Free Trade
Agreement (CUFTA) in 1988.
That being said, as emphasized earlier, so-called “neo-liberal reforms” of the 1980s and
1990s served more to occlude interventionism in those decades than extinguish interventionist
tendencies outright (Doern & Tomlin 1991; 1996). As demonstrated in Figure 1.3, what the 1990s
did witness was a shift from federal to provincial dominance, at least insofar as vertical industrial
policy is concerned. This shift is evidenced by the reversal in the proportion of direct industrial
subsidies allocated from each level of government.
20
Figure 1.3: Canadian industrial policies, 1989-2013
Based on annual budget addresses and Statistics Canada CANSIM table 380-0080: Revenue, expenditure and budgetary balance — General governments, quarterly (dollars). Dollars in billions (2015 CAD). Territorial data not available.
Although expenditure on direct industrial assistance by the provinces now outpaces federal
commitments, Figure 1.3 also suggests industrial policy initiatives are common at both levels of
government. What is more, many ventures appear to be proactive (anticipatory) and focused on
sunrise industries —a combination reflective of “good” industrial policy according to the
discussion surrounding Figure 1.2. Examples include advanced vehicles, green energy, genomics,
and biotechnology.
Far from being a thing of the past, the most striking thing about Figure 1.3 is the frequency
with which industrial policy is pursued by Canadian governments. The implication is that
Canadian industrial policy is expeditious, but is often short lived. Consequently, although there is
a lot of industrial policy in Canada, much of it may not be sustained long enough to have much of
an impact. The next section advances a theory that purports to explain why Canadian industrial
policy may be more prone to rapid mobilization and dissolution than industrial policy in countries
better known for interventionism.
21
1.2 Regime theory: a brief introduction
Regardless of the kind of industrial policy under examination (major or minor, horizontal
or vertical), researchers require a theoretical framework linking individual policies to outcomes.
A major undertaking in this thesis is the development and application of regime theory. Chapter 2
is dedicated to outlining regime theory as a general perspective. Chapter 3 is devoted to modelling
different configurations of industrial policy regimes in order to advance hypotheses about the
expected behaviour of agents therein. A brief overview of regime theory is provided here.
The concept of regime was coined by Plato to express the “totality” and “form” of the
dialectic between social structure and social behaviour (Warren 1984: 22-24). Since Plato, the
concept has become ubiquitous. While its precise usage varies from one author to another and
across disciplines, most seem to agree that regimes solve collective action problems.15 Where
authors diverge is at the level of analysis. In the discipline of political economy, one influential
school approaches regimes from the “macro" or “systemic” level. This school —often called
comparative political economy or CPE— tends to view regimes as sets of rules that establish
patterns of production within a jurisdiction, including knowledge production (Campbell &
Pedersen 2014; Etzkowitz & Leydesdorff 2000). These rules and their attendant patterns of
production are considered to emblemize the political economy (Streeck & Thelen 2005). The unit
of analysis is the sector, the industry, or even the entire economy. The regime itself is impersonal:
it is a structure. Meanwhile, another influential school —which I will call positive political
economy— tends to approach regimes from the “micro” or “subsystemic” level. This school
conceives of regimes as arrangements of actors involved in production at a particular place and
time (Stone 1989). The unit of analysis is the firm, association, agency, or individual.
15 Haas (1975) defines international regimes as collective arrangements among nations designed to create or more
effectively use scientific and technological capabilities. Further to Haas, Young (1980) and Krasner (1982) argue that
international regimes establish principles, norms, rules, and procedures around which actors' expectations converge.
According to Stone (1989: 3), regimes are “informal arrangements that surround and complement the formal workings
of governmental authority” (parentheses in original). Jochim and May (2010) define policy regimes as having a “core
idea” that “serves as the common basis for a regime” or what Jones and Bachelor (1993) refer to as “solution sets.”
Regimes thus have a normative or goal-oriented basis. Hence, Elkin’s (1997: 110) definition of the regime as “the
desired political way of life… encompass[ing] what exists insofar as it conforms to our aspirations… thus the term
has both an empirical and normative dimension.”
22
The two perspectives, although unique, are not exclusive. Both have appeal and, taken
together, the two approaches have the makings of a fulsome “regime theoretic” perspective on
political economy (Dowding 2001a). The immediate task is to resolve terminological confusion.
As it stands, “regime” refers to two different things. In the “macro” usage, the regime is a structure
—rules governing patterns of production over time, what students of the regulation school call the
“regime of accumulation” (Lipietz 1992). From the “micro” perspective, the regime is an agent —
the actors involved in production at a specific point in time. To avoid confusion, I will refer to the
former as the political economy. The political economy is a macro-level, structural, concept.
Regimes are agential. Moreover, regimes can be further broken down by function into sub-units,
namely knowledge regimes, production regimes, policy regimes, and advisory regimes. Such
distinctions, although not always necessary, evoke a division of labour that avoids conflating the
roles performed by potentially overlapping, yet possibly discrete, types of regimes. Like divisions
of labour in a multidivisional firm or supply chain, the criterion demarcating one type of regime
from another hinges on what is produced: knowledge, goods and/or services, policy, advice, or
any combination of these outputs.
By most accounts, the political economy is defined by the structure of the tangible economy
—whether local, sectoral, national, or regional— and the distribution of power resources among
classes in society (Esping-Andersen 1990; Jessop 1990). From my perspective, the political
economy denotes relatively stable, system-level variables useful for typifying sectors and, at a
higher level of abstraction, national economies. While it may be true that “late capitalism” is
variegated, I evoke simple distinction between “liberal” and “coordinated” production when
discussing political economies (Hall & Soskice 2001; cf. Jessop 2011; Cawson 1978).
Whereas political economies are characterized by stability, regimes are more volatile.
Again, regimes are organizational forums in which specific courses of action are formulated and
implemented. I define regimes as associations of actors who coordinate their behaviour in pursuit
of common goals. In short, regimes are vehicles for collective action.
The crux of regime theory is as follows. The political economy is sustained (and
occasionally subverted) by a continuous feedback loop in which the activities of regimes are
central (Figure 1.5 below). Yet the question of whether the political economy is sustained over
time is not necessarily a function of the extent to which regimes are reproduced. As I will explain
in the following subsections, while regimes in coordinated political economies beget conditions
23
hospitable to their reproduction, liberal political economies are defined by the opposite tendency:
the tendency for regimes to sow the seeds of their own destruction and, consequently, be ad hoc
and short lived.
Given the centrality of regimes in regime theory, it is imperative to have a thorough
understanding of how regimes come into being, how they operate, and how they affect the political
economy within which they are nested. These are three related but ultimately separate questions,
each of which requires its own theory to explain. I will briefly explore each question in turn.
1.2.1 Origins
Actors do not just spontaneously assemble into regimes when they sense a problem to be
solved. Rather, regimes need to be mobilized. Explaining the origins of regimes requires a theory
of mobilization (Smelser 1962). All good theories have three elements: necessary conditions,
agents, and causal mechanisms.
I use the familiar concepts means, motive, and opportunity to convey the necessary
conditions for regime mobilization.16 Means are resources, broadly defined, such as capital and
knowledge. When people want to solve a problem, they must possess the required know-how and
they must be capable of marshalling sufficient resources to pay the associated costs. Motive is the
shared perception that a problem exists and that it ought to be solved in some particular way.
Opportunity is the occasion to put means to use. Opportunity can be understood as the spatio-
temporal “fortuitousness of events” —what is commonly referred to as “the right place at the right
time.” When it comes to public policy, being at the right place means having access to authorities
(Laumann & Knoke 1987).
Beyond conditions, good social science identifies agents and causal mechanisms. Strictly
speaking, agents are individuals involved in taking some action. Having said that, agents are often
better conceived as collective actors, such as ministries, associations, or even “business” and/or
“labour” in the abstract. The decision to treat collectivities as agents can be methodological or
16 Means, motive and opportunity are analogous to (and motivated by) John Kingdon’s (1984) three “streams”: policy,
problems and politics. I opt for the former terminology because I think the concepts are more easily grasped by non-
specialists than Kingdon’s terms.
24
theoretical. It is often impossible to study individual behaviour. Other times, it is more appropriate
to study groups, both because group assignment is frequently a variable of theoretical interest and
because behaviour is not necessarily a function of individual preferences (Argyris & Schön 1978;
Buchanan 1954; Sen 1970; Shepsle 1992).
In the abstract, regimes typically involve three broad types of actors: private stakeholders,
public officials, and third sector actors, each of which is assumed to have unique competencies
and behavioural characteristics. When discussing a specific case —i.e., the origin of this or that
specific regime— it is useful to identify agents more precisely. The agents might be entire firms
or individual CEOs, whole departments or specific directors, community organizations or specific
activists.
Causal mechanisms lie at the intersection of conditions and actors. To create an effect,
agents must somehow operate on their environment (Giddens 1984). Importantly, an agent’s
environment is likely to have both physical and social dimensions. Legislators introduce bills and
cast votes, business people draft and sign contracts, producers produce goods and consumers
consume them. Regimes originate when agents mobilize for collective action. The causal agent
doing the mobilizing is the policy entrepreneur. The causal mechanism is persuasion.17
For clarity’s sake, it should be mentioned that policy entrepreneurs are also sometimes
called “political entrepreneurs,” “social entrepreneurs,” or simply “leaders” (Breton & Breton
1969; Salisbury 1969; Wagner 1966). To the extent that the various conceptions of entrepreneurs
differ from one another, it is with respect to the stage of the policy process in which these agents
are active (Roberts & King 1991). Policy entrepreneurs and social entrepreneurs are analogous
concepts: both are considered to mobilize actors in support of policy change during an initial stage
of policy process known as “agenda setting” (Breton & Breton 1969; Kingdon 1984). By contrast,
political entrepreneurs are considered to coordinate regimes in the operational stage, which policy
scholars call “policy formulation” and “policy implementation” (Frohlich, Oppenheimer & Young
17 Do not be thrown by the terminology here. Those expecting the causal mechanism to be the passage of legislation
would not be wrong. Legislation relies on persuasion to pass, but not all policy is made by legislatures. All policy
does, however, follow from persuasion.
25
1972).18 For its part, “leader” is a generic term applicable to either the origin or operation stage
(Jones 1989).
Policy entrepreneurs can be individual or collective actors who may emanate from the
private, public, or third sector (Kingdon 1984). Moreover, policy entrepreneurs may be singular
or many, concentrated or dispersed. When policy entrepreneurs are many and dispersed,
entrepreneurship is said to be polycentric. In any case, policy entrepreneurs mobilize agents into
regimes by convincing them there is a problem worth solving that can be solved by working
collectively. In other words, policy entrepreneurs use rhetoric to highlight synergies between the
three necessary conditions: means, motive, and opportunity.19 As detailed in Chapter 2, policy
entrepreneurs also help to close information gaps by disseminating information about the
preferences of prospective regime participants.
While intuition might suggest that legislators and executives are the agents best poised to
act as policy entrepreneurs, in practice, policy entrepreneurs are often stakeholders themselves.
When civil society interests express voice in an attempt to steer government policy, they employ
rhetorical strategies in the hopes of persuading officials —what is known in the business world as
a “pitch.” While some may doubt whether lobbying is entrepreneurial, the fact that stakeholders
routinely consult with professionals versed in pitch-making suggests there is a good deal of
ingenuity involved in lobbying (Roberts & King 1991). For a policy to proceed, the ideas behind
it must have resonance. The task of the policy entrepreneur is to frame issues and ideas such that
they have maximum resonance with their audience. Whether that audience is a board of directors,
an associational membership, a regulatory commission, a legislature, or some other body varies by
case and is therefore a question best left for model building (the subject of Chapter 3) and case-
level empirical analysis (undertaken in Chapter 4).
Before moving on, it is important to note that the process of regime mobilization need not
occur in one fell swoop, but may rather proceed piecemeal. Moreover, as discussed in greater detail
in Chapters 2 and 3, "knowledge regimes" may mobilize far in advance of "production regimes,"
18 The exception is Moe (1980), whose distinction between administrative and political roles played by entrepreneurs
leads him to view the political entrepreneur as mobilizer and the “administrative entrepreneur” as coordinator. 19
Shepsle (2010: 457) aptly describes entrepreneurs as agents who choose or create their principals (hence,
mobilization), which contrasts with the typical arrangement in which principals hire their agents.
26
both of which may be self-coordinating or coordinated to various extents by policy regimes. In
such cases, basic research and its attendant "knowledge regime" constitute means upon which
"production regimes" may later draw in the process of mobilization (cf. Campbell & Pedersen
2011). Considerations of this sort reveal that the demandingness of the task of regime mobilization
varies according to initial conditions. If resources required by a regime are already available for
consumption, the task of regime mobilization is much less demanding than if essential resources
must be created by the regime or obtained from elsewhere. This is especially true if producers of
the resource can be easily and affordably integrated into a regime.
Figure 1.4 displays eight general possibilities regarding the rate at which regimes mobilize.
The northmost octant represents the demanding situation in which the necessary component sub-
units to the regime —knowledge regimes, production regimes, and policy regimes— must be
mobilized all at once. The southmost octant represents the opposite situation in which all the sub-
units undergirding the regime are mobilized gradually. The other six octants represent various
other possibilities.20 As discussed in greater detail in Chapter 2, unlike knowledge, production,
and policy regimes, advisory units are not integral to regimes but are rather extraneous.
Consequently, advisory regimes receive little discussion in this thesis.
20 As with government involvement in Figure 1.1, the axis representing policy regime mobilization in Figure 1.4
cannot be disaggregated by function without adding a considerable amount of complexity to an already complex
figure. For instance, a policy regime governing a knowledge regime at time1 may mobilize rapidly whereas the policy
regime governing a production regime at time2 may mobilize gradually. Moreover, a policy regime mobilized to
coordinate both knowledge and production regimes at time3 may mobilize at an entirely different rate. Detail and
complexity of this sort receives discussion later in the context of the case studies.
27
Figure 1.4: rate of regime mobilization
Although less demanding, there is a possible downside to gradualism. Simultaneous and
rapid mobilization is more conducive to a clear and consistent organizational mission than is
piecemeal and gradual mobilization. While institutions largely determine whether decisionmaking
is executive or negotiated, all else being equal, regimes that come into existence gradually over a
long timeframe are more likely to be negotiated because organizational missions of the parties
involved must be consciously harmonized after the fact as opposed to stated and agreed upon ex
ante. The ideal situation, then, is one in which existing knowledge and production regimes do not
need to be created from scratch, but rather simply require a dose of coordination to seize an
economic opportunity that all parties recognize as a worthwhile pursuit. The extent to which initial
conditions of this sort contribute to comparative advantage is a theme taken up in Chapter 3.
To be clear, rate of mobilization is potentially related to, but ultimately distinct from,
considerations of whether regime operation is executive or negotiated. Whereas rate of
mobilization is pertinent to the theory of regime origins, considerations related to regime type fall
in the ambit of the theory of regime operation —a theory to which I now turn.
28
1.2.2 Operation
The theory of regime mobilization outlined above accounts for how actors come together
to pursue collective action problems. Having been mobilized —or having been persuaded to
mobilize— actors find themselves in a new environment: a social setting in which agents hold
resources, have objectives, and possess expertise. These three variables comprise the necessary
conditions for the theory of regime operation.
As in the theory of regime mobilization, three general types of agents may be involved in
the operation of regimes: private stakeholders, public officials, and third sector actors. However,
there need only be one type of agent physically present in any regime. Moreover, any type of agent
may fill the role of coordinator; that is, the role of “political entrepreneur” as the causal agent
(Frohlich, Oppenheimer & Young 1971). What matters is that the mix of actors possesses the
requisite resources, shared objectives, and expertise to realize their goals. If they do not, the regime
flounders in the operational stage and ceases to be.
The causal mechanism in the theory of regime operation is joint production. Joint
production involves putting agents’ resources to use in collective action. Importantly, joint
production can only proceed if agents are willing and able to interact for the purpose of executing
transactions. A significant portion of Chapter 2 is dedicated to establishing a formal theory of how
transactions occur within regimes. At this point, it suffices to say that transactions come in two
varieties: coordinative and productive. Coordinative transactions involve exchanges of
information necessary for coordinated collective action. Productive transactions involve
exchanges related to the costs of joint production. Crucially, productive transactions pay rents in
the form of opportunity costs demanded by agents possessing special competencies required by
the regime to fulfill its objectives.
Opportunity costs factor large in regime theory. Opportunity costs represent the trade-off
between unilateral production (which agents can perform on their own) and joint production
(which can only be performed by regimes). Ceteris paribus, opportunity cost is a function of the
relative slack or tautness of the economy. That is to say, generally, a well performing economy
drives up opportunity costs because opportunities for lucrative unilateral production are plentiful.
By contrast, a slack economy has fewer such opportunities, lowering the cost of regime
participation.
29
Given the centrality of exchange in the theory of regime operation, joint production is more
than a collective action problem. Joint production is also a principal-agent problem wherein the
regime is the principal and indispensable members are agents. As discussed in greater detail in
Chapter 2, the dynamics of principal-agent relationships are largely determined by whether
institutions governing regimes promote executive or negotiated decisionmaking.
The institutions governing regimes consist of decision rules and the mode of coordination,
which are themselves strongly influenced by the institutions governing the macropolity, namely
the electoral and legislative system. Decision rules —also known as “aggregation rules”— govern
the process by which policy is made by determining the distribution of veto points among
decisionmakers, voting procedures, and thresholds (e.g., simple majority, supermajority,
unanimity) (Ostrom 1986). Decision rules are found at both the micropolitical level of regimes and
the macropolitical level of governing institutions (Shepsle 2010). Mode of coordination determines
the nature of exchange relationships within regimes as well as whether regimes are permitted to
externalize costs. Drawing on the concept of institutional friction, Chapter 2 demonstrates that
“low friction” macropolitical institutions enable and encourage executive decisionmaking at the
micropolitical level, and often permit cost externalization, whereas “high friction” macropolitical
institutions enable and encourage negotiated decisionmaking at the micropolitical level, and often
forbid cost externalization. The theory of regime outcomes offers an explanation for how and why
this is the case.
1.2.3 Outcomes
The production of goods and services by regimes can have profound effects on society.
The distributive, social, and normative outcomes that follow from joint production make up the
conditions of the theory of regime outcomes. Distributive conditions relate to the dispersion of
costs and benefits associated with joint production. Importantly, costs and benefits of joint
production are almost always unevenly distributed across society (Weingast, Shepsle & Johnsen
1981). Social conditions involve the complexion of politically-mobilized groups in society. Since
policies mobilize both supporters and opponents, we should expect joint production to have an
effect on future interest representation, power resources, and political strategies employed by
30
groups (Campbell 2012; Pierson 1993; Schattschneider 1935). The behaviour and output of
regimes also affect norms (i.e., the dominant values held by society).
Although the effect of joint production on societal values is closely related to questions of
distribution, its impact on norms is distinct. For instance, it is possible for policies with dispersed
benefits to nevertheless provoke negative reactions if the public values something other than
immediate material benefits (Inglehart 1997).21 Likewise, popular attitudes toward the appropriate
amount of state intervention in the economy may have more to do with ideology or collective mood
than distributive benefits of policies (Stimson 1991). In such cases, regimes may provoke backlash
even when their activities are welfare enhancing, particularly in jurisdictions where anti-
interventionist sentiment is entrenched. Alternatively, policy failures may be overlooked or
forgiven if the policy is in alignment with the popular mood, ideology, or dominant narratives
(Jones, McBeth & Shanahan 2014; Schneider & Ingram 1993). Finally, the public might overreact
to policy failures, causing it to curb or abandon certain values when their pursuit proves intractable.
The effect of regimes on society is a function of their resilience and reproduction. In
democratic systems, the sustenance of regimes depends on election outcomes. As discussed in
greater detail in Chapters 2 and 3, governments that allow regimes to externalize costs on to the
public make themselves vulnerable to punishment at election time. Three agents are involved in
making such evaluations of regimes: voters, parties, and the media. The central hypothesis of this
thesis is that the activities of regimes become an electoral liability when they are perceived to be
costly to society.22 When they are not, elections are fought on other issues. If incoming or
incumbent governments have no incentive to dissolve regimes, they will typically be sustained
over the electoral cycle (cf. DeLeon 1983).
21 For example, while trade liberalization is said to “raise all boats,” deficient labour and environmental standards
overseas has made opponents of policies that are otherwise welfare enhancing. 22
I say “perceived to be costly” in order to avoid privileging distributive explanation over normative explanation. A
cost need not be material. Perspectives that view costs only in fungible terms, although they may do so for the sake of
analytical parsimony, err in advancing a needlessly artificial view of the world. Research conducted with an
interpretivist lens is not forced to choose between constructivist and rational choice perspectives on human motivation.
In regime theory, qualitative analysis of election issues is adequate to reveal how the cost of policies is perceived by
voters, parties, and the media.
31
When regimes are not sustained, their effect is nevertheless significant because the
dissolution of one regime frees up slack for the mobilization of another (Cyert & March 1964;
Hirschman & Lindblom 1962). When regimes mobilize and dissolve in rapid succession, the
resulting pattern of policy change is said to be “punctuated.” I hypothesize highly punctuated
patterns of regime mobilization and retrenchment to be characteristic of liberal political
economies. The reason is liberal systems tend to be characterized by low friction majoritarian
macropolitical institutions —i.e., plurality electoral systems, legislative majorities, executive
dominance, and party discipline— which encourage both executive and clientelistic regimes
(Atkinson & Coleman 1989a; Lowi 1969). Because clientelistic regimes are weakly representative
of the electorate, we should expect them to be prone to cost externalization. By contrast, I
hypothesize smoother and more long term patterns of regime mobilization and retrenchment to be
characteristic of coordinated political economies. The reason is because coordinated systems tend
to be characterized by high friction representative macropolitical institutions —i.e., proportional
electoral systems, coalition governments, and consensus-based policymaking— which encourage
corporatist or concertative (negotiated) regimes that are dissuaded from cost externalization
(Lijphart 2012). Recalling the discussion of executive and negotiated policymaking surrounding
Figure 1.2, neither liberal nor coordinated political economies should be assumed a priori to be
better or worse than the other. The take away here should be that liberal and coordinated political
economies are different, institutionally speaking, and that these institutional differences have wide
reaching implications (Knight 1992).
To summarize the above argument, patterns of policy change are a product of the rate of
regime mobilization and dissolution. Rapid mobilization and dissolution characterize highly
punctuated patterns of policy change; gradual mobilization and dissolution characterize
comparatively smoother patterns of policy change. The rate of regime mobilization and dissolution
is hypothesized to be a function of the extent to which regimes externalize costs, with cost
externalization being positively associated with punctuated patterns of policy change. Cost
externalization is itself hypothesized to be a function of the institutional context. Low friction
majoritarian macropolitical institutions typical of liberal political economies permit cost
externalization and therefore give rise to punctuated patterns of policy change. Conversely, high
friction representative macropolitical institutions typical of coordinated political economies
prohibit cost externalization and therefore give rise to smooth patterns of policy change.
32
Whether regimes are sustained or abandoned and mobilized anew speaks to what might be
called proximate outcomes specific to the particular regime under analysis. Aside from proximate
outcomes, what might be called cumulative, or distal, outcomes reveal whether the political
economy is a useful predictor variable in its own right, independent of what goes on within
regimes. In other words, we may ask: what is the cumulative effect of punctuated patterns of policy
regime mobilization and dissolution in liberal political economies versus smoother patterns of
mobilization and dissolution in coordinated political economies?
Several theoretical perspectives have drawn inferences between the political economy and
aggregate outcomes (Esping-Andersen 1990; Jessop 1990; Streeck & Thelen 2005). Chief among
these is the varieties of capitalism approach devised by Peter Hall and David Soskice. According
to Hall and Soskice, there are two archetypical political economies: liberal market economies and
coordinated market economies. Each possesses unique, institutionally-derived competencies that
make liberal market economies and coordinated market economies equally viable, if very distinct,
models of economic governance.
One of the most fascinating —and controversial— hypotheses put forward by Hall and
Soskice is that liberal and coordinated market economies possess unique capacities for product
innovation. The argument is as follows. Liberal market economies have comparatively flexible
labour markets which allow personnel with specific talents to be easily obtained by firms. Liberal
market economies also feature institutions that permit mergers and acquisitions, which means new
technologies can be acquired by takeovers. Finally, concentration of corporate decisionmaking in
liberal market economies translates to little resistance to changes in corporate strategy. This all
amounts to advantage in radical product innovation. By contrast, in coordinated market economies,
company loyalty, job security, and work autonomy foster both a high level of product-specific
expertise and a culture of product improvement at the level of the shop floor. Moreover, horizontal
integration encourages product differentiation among firms (as opposed to product competition),
and consensus-based decisionmaking ensures that sudden changes in corporate strategy are easily
vetoed. This amounts to advantage in incremental product innovation (Hall & Soskice 2001: 38-
44).
While Hall and Soskice’s findings have been critiqued by some, others have found at least
partial support for the premise that liberal and coordinated market economies possess unique
competencies for innovation (Akkermans, Castaldi & Los 2009; Schneider, Schulze-Bentrop &
33
Paunescu 2009; cf. Taylor 2004). From a regime theoretic perspective, the argument makes
intuitive sense. Regimes in coordinated market economies are usually more entrenched,
consensus-based (i.e., negotiated), and prohibited from externalizing costs in the pursuit of risky
ventures. Regimes in liberal market economies are often less deeply entrenched, executive-based,
clientelistic, and capable of externalizing costs in risky pursuits. Add to this the tendency for
regimes to have a high rate of turnover in liberal market economies compared to coordinated
market economies and a convincing theoretical case is made for why liberal political economies
are more competent to effect radical innovation while coordinated political economies are more
competent to effect incremental innovation.
Hall and Soskice do not delve into whether institutional features beget advantage with
respect to first wave versus subsequent wave innovation. Since first wave innovations are the most
radical, it stands to reason that liberal political economies are at an advantage when it comes to the
development of technologies that are completely new. Moreover, regimes in liberal systems should
be well-poised to initiate subsequent wave innovation, since initial innovation is radical regardless
of whether it is first or subsequent wave. That being said, I hypothesize that coordinated political
economies possess an overall advantage in subsequent wave innovation. Firms initiating
subsequent wave innovation are likely to be those that have already sunk capital into first wave
product designs, giving rise to a paradoxical situation in which firms invest in research and
development even though they face disincentive to reorient production —they face disincentive to
engage in “creative destruction” (Gilbert & Newbery 1982). The preference is instead to license
patents to outsiders with the competence to perfect subsequent wave product designs. These
licensees, I surmise, are likely to be regime actors in coordinated political economies. Why?
Because building product-specific technical competence takes time, and regime competence is a
function of regime longevity. As I have established, regimes in coordinated systems are much
more likely to be sustained long term than regimes in liberal systems.
All is not well, however. Aside from a unique capacity to pursue risky innovation of a sui
generis variety, I hypothesize that freedom to externalize costs gives rise to a second tendency
emblematic of liberal regimes: a bias toward less risky but equally costly “reactive” policies such
as late stage support of sunset industry. These are policies that fall in the ambit of restructuring
and late mover industrial policies defined above. As documented by Blais (1986) and Atkinson
and Coleman (1989), reactive industrial policy in support of sunset industry is expensive because
34
the ability of mature industries to compete with low cost competitors is dependent upon costly
productivity-improving capital upgrades (Porter 1990). Although policies aimed at productivity
advantage may seem like a good idea, reactive industrial policy in support of sunset industries is
ill-advised for two reasons. First, short term gain is offset by capital expenditures for machinery,
which is often not produced domestically. Capital upgrades therefore constitute costly technology
transfer that does little to stimulate the domestic economy. Second, as lower cost competitors close
the productivity gap, or further widen the cost gap, home advantage is lost. Unless restructuring
and late mover industrial policy can be made to more closely approximate upgrading by
emphasizing product differentiation, there is little long term gain associated with reactive industrial
policy in support of sunset industries.23
By contrast, I hypothesize that coordinated regimes’ aversion to risk and cost
externalization translate to bias in favour of incremental and subsequent wave innovation of an
anticipatory upgrading variety. In other words, I assume coordinated regimes to be competent to
effect innovation through product differentiation. Unlike liberal systems, representative
institutions that guard against cost externalization prevent costly technology transfer for the sake
of productivity improvement. Instead, coordinated regimes are incentivized to find low cost,
welfare maximizing ways to improve competitiveness. According to the theory outlined in Chapter
3, the imperative toward cost internalization in representative systems incentivizes regimes to
adopt and improve upon cheaply-acquired, immature innovations, such as those in the conceptual
stages of development (Ostry 1990). Incidentally, these immature innovations are likely to be
innovations initially pursued, but since abandoned, by firms in liberal political economies. This
and other implications of the theory, are listed at the end of Chapter 3.
1.2.4 Summary of the argument
The last few pages have given readers a lot to digest. To reiterate, regime theory is a
composite of three stand-alone yet interconnected theories (or “sub theories”): a theory of regime
23 Porter (1990) identifies qualitative “differential” advantage as key to competitiveness in mature industries, such as
superior product quality, cross product modality, and effective customer service.
35
origins, a theory of regime operation, and a theory of regime outcomes. What is more, the
cumulative impacts (or “distal effects”) of joint production on the part of regimes contribute to
particularities in the political economy, which have their own long term consequences for product
innovation and economic specialization. In economists’ terms, particularities of the political
economy affect a jurisdiction’s comparative advantage.
While this may all sound very complicated, thankfully, there is an anchor that brings
stability and predictability to the chaos: macropolitical institutions. The kernel of regime theory is
institutional. By limiting or facilitating cost externalization on the part of regimes, macropolitical
institutions have profound, reverberating, and predictable effects that structure political
economies.
Figure 1.5: structure of the argument
Having identified macropolitical institutions as the kernel of regime theory, let us look
more closely at the details. Figure 1.5 depicts the structure of the argument. The first thing to note
is that regime theory is processual —it proceeds in stages. The second thing to note is the entire
process is continuous and never ending. Like a conveyor belt, outcomes at one stage become initial
conditions for the next.
As indicated by the labels along the bottom of Figure 1.5, each stage corresponds to one of
the three stand-alone (sub)theories elaborated earlier: the theory of regime origins, the theory of
regime operation, and the theory of regime outcomes. Elections at the back end produce initial
conditions at the front end. In other words, the political economy reproduces itself, either by
36
preserving the status quo over multiple iterations of the sequence or by changing it.24 Remember,
coordinated political economies are characterized by the preservation of regimes; liberal political
economies are characterized by “punctuated” patterns of regime mobilization and dissolution.
As elaborated in the previous section, each stage in the sequence has three components —
conditions, agents, and mechanisms— and the outputs produced by mechanisms at one stage
establish the conditions for the next. I have already detailed the inner workings of each stage and
so will not repeat myself here. I will emphasize, though, that privileges extended to agents within
regimes are determined (and renewed) by outsiders to the regime, namely voters writ large.
Two final points are in order. First, attentive readers will notice the theory seems to assume
a lack of foresight on the part of agents. Specifically, foresight is not anticipated to prevent regimes
from externalizing costs when they are not preempted from doing so by institutional checks.
Skeptics may ask: is it not plausible to expect that, anticipating electoral punishment, “clientelistic”
regimes will behave in a way that preserves their longevity by refraining from cost shifting? The
short answer is no. Even if we reject the suggestion that clientelistic regimes are self-serving in
their intentions, and instead view regime agents as comprehensively rational strategizers,
unforeseen challenges often entail spending beyond one’s means.25 The theory postulates that,
whereas institutional design necessitates negotiated solutions in coordinated systems, in liberal
systems, temptation to externalize costs is simply too great. On one hand, cost externalization is a
consequence of the fact that ambiguity regarding causes and consequences leads policymakers to
underestimate risk. On the other, regimes in liberal systems face moral hazard incentives to act in
risk seeking and rent seeking ways. A discussion of these themes and how they fit into regime
theory is taken up in Chapter 2.
Second, it is prudent at this stage to assign clientelism a theoretically precise role.
Clientelism can be understood in two distinct but complementary ways. In one sense, clientelism
24 Students of path dependence will recognize events that preserve or alter the status quo as self-reinforcing and self-
undermining sequences, or, more simply, positive and negative feedback (Mahoney 2000; Pierson 2000). 25
As discussed in greater detail in Chapter 2, the crux of the argument is that majoritarian institutions allow greater
choice among policy alternatives. Assuming regime agents pursue only policies they anticipate will be successful,
regime agents expect voters to reward the incumbent government based, among other things, on the regime’s
performance, which they expect to be high (Ferejohn 1986). It is the disconnect between expectations and outcomes
that imperils cost-shifting regimes.
37
is an institutional feature of majoritarian systems. In another sense, clientelism is a behavioural
characteristic. The tendency toward clientelism is institutionalized in that the plurality of voters
responsible for the winning party’s mandate constitutes a client group. For instance, in Canada, it
is common to hear of “the farm vote,” “the urban vote,” “the public sector vote,” and so forth. The
likelihood that the plurality is fewer in number than a numerical majority makes the electoral base
especially client-like. The “farm vote,” for example, might be responsible for, say, thirty per cent
of the popular vote, yet may produce a majority of seats in the legislature and a unitary cabinet.
Behaviourally, clientelism emerges in majoritarian systems because policy preferences can be
pursued with relative precision. Compared to representative systems, where the policy process is
characterized by bargaining toward consensus, the policy process in majoritarian systems need
only involve selective consultation with prospective clients. However, the behavioural tendency
toward clientelism conflicts with efforts to establish “consultative democracy,” which have
become increasingly pronounced in majoritarian systems.26 Consequently, the behavioural
argument regarding tendencies toward clientelism in majoritarian systems is more stylized and
objectively weaker than the institutional argument. Yet, as demonstrated analytically in Chapter 2,
the behavioural argument is unnecessary to the theory. While the behavioural argument lends
support to the predictions of regime theory, it is dispensable. Regime theory “stands alone” as an
institutional theory. It does not rely whatsoever on any behavioural assumptions about the
motivations and biases of agents. This should be interpreted as a strength of the theory.
1.3 Methods and scope
At this point, it is prudent to address issues pertaining to the methods used in this thesis
and the scope of analysis. The subsections to follow attend to possible reservations and criticisms
in three salient areas. First, the positivist school of political economy has been subject to numerous
critiques (Elster 1983; Green & Shapiro 1994; Simon 1983). Rather than dismissing them, I argue
that standard critiques of positive political economy no longer apply; positive political economy
26 Research suggests tension between clientelism and consultation in some cases and genuine transformation —or
simply a plurality of “policy styles”— in others (Cairney 2008; Howlett & Rayner 2009).
38
has accommodated sociological, constructivist, and interpretivist insights to an extent that, while
the work programs of so called “sociological” and “historical institutionalist” political economy
may bear little resemblance to that of positive political economy, the schools are not mutually
exclusive (Cairney 2012; Hall & Taylor 1996; Wueest 2018).
Second, the empirical focus of the thesis is clearly biased toward the provincial level of
government. Do not the federal and local levels of government also engage in industrial policy?
Surely they do. However, provincial jurisdiction over matters of economic development dictates
that provincial governments are the primary agents of industrial policy in Canada. This is not to
say that federal and local governments are not involved in financing and implementing industrial
policy. As explained below, industrial policy is often a matter of “multi-level governance.”
Finally, it may be said that the thesis exhibits a disproportionate amount of theory relative
to the amount and sophistication of the evidence presented. Moreover, positive evaluation of the
theory in light of empirical findings may be biased by an arbitrary method of case selection. Both
criticisms are valid and receive discussion below in the context of the plan for future research.
1.3.1 Rational choice?
Rationality is one of the most hotly debated concepts in the social sciences. Disagreement
about what rational choice entails, and whether it is a useful baseline model for analyzing and
understanding human behaviour, has put up walls between and within academic departments. The
basic premise of rational choice theory is that individuals are maximizers. More precisely, the
presumption is that people try to select what they perceive to be the best means of maximizing
their utility (Mises 1949). Notice the words try, perceive, means, and utility. A great deal of
confusion follows from inattention to, and misapprehension of, instrumentalism (means) and
maximization (utility). Rational choice does not imply that agents seek to maximize their material
well-being. Nor does it imply that agents’ appetite for material resources is insatiable. Rather,
rational choice simply posits that agents seek satisfaction, however defined. The assertion is
benign, and is more appropriately critiqued for explaining everything than it is condemnable for
explaining little (cf. Green & Shapiro 1994).
What drives explanation in positive political economy if not rational choice? Written as a
causal function, positive political economy is based on the notion that preferences plus institutions
39
yield outcomes; action is a function of actors’ preferences given institutional constraints and
opportunities. The model goes by two names: “actor-centred institutionalism” and “rational choice
institutionalism” (Scharpf 1997; Shepsle 2008). Given that rational choice is misleading and
inflammatory term, my preference is for actor-centred institutionalism.27
Actor-centred institutionalism conveys that, although individuals ultimately act on their
preferences, the explanatory workhorse is institutional. As Jessop (2016: 9) explains, actor-centred
institutionalism “eschews methodological individualism” and “focuses instead on the emergent
logics and dynamics of different institutional orders or functional subsystems and on the associated
asymmetrical opportunities they grant different actors.” Thus, actor-centred institutionalism is
invulnerable to the many critiques that have been leveled against the concept of methodological
individualism (Gellner 2003; Hodgson 2007; Lukes 1968; cf. Elster 1982).
On the above point, actor-centred institutionalism is entirely compatible with perspectives
that view individuals’ behaviour as determined partly or wholly by the institutional milieu in which
they are situated (March & Olsen 1989: 16). It is, however, important not to conflate institutional
variables with cultural influences. Culture affects both preferences and strategy (that is,
preferences over means and preferences over ends) whereas institutional rules affect only strategy
(preferences over means). Thus, although it is clear that cultural norms can be interpreted “as
institutions” in instances where norms affect strategy (preferences over means), norms that affect
preferences over ends should not be interpreted as institutions because doing so introduces
endogeneity to the preferences + institutions → outcomes model of choice. When culture
genuinely affects preferences (i.e., preferences over ends), norms should be treated as exogenous
to the model. This is not to say that researchers are prohibited from theorizing about where
preferences come from (see, for example, Douglas & Wildavsky 1982). Rather, given the plurality
and dynamism of tastes in society, so long as the objective of social science is to advance
generalizable theories with clearly delineated variables, treating the origins and qualities of
preferences as exogenous in basic models of decisionmaking is both necessary and desirable.
27 As Niou and Ordeshook put it: “Our preference… is to banish the words rational and irrational altogether from
our lexicon and to instead simply proceed to the task of seeing if we can explain (and predict) social and collective
actions with concepts that do not require such words” (2015: 41, italics and parentheses in original).
40
The real question is thus not whether the assumption of rationality is appropriate, but rather
whether actor-centred institutionalism produces ex ante predictions or simply ex post explanations.
Clearly, if preferences are both an input variable and exogenous to the model, values must either
be estimated or observed empirically. Estimated values take the form of assumptions, which may
inform predictive models, whereas observed values come in the form of data, which may inform
explanatory models.
There is nothing wrong with making assumptions about actors’ preferences, so long as one
is cognizant of the fact that tastes come in many varieties and may be unstable (Kahneman 1973).
On this point, Jones (1994) differentiates between stable preferences over goals —what he calls
Stigler-Becker preferences— and variable preferences over goods obtained in the process of
satisfying goals —what he calls direct preferences— the latter of which have been shown to be
unstable (Cohen & Axelrod 1984; Cohen & March 1986; Stigler & Becker 1977). To illustrate,
preference for daily nourishment is predictable and stable, even across individuals. Preference for
cheese, crackers, caviar, or some bundle thereof, however, varies on several dimensions (e.g., from
one individual to another, across time, according to context, mood, and so forth). With respect to
Stigler-Becker preferences, the assumption that firms involved in industrial policy seek to
maximize returns is reasonable (although the assumption is controvertible). Similarly, it is
probably safe to assume that governments consistently seek to advance the public good (although,
again, the assumption is controvertible). The rub lies in the assumption that actors maintain stable
direct preferences over the terms of collective goods provision: goods whose acquisition is
necessary for the fulfillment of Stigler-Becker preferences.
Although the search for stable preference equilibria on the part of self-styled “rational
choicers” ended with one of the school’s major figures asserting that there is no such thing as
equilibrium of tastes in society, the work program of positive political science rebounded
immediately (Riker 1980; Ordeshook 1980). Positive political science has since focused on agenda
setting and preference mobilization, often of “latent biases” (Cobb & Elder 1983; Riker 1986).
Consequently, the current state of the art treats equilibrium of preferences as partial, temporary,
and structurally-induced. Partial because cycling equilibria are always possible in
multidimensional choice situations, even in the presence of a “top set” (Gibbard 1973; Ordeshook
1986); temporary because cognitive limitations and biases allow individuals to attend only to so
many potential dimensions of conflict at once (Jones 1994); and structurally-induced because
41
institutions limit who is involved in decisionmaking and the manner in which they go about
problem-solving (Shepsle 1979).
Preference instability clearly does not bode well for prediction. Moreover, as demonstrated
by Jones (1994), it is possible for policymakers to simultaneously hold contradictory preferences
(see also Kahneman 1973). Indeed, most unbiased observers acknowledge that industrial policy
can be either beneficial or deleterious to society. From Jones’ perspective, whether or not industrial
policy is considered a wise idea depends on which dimension —bane or benefit— policymakers
are attentive to at a given point in time. In the absence of a variable that predictably focuses
decisionmakers’ attention toward a salient dimension, theories will fall short of prediction.
Thankfully, means, motive, and opportunity serve precisely this function. Given the risks involved,
industrial policy is a poor prospect for a government in the red (Kahneman & Tversky 1979). Yet,
sluggish growth in the absence of intervention may serve as motive to effect industrial policy
(McKay & Grant 1983). Still, the idea must be considered by actors with the political standing to
introduce the prospect of industrial policy to the agenda (Richards & Pratt 1979; Stone 1989).
Thus, insofar as an account of how attention comes to be focused on salient dimensions of conflict
is a prerequisite for prediction, regime theory satisfies the criteria. Regime theory is predictive.
Can other popular perspectives on political economy do better? Although research under
the ambit of “comparative historical analysis” tends to eschew formal modelling, it does not refrain
from assuming that economic agents are motivated by a desire for material well-being (Steinmo,
Thelen & Longstreth 1992; Thelen 2004). Indeed, the comparative historical perspective purports
to explain institutional change, leaving the question of subsequent social choice open. As Streeck
and Thelen acknowledge, “our definition [of institutions] shares with the more economistic
treatments associated with ‘rational choice’ theory an emphasis on strategic behavior within
institutional constraints, rejecting the shared cognitive templates that some sociologists associate
with institutions” (2005: 11). While Thelen’s theory of “gradual transformative change” has been
integrated into varieties of capitalism —which claims to be both actor-centred and firm-centric—
the literature on institutional transformation does not engage with the positivist literature on
42
institutional origins (Hall & Thelen 2009; cf. Brennan & Buchanan 1985; Buchanan & Tullock
1965).28
Whereas varieties of capitalism has made cozy bedfellows with Thelen’s theory of gradual
institutional change, the same cannot be said for varieties of capitalism and power resources theory
(Esping-Andersen 1990). The main bone of contention concerns whose interests —those of capital
or those of labour— contributed most to the institutions of the contemporary welfare state (Iversen
& Soskice 2009; Korpi 2006). The issue is non-trivial insofar as varieties of capitalism and power
resource scholars disagree over class incentives toward preserving or dismantling the institutions
of coordinated political economies, which appear to be quickly evolving (Schneider & Paunescu
2012; Thelen 2014). More recently, Baccaro and Pontusson’s (2016) theory of national growth
models —which differentiates between export-led and consumption-driven growth— has been
celebrated as both a superior theory to varieties of capitalism and a complement (Hope & Soskice
2016; Streeck 2016).
My adoption of varieties of capitalism is premised on the fact that varieties of capitalism
is complementary with the institutional basis of regime theory. Moreover, despite coming at the
question of technological innovation from different angles —varieties of capitalism from a firm-
centred approach and regime theory from a state-centred approach— both perspectives arrive at
the same conclusions. That said, the appeal of actor-centred political economy is more
methodological than theoretical.
On the subject of method, as discussed at length in Chapter 3, attempts to capture structural
effects in models of political economy have largely floundered. Attention to neo-corporatist
structures of interest intermediation gave rise to two distinct literatures on policy networks, both
of which eventually came to be associated with Giddens’ impressive (but analytically onerous)
theory of “structuration” (Giddens 1984; Knoke, Pappi, Broadbent & Tsujinaka 1996; Van
Waarden 1992). As acknowledged by Sum and Jessop, actor-centred institutionalism is superior
to structuration “especially as regards operationalization” (2013: 61). Yet, Sum and Jessop,
28 Interestingly, gradual transformative change explicitly rejects punctuated equilibrium theory in favour of
endogenous processes of institutional change (Mahoney & Thelen 2010). Yet, this thesis highlights synergies between
regime theory and varieties of capitalism, on one hand, and synergies between regime theory and punctuated
equilibrium theory, on the other (cf, Baumgartner & Jones 1993; Jones & Bachelor 1993). Since this thesis does not
deal with institutional change, the tension is mentioned only parenthetically.
43
perhaps owing to their interest in waging a “battle against economics imperialism,” critique actor-
centred institutionalism for its alleged failure to account for how discourse shapes preferences.
Consequently, discourse features prominently in Jessop’s “structural relational” approach, which
is at once neo-Marxist (drawing on Poulantzas) and complementary with actor-centred
institutionalism (Jessop 2016: 16). Discursive influence over preference formation has been salient
in the positivist literature since Riker (1982), however, which may be an indication that social
science is consolidating (John 2018).29
Insofar as modelling is concerned, network analysis is unattractive due to its high analytical
costs and low explanatory payout (Dowding 1995; 2001). Thankfully, additional layers can be
added to the parsimonious foundations of actor-centred institutionalism. The resultant “ecologies”
of “nested games,” although complicated, are amenable to simulation analysis (Axelrod 1997;
Smaldino & Lubell 2014; Tsebelis 1990).
Finally, on the question of whether social science should aspire toward formalization, all
science implies quantification and the use of symbolic logic to make propositions concrete (Carnap
1958). Formalization is, of course, a final step. As Sen (1970) has demonstrated, it is possible to
present findings so that one can skip the proofs and not lose track of the argument. I will hasten to
add that so-called “qualitative methods” do not serve as alternatives to formal social science.
Rather, when applied rigorously, qualitative methods embrace formalism (see, for example
Bennett [2015] on formal process tracing and Ragin [2008] on set theoretic "qualitative
comparative analysis").
1.3.2 Provincial focus
The relative influence of the two constitutionally-recognized orders of government in
Canada has been the subject of a long debate (Atkinson et al. 2013; Chandler & Chandler 1979;
Young, Faucher & Blais 1984). On one hand, jurisdiction over matters of economic development
necessitate that any thorough study of industrial policy must account for activities involving
provincial governments. On the other hand, it is clear that the federal government both formulates
29 For more recent treatments of the effect of discourse on preference formation, see Schmidt (2010) and Wueest and
Fossati (2015).
44
industrial policy and implements it through its satellite offices (Atkinson & Coleman 1989a).
Moreover, there is ample evidence that local governments intervene in the economy. Indeed, in
the age of “devolution,” many local governments have been granted mandates over industrial
policy by their provincial masters (Bradford 2003).
Although the cases examined in this thesis all have a strong provincial accent, two out of
three are in fact cases of multilevel governance. Agricultural biotechnology policy in support of
the canola industry involved four provincial governments, national producer organizations, and
several federal programs. Moreover, officials sought to harmonize their activities with those of
state and federal authorities in the United States. In the case of green energy manufacturing in
Ontario, local economic development agencies played a significant role. Yet, Conteh's (2013)
study of “multi-actor governance” surrounding federal economic development agencies found that,
regardless of where the money comes from, cooperation on the part of provincial officials is
usually a prerequisite for policy success. Subsequent case analysis of industrial policy initiated at
the federal level will reveal the extent to which Conteh’s assessment holds across cases.
1.3.3 Limitations
As with any study, this dissertation has several limitations. The most obvious limitation is
that coordinated political economies receive scant empirical attention. Indeed, support for
conclusions concerning coordinated political economies is based primarily on logical exercises
and basic quantitative analysis. Although the logical conclusions concerning representative
institutions, friction, and opportunities for risk taking are robust, more research is required to
cement the conclusions of this thesis. Chiefly, a thorough quantitative analysis of cross-national
patent transfers is needed to assess the extent to which specialization in radical and incremental
innovation is endemic to liberal and coordinated political economies (cf. Akkermans et al. 2009).
These themes are discussed in greater detail in Chapter 3.
Another potential limitation of the study is that the cases reflect “selection on the dependent
variable,” which is said to occur when positive exemplars are chosen as cases to the neglect of
negative exemplars and null data (Collier & Mahoney 1996; Geddes 1990). Verification by
positive exemplars involves assessing co-occurrence between the dependent and independent
variables. Verification by negative exemplars, by contrast, involves assessing correspondence
45
between the absence of causal and explanatory variables. Analysis of null results involves the
examination of cases not predicted by the theory, namely instances where the explanans is
observed but the explanandum is not, and vice versa.
Although demonstration and analysis of negative exemplars improves confidence in
theory, avoiding selection bias requires attention to null cases. Selection bias is problematic when
a few exemplars are chosen to affirm theory to the neglect of plentiful null results. To illustrate, in
a universe of one hundred cases, the existence of three exemplars would indicate that three percent
of variance is explained by the theory. Most analysts would conclude the variance explained by
such a poorly fit model is due to chance. However, if ninety seven null cases go unobserved, the
theory would appear to explain one hundred percent of the variance on the dependent variable.
“Nested analysis” of quantitative data offers a useful method for unbiased case selection
(see Lieberman 2015; 2005). A fulsome approach to nested analysis involves the three steps: fitting
a statistical model (i.e., regression or correlation matrix); investigating predicted cases as positive
and negative exemplars; and investigating outliers as null data points. Theory is affirmed, not
simply when predicted values match the data, but rather when it is demonstrated through case
analysis (i) that the predicted causal mechanism is at work in positive exemplars; (ii) that the
hypothesized causal mechanism is not at work in negative exemplars; (iii) that the causal
mechanism faltered in outlying (null) cases where values of the dependent variable are predicted
but absent; and (iv) that something else caused the dependent variable in outlying cases where
values of the dependent variable are present but not predicted (cf. Rohlfing 2008).
Figure 1.6 illustrates how nested analysis works in practice. Assume Industry Canada
outlays capture the dependent variable: government commitment to industrial policy. For the
independent variables, assume the national unemployment rate captures motive to pursue industrial
policy; assume the size of the surplus (deficit) captures the means to pursue industrial policy; and
assume a government majority captures the opportunity to pursue industrial policy. Per regime
theory, assume the hypothesized relationship between motive and industrial policy is positively-
signed.
46
Figure 1.6: Industry Canada outlays as case observations in a regression model
Based on public accounts and Statistics Canada CANSIM table 282-002: Labour force characteristics by sex and detailed age group.
As seen in Figure 1.6, twenty-one out of twenty-six cases fall in the expected quadrants (B
and C), suggesting good model fit. Moreover, variation about the regression line is explained by
the means variable —surplus (deficit)— particularly with respect to cases of high unemployment
and modest spending. The suggestion here is that resources are insufficient to engage in industrial
policy, despite high unemployment. Case analysis is required to affirm such suspicions, however,
and to affirm that the causal mechanism —regime mobilization— occurs in quadrant B cases and
does not occur in quadrant C cases. On the latter point, unbiased observation requires that it be
demonstrated at the case level that regimes are not everywhere all of the time, but rather that the
causal mechanism varies across positive and negative exemplars.
Of course, nested analysis is highly demanding with respect to both quantitative indicators
and case analysis. Regarding quantitative indicators, notwithstanding the Industry Canada case
illustrated above, it is often not possible or accurate to operationalize ministerial expenditures as
47
the dependent variable. On one hand, total outlays conflate operating budgets with an array of
grant programs. On the other, ministries responsible for industrial policy are numerous and vary
over time. Consequently, for series to be meaningful, they must aggregate expenditures related to
numerous industrial policy portfolios. Construction of such a dataset from public accounts data is
a gargantuan undertaking, but is underway.
Subsequent field work on cases falling in all four quadrants of Figure 1.6 is even more
demanding than collection of quantitative indicators. Again, the task is to determine if the
hypothesized causal mechanism is at work in positive exemplars and not at work in negative
exemplars (Lieberman 2015). Regarding the question of whether regimes are ubiquitous, while
Figure 1.6 seems to indicate that there is more federal intervention when unemployment is high
and when slack resources are available, further research is required to determine the true extent of
variation on the dependent variable and causal mechanism. Only then will be possible to assess
the extent of alignment between the possibility set implied by regime theory and the range of real-
world possibilities.
The above point raises another possible limitation of the thesis. It may be argued that that
the possibility set implied by regime theory is too large for regime theory to be falsified. Indeed,
regime theory seems to be capable of explaining any observation by invoking qualifications. While
it is true that regime theory and the four models of industrial policy developed in this thesis cover
many possibilities, several of the hypotheses and propositions elaborated in Chapter 3 are
falsifiable, as are assumptions pertaining to friction and risk, and players’ game strategies given
resources and unilateral opportunities. So while it may be true that actor-centred institutionalism
covers virtually all possibilities, its predictions are precise in that they link specific decision rules
and modes of coordination to certain outcomes. For its part, regime theory ties specific institutional
and situational variables at the level of the political economy to certain modes of coordination and
decision rules (see Chapter 3). It is upon these “microlevel” institutions that the behavioural
predictions of regime theory rest.
48
1.4 Looking ahead
The following chapters develop more fully the themes touched on in this introduction.
Chapter 2 engages with game theory and social choice analysis to explain how regimes come into
being (their origins), how they work in various institutional contexts (operation), and with what
effect (outcomes). Going beyond the cursory overview of regime operation offered in this
introduction, the discussion of regime operation in Chapter 2 emphasizes decision rules, mode of
coordination, costs incurred by acting collectively, and principal-agent relationships that follow
from knowledge and resource asymmetries among participants. This discussion concludes with
formal explication of regime operation that analytically cements the institutional basis of regime
theory. The penultimate section of Chapter 2 elucidates the role of macropolitics in determining
whether regimes are terminated or sustained with the completion of electoral cycles. The chapter
wraps up with a discussion of how institutions governing the externalization of costs give rise to
different outcomes across political systems, in turn defining and sustaining political economies.
Chapter 3 introduces regime theoretic insights to debates on the role of industrial policy in
technological innovation. Engaging with the varieties of capitalism literature, Chapter 3 advances
a theory of innovation premised on institutional competencies. In contrast to the “firm centric”
orientation of varieties of capitalism, emphasis is placed on the relationship between
macropolitical institutions and the micropolitics of exchange, knowledge transfer, and cost
externalization within regimes. The advantages and disadvantages of different modes of
coordination receive discussion in light of cross-national evidence, culminating in the hypothesis
that the ability of regimes to externalize costs is correlated with competency for innovation. Liberal
regimes, which allow cost externalization, are hypothesized to be more competent to effect radical
first wave innovation. Coordinated regimes, which prohibit cost externalization and instead
internalize costs, are hypothesized to be more competent to effect incremental and subsequent
wave innovation. Chapter 3 concludes with a summary of the implications and expectations of the
theory (see Box 3.1).
Chapter 4 explores three cases of Canadian industrial policy: the aluminum ship building
industrial policy implemented by the British Columbia New Democratic Party (NDP) government
from 1994 to 2000; federal-provincial agricultural biotechnology industrial policy in support of
the canola industry, which was centred in Saskatchewan and pursued by successive governments
49
between 1985 and 2001; and the green energy industrial policy pursued by the Ontario Liberal
government from 2010 to 2015. Each case study undertakes a qualitative analysis of regime
origins, operation, and outcomes. As hypothesized, the distributive consequences of joint
production factor large in whether policy regimes are maintained over multiple electoral cycles.
Moreover, as predicted by the theory of institutional determinants of innovation developed in
Chapter 3, of the three cases, only agricultural biotechnology has been an unequivocal success. At
the time, agricultural biotechnology was a radically innovative industry in its first wave, whereas
shipbuilding and green energy technologies were further along the product cycle (aluminum
shipbuilding was a subsequent wave innovation, whereas green energy was nearing maturity on
its first wave). The case studies demonstrate that obtaining the expertise required to catch up to
international competitors in the shipbuilding and green energy cases involved cost overruns, which
were predictably externalized, prompting electoral punishment and regime dissolution. In the
terminology of the models of industrial policy developed in Chapter 3, agricultural biotechnology
was a case of sui generis industrial policy; aluminum shipbuilding was a case of restructuring; and
green energy manufacturing was a case of late mover industrial policy.
The final chapter summarizes the evidence presented in the thesis and discusses some of
the inferences that can be drawn from the findings. Specifically, it elucidates the various
dimensions that should be considered when asking the (very difficult) question of whether the
benefits of industrial policy are worth the cost. As highlighted by Figures 1.1 and 1.2, there are
many different approaches to industrial policy, each with its associated outcomes. Moreover, only
some industrial policies are innovative, and only certain industrial policies are likely to succeed in
a given institutional context. Whatever one’s normative evaluation of industrial policy, social
science that fails to appreciate the important role of industrial policy in modern society does so at
its peril.
Stylistically, in order to ensure the thesis is accessible to non-specialists, I have limited
formal applications of the theory to a few specific subsections throughout. The thesis is structured
so readers disinterested in proofs can skip them and not lose track of the argument. The same goes
for the statistical analysis in Chapters 3. What is said in the more rigorous sections is repeated
elsewhere in plainer terms.
1
Chapter 2
Regime Theory
Despite an impressive literature on the subject, few scholars have taken a deductive approach to
studying industrial policy. Rather, most studies to date have been either inductive or descriptive (Cimoli,
Dosi & Stiglitz 2009; Johnson 1984; Krugman 1983).30 An issue with the typical approach is that it puts
the cart before the horse; it seeks to analyze industrial policy, specifically, without first anchoring models
of joint production to a more general theory of collective action.31 Explanation in social science should
proceed systematically, in piecemeal fashion (Merton 1949). It should begin with the articulation of basic
analytical frameworks that establish relationships between general classes of relevant variables.
Explanation should then proceed to the derivation of theories in which some variables, agents, and causal
mechanisms are identified and elevated over others for their explanatory merit. Finally, having settled on
a limited number of explanatory variables, theories should be distilled further into more highly-specified
models that predict how agents should act, and events should unfold, in specific cases.32
This chapter elaborates the details of regime theory. Recall from the Chapter 1 that regimes create
distributive and other conditions that citizens vote to sustain or change at election time. Consequently,
regimes may be in operation for a single electoral cycle or may be sustained, albeit sometimes in updated
form, by a feedback loop that spans multiple electoral cycles. The nature of feedback is determined in
large part by the structure of macropolitical institutions, particularly whether the political system is
presidential or parliamentary and whether the electoral system is representative or majoritarian. This
30 For notable examples of explanation-oriented scholarship on industrial policy, see Atkinson and Coleman (1989), Blais
(1986), Evans (1995), and Haddow (2015). The main difference between conventional and contemporary literature on industrial
policy stems from the wave of trade liberalization in the early 1990s, which witnessed a shift of emphasis from tariff barriers
toward industrial organization, information exchange and the knowledge economy (see Cimoli et al 2009; Evans 1995;
Krugman 1993; Stiglitz & Yifu 2013). 31
Moreover, while the developmental state literature emphasizes the importance of institutions, few studies invoke theories of
“institutional collective action” wherein actors’ choices are assumed to be institutionally structured (cf. Feiock 2013). A major
exception, of course, is the varieties of capitalism (VoC) approach, which predicts behaviour based on incentive structures that
are institutionally-derived. 32
With respect to evaluation, frameworks can be evaluated for their logical plausibility; theories can be assessed for the extent
to which the variables they identify as meaningful explain variance across a number of empirical applications; and the predictive
power of models can be directly tested at the case level (either the model, or a component of it, is affirmed or it is falsified).
2
relationship between policy feedback and macropolitical institutions gives rise to observable differences
and similarities in policy characteristics across industrialized countries (Jones et al. 2009; Lijphart 2012).
These characteristics comprise the political economy.
The next three sections flesh out the three component parts —or “sub-theories”— that constitute
regime theory. As outlined in Chapter 1, these sub-theories are: (1) the theory of how regimes are
mobilized (the theory of regime origins); (2) the theory of how regimes achieve joint production (the
theory of regime operation); and (3) the theory of how the consequences of joint production interact with
macropolitical institutions to create feedback effects unique to the type of political economy in question
(the theory of regime outcomes).
Regime theory, like all proper theories, is portable; it is applicable to many situations. Indeed,
regime theory can be applied to the study of virtually any policy (May & Jochim 2013). From a regime
theoretic perspective, all policies are sustained or subverted by supporters or opponents who mobilize
according to their preferences, which are determined by the distributional, social, and normative outcomes
associated with existing policies (Cobb & Elder 1983; Schattschneider 1960). In the next chapter, I pivot
off regime theory to specify more precise models useful for analyzing industrial policy regimes in various
situational contexts.
2.1 The creation of regimes
Regimes are associations of actors who coordinate their behaviour in pursuit of common goals. In
short, regimes are vehicles for collective action. More specifically, regimes mobilize collective resources
for the purpose of enhancing the welfare of their members. Participation in a regime is beneficial either
because collective goods —typically “club goods”— are welfare enhancing in their own right or because
they provide the means by which members’ welfare may be enhanced.33 For its part, society encourages
33 For example, cooperative investment in capital, the use of which can be exclusive to members of the regime (i.e., a club
good), can enhance members’ welfare by improving the efficiency by which individual members conduct their business. Group
insurance policies and other redistributive benefits fall into this category of club goods that are welfare enhancing in their own
right. By contrast, cooperative investment in capital may be a necessary (and often costly) step in the execution of joint
production, the long run return from which is welfare enhancing.
3
and facilitates the formation and operation of regimes when regimes promise to produce positive
externalities. Society withdraws its support when regimes fail to live up to that promise.
Regimes are progressive in the sense that they seek to move the political economy to a new
equilibrium in which untapped possibilities for the satisfaction of latent demand are realized (Worsham
& Stores 2012: 171).34 This task is accomplished by altering the technology according to which goods
and services are supplied (Kirzner 1973; Schumpeter 1911). The agent responsible for recognizing latent
demand and supplying the technological means of satisfying it —thereby moving the political economy
to a new equilibrium— is the entrepreneur. The recognition and satisfaction of latent demand is
entrepreneurship (Casson 1982; Mises 1949).
While all regimes are goal-oriented, the ends regimes work toward vary considerably. Despite this
variability, a simple division of labour may be invoked to analyze and understand the roles performed by
different organizational entities within a regime.35 Disaggregating the organizational unit of analysis,
regimes can be separated by function into four possible sub-units: knowledge regimes, production regimes,
policy regimes, and advisory regimes. Knowledge regimes produce knowledge and information;
production regimes produce goods and services; policy regimes produce policies that govern and
coordinate regimes; advisory regimes produce and disseminate advice across political economies. Figure
2.1 displays the relationships between the different organizational sub-units.
34 In the parlance of microeconomic theory, progressive transformations brought about by regimes entail two things. One is
alteration of supply and demand functions in the political economy due to the introduction of either or both new goods and
services or substitutes for existing goods and services. The other is individuals’ movement to higher indifference curves not
previously attainable. Both phenomena are brought about by an “exogenous” change in technology —i.e., the product of
entrepreneurship. 35
The regime-theoretic division of labour parallels divisions of labour in the economy, generally. In tightly-integrated regimes,
the division of labour is akin to divisions of labour found in multidivisional firms (i.e., firms comprised of specialized sub-
units). In more loosely-integrated regimes, the division of labour is analogous to a supply chain.
4
Figure 2.1: the regime-theoretic division of labour
As displayed in Figure 2.1, knowledge regimes, production regimes, and policy regimes are both
integrated and nested within a political economy. Advisory regimes, by contrast, bridge political
economies by disseminating locally-generated knowledge to other jurisdictions. As such, advisory
regimes are agents of knowledge transfer and diffusion.36
Empirically, the relative size and degree of overlap among organizational sub-units varies. In some
cases, knowledge and production regimes are highly integrated and may even completely overlap, as when
one hundred percent of industrial research and development (IR&D) is conducted by productive firms.37
Similarly, in instances in which producers are self-coordinating, there is substantial overlap between
policy and production regimes. Thus, the divisions of labour among organizational sub-units are clearer
—and more analytically useful— in cases where regimes are loosely integrated compared to cases where
regimes are integral.
36 Fact finding missions fall under the rubric of advisory regimes. For example, the government of Ontario sponsored several
delegations to Europe and Japan in the late 1980s for the purpose of obtaining information about how best to devise and execute
industrial policy (Ontario 1988). The International Monetary Fund (IMF), World Bank, United Nations, and (especially) the
Organization for Economic Cooperation and Development (OECD) are examples of organizations that serve advisory functions
on an ongoing basis. 37
Truly complete overlap of knowledge and production regimes occurs only in firms where IR&D occurs at the level of the
shop floor since multidivisional firms have internal divisions of labour demarcating knowledge regimes from production
regimes.
5
The regime-theoretic division of labour is useful for highlighting the fact that, within any given
regime, specialized tasks may be performed by adjoined but potentially discrete sub-units. Moreover, with
respect to the question of how regimes come into existence, the regime-theoretic division of labour is
helpful for recognizing that the organizational components undergirding a regime may not materialize all
at once or according to the same process of mobilization. Indeed, the resources and impetus required to
mobilize a knowledge regime dedicated to basic research are not likely to be the same as those required
to mobilize a production regime dedicated to furnishing consumption goods. Furthermore, the policy
regime responsible for coordinating knowledge production may differ from the policy regime responsible
for coordinating industrial production.
This is not to say that simultaneous, across-the-board mobilization is impossible. Recalling the
discussion surrounding rate of mobilization in Chapter 1, while simultaneous and rapid mobilization of
knowledge regimes, production regimes, and policy regimes may be demanding, rapid mobilization is
more likely than gradual mobilization to correspond with a clear and consistent organizational mission. In
cases of gradual mobilization, additional effort is required on the part of policy regime agents to harmonize
roles and expectations across production and knowledge regimes whose raisons d’être might differ from
one another.
Despite variable time horizons regarding mobilization, organizational sub-units aggregate to form
a whole in the sense that the existence of one sub-unit is often a necessary condition for the establishment
of another. For instance, knowledge regimes often come into being before production regimes because the
knowledge produced by the former constitutes a resource essential for the success of the latter. Put
differently, local advantage with respect to one type of regime-based production can beget advantage with
respect to other types of production.
I return to the issue of advantage as it relates to competence to effect industrial policy in Chapter
3. For now, it is pertinent to recognize that the establishment of regimes can occur rapidly or be rather
episodic. In any case, the process of mobilization is hypothesized to play out in a predictable fashion,
regardless of which type of sub-regime is being mobilized and when. Regime theory, like all general
theories, is portable across time, space, and context.
6
2.1.1 Means, motive, opportunity
Means, motive, and opportunity represent the necessary conditions for regime creation. Means are
the resources required to establish a regime, such as capital and knowledge. Motive is the state of mind,
shared by a sufficient number of influential actors, required to pursue a common objective. Put differently,
motive represents shared preferences. Opportunity is the occasion to put means to use.
Means are ultimately technological. As John Kingdon puts it, “advocates of a proposal must delve
deeply into the details and into technicalities… attending to the feasibility of implementation, and
specifying the actual mechanisms by which an idea would be brought into practical use” (Kingdon 1984:
131). Yet, means are seldom operationalized in terms of technological availability. Rather, means tend to
be operationalized as capacity or slack (Cyert & March 1964). For instance, Cohen, March, and Olsen's
(1972) well known garbage can model of organizational choice emphasizes “energy” (the effort required
to mobilize a resource) and “load” (the total demand for energy within an organization). More recently,
punctuated equilibrium theorists have become increasingly preoccupied with the importance of “issue
attention” (Jones & Baumgartner 2005). This focus on organizational capability stems from Herbert
Simon's observation that boundedly-rational actors lack the intellectual capacity to attend to many issues
at once (Simon 1947). Moreover, although organizations are capable of “parallel processing” —and
therefore capable of expanding the “agenda space” of issues under consideration— the capacity of
organizations to process inputs and deliver outputs is finite and thus vulnerable to “overload”
(Baumgartner & Jones 2015; Rose 1980).
Of course, the organizational capacity required to employ a technology depends on the nature of
the technology and its availability. Furnishing a state of the art nuclear power facility is a relatively simple
task for the United States Department of Energy compared to equivalent agencies in the developing world.
Examples such as this speak to the fact that the technological means to accomplish a task may not be
available ex ante, but may need to be created or purchased from elsewhere. Clearly, then, it is appropriate
to conceive of means not just in terms of organizational resources but in terms of budgetary resources as
well.
Along these lines, Schneider and Teske (1992) operationalize means as budgetary slack capable
of being reallocated for innovative purposes. Operationalizing means as budgetary resources is both
simple and appropriate. Moreover, it is preferable to operationalizing means as organizational slack for
several reasons. First, collecting personnel data of sufficient detail to get a sense of an organization’s
7
capacity to execute specialized tasks is highly demanding. Second, the alternative methods of
operationalizing means as energy or attention risks conflating means with motive and opportunity. Third,
an organization’s capacity to execute specialized tasks can be considered a function of its financial
capacity; well-resourced organizations possess the financial capacity to invest in their organizational
capacity. Lastly, like the liquid state in the process of sublimation, organizational capacity is likely to
appear and vanish instantaneously because idle organizational capacity is wasteful and will therefore be
avoided. Excess financial capacity, on the other hand, is virtuous and may even yield interest. In sum,
methodologically, the financial capacity to obtain and deploy a technology is an apt and useful substitute
for the availability of technology itself.
Motive equates to shared preferences concerning how a group ought to accomplish a task. Put
differently, motive is the preferred solution to a problem. Substantively, motive takes the form of ideas
(Blyth 2007; Hall 1989). However, owing to difficulties surrounding the measurement of ideas, motive
has traditionally been operationalized as a proxy for more easily measured phenomena, namely problems,
available solutions, mood, or issue attention (Cox & Béland 2013; Jones & Baumgartner 2005; Kingdon,
1984; Stimson 1991). Granted, recent studies have put methodological developments to good use in an
effort to map the vagaries of “policy discourses” (Leifeld 2013; Muller 2015; Wueest & Fossati 2015).
Yet, it has been argued that greater specification of ideational variables does little to promote the
advancement of social science because ideas are case-specific and therefore only really useful for
explaining idiosyncratic “residual variance” (Blyth 1997).38 Where general theories of ideational change
have been advanced (Goldstein & Keohane 1993; Hall 1993), they have been the subject of considerable
controversy (Baumgartner 2014; Carstensen 2011; Daigneault 2014). Consequently, insofar as
comparative research is concerned, much like means, the standard has been to operationalize motive
indirectly, usually in terms of ideology or problem severity (Breunig 2011; Travis & Zahariadis 2002).
38 I do not personally subscribe to this reasoning. As Blyth later argued, ideas serve a preference ordering function (Blyth
2007). Seen in this light, ideas are the information according to which preferences are based (Jacobs 2009). Therefore, variance
on ideational variables provides an explanation for why preferences may vary across cases and why they may change within
cases. This, I take to be a monumental stride in the advancement of social science. Indeed, conventional methods take
preferences as given: i.e., something that is determined exogenously (Elster 1994). Although cultural theory has proven capable
of explaining why preferences may differ across cases (i.e., cross-culturally), it does not provide an explanation for preference
change within cases (cf. Douglas & Wildavsky 1982).
8
Opportunity is without a doubt the most slippery of the three variables with respect to both
conceptualization and operationalization. The notion is that spatial and temporal arrangements of actors
and resources constitute causal variables in their own right: that is, independent of all other considerations.
Yet, debate surrounds whether the causal impact of opportunity is worth the effort of identifying it
empirically (Dowding 1995). Particularly troubling is the fact that opportunity is not static, but rather
constantly changing. The solution has been to construct typologies of “community and network structures”
and then apply the appropriate type to a given case as a categorical variable (Atkinson & Coleman 1989b;
Howlett 2002; Waarden 1992). In this sense, opportunity constitutes the “initial conditions” pertaining to
each case, such as the local “mode” of governance, coordination, or interest intermediation (Börzel 1998;
Dahl & Lindblom 1953; Knoke et al. 1996).
Conventionally, opportunity has been conceived as the interaction between institutions —namely
“boundary rules” and “decision rules”— and actors and resources previously mobilized (Scharpf 1989).39
The criterion distinguishing opportunity from means is institutionalization: whether, and to what extent,
interest representation is constant or taken for granted. Invoking the concept of institutionalization allows
distinctions to be drawn between institutionalized interests, latent interests, and mobilized interests
(Atkinson & Coleman 1989b; Schattschneider 1960). Whereas mobilized interests are typically
understood as previously latent interests that have since mobilized, institutionalized interests are
considered interests that do not need to go through the normal process of mobilization because they enjoy
institutionalized representation (Gamson 1968).
An alternative approach is to conceive of institutionalized interests as those which can easily be
mobilized thanks to institutionalized “opportunity structures” (Fischer & Leifeld 2015; Keck & Sikkink
1998; Princen 2007). This opportunity-oriented conception of institutionalized interests is more
analytically precise than that which takes mobilization for granted because taking mobilization for granted
assumes away the causal mechanism. Means, motive, and opportunity are necessary but insufficient to
cause an effect because they do not encompass a causal mechanism. Resources, ideas, and opportunity
39 Scharpf (1989) also highlights the importance of “decision styles” —i.e., whether decisions are made by way of
confrontation, bargaining, or problem solving— but these are motivational assumptions and so should fall under the ambit of
motive (see also Kelley & Thibaut 1978).
9
structures cannot do anything on their own. They are not agential. Rather, mobilization requires a causal
agent.
2.1.2 Mobilization of bias
Theory on mobilization of bias follows from the literature on political agenda setting (Baumgartner
& Jones 1993; Cobb & Elder 1983; Kingdon 1984). Cobb, Ross, and Ross (1976) identify three models
of agenda setting based on where “issue initiation” and “issue specification” take place. According to their
outside initiation model, issues originate in civil society and enter the political process if and when
advocates gain agenda access. By contrast, in their mobilization model, issues originate within
government, so agenda access is automatic, but successful implementation requires issue expansion to the
public agenda as well, presumably to obtain mass support. Finally, their inside initiation model involves
issues that arise within government which supporters do not try to extend to the public agenda due to the
political sensitivity of issues. In such cases, government either mobilizes resources “in house” or, as is
more often the case, discreetly collaborates with select civil society groups behind closed doors (Lindblom
1977).
All three models are pertinent to regime theory because, as discussed in Chapter 1, government
participation in regimes falls on a scale that ranges from low involvement to high involvement.40
Government can play a large role in initiation, a moderate role, or no role at all. Similarly, government
involvement in the process of policy specification and implementation can take many forms.
Both Kingdon (1984: 67) and Baumgartner and Jones (2015: 180) find that government is usually
the initiator in the American political system. For their part, Cobb, Ross, and Ross agree but anticipate
that the outside initiation model will be prevalent in “more egalitarian” (i.e., representative) societies
(1976: 132). While Cobb, Ross, and Ross, along with Lindblom (1982) and Schattschneider (1960),
attribute such predictions to structural conditions (namely the concentration of wealth in society), regime
theory posits an institutional explanation. Unlike representative institutions, majoritarian institutions
40 While the discussion of government involvement in Chapter 1 concerned regime operation —namely government
involvement in coordinated production— the principle applies to the process of mobilization as well.
10
usually do not require “Downsian mobilizations” in which civil society is captivated by “euphoric
enthusiasm” in order for legislation to pass (Downs 1972). To the extent that mass mobilization is
necessary in majoritarian systems, it is more likely in “high friction” majoritarian systems, like the United
States, where overcoming divisions within Congress and between the legislative and executive branches
sometimes requires broad, bipartisan support (Jones, Larsen-Price & Wilkerson 2009). The expected norm
in majoritarian systems —especially “low friction” systems in the Westminster tradition— is clientelistic
mobilization of the “inside initiation” variety (Atkinson & Coleman 1989a; Lowi 1969). In such cases,
regime theory anticipates that initial mobilization is followed by “Schattschneiderian” counter-
mobilizations at election time, in which earlier clientelistic mobilizations are controverted
(Schattschneider 1960).41
Mobilization is intimately tied to opposition, amendment, bargaining, and compromise. Whether
a proposal will run the gauntlet of mobilization unscathed depends on the extent of mobilization and the
degree of homogeneity among mobilized groups. Put another way, the probability that a proposal will be
altered in the process of mobilization is a function of the “scope of conflict.” In Cobb, Ross, and Ross’
mobilization model, the scope of conflict is expanded such that “bandwagoning” behaviour occurs as
disparate interests attempt to “get something out of” any incoming policy decision. Typically, the final
product bears little resemblance to the initial proposal, but is rather a “recombination” or “mutation” of
several proposals (Kingdon 1984: 124). The same is true of outside initiation, with the caveat that
bandwagoning behaviour will only occur if it is apparent (that is, both imminent and known) that
government is seriously considering a proposal. The opposite is true of inside initiation where the scope
of conflict is deliberately limited.
Figure 2.2 portrays the different ways mobilization can occur. As per Cobb, Ross, and Ross (1976),
the critical factor is whether initiation occurs within government or civil society. More precisely, the
critical factor is whether the initiator is a government or private agent.
41 The courts may also be used in Schattschneiderian counter-mobilization —i.e., when groups mobilize in opposition to an
existing policy (see Baumgartner & Jones [1993] on "venue change").
11
Figure 2.2: pathways to mobilization
Recall that causal agents in the origin stage are known as policy entrepreneurs. Panel (a) in Figure
2.2 conveys situations in which government is the initiator and entrepreneur. Panel (a) includes both the
inside initiation and mobilization models: which one depends on the extent to which civil society groups
are made aware of the government’s proposal. To reiterate, the involvement of mass society corresponds
with the mobilization model; the involvement of only select civil society groups conforms to the inside
initiation model. As seen in Panel (a), government agents (inside the executive, legislature, or both) signal
civil society groups, represented as i, j and k, at time1. The joining of these previously-isolated groups
signifies mobilization as they accept the government’s proposal at time2. Again, groups may mobilize
around a proposal with or without amendment.
Panel (b) represents outside initiation involving one or more private entrepreneurs. Here,
entrepreneurs attempt to mobilize support for a proposal among both civil society and political actors at
time1. The assumption is that galvanization of one group (political or civil society) at time2 is contingent
on the galvanization of the other.42 Thus, private entrepreneurs act as brokers, conveying information
42 The basis of the assumption is as follows. From the perspective of private stakeholders, there is little reason to assume the
costs of mobilization prior to obtaining government support. Meanwhile, in the eyes of government, there is no reason to
proceed to enact policy with no civil society support. Instead, each party signals its intention to the policy entrepreneur, who
12
about the preferences of one party to the other. This role is typical of association leaders who both
coordinate private associations and act as delegates to government.
A third scenario is portrayed in Panel (c) in which mobilization occurs without government. As
with associational leadership, entrepreneurs seek to mobilize private actors to pursue collective action.
However, collective action is to be sought entirely on private interests’ own accord —that is, without
government assistance.
Before turning to the theory of entrepreneurship, it is first necessary to provide an account of the
conditions that lend themselves to each type of mobilization introduced above. Three questions are of
concern. The first involves the conditions under which private actors will find it worthwhile to mobilize
on their own. The second involves the conditions under which private actors will find it worthwhile to
mobilize collectively. The third involves the conditions under which is government will find it worthwhile
to initiate mobilization.
The calculations employed by both private and government actors can be understood in terms of
cost-benefit analysis. If expected benefits reasonably exceed expected costs, then mobilization should be
forthcoming. Yet, to complicate matters, simple cost-benefit analysis is undermined by uncertainty about
expected costs and benefits, in which case a significant amount of cost takes the form of risk (Knight
1921). Unlike cost calculations in simple cost-benefit analysis, appetite for risk is not constant but rather
tends to increase at a marginal rate (i.e., curvilinearly) with resource slack (Menezes & Hanson 1970).
That is, tolerance for risk depends on the amount of expendable resources at an agent’s disposal.
may then embellish each party’s level of commitment or enthusiasm in order to inspire general confidence in the policy or
program.
13
Figure 2.3: the possibility frontier
Figure 2.3 depicts a hypothetical possibility frontier. The x axis represents the level of commitment
to “venture x,” the program around which mobilization is assumed to take place. The y axis represents the
commitment to all other functions performed by the agent. As the possibility frontier is essentially a budget
constraint, an agent with ample resources will be able to devote a comparatively larger share to new
ventures than an agent whose existing commitments exhaust most of its budget. This rule applies to both
private and government actors. If venture x requires a level of investment represented by Point B, but an
agent can only afford to contribute the amount of resources denoted by Point A, venture x will not be
sought notwithstanding some sort of cost sharing arrangement. If others value venture x as well, they may
opt to make up this difference.
Incidentally, private stakeholders and governments face a similar conundrum: private stakeholders
are constrained by production possibilities, governments are constrained by policy possibilities. Put
differently, private entities can only produce so much, given their resources. Governments can only pursue
so many policies simultaneously, given similar constraints. Ignoring moral hazard for the moment, since
the problem confronting both private and government actors is the same, so should be the calculus made
by each type of actor when choosing whether or not to pursue a new venture. To elaborate, each individual
involved in a decision is assumed to have some idea about the expected benefits of the venture as well as
some idea about its costs and risks. The amount contributed to a venture is a reflection of actors’ cost-
14
benefit trade-off (which, again, includes some form of risk calculus). A venture that promises ample
benefits with low cost and low risk should receive investment. A venture with an unfavourable trade-off
should not. Importantly, however, actors’ tolerance for risk is not constant but rather is assumed to increase
with available resources. Hence, as conveyed algebraically below, the more slack resources available, the
greater the likelihood that investment in risky ventures will be forthcoming.
So far, the story of mobilization is as follows. Mobilization is contingent on actors’ anticipated
rewards outweighing estimated costs, with risk being a function of slack resources. Yet, as conveyed in
Figure 2.2, mobilization usually involves multiple actors, often from both the private sector and
government. Multiple involvement can affect the calculus of agents in different ways, depending on what
the group sets out to achieve. I will focus on one general scenario relevant to this thesis: situations in
which collective goods are pursued.43
Because collective goods are available to all who contribute to their provision (per the principle of
non-excludability), each additional contributor has the effect of spreading risk while the reward —the
collective good— remains indivisible (Bowen 1943; Samuelson 1954). Consequently, the likelihood that
a venture will be pursued increases with each additional contributor until a saturation point is reached.44
It is however important not to equate indivisibility and non-excludability with non-exhaustibility; in most
cases, there is an empirically determined limit on how many users can effectively employ a collective
good before crowding erodes the use value of the good (per the law of diminishing marginal returns to
scale) (Kiser & Ostrom 1982: 68). In some instances, carrying capacity of collective goods is very high
(e.g., transportation and communication infrastructure). In others, carrying capacity is low (e.g.,
machinery). When collective goods amount to an industry, exhaustibility is not typically an issue because,
usually, the impetus is to collectively provide exhaustible goods to specialized members of the group who
43 Olson (1965: ff 21) defines collective goods as goods that befall only to a particular group, however defined.
44 For illustration, consider a lottery for which the prize is a vacation home. Every person in a group of friends may value the
prize, but a price of $1000 per ticket deters all four friends from entering the draw. They are too risk averse. However, if two
friends agree that the prize is non-exhaustible (that it could serve as a club good), the price paid per entry falls to $500, while
the utility obtained from the good is unchanged. If three friends agree, the price per entry becomes $333. If four friends agree,
the price per entry falls to $250, and so forth until the good is exhausted. At some point, so many people will occupy the
vacation home that contributors will obtain negative utility from it, although the threshold number of friends could be a very
high.
15
then coordinate production for the group’s benefit. Thus, the number and size of potential beneficiaries,
whether public or private, determines the level and scope of both political and resource mobilization.
But how is multiple involvement secured? In the absence of coordination signaling levels of
commitment between actors, cost-benefit calculi cannot be completed. Indeed, in the absence of
communication, actors would not know others are considering ventures from which all may benefit. As
suggested by the discussion surrounding Figure 2.2, proposals are transmitted from one agent to another
by policy entrepreneurs. Beyond merely communicating information about the substance of proposals,
entrepreneurs may also obtain and communicate information about the terms according to which different
actors would be willing to pursue joint ventures: information which need not be genuine or accurate.45
Consequently, entrepreneurs reduce transaction costs associated with bargaining. Who makes the first
offer depends on where initiation happens.
Whether, and the extent to which, it is worthwhile for an individual, firm, or government to
mobilize depends on the sign and size of the utility expected to be obtained from the proposed venture.
Consider the function:
𝑈𝑖(𝑉) = 𝑈𝑖(𝑋)(1 − 𝜏) − 𝐶𝑖(𝑉)
Equation 2.1 Where
𝜏 = ∏ ( 1
𝑤𝑖 [1 − 𝑃𝑖(𝑋)] )
𝑛
𝑖=1
The left side term, 𝑈𝑖(𝑉), represents actor 𝑖’s utility expected to be obtained from the venture 𝑉. On the
right side, 𝑈𝑖(𝑋) signifies the utility obtained from the provision of collective goods 𝑋; 𝜏 is a risk function;
and 𝐶𝑖(𝑉) represents the actor’s upfront costs of mobilization. With respect to the risk function, 𝜏 is the
product of each contributor’s assessment of the probability of failing to obtain the collective good 𝑋 (that
45 Disingenuousness on the part of the policy entrepreneur may serve the function of initiating a dialogue that would otherwise
not occur. For instance, an entrepreneur may inform both parties to a potential joint venture that the other is interested without
first obtaining such information from the principal.
16
is, 1 − 𝑃𝑖(𝑋)) given slack resources 𝑤𝑖, whereby tolerance for risk is positively associated with resource
slack (hence 𝑤𝑖−1).46 In simple terms, risk spreading increases willingness to invest.
As explained in substantive terms above, when the number of contributors 𝑖 to the production of
collective goods 𝑋 increases, 𝜏 decreases ceteris paribus. Consequently, the more contributors to the
production of collective goods, the greater the value of 𝑈𝑖(𝑉) up to the point that the risk associated with
the venture is trivial (i.e., approaches zero). Moreover, the more slack resources held by contributors 𝑖,
the greater the value of 𝑈𝑖(𝑉), again, up to the point that the risk associated with the venture is trivial.
Notice, though, that when the number of actors is greater than one, each actor’s calculation depends
on calculations already made by others, which depend themselves on calculations previously made by
others, and so on ad infinitum. No progress can be made without an initial estimate of others’ contributions.
Again, the task of obtaining and communicating information about such estimates is entrepreneurial,
whether communicated by one of the mobilizing actors i or by an outside entrepreneur.47
This section established and emphasized the signaling function performed by policy entrepreneurs:
the causal agent in the process of regime mobilization. At this point, it is prudent to specify that when
entrepreneurs are many and/or dispersed —as when there are both private and public entrepreneurs, or
multiple private and/or public entrepreneurs— the causal agent is said to be polycentric. Polycentric
entrepreneurs may cooperate with one another, compete with each other, and/or engage in “negative
coordination” (i.e., non-interference). Cooperating entrepreneurs can be vertically or horizontally-
integrated. Vertically-integrated entrepreneurs are organized hierarchically; local or specialized groups
are coordinated by one or more subordinate entrepreneurs, while one or more superior entrepreneurs
coordinates the larger “federal” organization. In horizontal integration, by contrast, there is no larger
organization but rather several small or intermediate “confederal” groups each headed by one or more
entrepreneurs (cf. Olson 1965: 62-63). When entrepreneurs compete, the story is fairly straightforward:
each attempts to attract members by offering a more desirable package of benefits at a lower premium
46The logic here is that each contributor has its own perception of likelihood of failure (1 − 𝑃𝑖(𝑋)), which may be exaggerated
or discounted depending on the contributor’s wealth (𝑤𝑖). The product of individual risk evaluations yields the risk function of
the group, which is inherited by the individual. Note that the upfront cost for the individual is a separate term. 47
Keep in mind that such information need not be genuine. Although it may seem as though mobilizing actors i would have
no incentive to convey disingenuous information, it is an empirical regularity for actors to err or bluff with respect to their
anticipated level of commitment only to renege after the fact.
17
than competitors. Negative coordination, by contrast, involves tacit cooperation, as when several
entrepreneurs mobilize and coordinate public and private support separately but for the same purpose.
Remaining questions involve the motivations of entrepreneurial agents as well as what they do in
the process of mobilization. The following subsection lays out the theory of the policy entrepreneur as the
causal agent and specifies the causal mechanism involved in mobilization by sketching a theory of
persuasion.
2.1.3 Agents of change: policy entrepreneurs
The origins of the literature on policy entrepreneurs are illustrative of why entrepreneurship is
integral to regime theory. In Logic of Collective Action, Mancur Olson demonstrated that welfare gains
achievable via collective action will not typically be pursued by self-interested actors, small groups
notwithstanding (Olson 1965). The problem is that, since group benefits obtained by way of collective
action are usually non-excludable, members of large groups have an incentive to under-contribute to
collective enterprises. Wariness of “free riders” results in failure to engage in voluntary collective action.
Only when groups can offer exclusive “selective benefits,” or when commitments are perceived to be
credible because of trust, monitoring, or coercion, is collective action expected to follow.48
Because the cost of trust-building, monitoring, and coercion increases with group size, Olson is
not optimistic about voluntary collective action in large groups.49 On one hand, when members are of
equal or roughly equal size —i.e., when members contribute and extract roughly equal amounts to and
from the collective enterprise— all members stand to gain by free riding. Members can extract without
contributing, the realization of which dooms the collective pursuit. On the other hand, when large groups
are populated by members of unequal size, the fact that few large members are more easily monitored
48 Olson’s “byproduct theory” works as follows. Members of large (“latent”) groups are not motivated to contribute to
collective goods because collective goods are provided regardless of the individual rate of contribution. Rather, members
contribute to the group to secure exclusive “selective benefits,” the sale of which finances the provision of collective goods.
Ergo, collective action, and the provision of collective goods, is a byproduct of the sale of selective benefits. 49
Moreover, monitoring may not be forthcoming even in small groups if opportunity costs favour alternative efforts (e.g.,
production). On this point, Ostrom finds that monitoring (a collective good) in self-governing systems is not voluntary but
rather follows from selective benefits (e.g., monitors are allowed to pocket half of the fines collected from defectors) (see
Ostrom 1990: 62).
18
than many small members leads to “the exploitation of the great by the small.” Small members retain the
ability to free ride. Large members do not.50 Exploitation of the great by the small results in costs in excess
of benefits for large members, giving rise to a paradox of collective action: members capable of faring
well unilaterally are exploited by those who fare poorly on their own such that large members are
dissuaded from engaging in collective action.51 The paradox is very simply conveyed as a payoff matrix,
presented in Figure 2.4.
Figure 2.4: Olson’s paradox of collective action
L
C D
S
C
4
3
3
1
D
2
4
3
1
collective
action
unilateral
action
Payoffs for “S” (small) are left-justified, payoffs for “L” (large) are right-justified. S is tempted by the defect-cooperate (D,C) payoff (4,2) to defect from contributing to collective action. Although cooperate-cooperate (C,C) yields a higher absolute payoff (3,4), cooperation yields a lower individual payoff for S than can be obtained through defection (which, again, is 4,2). Since L can obtain a larger payoff than (4,2) by acting unilaterally, it will opt to abstain from collective action to obtain (1,3), which is the pure strategy Nash
50 Olson attributes the exploitation of the great by the small to the fact that large members obtain greater value from collective
goods than do small members. This is an unnecessary and often unrealistic assumption. According to the “paradox of collective
action” discussed in this chapter, in some sense large members obtain less value from collective action than small members
because the former are likely to fare better unilaterally than the latter. Olson’s conclusions remain unchanged, however; just as
small businesses are less easily regulated than large corporations, small members are less easily monitored than large members
in collective action situations. 51
Large members are not motivated to exploit small members because the contribution of small members to collective action
is assumed to be inconsequential to large members unless large members also commit to collective action (hence the stable
payoff of 3 on the right side of Figure 2.4). The assumption, discussed in greater detail in section 2.2 and in Chapter 3, is that
collective action is not forthcoming absent contributions from large members but is forthcoming absent contributions from
small members.
19
equilibrium. The paradox is that S is left worse off. Note: if the payoff in (D,C) were changed to (4,3), the result would be sustained because, although L would be indifferent between collective and unilateral action, transaction costs associated with collective action would tilt the balance in favour of unilateral action. The payoffs presented in Figure 2.4 account for transaction costs.
Observing that there is more voluntary collective action in the real world than Olson’s theory
predicts, Wagner (1966) resolved what might be called “the paradox of the paradox of collective action”
by specifying a role for entrepreneurs in Olson’s framework. According to Wagner, the paradox of
collective action creates a market opportunity ripe for exploitation by entrepreneurs. More precisely, a
corrective to the tendency for actors to behave contrary to their best interests represents a “latent need”
whose satisfaction may yield both group benefits and entrepreneurial profits.
Wagner’s basic insight is that entrepreneurs can render commitments credible, either by giving
assurances, by paying cooperation costs up front (by absorbing these costs or by collecting levies), or by
enforcing agreements. Of course, a cooperative equilibrium can be achieved institutionally, by
implementing contracts, for example. That negotiating and enforcing contracts is costly does not rule out
institutional solutions. Rather, the fact that institution-building is a pursuit in and of itself implies action
by some agent whose role is extraneous to the group’s core purpose. Recognizing its interests may be
furthered by employing someone to design, draft, and even enforce contracts, the group may opt to solicit
outside services. Both means of rendering commitments credible therefore involve entrepreneurial agents:
a monitor-coordinator in cases where the entrepreneur is continuously active and an institution-builder (or
enforcer) in cases where the entrepreneur’s presence is more sporadic.52
Wagner’s brief but powerful ten page critique and amendment of Olson’s theory piqued scholarly
interest in the role of entrepreneurs in organizing collective action. Two articles followed on Wagner’s
heels which sought to more precisely outline the calculi of leaders and followers in social movements.
Breton and Breton (1969) surmised that social movements mobilize when unilateral action proves
insufficient to sustain an adequate rate of income growth. At some point, a threshold is crossed beyond
which the benefits of individualistic participation in the economy are overtaken by the benefits of
collective participation. The calculus shifts from favouring unilateral action to favouring collective action.
52 Scaled up and repeated indefinitely, the task of enforcing contracts may be assigned to what Frohlich, Oppenheimer, and
Young (1971) liken to “a central agency,” overseen by an entrepreneur who is elected by group members to administer pooled
resources for the group’s benefit in the operational stage discussed in the next section.
20
Along similar lines, Salisbury (1969) suggested that followers in collective action situations must receive
sufficient benefits and leaders sufficient return for collective action to be pursued. Unlike Breton and
Breton, Salisbury identified three kinds of benefits: material, solidary, and purposive. Material benefits
are self-explanatory: they are material. Solidary benefits are akin to the utility one obtains from merely
belonging to a group. Purposive gains are indivisible accomplishments obtained by the group (like
winning the Stanley Cup, for example). Consonant with Olson (1965), although the group produces and
enjoys “collective benefits,” membership is sustained by “selective benefits” enjoyed only by contributing
members of the group.
In the first book length work on entrepreneurs and collective action, Frohlich, Oppenheimer, and
Young (1971) sought to formally establish the incentive structures facing entrepreneurs and their
followers. Again, the entrepreneur’s decision to provide a collective good is considered to be dependent
on whether the entrepreneur can make a profit. In technical terms, the decision depends on whether or not
the entrepreneur’s utility function is positive. Consider the function:
Equation 2.2
𝑈𝐴(𝐿𝐴) = 𝑈𝐴(𝑋𝐴) + ∑ 𝐷𝑗(𝐴)
𝑛
𝑗=1
+ ∑ 𝑇𝑗(𝐴)
𝑛
𝑗=1
+ 𝑏𝐴
−[𝐶(𝑂𝐴) + 𝐶(𝑋𝐴)]
Where UA(LA) represents the utility an entrepreneur —called Leader A— derives from providing collective
goods; 𝑈𝐴(𝑋𝐴) is the entrepreneur’s own valuation of collective goods; ∑ 𝐷𝑗(𝐴)𝑛𝑗=1 is the sum total of
“donations” obtained by Leader A from group members j; ∑ 𝑇𝑗(𝐴)𝑛𝑗=1 is the sum total of “taxes” obtained
by Leader A from group members j; 𝑏𝐴 represents the non-material utility (i.e., pleasure, enjoyment)
Leader A derives from being an administrator; 𝐶(𝑂𝐴) is the cost of the collection organization; and 𝐶(𝑋𝐴)
is the cost of supplying collective goods.53
53 Frohlich, Oppenheimer and Young (1971: 44) present a slightly different function, viz., 𝑈𝐴(𝐿𝐴) = 𝑈𝐴(𝑋𝐴) + ∑ 𝐷𝑗(𝐴)𝑛𝑗=1 +
∑ 𝑇𝑗(𝐴)𝑛𝑗=1 − (1 − 𝑏𝐴) [𝐶(𝑂𝐴) + 𝐶(𝑋𝐴)] where 𝑏𝐴 represents a linear constant representative of the non-material utility Leader
A obtains from being an administrator, which is proportional to the size of the collective enterprise.
21
Inversely, the utility function determining whether the “ordinary member” will opt for an
entrepreneur to provide collective goods is:
Equation 2.3
𝑈𝑗(𝐿𝐴) = 𝑈𝑗(𝑋𝐴)𝑃𝑗(𝑋𝐴) + 𝑓𝑗(𝐴) 𝑟[𝐶(𝑂𝐴) + 𝐶(𝑋𝐴)]
−𝐷𝑗(𝐴) − 𝑇𝑗(𝐴)
Where 𝑈𝑗(𝐿𝐴) represents the utility obtained by an individual member —called Member j— thanks to
Leader A’s efforts; 𝑈𝑗(𝑋𝐴) is Member j’s valuation of collective goods; 𝑃𝑗(𝑋𝐴) is Member j’s estimation
of the probability that collective goods will be provided; 𝑓𝑗(𝐴) is the share of Member j “contracts” which
may be obtained by members to contribute to the supply collective goods; 𝐶(𝑂𝐴) and 𝐶(𝑋𝐴) are, from the
perspective of Member j, sales from contractual contributions to the collection organization 𝑂𝐴 and the
supply of collective goods 𝑋𝐴; 𝑟 is the profit rate of the economy (e.g., slack or taut), which is assumed to
be fixed; 𝐷𝑗(𝐴) and 𝑇𝑗(𝐴) are the amounts that Member j transfers to the entrepreneur, Leader A, in the
form of “donations” and “taxes,” respectively.
In plain terms, the crux of the argument is that, whether considering entrepreneurs or individual
members, participation is contingent on benefits exceeding costs. In the entrepreneur’s case, benefits may
take on four possible forms: the benefit derived from the collective good itself; “donations” obtained from
members; “taxes” collected from members; and the non-material enjoyment the entrepreneur gets by
virtue of leading. Costs incurred by the entrepreneur come in two forms: the cost of supplying collective
goods to members; and the cost of the collection apparatus, which is required to obtain payments —
“donations” and “taxes”— from members. For members, benefits may take on three possible forms: the
benefit derived from the collective good; payments obtained for contractually providing services related
to the collection apparatus; and payments obtained for contractually providing services related to
supplying the collective good to members of the group. Meanwhile, members’ costs are the benefits
extracted therefrom by the entrepreneur: “donations” and “taxes.” Importantly, “selective benefits” are
assumed to comprise part of the benefits associated with collective goods: 𝑈𝐴(𝑋𝐴) and 𝑈𝑗(𝑋𝐴) in utility
notation.
Those familiar with Olson’s paradox of collective action may recall that the paradox applies only
to “latent groups”: groups of such a size that monitoring the behaviour of small members is impossible.
22
Many regimes, however, would be classified as “intermediate groups” whose intermediate size may permit
self-monitoring and, consequently, self-coordination. In the vocabulary of Frohlich, Oppenheimer, and
Young, the cost of supplying collective goods 𝐶(𝑋𝐴) and organizing remittances 𝐶(𝑂𝐴) is not so
prohibitive for intermediate groups that entrepreneurs are needed. Although evidence of self-coordination
in intermediate groups abounds, many intermediate groups fail to achieve collective action despite the
group’s best interests. What explains the puzzle of non-cooperation in intermediate groups if not Olson’s
paradox of collective action? Entrepreneurs fulfill a critical role in both intermediate and latent groups by
assuming transaction costs: costs associated with coordination that otherwise prohibit collective action in
all but the most tightly-knit groups (Ostrom 1990).
Drawing inspiration from institutional economics, most contemporary works on political economy
have either alluded to transaction costs or studied them explicitly (see especially Langlois 1992; North
1990; Williamson 1973). Transaction costs are expenses, monetary or otherwise, related to the fulfillment
of productive transactions. Holding prices constant, transaction costs may frustrate economic pursuits that
would otherwise be forthcoming.54 It is along these lines that North (1990) attributes successful economic
development to institutions that limit transaction costs.
So far, so good. But what does any of this have to do with entrepreneurs? Juxtaposing vertical
transactions within firms against horizontal transactions between firms, Ronald Coase long ago identified
the potential for the “entrepreneur-co-ordinator” to serve an allocative function distinct from the price
mechanism (Coase 1937). Whereas discrete units (be they firms or individuals) rely on the price
mechanism for “horizontal” exchange, integrated units benefit from efficiencies of management (Chandler
1977). In the case of horizontal exchange, transaction costs are either or both absorbed into prices or paid
on top of prices. In the case of exchange within integrated units, entrepreneurs assume transaction costs,
which is possible due to efficiency gains that accompany labour specialization. As we will later see,
54 As an example, if an individual wishes to purchase $25 worth of gasoline, the transaction costs associated with the exchange
are additional costs related to “search” —finding not only a service station but perhaps also a station whose product is of
reputable quality at the “going price”— as well as the costs of executing the transaction (e.g., travel time), which may be in the
form of either or both real (material) costs and opportunity costs. Moreover, in the absence of laws covering exchanges, parties
face the costs of policing and enforcement lest the seller be tempted to cheat the buyer by misrepresenting the quality or quantity
of the product sold. Consequently, some situations would entail costs far in excess of $25, while others would entail costs
approximating $25 (if the individual lives next door to the service station, for example).
23
however, costs of joint production may also be diffused in a variety of ways, some of which involve what
I call “cost externalization.”
Since the time of Coase’s writing, “horizontal integration” has become an everyday term. The
basic premise of horizontal integration is that coordination and management is not confined to singular
firms, groups, or individuals but may rather be accomplished across these units. Importantly, horizontal
integration constitutes a collective action enterprise, the success of which is dependent on the coordinative
and managerial expertise of entrepreneurial agents. Drawing insights from transaction cost economics into
theories of collective action, Moe (1980) recognized, as Coase did, the managerial role of entrepreneurs.
According to Moe’s formulation, entrepreneurs establish and manage administrative structures, assume
the costs of communication both between members and between the group and externals (e.g., information
gathering), and ultimately coordinate joint production (Moe 1980: 46-64).
Answering the question of who is expected to fill entrepreneurial and membership roles is a matter
of determining the types of individuals likely to have the most favourable utilities according to the
functions given above. Salisbury (1969: 26) contends that entrepreneurs are often “salaried executives,”
but concedes that “avocational or philanthropic concerns [may] substitute for entrepreneurial ‘profit
motives.’” Importantly, Salisbury adds, “even here, however, organizing is costly, and there must be
subsidies drawn from other extra-group sources to sustain the activity or the group will shortly be
bankrupt.” According to Kingdon (1984:122), the “defining characteristic” of policy entrepreneurs is
“their willingness to invest their resources —time, energy, reputation, and sometimes money— in the
hope of a future return.”
Whereas short term risk for long term reward is the defining motivational characteristic of
entrepreneurs, patience and persistence is the entrepreneur’s defining behavioural trait. Entrepreneurs
must strike when the iron is hot (or launch into action during the appearance of fleeting “policy windows,”
to use Kingdon’s vernacular). This means entrepreneurs must be continuously mindful of whether or not
potential clients are adequately “softened up” to be receptive to the entrepreneur’s ideas. Usually, to be
“softened up” is to be dissatisfied with the status quo. However, since the number of firms, interest groups,
politicians, and rival entrepreneurs seeking to take advantage of opportunities to change the status quo is
likely to be great, the odds that an individual entrepreneur will be successful are rather slim. Consequently,
as argued by Baumgartner and Jones (1991), effective entrepreneurs must be experts at “venue shopping,”
24
a task which, according to Mintrom and Norman (2009: 650), requires that entrepreneurs be “comfortable
working within established institutional arrangements.”
So far, I have identified entrepreneurs as the causal agents responsible for regime mobilization.
Beyond this, I have identified some motivational and behavioural characteristics of entrepreneurs. Yet to
be established is the causal mechanism employed by entrepreneurs, the conceptualization of which
requires a theory of persuasion.
At least as far back as Arrow (1951), students of institutionalist political economy have been
cognizant of the fact that the number of issue dimensions under consideration in a choice situation can,
along with agenda control and strategic voting, influence outcomes in group decisionmaking contexts.
Such a realization led William Riker to develop his theory of heresthetics, wherein crafty political actors
dubbed “herestheticians” manipulate the decision situation both institutionally (by manipulating agenda
setting and decision rules) and rhetorically (by manipulating the quality and quantity of issue dimensions
up for debate) (Riker 1986). As argued by Baumgartner and Jones (1993: 48) “both types of heresthetic
are important for agenda studies… entrepreneurs attempt to manipulate both the rules and the institutions
of policymaking, and the understandings that others develop of the issue.” As touched on earlier, one
heresthetic strategy available to entrepreneurs is venue shopping. As documented by Baumgartner and
Jones, policy entrepreneurs in the United States have historically been quite successful in exploiting
overlapping policy jurisdictions to undermine the policy status quo (for example, by drawing attention to
previously ignored dimensions of nuclear power generation, pesticide use, and smoking).
As highlighted by Jones (1989b), the perspective just described —which has since been
popularized under the heading of punctuated equilibrium theory— combines two distinct lenses on
entrepreneurship: one based on exchange theory, in which costs and benefits are reasonably known to
actors (e.g., Salisbury 1969; Frohlich et al. 1972), and one based on organizational theory, in which
uncertainty and ambiguity occludes rational calculation of costs and benefits (e.g., Cohen et al 1974;
Kingdon 1984). Baumgartner (1989) likens the former lens to a “Newtonian” perspective on politics and
the latter lens to a “biological” perspective, but argues both are required for a comprehensive
understanding of politics. Newtonian perspectives, Baumgartner argues, are useful for studying day-to-
day policymaking wherein actor preferences are established. Biological perspectives, by contrast, are
necessary for understanding politics when issues escape into the larger “complex adaptive system” of the
polity writ large. In other words, the Newtonian lens, popular in economics, is appropriate for studying
25
politics “in equilibrium,” whereas the biological lens, popular in organizational theory, is appropriate for
studying politics “in disequilibrium.”55
Although they draw inspiration from Baumgartner and Jones, Schneider and Teske (1992) depart
somewhat from their formulation and instead argue that a fulsome theory of entrepreneurship can be
derived from Austrian economics. Adapting Austrian insights on economic entrepreneurship to political
situations, and suggesting that Riker’s theory is replete with Austrian overtones, Schneider and Teske
argue mobilization to be a function of available resources, latent demand, and political ingenuity. These
three conditions —which are roughly analogous to means, motive, and opportunity— must be seized upon,
however, by entrepreneurial agents who are constrained by a cost-benefit calculus with respect to the ease
with which the collective action problem of mobilization can be solved. When entrepreneurs opt to act,
they attempt to persuade others by introducing dimensions into choice situations. Similar to Baumgartner
and Jones, Schneider and Teske argue the following:
…while equilibrium may appear in political arrangements at any given point in time, such
an equilibrium is inherently unstable. This presents openings for Riker's ‘heresthetician’—
an entrepreneurial political leader who ‘probes until he finds some new alternative, some
new dimension that strikes a spark in the preferences of others.’ Riker argues that through
agenda control, strategic behavior, and (most importantly) the introduction of new policy
dimensions to political debate, the heresthetician can break up institutionally induced and
maintained equilibria to create new and more profitable political outcomes. (Schneider &
Teske 1992: 739)
The appeal of Austrian economics stems from its relaxation of objectionable assumptions inherent
to the mechanistic “Newtonian” approach discussed above. Unlike conventional neo-classical economic
modelling, in which entrepreneurship and innovation are treated “exogenously,” Austrian economics
seeks to model the process of innovation (Casson 1982; Kirzner 1973). In political situations, modelling
the process of innovation involves demonstrating how new equilibria are established within
decisionmaking settings.56 Importantly, re-equilibration of preferences does not necessarily depend on a
55 As explained by Jones (1989b), dimensional perspectives of the “Newtonian” variety, such as those based on the median
voter theorem, often break down when used for system level analysis, but work well for analyzing decisionmaking in closed
quarters (e.g., committees and even the parent chambers of Congress). 56
For instance, modelling the process by which equilibria change can be accomplished using game theory to model bargaining
situations (Scharpf 1987).
26
change of decisionmaking venue, exogenous shocks, or preference uncertainty. Rather, preference re-
equilibration may follow from changes in actors’ “hearts and minds,” which may be prompted by a change
in circumstances or may follow from the persuasiveness of entrepreneurial rhetoric.
The view that entrepreneurs use rhetoric to introduce new, hitherto unconsidered, dimensions to
political debate in an attempt to change actors’ preferences relegates the usefulness of “biological”
perspectives to applications in which ambiguity is pronounced —that is, to situations in which actors have
divergent preferences and decisions are made without a concrete decision rule, as when veto players are
dispersed across several discrete decisionmaking jurisdictions (see Jones 1989b). Importantly, as
suggested by Moe (1980: 33), the Austrian perspective is appropriate for situations in which actors lack
complete information, so long as actors’ “subjective estimates” of their utilities are reasonably known to
researchers. Since actors’ estimates of costs and benefits are considered the product of political persuasion,
Moe, similarly to Riker, places emphasis on rhetorical manipulation. For their part, Baumgartner and
Jones (1993) acknowledge the possibility that “policy images” may change endogenously in the absence
of “exogenous shocks.” They do not, however, invoke Austrian economics as a corrective to deficiencies
of the “Newtonian” lens on which they otherwise rely.
I have introduced the entrepreneur as an agent of change in this section in order to complete the
picture of the theory of regime mobilization. However, as per the theory of preference change developed
above, the entrepreneur is also an agent of change in situations in which policymaking is ongoing. In the
interest of terminological clarity, my preference is to refer to entrepreneurs involved in the mobilization
stage as “policy entrepreneurs” and entrepreneurs involved in the operational stage as “political
entrepreneurs.” This choice is based not on the semantics of each label but rather how terminology has
been used in the literature to date.57 The policy entrepreneur responsible for regime mobilization may be
the same agent as the political entrepreneur responsible for managing regime operation, or they may differ.
Moreover, as discussed earlier, entrepreneurship may be polycentric. What is important to realize is that
the tasks performed by entrepreneurs vary from one stage of the theory to the next. Having laid out the
theory of how regimes come into existence, we are ready to move on to the theory of regime operation.
57 For instance, Kingdon (1984), Baumgartner and Jones (1993) and Mintrom (1997) are all concerned with mobilization (and
diffusion, in Mintrom’s case) and all use the term “policy entrepreneur.” By contrast, Wagner (1966), Salisbury (1969),
Frohlich, Oppenheimer and Young (1972), and Moe (1980) are all concerned with the administration and management of group
resources and all use the term “political entrepreneur.”
27
2.2 Regime operation
The theory of regime origins developed in the previous section explained how support for a regime
is mobilized. Support for a regime is one thing, viability is another. As explained in Chapter 1, the initial
conditions for the theory of regime operation are determined by the resources, objectives, and expertise
mobilized agents bring to the regime. Remember, the regime may consist of one or more of the following
types of actors: private stakeholders, public officials, and third sector actors. A regime is viable if it is able
to put resources to effective and sustainable use in the execution of joint production.
Given that it deals with interaction and exchange among actors, regime operation is usefully
conceptualized according to the principles of game theory (Scharpf 1997). When regimes are large, when
membership between regimes is fluid, when the entrepreneurial function is polycentric, or when leadership
is contested, interaction and exchange can be understood to occur in a complex “ecology of games” (Long
1958). Patterns of interaction and exchange in complex, multilevel games have been fruitfully
demonstrated both analytically and using computer simulations (Smaldino & Lubell 2014; Tsebelis 1990).
For simplicity, I will limit discussion here to “vanilla” applications of regime theory: situations dealing
with a single uncontested regime with a unitary entrepreneur.58
As previously stated, the theory of regime operation is a theory of collective action. More precisely,
the theory of regime operation involves exchanges and transactions that determine the distribution of costs
and benefits in the execution of joint production. The first question to consider is whether the resources
held by regime members are sufficient to pay the cost of joint production. A second question to consider
58 It is of course possible that more than one regime will be mobile at a time. Moreover, the leadership of a regime may be
contested. Frohlich, Oppenheimer and Young (1971) explain differences in “strategic interactions” in group situations in which
leadership is contested versus situations in which it is not. They posit that, in non-competitive situations, strategic interactions
take two forms: those between individual members of the group and those between individual members and leaders. However,
in competitive situations, strategic interactions take three forms: those between the individual members of the group, those
between individual members and leaders, and those between individual members and the opposition. Moreover, in situations
involving more than one opposition leader, “N-person interactions would occur, and the problems of coalition formation would
become important” (Frohlich et al 1971: 131). Analysis of interactions between coalitions, although somewhat more
complicated, are therefore not in any way antithetical to group decisionmaking models upon which regime theory is premised.
Rather, situations involving strategic interaction within and among coalitions can be considered special cases in which the
organizational mission of the regime is contested (Sabatier & Jenkins-Smith 1993).
28
is whether resources can be effectively marshalled —i.e., exchanged— in the execution of joint
production. A third question concerns the effect institutions have on patterns of interaction and exchange
within regimes. The next three subsections explore each question in turn. They are followed by a formal
exposition of regime operation.
2.2.1 The cost of collective action
Section 2 introduced actors’ cost calculations in the context of regime mobilization. Recall,
however, that commitments required for mobilization are largely intentional: they take the form of
promises regarding future contributions. Joint production requires firm commitments, the transaction costs
associated with which are typically greater than those paid during mobilization. Recall also that transaction
costs are extraneous to the actual costs of joint production. Transaction costs fall under the ambit of what
I will call coordination costs, which are separate from production costs.
On the issue of coordination costs, while “talk is cheap” during mobilization, assurances must be
credible before actors can be expected to invest in joint production. As elaborated by Scharpf (1993: 155),
“high-trust relationships will emerge only under one of two conditions: when interactions are practically
limited to mutually beneficial encounters (as is true among distant friends or in specialized business
partnerships), or when they are diverse in character but so frequent and salient that high degrees of mutual
dependence and vulnerability will justify the investment in a highly demanding special relationship.”
Thus, when actors are not well known to each other, establishing trust requires coordination costs be paid
to make assurances credible. Whereas the task of coordinating contracts (formal or otherwise) is
entrepreneurial, fees for service fall to the regime.
Coordinating entities stand to profit from their services so long as regime members value the return
from collective action such that rewards exceed the costs of rents paid to coordinating entrepreneurs. A
common example of such an arrangement is the industry association. Yet, industry associations rarely
engage in largescale, risky projects that characterize many industrial policies. When they do, it is not
unilaterally. Moreover, unestablished industries almost never coordinate spontaneously (Evans 1995). The
suggestion is that private firms are loath to pay coordination costs of much significance, hence my
assertion in Chapter 1 that the state typically absorbs fifty to one hundred percent of the coordination costs
required to initiate largescale joint production.
29
With respect to production costs, recalling the possibility frontier introduced in Figure 2.3, the cost
of joint production should be interpreted as the opportunity cost of foregone alternatives on the axis
adjacent to the joint production venture. In other words, the cost of joint production is measured as the
utility sacrificed by forgoing unilateral production. As conveyed by the solid line in left-hand panel of
Figure 2.5, given that joint production implies transaction and other sunk costs (e.g., capital investment),
the trade-off between unilateral and joint production will seldom favour collective action.59 Rather, joint
production requires financing arrangements. Financing arrangements are determined by policy
possibilities, as depicted in the right-hand panel of Figure 2.5. Importantly, since policy possibilities are
analogous to a budget constraint, they apply to any collective actor (i.e., corporate actor), including but
not limited to government.
Figure 2.5: production and policy possibilities
The policy bundle on the policy possibility frontier (right) determines the range of attainable bundles on the production possibility frontier (left) by enabling joint production (the horizontal axis on the left panel, which is an industrial policy called “venture x” in the right panel). All trade-offs are presented as linear. However, situations in which there are economies of scope (i.e., positive synergies) between the goods on opposite axes would instead yield frontiers concave to the origin. Situations in which there are diseconomies of scope yield frontiers convex to the origin.
59 The exception, as pointed out by Scharpf, is when actors are sufficiently familiar and proximate that cognizance of collective
gains is virtually costless.
30
Figure 2.5 conveys that the point selected on the policy possibility frontier (right) determines the
shape of the production possibility frontier (left). For instance, in the scenario presented in Figure 2.5,
Point A on the policy possibility frontier devotes a meagre level of financing toward venture x, which in
turn yields a production possibility frontier that strictly favours unilateral production (Line A in the left-
hand panel of Figure 2.5). By contrast, more generous financing at Point B on the policy possibility frontier
yields a production possibility frontier (Line B) more amenable to joint production.
So far, the implication seems to be that joint production depends on the absorption of transaction
costs. While this is true, it is also often the case that production costs must be guaranteed —that is, covered
before the fact— for joint production to proceed. If, and the extent to which, production costs must be
paid upfront depends on the opportunity costs of individual regime members. Recall from Chapter 1 that,
generally, opportunity costs are a function of the slack or tautness of the economy, with taut economies
being biased against joint production and slack economies being biased toward joint production (see also
Breton & Breton 1969). Because shifting from unilateral production to joint production involves forsaking
unilateral gains, members with opportunity costs in excess of expected benefits from joint production are
likely to require incentives to participate: an amount I will refer to as the member’s participation cost.
Since members with high participation costs are also typically agents with competencies required by the
regime to execute joint production, distribution of resources within regimes can be understood as a
principal-agent problem.
2.2.2 Principals and agents
Principal-agent problems come in two main forms: one in which principals are unable to monitor
agents operating on their behalf, and another in which agents possess information their principals cannot
otherwise reasonably obtain (Dixit 1997). Like many social organizations, regimes are essentially
networks of principal-agent relationships (cf. Williamson 1985). However, the fact that regime
participants are simultaneously each other’s principals and agents means that regimes constitute a unique
class of principal-agent problem. For instance, since the regime leadership serves the regime membership
as its client, the leadership is the membership’s agent (and the membership the leadership’s principal).
Meanwhile, since the leadership depends on the membership to execute joint production, the leadership
31
is also a principal to an agential membership. Moreover, the lines delineating membership from leadership
are not always clear. Indeed, in many circumstances “the regime,” as a corporate actor, is both its own
principal and agent, which is simply to say that joint production is a collective action problem.
Of interest to the analyst are circumstances in which agents exploit their principals. When regimes
are small or of intermediate size (as they often are), analysis of principal-agent dynamics is simplified by
the fact that agents’ defection from group goals can be monitored relatively easily. In such situations,
exploitation of principals is most often of the second form described above: exploitation of information
asymmetries. Since information is a rather nebulous resource, there are many different ways information
can be used by agents for personal gain. Chief among the ways agents may exploit information
asymmetries is to “hold up” joint production by demanding the regime pay a premium for the agent’s
competence (Picot, Reichwald & Wigand 2008). In such cases, the agent’s participation cost is that of a
monopolist.
The ease with which members may exploit the regime is a function of the supply and demand for
each member’s contribution to joint production. If a good is in high demand but has a monopolistic
supplier, the supplier may extract monopoly rents from the customer. Thus, in the absence of competition,
regime agents with specialized competencies demanded by the regime may exploit their principals up to
the point at which joint production —and therefore the regime— is no longer viable. As discussed in
Chapter 1, the equilibrium price for competence (i.e., where supply equals demand) is significantly
influenced by the overall performance of the economy. Equilibrium prices tend to be higher in taut
economies compared to slack economies.
Of course, power asymmetries between private actors may be buffered by the state, which may act
as a guarantor against opportunistic behaviour and exploitation of weak principals by the strong agents.
However, it is not unusual for private actors to be better resourced than the state when it comes to
information, capital, and specialized knowledge (Lindblom 1977; Richards & Pratt 1979). Consequently,
even public sector principals can be outmaneuvered by private agents incentivized to exploit not only
other regime members but the public writ large when the state intervenes —a phenomenon known as
“capture” (Stigler 1971). Moreover, the seemingly limitless resources of the state give rise to moral hazard
problems, which can affect both private agents and public officials. For their part, public officials face
moral hazard incentives to “raid the fiscal commons” by repeatedly requesting appropriations on behalf
of their clients (i.e., regime members/stakeholders). Meanwhile, private agents have an incentive to
32
repeatedly raid the regime’s “fiscal commons,” with the knowledge that public contributions to production
costs will either be replenished or written off by the state. I return to the substantive implications of cost
externalization, including a summary of the pros and cons of cost externalization, below and in Chapter
3. For now, it suffices to say that the solution to moral hazard is to impose hard budget constraints on
regimes and the public agencies operating on their behalf (Oates 1991).
Whereas monopolistic supply leads to demands for exploitive rents, competition among suppliers
pushes the price of competence to the welfare optimal equilibrium wherein costs incurred by producers
equal price paid by the regime. Yet, even in the absence of competition among suppliers, situations may
arise in which the regime avoids exploitation by hold up, albeit at the suppliers’ expense. These are
situations in which the regime can command monopsony prices from suppliers by virtue of being the sole
consumer of an agent’s product (i.e., competence). In such situations, the direction of exploitation is
reversed, with the regime demanding a lower price for the agent’s competence to the point at which it is
no longer in the agent’s interest to participate. Again, how low depends on other opportunities available
to suppliers in the economy. Members’ opportunity costs can be very low when regimes are monopsonistic
because unilateral production —and therefore exit from the regime— may not be a viable option.
Principal-agent problems are problematic for society because they reduce total welfare. Loss of
welfare from both monopoly and monopsony principal-agent problems is displayed in Figure 2.6. The
downward sloping line is a demand curve representing financiers’ willingness to subsidize quantities of
production at different prices. The upward sloping line is a supply curve representing producers’
willingness to produce quantities of goods at different prices. Monopoly price and monopoly quantity are
denoted by 𝑀𝑃𝑃 and 𝑀𝑃𝑄, respectively. Monopsony price and quantity are denoted by 𝑀𝑆𝑃 and 𝑀𝑆𝑄,
respectively. Competitive equilibrium price and quantity are denoted by 𝐸𝑃 and 𝐸𝑄, respectively. The area
marked A is the monopoly producer’s rent obtained over the equilibrium amount when 𝑀𝑃𝑃 is demanded.
Area B is the monopsony consumer’s rent obtained under the equilibrium amount when 𝑀𝑆𝑃 is demanded.
Area C represents society’s deadweight welfare loss under either circumstance: less is produced than
otherwise would be if producers (consumers) did not command monopoly (monopsony) prices.
33
Figure 2.6: welfare losses from monopoly and monopsony rents
Producers and financiers are both willing to settle on the equilibrium price 𝐸𝑃 and quantity 𝐸𝑄. Monopoly (monopsony),
however, creates a welfare deficient situation in which monopolists (monopsonists) demand 𝑀𝑃𝑃 (𝑀𝑆𝑃), causing the quantity produced to shift left. Rents are captured in the form of producer (consumer) surplus, denoted by Area A (Area B). The deadweight loss of welfare for society is represented by Area C.
Clearly, the extent to which principals and agents enjoy monopoly and monopsony privileges
affects the relative bargaining positions of regime agents. In the literature on regimes, monopolistic and,
in some cases, oligopolistic agents have been described as “large” or “lead” members to convey that it is
their preferences which determine the course of action pursued by the regime. Conversely, “small”
members have been described as ineffectual “followers” prone to “going along,” even when the course
pursued by the regime conflicts with members’ preferences, out of fear that outsiders will lose out entirely
(Stone 1989: 235). The latter, “nested,” strategy is maximin optimal in the sense that regimes, by virtue of
their ability to harness returns to scale, threaten to crowd out smaller, unilateral, producers from market
opportunities (Tsebelis 1990).
Chapter 3 returns to the issue of how monopoly, monopsony, and the state of the economy affects
the price of knowledge transfer in industrial policy regimes. For the time being, the pertinent question
concerns how institutional rules governing bargaining situations structure outcomes. Of particular import
is the question of how the cost of securing participation is distributed both within regimes and without.
34
2.2.3 Decision rules and mode of coordination
I stated earlier that regime operation is usefully conceptualized according to the principles of game
theory. Yet, as elaborated by Clarence Stone in Regime Politics, a regime is “more than an ‘ecology of
games’… the regime is purposive, created and maintained as a way of facilitating action” (Stone 1989:
4). More specifically, according to Fritz Scharpf, regime-building involves the conscious creation of
coordinative institutions premised on shared norms regarding value creation and distribution (Scharpf
1997: 141-142). The two dimensions of value creation and distribution underlie the mode of coordination,
which can be typified according to the relative salience of each dimension. Drawing on Scharpf and Mohr
(1994), four archetypical modes of coordination are given in Table 2.1.
Table 2.1: value creation, distribution, and mode of coordination
salience of distribution
low high
salience of value creation
low negative
coordination
bargaining
high problem solving positive
coordination
Adapted and modified from Scharpf and Mohr (1994).
When both value creation and distribution dimensions are of low salience, the corresponding mode
of coordination is negative coordination, or a policy of mutual non-interference. Situations in which the
salience of value creation is low while the salience of distribution is high are germane to familiar
bargaining situations. Conversely, when the salience of value creation is high and distribution low, the
mode of coordination is one of problem solving. Finally, when both value creation and distribution are
salient, the mode of coordination is known as positive coordination (cf. Lindblom 1965).
Given that joint production involves value creation, the two modes of coordination pertinent to
regime theory are problem solving and positive coordination. Since industrial policy involves attempts to
35
alter the composition of firms in an economy, which implies distribution, the mode of coordination
examined most extensively in this thesis is positive coordination. That said, the archetypical modes of
coordination displayed in Table 2.1 are but pure types, and are rather unrepresentative of the full gamut
of possible modes of coordination. For illustration, consider a situation in which two players —Player X
and Player Y— attempt to effect joint production by engaging in positive coordination. As demonstrated
in Figure 2.6, the distributive dimension for Players X and Y can be represented by horizontal and vertical
axes, respectively, whereas the value creation dimension can be conceived as a vector extending from the
origin.
Figure 2.7: positive coordination
Adapted and modified from Scharpf (1993).
In pure positive coordination, distribution is assumed to be contingent upon value creation. This
is because, at the origin, positive movement (i.e., gain) along either axis implies a corresponding loss on
the other. Substantively, distribution is purely redistributive at the origin: resources held by one player are
transferred to another. And since any effort to redistribute will be resisted (i.e., vetoed) by the losing
player, the status quo is a Nash equilibrium. Conversely, as the status quo shifts north-east on the value
creation vector, both players automatically gain on the distributive dimension. Whereas the distribution
dimension is representative of conflicting interests, the value creation dimension is reflective of joint
interests (Scharpf 1993).
36
Importantly, any point north-east of the origin is Pareto superior to the status quo, no matter how
inequitable, because both players benefit from value creation. In other words, the Pareto superior solution
space —the area comprising “winsets of the status quo”— is contained by the origin, which represents
initial distribution of resources. Since the initial distribution is assumed to be unilaterally obtainable, I
refer to players’ resources at the initial, status quo point, as each player’s unilateral amount.
Figure 2.8 displays the unilateral amounts for Players X and Y as UAx and UAy, respectively. Line
A−B represents a hypothetical joint production possibility frontier when players produce unilaterally.
Again, without value creation, Player Y’s gain is Player X’s loss and vice versa, so nothing happens —
the Nash equilibrium of the status quo cannot be beat. Now imagine that value creation moves the joint
production possibility frontier to Line A′−B′. Any point on the solid portion of Line A′−B′ is Pareto
superior to the status quo because both players are made better off; the Pareto superior solution space is
again contained by the unilateral isoquant (the intersection of the players’ unilateral amounts). Notice,
however, that opportunities exist for value creation outside of the Pareto superior solution space —that is,
at points below the intersection of Line A′− B′ and UAy and at points to the left of the intersection of Line
A′− B′ and UAx. These points, which fall on the dashed portion of the A′− B′ possibility frontier in Figure
2.8, are Kaldor efficient utilitarian solutions in which aggregate gain is achieved by making one or more
parties worse off.
Figure 2.8: distribution in positive coordination and positive coordination with bargaining
37
Whereas distribution within positive coordination permits unequal gains within a Pareto efficient
solution space (that is, constrained by each player’s unilateral amount), breaking free of these constraints
depends either on hierarchical distribution of veto power or bargaining —the latter of which Scharpf and
Mohr (1994) refer to as a “hybrid” mode of coordination called positive coordination plus bargaining
(PC+B). Hierarchical veto power is straightforward: the hierarch rules by decree. Conversely, when
bargaining is permitted, as in PC+B, players may agree to forsake their unilateral amount for the benefit
of the regime in exchange for side payments. For instance, a point just below UAy on Line A′− B′ affords
Player X ample resources with which to compensate Player Y. Here, gains are made by temporarily
supplanting Pareto efficiency with Kaldor efficiency. In the real world, Pareto inferior bargains are often
necessary for Pareto superior value creation to occur. That is, bargains must be struck to accommodate
delays between the sacrifice of investment and the benefit of return —a problem which takes the form of
a battle game (Figure 2.9).
Figure 2.9: coordination as a battle bargaining game
L
C D
S
C
1
1
3
4
D
4
3
2
2
battle
Payoffs for “S” (small, subordinate) are left-justified, payoffs for “L” (large, lead) are right-justified. Unlike other variable sum games, battle involves a redistribution problem whereby cooperate-cooperate (C,C) yields the worst possible outcome (1,1). To obtain the welfare maximum —(4,3) or (3,4)— one player must defect (or, more accurately, defer): players must select (D,C) or (C,D). If neither player defers, producing (C,C), assume that resources are expended in fruitless negotiations analogous to a defect-defect situation in chicken (described below), culminating in the payoff of (1,1). If both players defer in battle (D,D), in which case neither player takes the lead, assume players revert to unilateral production.
38
Of course, the extent to which bargaining can yield an expanded solution space depends on the
resources held by players and their willingness to strike bargains. Willingness to strike bargains is itself a
function of the player’s participation cost, which is a function of the extent to which profits from joint
production fall short of the player’s unilateral amount. Put differently, willingness to assume burdens of
joint production depends on the “margin of superiority” of joint production over unilateral production,
which is measured as the difference between “accounting profit” achieved from joint production and
“economic profit” which includes the opportunity cost of foregone unilateral production. Recall that the
unilateral amount —and, consequently, the margin of superiority of joint production over unilateral
production— is influenced by the slack or tautness of the economy because economic opportunities
determine opportunity costs. Indeed, as demonstrated formally below, all roads lead to opportunity costs.
Two predictions can be made if the relative opportunity costs of players are known (or can be
approximated). Assuming regimes seek out the lowest price for competence, one prediction is that players
with lower opportunity costs will undertake subordinate roles in regimes. The other is that subordinates
will defer to lead members for the sake of securing joint production. Thus, in the battle game presented in
Figure 2.9, the subordinate player S is expected to defer to the lead member L, allowing the latter to obtain
a disproportionate but Pareto optimal payoff (3,4).
Per the PC+B mode of coordination, when value creation is a product of resources owned and
mobilized by players internal to the regime, the regime is said to internalize the cost of production. Yet,
in the world of contracting, examples abound of actors “bargaining” with resources they do not have. To
the extent that players are accountable for bargains made and contracts entered into, cost internalization
is maintained. On the other hand, when players default on their commitments, or require outside subsidies
to make them, costs of production are said to be externalized. Importantly, externalized costs are not Pareto
efficient because they are absorbed by others. Scharpf and Mohr (1994) thus differentiate between positive
coordination plus bargaining (PC+B) —in which the Pareto principle is respected insofar as participants
internal to the regime are concerned, but in which the Pareto principle is not extended to outside actors—
and positive coordination plus negative coordination plus bargaining (PC+NC+B) —according to which
the Pareto principle is unequivocally observed. Simply put, PC+B permits cost externalization whereas
PC+NC+B does not.
Whether cost externalization is permitted significantly affects the range of possibilities regimes
can pursue. In the context of Figure 2.8, if bargaining is permitted, the size of the solution space is,
39
hypothetically speaking, constrained only by limits on cost externalization. If cost externalization is
permitted, the solution space is hypothetically unconstrained. I will have more to say about the
implications of cost externalization in the following sections and in Chapter 3. At this point, it is important
to appreciate that the more institutional representation enjoyed by potential victims of cost externalization,
the less viable will be cost externalizing strategies.
The preceding analysis evoked the mode of coordination as a determinant of the range of
possibilities available to actors. As demonstrated by the discussion surrounding Figure 2.8, the mode of
coordination determines the size of the solution space, which is hypothetically limitless when cost
externalization is permitted. Yet to be established is how the regime decides upon a specific point within
the solution space. Awareness of the fact that the size of the winset of the status quo is a function of the
decision rule allows researchers to narrow down the range of alternatives likely to be selected (Shepsle
2010; Tsebelis 2002). Determining where the solution falls within winsets can be modelled using game
theory.
Thus far, the analysis has only included examples involving two players, neither of which has an
absolute veto over the other. It is easy to imagine how the game would change in a world of unilateral
vetoes: one player gets its way while the other loses (pity and altruism notwithstanding). Not surprisingly,
outcomes also vary according to whether the decision rule is unanimity or majority vote. Notice, however,
that in a game with two players, unanimity and majority voting produces identical outcomes. To appreciate
how outcomes differ depending on the decision rule, we must consider situations with three or more
players.
Figure 2.10 plots the preference points and circular indifference curves for three players in n-
dimensional space.60 The shaded regions where preference envelopes overlap represent winsets of the
status quo: areas in Euclidean space in which points falling therein defeat the status quo. In the example
given in Figure 2.10, there are three relatively large lightly-shaded majority winsets and one comparatively
small darkly-shaded unanimity winset. Under a majority decision rule, the point chosen by the group
(realistically, two-thirds of the group) will fall on one of the edges of the triangle joining points X, Y, and
60 Circular indifference curves are interpreted the same way as topographical maps, from the perspective of looking down onto
preference peaks in three dimensions. Players’ preferred points are located at the centre (the top) of each player’s preference
envelope, whereas the preference frontier represents the furthest distance from the preferred point the player will tolerate.
40
Z within the area of enclosing one of the majority winsets. Exactly where depends on the relative
bargaining strength of the players. Which side of the triangle depends on which two players form the
majority. By contrast, under unanimity rule, the point chosen by the group will fall in the area of the
unanimity winset. Again, precisely where depends on the bargaining strength of the players —a subject
to which I will return shortly.
Figure 2.10: winsets under majority and unanimity rule
Although it has been demonstrated analytically that decision rules do not necessarily affect
outcomes, we can say with confidence that, notwithstanding exceptional circumstances in which
additional veto players duplicate existing preferences, stability and conservatism are positively associated
with the representativeness of the decision rule (Hammond & Butler 2003).61 That is to say, generally, the
more players involved in a decision, and the more representative the decision rule, the smaller and more
central will be the winset of the status quo. This is the crux of institutional friction. Indeed, it is easy to
imagine modifications to the situation portrayed in Figure 2.10 that would produce no winset of the status
61 The most obvious proof that decision rules do not necessarily affect outcomes is found in systems with disciplined
legislatures. Dozens (and perhaps hundreds) of individual votes are cast but preferences are aligned thanks to party discipline.
Since preferences are aligned according to party affiliation, additional voters would not affect the substance of policy. However,
in such instances, the decision rule of interest is not that of the chamber but rather that of the party, which “whips” members’
preferences such that they act as one.
41
quo, such as additional veto players or tighter preference envelopes. When there is no winset, the status
quo prevails.
With respect to the question of where solutions will be located within winsets, predictions can be
made using game theory. As we saw in the context of battle, subordinate members with relatively low or
negative participation costs are more likely to defer to lead players whose participation costs are great.
Because it involves a distribution problem that must be solved before joint production can proceed, battle
is an interesting case wherein players possess double peaked preferences. For ease of demonstration,
Figure 2.11 displays players’ preferences in one-dimensional space. The peak on which the solution will
settle in battle —labeled “A leads” and “B leads” in Figure 2.11— is determined by players’ relative
bargaining strength.
Figure 2.11: double peaked preferences in battle
Player A’s preferences are shown as a solid line. Player B’s preferences are shown as a dashed line. As seen in the battle payoff matrix in Figure 2.9, (C,D) and (D,C) strategies are those in which one player leads and the other defers, with the former capturing a utility of 4 and the latter a utility of 3. The status quo payoff is (2,2) and failure to solve the distribution problem results in a payoff of (1,1). The necessity of solving the distribution problem results in a situation in which the winset of the status quo is intransitive: separated by Euclidean distance represented by the valley between the peaks displayed in Figure 2.11.
Bargaining situations that do not involve distribution problems take the form of chicken (Figure
2.12). In games of chicken, although agreement from both players is necessary for joint production to
proceed, one player is not required to defer to the other as was the case in battle; preferences are transitive
across the winset of the status quo. Yet players have an incentive to seek a solution closer to their preferred
side of the winset. To be clear, as evident by the payoffs in Figure 2.12, there does exist a winset between
each players’ preferred point. Disagreement is over whether the solution should fall closer to one player’s
42
side of the winset or the other’s (for example, closer to point Z or closer to point X within the southernmost
majority winset in Figure 2.10). In games of chicken, the defect strategy involves bluffing about one’s
intention to withdraw from the regime, which would entail dashing all other members’ hopes for joint
production. Consequently, other members face incentives to defer to players who adopt bullheaded
strategies. As discussed in more detail below, costs associated with such accommodations —which
amount to monopoly rents— may have to be externalized.
Figure 2.12: bargaining as a game of chicken
C D
C
3
3
4
2
D
2
4
1
1
chicken
Cooperate-cooperate (C,C) is a situation in which players agree to split the difference between their preferred points within the winset to obtain the equitable payoff (3,3). Cooperate-defect (C,D) is a situation in which Row concedes to Column, yielding a solution closer to Column’s preferred point with a payoff of (2,4) in favour of Column. Defect-cooperate (D,C) is the inverse of (C,D) in favour of Row. Defect-defect (D,D) is a situation in which both Row and Column bluff and the regime fails to mobilize.
Invoking battle and chicken, it is easy to see how game theoretical bargaining models can inform
predictions about which alternatives will initially be selected by regimes given members’ resources and
preferences. Initiation is, however, but one stage in a series of sequential games played by regime
members. Agreeing on a joint production solution is one thing. Staying true to one’s commitment for the
course of the regime’s existence is another. Of particular concern is “agency slippage” following initiation,
whereby agents defy their principals by attempting to steer the regime toward the agent’s preferred point
—a phenomenon known as “drift” (McCubbins, Noll & Weingast 1987).
In the language of game theory, drift is a form of defection which implies satisfying one’s own
preferences at the expense of other regime members. Substantively, agency slippage is a principal-agent
43
problem in which the agent fails to honor its commitments to “pull its own weight,” which can be modelled
as a prisoner’s dilemma. The extent to which defection detracts from the payoff obtained by cooperating
partners is a function of the extent of drift. For simplicity, Figure 2.13 conveys a generic prisoner’s
dilemma payoff matrix, but readers should keep in mind that relative payoffs will vary empirically. That
is, the extent of drift varies by case.
Figure 2.13: agency slippage as a prisoner’s dilemma
C D
C
3
3
4
1
D
1
4
2
2
prisoner’s dilemma
Cooperate-cooperate (C,C) is a situation in which there is no departure from the agreed upon group objective: it characterizes efficient joint production. Cooperate-defect (C,D) is a situation in which Column exploits Row by acting out of self-interest, detracting from the payoff obtained by Row, yielding a payoff of (1,4) in favour of Column. Defect-cooperate (D,C) is the inverse of (C,D), in which Row exploits Column. Defect-defect (D,D) is a situation in which both Row and Column attempt to drift, yielding inefficient joint production that yields a payoff of (2,2) in the matrix shown above.
Defection in generic prisoner’s dilemma games is analogous to free riding in the extreme:
cooperative players devote resources to production, the value generated from which flows
overwhelmingly to defectors. To the extent that monitoring is effective, defectors can be disciplined —
either ex ante or ex post, depending on the institutions (e.g., contracts) governing the regime— or be
shunned from the regime altogether. As we have seen, the latter option is only viable if the defector’s
talents are not required to execute joint production. In other words, monopolists have much greater
freedom to defect and avoid punishment. Yet, as we will see in the context of the case studies in Chapter
4, situations are possible in which non-monopolists become de facto monopolists after costs are sunk by
the regime in order to poise members toward joint production.
Another post-initiation agency slippage possibility that may undermine regimes is withdrawal.
The ever present temptation to revert to unilateral action constitutes an assurance problem emblemized by
44
the game stag hunt. As per the payoffs in Figure 2.14, defectors may be tempted by the “small game” of
unilateral production, in which case joint production —in pursuit of the proverbial “stag”— cannot be
successfully carried out. Such a situation is likely if a member’s participation costs are very high, in which
case economic profits from joint production only marginally exceed opportunity costs. As in chicken,
threats of reverting to unilateral production allow members to bid up the price of their participation. While
such a strategy is only possible if the member possesses competence required by the regime, as with
tendencies toward free riding, non-monopolists may become de facto monopolists thanks to investments
undertaken by the regime. In simple terms, potential defectors face incentives to “take the money and
run.”
Figure 2.14: coordination as an assurance problem
C D
C
4
4
3
1
D
1
3
2
2
stag hunt
The cooperate-cooperate (C,C) payoff (4,4) represents the benefits obtained through joint production. Cooperate-defect payoffs (C,D) and (D,C) represent situations in which one player reverts to unilateral production, leaving members committed to joint production worse off than if they had not mobilized for joint production in the first place. Defective strategies yield benefits to defectors in that they obtain advantage from others’ commitments to joint production. For instance, defectors may obtain benefits in the form of capital upgrades or knowledge transfer based on their initial commitment to joint production, or they may benefit from the withdrawal of their fellow members from the competitive market. The defect-defect strategy (D,D) represents a situation in which both players opt for unilateral production (i.e., regime termination), in which both players benefit equally (neither player benefits at the other’s expense).
I return to game theoretic modelling in Chapter 3. For now, let me conclude this section with a
final word on institutions. The preceding analysis suggests group choice would be awfully conservative if
institutions were truly representative. Instead, most of the time, a select few representatives enjoy the
privilege of sitting on decisionmaking boards and committees, which are themselves rarely governed by
45
unanimity decision rules. Rather, most “representative” decisionmaking bodies utilize qualified majority
rule and so depart from the status quo only under nearly-consensual circumstances. Nonetheless,
institutions with symmetrical distribution of veto powers and qualified majority rule contrast sharply with
majoritarian institutions which, in many cases, compound to produce de facto hierarchical rule (Shepsle
2010). The most obvious example is the relatively frictionless Westminster system, wherein plurality
voting permits false majorities, which allow the party leadership to select a unitary cabinet that then
submits policy proposals to a disciplined legislature. Indeed, in the absence of extra-institutional checks
(e.g., inclusive political culture), first ministers in Westminster systems enjoy carte blanche to act as
autocrats (Savoie 1999; cf. White 2001).
Within regimes, representative institutions and consensual decisionmaking ensure that members
are not repeatedly forced into bargains whose terms they prefer only marginally to exit. In this way,
decision rules constrain regimes’ range of action by determining levels of micropolitical friction, where
friction is a function of the number of veto players in a group or organization (Jones et al. 2009; Lijphart
2012). Outside regimes, representative political institutions guard against cost externalization by
bestowing veto powers upon representatives of groups who might otherwise have their resources
appropriated. As with decisionmaking procedures within regimes, decision rules constrain governments’
range of action by determining levels of macropolitical friction. Importantly, more representative
macropolitical institutions permit less cost externalization by regimes, limiting the Nash solution space to
the Pareto frontier emblematic of the PC+NC+B mode of coordination. Moreover, as demonstrated
empirically in Chapter 3, both types of friction are strongly correlated with one another. The two concepts
can therefore be collapsed into a single measure of institutional friction. Thus, recalling the discussion of
type from Chapter 1, decisionmaking in representative regimes is “negotiated” whereas decisionmaking
in majoritarian regimes is “executive,” with regime type being a function of institutions. Majoritarian
institutions tend to produce relatively small, relatively unrepresentative, relatively frictionless,
“clientelistic” regimes prone to executive decisionmaking, risk taking, PC+B, and cost externalization. By
contrast, representative institutions tend to produce relatively large, relatively representative, relatively
high-friction, “consensual” regimes prone to negotiated decisionmaking, risk aversion, PC+NC+B, and
cost internalization.
As foreshadowed in Chapter 1, regime theory benefits from, but does not rely upon, behavioural
assumptions about tendencies toward consensus and clientelism. Rather, its institutional legs are more
46
than sufficient to stand on. With respect to behavioural predictions about the strategies pursued by actors
in bargaining and coordination games, these expectations are predicated on an institutional theory of social
choice in which actors are assumed to maximize economic profits. The assumption is that actors exploit
the degree to which they are indispensable to regimes in bargaining situations. Yet, little violence is done
to the theory by dispensing with assumptions regarding utility maximization, so long as we can agree that
actors will not voluntarily get themselves into situations in which they expect to incur losses.
Two features of the institutional argument, in particular, are supported by the formal analysis to
follow. First, since the cost of joint production is a function of regime members’ opportunity cost,
institutional checks on cost externalization dissuade regimes from paying premium prices for competence.
Second, ceteris paribus, majoritarian institutions are biased toward risky ventures, whereas representative
institutions are inherently more conservative. That is, as demonstrated in Figure 2.10, when the number
of decisionmakers increases, winsets of the status quo tend to diminish in size.
Importantly, the correspondence between decision rules and friction is a general phenomenon that
applies to any organization no matter how large or small (Tannenbaum 1946). Accordingly, friction affects
both the micropolitics analyzed in this section and the macropolitics discussed in the next. However, a full
appreciation of how and why the stringency of the decision rule corresponds with the size of the Nash
solution space requires formalization: a task to which I now turn.
2.2.4 Formalization
The discussion surrounding regime mobilization identified opportunity costs as the main barrier
to collective action. If actors obtain sufficient utility from acting unilaterally, there is not much incentive
to assume the costs of organizing for collective action (Breton & Breton 1969). The importance of
opportunity costs carried over to the analysis of regime operation and the discussion of circumstances
under which actors would forego their unilateral amount in the short term in exchange for the possibility
of future profit. Regime theory anticipates actors with low opportunity costs —that is, little to lose and
much to gain from joint production— will be enthusiastic participants in joint production. By contrast,
actors with high opportunity costs —participants with much to lose and relatively little to gain— will be
hesitant to engage in joint production. Put differently, actors with low unilateral economic profits will
47
seek out opportunities to increase their profits through joint production. By contrast, actors with high
unilateral economic profits will be more ambivalent toward joint production.
Let 𝑜𝑐𝑖 represent a player’s opportunity cost of forgoing unilateral production. Let П𝑖 represent the
surplus utility (i.e., accounting profit) obtained by shifting from unilateral to joint production. By
estimating 𝑜𝑐 and П, we may derive the cost of a member’s participation in joint production. Let 𝑝𝑐𝑖
represent the 𝑖th member’s participation cost, the solution for which is:
Equation 2.4 𝑝𝑐𝑖 = 𝑜𝑐𝑖 − П𝑖
Participation cost is opportunity cost less surplus because, substantively, 𝑜𝑐𝑖 can be realized prior
to any joint production, whereas П𝑖 implies both risk and delay. Remember, 𝑜𝑐𝑖 is the foregone yield from
unilateral production. Introducing risk aversion and time discounting to the model, we may say members
with 𝑜𝑐𝑖 < П𝑖 are risk tolerant and patient while members with 𝑜𝑐𝑖 > П𝑖 are risk averse and impatient.
Indeed, 𝑜𝑐𝑖 > П𝑖 implies both the forfeiture of a substantial immediate payout (the value of 𝑜𝑐𝑖) and the
assumption of substantial risk: the member might lose the value of 𝑜𝑐𝑖 altogether. By comparison, 𝑜𝑐𝑖 <
П𝑖 implies little risk relative to payoff since the immediate payout obtained by unilateral production (the
value of 𝑜𝑐𝑖) is dwarfed by the expected additional yield from joint production (the value of П𝑖).
To reiterate the preceding point, members with 𝑜𝑐𝑖 < П𝑖 have little to lose and much to gain from
joint production, while members with 𝑜𝑐𝑖 > П𝑖 have much to lose and relatively little to gain. Expressing
members’ calculations as utility functions cements this conclusion. Consider the function:
Equation 2.5 𝑈𝑖(𝑉) = 𝑈𝑖(𝑋)𝑃𝑖(𝑋)[1 − 𝑇𝑖(𝑋)] − 𝐶𝑖(𝑋)
Where 𝑈𝑖(𝑉) is member 𝑖’s utility obtained from joint production; 𝑈𝑖(𝑋) represents member 𝑖’s utility
obtained from the provision of collective goods 𝑋, including any profit derived from contracts related
thereto; 𝑃𝑖(𝑋) represents the probability of obtaining 𝑋; 𝑇𝑖(𝑋) represents the discount rate of obtaining 𝑋;
and 𝐶𝑖(𝑋) represents the value of 𝑖’s own contribution to the jointly produced goods 𝑋. Here 𝑈𝑖(𝑋) and
𝑇𝑖(𝑋) are variables representing risk and time discounting, respectively. 𝑈𝑖(𝑋) = 𝑜𝑐𝑖 + П𝑖 (economic
48
profit) and 𝐶𝑖(𝑋) is roughly equivalent to 𝑜𝑐𝑖.62 Ignoring 𝑃𝑖(𝑋) since this variable is context-sensitive,
assume the discount rate 𝑇𝑖(𝑋) is a logistic function of 𝑝𝑐𝑖 whereby the discount rate increases
exponentially after 𝑝𝑐𝑖 crosses the zero threshold into the positive domain. Solving for 𝑈𝑖(𝑉) reveals that,
when 𝑝𝑐𝑖 > 0, 𝑈𝑖(𝑉) is negative. Moreover, when 𝑝𝑐𝑖 > 0, the size of 𝑈𝑖(𝑋) is irrelevant because the
discount rate increases with the size of 𝑜𝑐𝑖 . Again, Olson’s paradox of collective action is evident by the
distribution of relative gains: players with the most to gain (those with 𝑜𝑐𝑖 < П𝑖) are dependent on the
participation of those who will do just fine on their own (players with 𝑜𝑐𝑖 > П𝑖).
In the example given in Figure 2.15, players are faced with an opportunity to move from the status
quo at Point A —in which both players are producing unilaterally— to joint production at Point B. Player
Y’s participation cost (𝑝𝑐𝑌) is clearly negative, whereas Player X’s is clearly positive. A negative value
for 𝑝𝑐 implies a net surplus (𝑜𝑐𝑦 < П𝑦). Consequently, there will be no cost in securing Y’s participation.
Player Y foregoes little unilateral yield relative to the expected payoff obtained from collective action.
Assume Y is an eager participant. As for Player X, a positive value for 𝑝𝑐 implies a shortfall after 𝑜𝑐 is
deducted (𝑜𝑐𝑥 > П𝑥). There will be a cost involved with securing X’s participation. Player X foregoes
considerable unilateral yield relative to expected gains from collective action. Assume X is a hesitant, risk
averse, participant.
62 More specifically, 𝐶𝑖(𝑋) is 𝑜𝑐𝑖 less any coordination costs that must be paid by the member. 𝐶𝑖(𝑋) thus absorbs donations
and taxes included in Frohlich, Oppenheimer, and Young’s (1972) utility functions introduced earlier, while 𝑈𝑖(𝑋) contains
gains from contractual services provided by the member.
49
Figure 2.15: opportunity costs and the price of joint production
As we have already seen, if gains from joint production are inequitable —that is, if Point B were
to fall instead somewhere else on the dashed line in Figure 2.15— bargaining with side payments may be
employed in order to secure participation. Notice, however, that it is quite unlikely, given participation
costs, that Player X will sacrifice profits in order to secure Player Y’s participation. Rather, it is much
more likely that Player Y will relinquish some of its gains from joint production to secure Player X’s
participation. Indeed, whether 𝑝𝑐𝑥 will need to be externalized depends on whether bargaining within the
regime can bring 𝑝𝑐𝑥 to zero. Let 𝐸𝑝𝑐 represent excessive participation cost (or externalized participation
cost, if you prefer), the solution for which is:
Equation 2.6
𝐸𝑝𝑐 = ∑ 𝑝𝑐
𝑛
𝑖=1
𝐸𝑝𝑐 is the joint surplus or shortfall of the regime, measured in participation costs. If 𝐸𝑝𝑐 is
positive, the participation cost shortfall cannot be internalized by the regime. No amount of bargaining
can bring it to zero. Costs equivalent to 𝐸𝑝𝑐 must be externalized. If cost externalization is not allowed,
joint production cannot proceed. As discussed earlier in the context of supply and demand, regimes will
50
absorb substantial participation costs only when it is necessary, as when the regime requires specialized
competence for joint production to go forward.
Having formalized the theory of cost absorption, exchange, and externalization in regime
operation, the remaining task is to demonstrate how decision rules affect the course of action pursued by
regimes. Let 𝑉𝑥…𝑧 represent the range of options under consideration. Keeping in mind the function for the
utility obtained from a venture given earlier, ceteris paribus, the probability a policy option will be
selected is:
Equation 2.7 𝑃(𝑉𝑥) = 𝑁−1
where 𝑁 is the number of veto players in the group. As was shown in Figure 2.10, controlling for
preferences, as 𝑁 increases, winsets diminish in size.
The implications of the theory become evident when the model is presented as a simulation. Figure
2.16 depicts a hypothetical Monte Carlo decision tree wherein three members are required to come to a
joint decision with respect to three alternatives of varying risk and reward. As per the institutional basis
of regime theory, preferences are given by random assignment —that is, preferences for each alternative
X, Y, and Z are determined by a random draw whereby each alternative has equal probability of being
selected. Each alternative also has a corresponding probability of success and a reward proportional to
risk, although the long run expected value for each alternative is identical.
Figure 2.16: choice probabilities in a Monte Carlo decision model
51
The model presented in Figure 2.16 makes apparent the fact that the decision rule bears
significantly on choice situations. Beginning with a hierarchical decision rule in which one player —say,
Player A— has an absolute veto over Players B and C, the probability of preferring and selecting a given
alternative is 0.33 regardless of the preferences of Players B and C. By contrast, under a majority decision
rule, the probability of preference alignment among two thirds of decisionmakers diminishes to 0.10.
Finally, under unanimity rule, the probability of preference alignment is reduced to 0.04.
Clearly, veto players add friction to choice situations. However, the probabilities given above are
predicated on “hard vetoes” according to which players are prevented from compromising on alternatives
when preferences do not align. Thankfully, institutions in the real world are more flexible than that. If
they were not, government would be even more prone to gridlock than it already is. A realistic model of
the effect of decision rules on policy choice and outcomes must account for the exercise of both “hard
veto power,” in which alternatives are blocked outright, and “soft veto power,” which accommodates
compromise. For instance, compromising players may opt for the least risky option preferred by the
winning coalition over the alternative of maintaining the status quo.
Consider a Monte Carlo game whereby gridlock prevails by hard veto when decisionmakers’
preferences are distal, but the “lowest common denominator” alternative prevails by soft veto when
decisionmakers’ preferences are proximate. Such a preference ordering is depicted in Figure 2.16. Under
this system, unless they are preferred by the requisite number of players given the decision rule, riskier
schemes are either soft vetoed in favour of the least risky preferred alternative or blocked outright when
preferences are too disparate.
Figure 2.17: preference profiles with bias toward less risky alternatives
52
Player preferences are modelled as single peaked on a single dimension representing risk. The steeper angle on the right slope of each peak denotes bias toward the less risky alternative to the left. Sets above each peak represent combinations of players who prefer the corresponding alternative (empty sets, in which no player prefers the alternative, are not shown). When hierarchical rule is employed, any set containing the hierarch wins; when majority rule is employed, the set containing 2/3rds of the players wins; when unanimity rule is employed, only the set containing all three players prevails (the lowermost set over each alternative).
Under the scheme given in Figure 2.17, in which soft vetoes prevail for proximate policy
preferences (i.e., X, Y and Y, Z) and hard vetoes prevail for distal policy preferences (i.e., X, Z and X, Y,
Z), hierarchical rule produces a decision 100% of the time, yielding an expected return of 2.5 —the
expected value of the “frictionless” variant of the Monte Carlo model portrayed in Figure 2.16. By
contrast, owing to risk aversion, majority rule only produces a decision 74% of the time, as players are at
loggerheads in the remaining 26%. Failure to act reduces the expected value of majority rule to
approximately 1.98. Finally, unanimity rule produces a decision only 55% of the time, reducing the
expected value of unanimity rule to 1.44.
The payoff values of the model indicate two things. One is that, owing to friction being negatively
associated with the ability of groups to make decisions, aggregate gains diminish as the representativeness
of the decision rule increases. The other is that the path to riches varies depending on the decision rule.
Whereas hierarchical rule owes more than one third of its aggregate payoff to infrequent but significant
successes associated with the highest risk option (Option X), majority and unanimity rule depend instead
on more frequent smaller successes associated with lower risk options (Options Y and Z). Contrary to
hierarchical rule, unanimity rule is strongly biased against the highest risk option (Option X). Of course,
if the expected value of the model was < 0, the rankings would be reversed: unanimity vote would be the
most lucrative system and hierarchy would be the least.
Assuming decisionmakers are sufficiently informed (and sufficiently rational) to avoid options
with negative expected values, it might seem as though unanimity rule tends toward Pareto inferior
outcomes —an irony considering the association between unanimity rule and the Pareto superior
PC+NC+B mode of coordination (Bouton, Llorente-Saguer & Malherbe 2017). It is however rational for
risk seeking decisionmakers to gamble on policies with negative expected values. As we have seen, the
absence of institutional constraints on cost externalization invites moral hazard and, consequently, Pareto
inferior outcomes. Incidentally, moral hazard is a defining characteristic of hierarchical rule, and is only
weakly constrained under majority rule.
53
On the issue of variable expected values, four additional insights are gained from the Monte Carlo
simulation considered above. They are depicted graphically in Figure 2.18. First, as one would anticipate,
lower relative expected values correspond with diminishing returns on investment. That is, although
hierarchical rule outperforms majority and unanimity rule until the expected value of the highest risk
option crosses a threshold in the negative domain, returns on investment under hierarchical rule
progressively diminish as the gap between the expected values of the higher and lower risk options widens.
Second, unanimity rule outperforms majority rule (but not hierarchical rule) as the expected value of the
highest risk option crosses the zero threshold, holding the expected values of the other two options
constant at 2.5. Third, unanimity rule outperforms both hierarchical and majority rule as the expected
value of the highest risk option crosses a threshold at −2, holding the expected values of the other two
options constant at 2.5. Fourth, majority rule does not outperform hierarchical rule until the expected value
of the highest risk option drops below −4, holding the expected values of the other two options constant
at 2.5.
Figure 2.18: payoff performance of decision rules as a function of risk
The suggestion gleaned from Figure 2.18 is that, although more representative systems are biased
against risky ventures, they are not entirely preempted from pursuing them —a fact which has
consequences for the comparative performance of decision rules. If representative systems were entirely
dissuaded from pursuing policies with negative expected values, they would be at an advantage vis-à-vis
54
non-representative systems where such temptations are actionable. However, the fact that representative
systems are not entirely dissuaded from pursuing high risk policies means hierarchical decision rules
outperform more representative systems until the expected value of the highest risk option drops well into
the negative domain. The takeaway is that non-representative systems benefit from flexibility to pursue
risky ventures. However, virtue turns to vice as the expected value of risky options diminishes relative to
alternatives.
The substantive implications of the theory of regime operation are explored in the next section.
To the extent that unanimity rule is Pareto inferior to hierarchical rule, it is only when hierarchs exhibit
self-restraint. Little is accomplished, however, by speculating about behavioural tendencies toward moral
hazard and self-restraint. The pertinent question from an institutionalist point of view concerns what
behaviours institutions permit. In the case of purely hierarchical rule, institutions invite recklessness.
Inversely, when the representativeness of institutions is too demanding, opportunities for value creation
go unseized. Thus, there is a trade-off. As demonstrated empirically in Chapter 3, although both liberal
and coordinated political economies exhibit similar levels of economic performance, there is some
evidence to suggest that polities with very high and very low institutional friction have enjoyed a lower
rate of growth compared to other industrialized countries.
2.3 Politics, feedback, and the political economy
The discussion up to this point established some basic premises regarding how regimes mobilize
and how they operate. Central to the discussion of regime operation was the question of how decision
rules and the mode of coordination affect distribution. As demonstrated in the previous section, institutions
bear significantly on the likelihood that costs associated with joint production will be internalized by the
regime or externalized onto outside actors.
Recall from Chapter 1 that the initial conditions for the theory of regime outcomes consist of
distributive, social, and normative circumstances facing voters, political parties, and the media.
Distributive concerns are obviously related to the issue of cost externalization; public subsidies to regimes
strain policy possibilities, making less money available for other programs, debt service, and tax relief.
The crucial distributive question is whether regimes add more value to society than they subtract. Yet,
opinions regarding whether regimes are worthy of public support are likely to vary demographically.
55
Hence social context being an input variable in the theory of regime outcomes. If regimes enrich large,
important, or privileged segments of society, they are likely to be sustained even if they are costly.
Whether regimes should be sustained is, however, a normative question, whose answer is likely to differ
not only among individuals but also over time. Thus, the normative context also factors into whether
regimes will be maintained or dismantled with the completion of electoral cycles.
The following subsections elucidate the salient features of the theory of regime outcomes. My aim
is to sketch the process by which regimes produce conditions hospitable to their reproduction or demise.
Consequently, the pages to follow constitute but a brief foray into an incredibly extensive literature on
macropolitics, an exhaustive treatment of which would occupy several volumes. Nevertheless, readers
should find the conclusions both plausible and consistent with dominant thinking in the social sciences.
2.3.1 Regime outcomes and the macropolity
The study of macropolitics is concerned with the communication of mass preferences through the
representative institutions of government (i.e., the executive and legislative branches). Citizens are
assumed to express policy preferences by electing political representatives with similar views to their own
(Wlezien 1995). However, in contrast to the atomistic approach that characterizes positive political
economy, the study of macropolitics is concerned with voter behaviour en masse. One issue with atomistic
approaches to studying voting behaviour is that the dimensional complexity involved in casting an
informed vote conflicts with informational assumptions undergirding theories of rational choice (Jones
1989a). Furthermore, research has found that voting behaviour is frequently based more on emotional
responses to incomplete information than rational calculation (Zaller 1992). Atomism may also be
unhelpful for other reasons. For instance, in The Macro Polity, Erikson, MacKuen, and Stimson (2002)
demonstrated that mass voting behaviour is “greater than the sum of its parts,” with a small minority of
informed and calculating voters being decisive to election outcomes. The latter observation suggests that
both “Downsian” mobilizations and “Schattschneiderian” counter-mobilizations need only involve a
relatively small cross section of the electorate.
Clearly, elections are fundamental to the process by which core features of political economies
are reproduced. It is well known that political economies are stable over electoral cycles, despite changes
at the margins (Hall & Thelen 2009). Less clear is how, or even whether, the typical distribution of costs
56
and benefits in political economies affects vote choice (Bendor, Diermeier & Ting 2016). On this point,
many have argued that the characteristics of welfare regimes follow from middle class cooptation during
episodes of welfare state consolidation: periods in which the scope and limits of commodification are
established following social and technological upheavals (see also Polanyi 1944). Middle class interests
are said to have been integrated into the welfare states of coordinated Continental European and East
Asian political economies during critical junctures, but not those of liberal Anglo Saxon countries (with
the partial exception of Britain in the aftermath of the Second World War) (Streeck & Yamamura 2001).
In coordinated systems, expansive state services and public employment are considered to be responsible
for fostering continued widespread support for public provision. By contrast, in liberal systems, the
“residual welfare state” is thought not to be tailored to the interests of the middle class, but rather the poor.
The result is limited electoral support for public provision. According to Gøsta Esping-Andersen, “in class
terms, the consequence is dualism” (Esping-Andersen 1990: 57).
Given that regime sustenance is a function of the economic benefits flowing to the middle class,
the politics of dualism has received substantial attention from students of comparative political economy.
Häusermann and Schwander (2012), for example, find support for Esping-Andersen’s conclusion that
dualism is most prevalent in liberal political economies, but note that dualism has had the effect of
segmenting labour markets such that the distinction between “insiders” (beneficiaries of the political
economy) and “outsiders” (those denied its benefits) is sharpest in coordinated economies. Yet, since a
large portion of the electorate enjoys insider benefits in coordinated systems, the welfare state orientation
of coordinated political economies has remained relatively stable over time. Inversely, the fact that a
greater proportion of the middle class in liberal systems consists of outsiders provides a plausible
explanation for why the welfare state has remained modest, yet unbowed, in liberal political economies
(Bartels 2008). Unexplained by most accounts, however, is the tendency for the size of the state to
fluctuate markedly in liberal political economies (Baumgartner & Jones 2015).
The suggestion gleaned from the literature summarized above is that class cleavages, on one hand,
and incentives for cross-class coalition building, on the other, determine the nature of party systems.
Electoral success yields policies that give constituents incentive to support representatives who are in turn
incentivized to pursue policies that benefit their constituents, and so on, producing a feedback loop that
underlies the political economy. Thus, “formative moments” and “critical junctures,” often long in the
past, set processes in motion, the net effect of which is a specific mode of economic and social organization
57
(Esping-Andersen 1990; North 1990; Thelen 2004). Yet, while sectoral interests are noticeably
entrenched, or “locked in,” in coordinated systems, few such formative moments have occurred in liberal
systems (cf. Campbell 2012). Instead, liberal political economies have been found to privilege business
interests, generally speaking (Coleman 1988; Hacker & Pierson 2010; Lindblom 1977).
I contend that explanation lies primarily in differences with respect to the representativeness of
macropolitical institutions. The class composition of electoral constituencies is secondary; in fact, class
composition is posterior to institutions in the sense that the distribution of resources in society is
determined by political representation. Cross-class coalitions are necessary in coordinated political
economies because representative macropolitical institutions require them. Representative institutions
encourage accommodation, which produces a durable trajectory of cross-class bargaining emblematic of
coordinated political economies. By contrast, accommodation does not feature in liberal political
economies because accommodation is unnecessary (Lijphart 2012). Thus, non-durable trajectories are a
defining characteristic of liberal political economies.
By all accounts, liberal political economies are befitting of the name. I am, however, skeptical of
the notion that liberal political economies lack economic coordination altogether. As argued in the next
section, economic coordination occurs along clientelistic lines in liberal political economies but may go
undetected for two reasons. One is that clientelistic coordination tends to occur behind closed doors, as
per the “inside initiation” model of mobilization discussed earlier. The other is that institutionalized
“reactive” mechanisms routinely thwart tendencies toward policy continuity by mobilizing counterforces
(Mahoney 2000; Pierson 2000a). Consequently, trends do not appear to be trends at all. The implication
for theory is that class structure may not be as important as once supposed.63 Rather, as is now increasingly
recognized, it is more plausible that institutions are responsible for observed similarities and differences
63 In structuralists’ defense, the objective determinism of socio-economic variables appears to have diminished over time. For
instance, Dye (1966) found that socio-economic variables explained differences in the policies of American states much better
than political variables —a finding in line with the discovery that the average American voter at the time was hopelessly
ignorant about, and generally apathetic toward, politics (Converse 1964). Beginning in the 1970s, however, institutional
variables came to explain a greater proportion of policy variance observed between jurisdictions (Blomquist 2007). This
observation may be a consequence of one or more of the following: methodological problems with earlier analyses, an increase
in general political awareness, or a numerical increase in well informed and decisive voters (Downs 1972; Erikson, MacKuen
& Stimson 2002; Hofferbert 1990).
58
across political economies (Hall & Soskice 2001; Iversen & Soskice 2009; Streeck & Thelen 2005; Thelen
2004).
2.3.2 Political representation, institutions, and policy feedback
Dating at least as far back as Schattschneider (1935), political scientists have been attuned to the
fact that interest mobilization tends not to precede, but rather follows, policy initiation (Baumgartner &
Jones 2015; Campbell 2012; Walker 1991). Citing Schattschneider’s famous dictum that “policies make
politics,” Pierson (1993) argues that previous policies affect civil society groups in three ways. First,
policies can affect distribution by bearing directly on groups’ material resources. Second, policies can
affect the organization of society by granting or denying groups access to decisionmakers. Third, policies
can influence normative attitudes about certain types of policies. Notice that these effects closely
correspond to the initial conditions in the theory of regime outcomes. Yet, Pierson also contends that
policies affect public actors in two ways: by altering the capacities of the state and by affecting the private
and professional incentives of government officials. Notice that these effects closely correspond with the
initial conditions of the theory of regime origins.
Feedback occurs when effect becomes cause: when the dependent variable is both caused by and
causes the independent variable (Pierson 1993; 2000a). Not to be confused with reverse causality,
feedback is either “self-reinforcing” or “self-undermining.” In the former case, all relationships between
events in a feedback loop are positively signed. In the latter case, the feedback mechanism —the
“mechanism of reproduction”— is negatively signed (Thelen 1999). Consequently, self-reinforcing
sequences are characterized by steady or increasing returns over multiple iterations of the feedback loop,
whereas self-undermining sequences are characterized by diminishing returns.
Shifting his attention from returns to inputs, Pierson (2000b) attributes path dependence to a
second phenomenon: sunk costs. Sunk costs are a determinant of policy maintenance and stability when
the probability of staying the course increases with each additional move along the trajectory due to
corresponding increases in the cost of reversal. According to this formulation, policies do not depend on
steady or increasing returns to be sustained. Rather, the impetus is loss aversion. Since net costs of
pursuing policy alternatives are inflated by the price of policy reversal, bias remains in favour of the status
quo, suboptimal as it may be.
59
To summarize, the literature on path dependence contends that policies will be sustained when
they produce sufficient gains and/or when they are costly to undo. The question is: costly for whom?
Pierson (1993) argues that distributive consequences “lock in” stakeholder support for policies, but notes
that “interpretive effects” raise the public visibility of policies. Drawing on Arnold (1990), Pierson
surmises that the likelihood that path dependent sequences will be resisted, undermined, or broken is a
function of the visibility and traceability of policies, where visibility denotes perceptible effects of policies
and traceability denotes the extent to which culpable policies can be identified (Pierson 1993). Simply
put, policies blamed for producing negative consequences will be resisted.
The attribution of blame is the stuff of countermobilization, which can occur at two levels in the
political arena. One is the micropolitical level of regime politics. The other is the macropolitical level of
electoral politics. At the micropolitical level, policy change may manifest in one of three ways: through
regime reorganization, via regime expansion, or due to the appearance of a rival regime (Baumgartner &
Jones 1993: 36-37; Worsham & Stores 2012). In all cases, the goal of reformers is to better align the
“systemic bias” of regimes to the preferences of those dissatisfied with their performance. Regimes are
seldom accessible to the groups they affect, however (Howlett & Ramesh 1998). Even if regimes were
accessible, change might not be forthcoming due to an asymmetry of veto power between members in
favour of preserving the status quo, on one hand, and members advocating reform, on the other (Sabatier
& Jenkins-Smith 1993).
Due to problems associated with accessing and influencing regime politics, effective counter
mobilization is likely to depend on macropolitical procedures (Baumgartner & Jones 1993). In contrast to
the “quiet politics” of regime operation, macropolitical affairs evoke the attention of political parties and
the media, which brings an air of sensationalism to issues. When the performance of regimes becomes an
issue on the political agenda, expression of “systemic bias” may be supplanted by “popular bias” (Cobb
& Elder 1983; Elkin 1987). Transitions of this sort are not only liable to engender changes in attitude but
also sweeping changes in the personnel responsible for making decisions. The locus of decisionmaking
moves from the “policy subsystem” dominated by regime politics to the macropolitical level at which the
representative institutions of government are decisive (Redford 1969; Stone 1976).
The reactive mechanism at the macropolitical level is straightforward and familiar. Disaffected
groups seek out political representatives with the aim of dispensing with harmful policies. Yet, it must be
stressed, the representativeness of bias at the macropolitical level is a function of the representativeness
60
of macropolitical institutions, including the electoral system. There is a real possibility, therefore, of a
disconnect between apparent popular bias, as espoused by macropolitical representatives, and the true
popular bias in society. Seen in this light, it is appropriate to differentiate between the biases of regime
members at the micropolitical level, the biases of representatives at the macropolitical level, and the
“latent” biases of the public writ large.
Political scientists measure bias as the median preference of veto players in specific
decisionmaking contexts (Shepsle 2010). It is only necessary to consider the preferences of veto players
because it is only they who are decisive. It is necessary to consider the decisionmaking context because
institutional rules —namely decision rules and agenda setting procedures— affect choice outcomes. We
saw in Figure 2.10 that, generally, the more veto players involved in a decision, the smaller the winset of
the status quo. In plain terms, the more decisionmakers involved in making a choice, the less likely it is
the group will arrive at an acceptable solution. Again, the negative correlation between number of veto
players and the size of winsets is known as institutional friction. Since friction is familiar to all political
phenomena, we can employ the concept to analyze decisionmaking at the micropolitical level of
committees, boardrooms, and regimes as well as the macropolitical level of legislatures.
In contrast to scholarship that places emphasis on popular bias to explain policy stability and the
characteristics of the political economy, regime theory is institutional. Consequently, regime theory puts
considerable stock in institutional friction and its effects on patterns of policy change and stability. We
have already seen how micropolitical friction affects decisions at the regime level. The next section
completes the theory by detailing the impact of macropolitical friction on political economies.
2.3.3 Friction, risk, and compromise
Punctuated equilibrium theory posits that all social systems are characterized by inertia and,
therefore, status quo bias (Jones & Baumgartner 2005b). Yet, punctuated equilibrium theorists have also
demonstrated that variation in levels of institutional friction correspond with observed differences between
political systems with respect to policy stability and change (Jones et al. 2009). As discussed above, in the
political economy literature, power resources theory explains why there is stability in coordinated political
economies but does not explain why liberal political economies are characterized by more frequent policy
punctuations. The implicit, but incomplete, suggestion gleaned from power resources theory is that
61
durable policies benefit majority interests. While variance in the size of “insider” and “outsider” groups
across political economies is illuminating, power resources do not tell the whole story. The
representativeness of macropolitical institutions completes the picture.
Macropolitical friction is conventionally understood as an amalgam of several institutional factors.
These factors include whether a polity is federal or unitary, whether the electoral system is majoritarian
or representative, whether legislatures are unicameral or multicameral, whether the political system is
parliamentary or presidential, whether the constitution is codified, the degree of party discipline in
legislatures, the extent to which the judiciary is powerful and autonomous, the level of central bank
independence, and the degree to which cabinet is cohesive (Lijphart 2012). Given their impact on decision
rules, two sources of macropolitical friction are particularly deserving of attention here: the electoral
system and the political system. Let us consider each in turn.
As discussed at some length already, whether decision rules are hierarchical, majoritarian, or
consensual significantly affects group choice, whereby the number of veto players in a decisionmaking
situation is negatively associated with the ability to make decisions. Scaled up to the macropolitical level,
representative electoral systems yield legislative politics biased toward consensus decisionmaking due to
approximate proportionality between electoral vote share and the assignment of legislative seats.
Consequently, coalition governments are quite common in representative systems, which means
decisionmaking authority is shared by multiple veto players. Meanwhile, majoritarian electoral systems
bias legislative politics toward either majoritarian or hierarchical decisionmaking due to asymmetry
between popular vote and legislative seat share. Whether majoritarian electoral systems tend toward
hierarchical or majoritarian decisionmaking depends on the political system.
The political system is pertinent to the discussion of legislative decisionmaking because it
determines the location of the legislative agenda setter. Although terminologically backward, presidential
systems bestow legislators with agenda setting powers; parliamentary systems bestow executives with
agenda setting powers (Tsebelis 2002). Recall that representative electoral systems tend to yield coalition
governments. Consequently, the agenda setter in representative parliamentary systems is likely to be a
heterogenous cabinet; heterogenous because of the representativeness of the electoral system and cabinet
because of executive agenda setting powers in parliamentary systems. The agenda setter in majoritarian
parliamentary systems, meanwhile, is likely to be a unified cabinet. By contrast, the agenda setter in
majoritarian presidential systems will be either a heterogenous or unified legislature. Although, generally
62
speaking, majoritarian electoral systems produce unified government, two additional institutional features
of the political system complicate matters, albeit in predictable ways.64 One is cameralism. The other is
party discipline. If the political system is multicameral, the likelihood of unified government diminishes
markedly. The same goes for political systems with weak party discipline.
Figure 2.19: the macropolitical friction scale
Figure 2.19 illustrates where the world’s major political systems fall on the macropolitical friction
scale. The Westminster model of parliamentary government emblemizes the least friction; parliamentary
democracy of the Continental European variety encompasses the most friction; American presidentialism
falls in the middle. For illustration, political systems with a single authoritative decisionmaker would be
essentially frictionless. By contrast, political systems wherein every decision is made by unanimous
referendum would exhibit maximum friction. In the latter system, every citizen would possess veto power
(and next to nothing would get done). Although both cabinet cohesion and party discipline vary across
Westminster parliamentary systems, the Westminster model of government comes closest to
frictionlessness, notwithstanding dictatorship (Kam 2009; White 2001). Seen in this light, it is not
surprising that first ministers in Westminster systems have been described as “autocrats” (Savoie 1999).
Macropolitical friction affects both regime mobilization and reproduction. Recalling that decision
rules affect the size of winsets regardless of the level of analysis, we can safely assume policy proposals
detrimental to veto players’ constituents will be resisted. Whether a representative is a veto player is
64 For its part, when jurisdiction is shared, federalism affects decisionmaking the same way cameralism does.
63
determined by the constitution of macropolitical institutions. The implication is that detrimental policies
are liable to be vetoed ex ante in representative systems but not in majoritarian systems due to
comparatively more veto players in the former system than the latter. Detrimental policies may be vetoed
ex post in majoritarian systems, however, if a sufficient proportion of the electorate is opposed to policy
renewal. The reactive mechanism according to which “negative feedback” of this sort is effected is the
general election. Just as regimes can be easily mobilized in low friction systems, they can be easily
dismantled, giving rise to more highly punctuated patterns of policy change observed in majoritarian
political systems (Baumgartner & Jones 1993; 2015).
Obviously, policies have consequences for society. Moreover, as evidenced by the preceding
discussion of macropolitical friction, institutions have consequences for society as well (Knight 1992).
Institutional consequences for society are nuanced, however. On one hand, the likelihood that policies will
be implemented in the first place is enhanced by low friction macropolitical institutions that favour regime
creation. Yet, the same low friction institutions that facilitate regime creation also facilitate regime
dissolution. Therefore, the social consequences associated with regime politics will not typically be
sustained long term in low friction systems. By contrast, the likelihood that policies will be initiated is
reduced by high friction macropolitical institutions that hinder regime creation. These same institutions
facilitate regime maintenance, however, because it is difficult to change policy once enacted in high
friction systems. Therefore, the social consequences associated with regime politics will typically be
sustained in high friction systems. The pertinent question now concerns the conditions under which
regimes mobilize and are sustained in high friction and low friction settings.
So far, I have attributed variation in rates of regime mobilization and dissolution to macropolitical
institutions. In a quite separate discussion, I have likened tendencies toward cost externalization and
internalization to decision rules at the regime level. The remaining task is to draw these two elements of
the theory together.
As demonstrated in the section on regime operation, representation determines the level of risk
tolerance in regimes. In technical terms, ceteris paribus, the representativeness of the decision rule
determines the size of winsets of the status quo. The same is true for macropolitics. Moreover, because
macropolitical representation determines regimes’ capacity for cost externalization, macropolitical
institutions determine the mode of coordination at the micropolitical level. Low friction, “liberal”
macropolitical institutions beget regimes that operate according to the positive coordination plus
64
bargaining (PC+B) mode of coordination, which tolerates cost externalization. By contrast, high friction,
“coordinated” macropolitical institutions engender regimes that operate according to the positive
coordination plus negative coordination plus bargaining (PC+NC+B) mode of coordination, which does
not permit cost externalization but rather adheres to the Pareto principle with respect to the welfare of
actors both within regimes and without. Hence the distinction between liberal and coordinated regimes
political economies as ideal types. Liberal political economies are characterized by majoritarian, low
friction macropolitical institutions and a risk tolerant mode of coordination at the regime level.
Coordinated political economies are characterized by representative, high friction macropolitical
institutions and a risk averse mode of coordination at the regime level.
Substantively, the expectation is that regimes in liberal systems will mobilize frequently and
rapidly, make decisions expeditiously, externalize costs of production, and dissolve within a relatively
short period of time (usually one or two election cycles). These are the main characteristics of liberal
political economies. In coordinated systems, regimes will mobilize infrequently and gradually, make
negotiated decisions, internalize costs of production, and remain in place for relatively long periods of
time. These are the main characteristics of coordinated political economies.
The tendencies just described can be reframed as advantages and disadvantages associated with
each political economy. Advantages and disadvantages come in two varieties: short run and systemic.
Liberal political economies are advantaged in the short run by the size of the possibility space afforded by
cost externalization, which allows risky policies to be pursued. Recall from Chapter 1, however, that cost
externalization also permits tendencies toward less risky but equally costly “reactive” policies —a
pathology of liberal political economies. Systemically, liberal regimes are advantaged by the ability to
make slack resources available quickly, permitting the next policy to proceed with relative speed.
However, although liberal political economies benefit from the fact that electoral retaliation for cost
shifting ensures regimes that make a habit of externalizing costs do not last, liberal political economies
are systemically disadvantaged in the sense that worthwhile policies may not be sustained long enough to
come to fruition.
The advantages and disadvantages associated with coordinated political economies are inverse to
those associated with liberal political economies. For coordinated political economies, a cost-constrained
possibility space is disadvantageous in the short run. However, cost control, along with representative
decision rules, allows regimes to be sustained long term in coordinated systems. As mentioned in Chapter
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1 and discussed further in Chapter 3, regime longevity is good for honing domestic expertise. Regime
“lock in” is disadvantageous, however, in the sense that slack is less easily freed for the pursuit of new
ventures in coordinated political economies.
Yet, if the story outlined above is accurate, shouldn’t governments in liberal systems be plagued
by debt, relative to their more representative counterparts? Not necessarily. My argument is not that
expensive programmes are blocked in representative systems as a rule; it is that costs and benefits must
be sufficiently diffuse for policy initiation to occur in representative systems. Costs are not truly
externalized if they are transferred on to beneficiaries (and supporters) of expensive policies. Indeed, when
this condition is satisfied, expensive policies may “lock in.” That is, thanks to dispersed veto power in
representative systems, such policies may be very difficult to change after they are implemented (cf.
Wilson 1973). Meanwhile, painful austerity policies intended to curb deficits are more likely to be vetoed
in representative systems than majoritarian systems for the same reasons other unpopular policies are
liable to be blocked. On balance, there should be little long run discrepancy in levels of government debt
between liberal and coordinated political economies. Data analyzed in Chapter 3 supports this argument.
This section has demonstrated that the advantages and disadvantages characteristic of the two ideal
typical political economies are institutionally derived. It is important to keep in mind, however, that
institutions do not do anything on their own. Institutions do not make choices. People make choices based
on their preferences, which are subject to institutional and other constraints (Scharpf 1997). While I have
put a lot of emphasis on institutions in the preceding discussion, another way of framing the argument
evokes Albert O. Hirschman’s (1970) Exit, Voice, and Loyalty. From the Hirschman perspective,
majoritarian institutions encourage “exit” behaviour whereas representative institutions encourage
“voice.” At the micropolitical level, if producers are dissatisfied with the way regimes are managed in
majoritarian systems, they may fold regimes with relative ease and produce unilaterally instead.
Meanwhile, at the macropolitical level, if voters are dissatisfied with the performance of regimes, they
may exercise exit by voting in the opposition at the next election. By contrast, regime withdrawal is usually
more difficult and more costly in representative systems owing to the extent to which regimes are
entrenched. If a market is highly coordinated (i.e., horizontally integrated), a decision to go it alone could
be suicide for the individual firm. The alternative is to instead seek advantage by using voice to air
grievances, bargain, and negotiate compromises (Hall & Gingerich 2009: 477). Hence the tendency
toward negotiated industrial policy in coordinated systems. Voice is also prevalent at the macropolitical
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level in representative systems. Although voters can change the balance of power in government, they
often cannot change its partisan composition wholesale. In contrast to majoritarian systems, in which
protest is expressed ex post by way of electoral punishment (i.e., voter exit), in representative systems,
protest is often expressed ex ante as voice, giving meaning to the term “consensual democracy”
(Hirschman 1970: 80).
As a final point, attentive readers will have noticed that the discussion has juxtaposed low friction
and high friction systems to the neglect of an important “medium friction” system: American
presidentialism. Indeed, the American system is something of a wildcard in the sense that it can be
characterized by relatively low levels of friction when the executive and both houses of Congress are
cohesive, but very high levels of friction when the branches of government are heterogenous. There is,
however, a characteristically American mechanism that serves to tilt presidential systems in the liberal
direction: legislative vote trading, otherwise known as logrolling. Consequently, although American
politics is rather prone to gridlock, logrolling may increase its propensity toward costly policies despite
otherwise high levels of friction (Tullock 1981).
2.4 Conclusion
The purpose of this chapter has been to specify the technical details of regime theory. My intention
has not been to showcase that the theory is complex —which it is— but rather bring it to life by adding
connective tissue to its basic skeletal structure. To belabour the biological analogy, although it is useful
to understand how the nervous system works, attention to minute detail is often unnecessary to adequately
explain basic biological functions. The same principle applies to theory building in the social sciences
(Dowding 2001b). Specifics are handy when you need them, but are often dispensable. Recalling the
comparison made in Chapter 1 between the structuralist orientation of comparative political economy and
the microfoundational orientation of positive political economy, regime theory is complex on the whole
because it encompasses both a microfoundational theory of individual behaviour and a structural theory
of comparative political economy. In other words, regime theory is “unified,” amendable to both in depth
case study and population level statistical analysis (Mahoney 2008). Yet, a methodological division of
labour between population level and case level analysis lightens the mental burden of the regime theorist.
On the one hand, there is no need to be attentive to big picture outcomes when considering micropolitics.
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On the other, it is unnecessary to sweat micropolitical details when considering structural trends in the
political economy.
Regime theory does not reinvent the wheel. Nor does it offer an alternative to established
approaches, per se. Indeed, a parallel argument is implicit in Mancur Olson’s Rise and Decline of Nations,
and is even stated explicitly toward the middle of that work:
Sufficiently encompassing or inclusive special-interest organizations will
internalize much of the cost of inefficient policies and accordingly have an
incentive to redistribute income to themselves with the least possible social cost,
and to give some weight to economic growth and to the interests of society as a
whole. (Olson 1982: 90)
Where my perspective diverges from Olson’s is with respect to the possible virtues of cost externalization
and rent seeking: tendencies which Olson unapologetically attributes to national decline.
Recall from the introduction to Chapter 1 that the debate surrounding industrial policy is, in
essence, a dialogue about the causes of societal progress and decline. Having established the general
theoretical framework, the stage is set for more detailed analysis of industrial policy. As mentioned in the
introduction to this chapter, the intention of the preceding discussion has been to outline a portable theory.
The next task is to specify more precise models of the origins, operation, and outcomes associated with
industrial policies in particular settings and circumstances. By delving more deeply into the nuances of
industrial policy regimes, Chapter 3 fills the gap between regime theory as devised here and the thesis put
forth in Chapter 1 concerning competencies for innovation. Recall that, consistent with Hall and Soskice
(2001), liberal political economies are hypothesized to specialize in radical and first wave innovation
while coordinated political economies are hypothesized to specialize in incremental and second wave
innovation.
Given that regime theory emphasizes issues of distribution —and juxtaposes Pareto efficient
representative institutions against Kaldor efficient majoritarian institutions— Chapter 3 provides an
institutional basis for the distinction recently made by Acemoglu, Robinson, and Verdier (2017) between
“cutthroat” and “cuddly capitalism.” In similar vein to Acemoglu and colleagues, and in partial contrast
to Olson’s theory of national decline, Chapter 3 evokes a functional argument about the benefits of a
global division of labour between two archetypical growth models while recognizing the normative
unpalatability of the notion that so called “cutthroat capitalism” is effective because it permits rent seeking,
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cost shifting, and clientelism. Yet, normative arguments aside, both coordinated and liberal political
economies may falter on functional grounds. As we have seen, representative systems may “lock in”
policies that benefit large contingents of “insiders” to the exclusion of “outsiders.” Meanwhile, liberal
regimes may exhibit dysfunctional tendencies toward costly “reactive” policies in defense of technological
losers. Moreover, as conveyed earlier in the context of a Monte Carlo simulation, there is a functional
trade-off between coordinated and liberal institutions. The inherent conservativism of consensual
institutions in coordinated economies ensures that many opportunities for value creation are not realized.
Inversely, low friction majoritarian institutions in liberal economies may prove destructive if policies
sought by regimes involve high risks.
On the preceding point, Lijphart (2012) provides ample empirical evidence that liberal political
economies are welfare deficient compared to coordinated systems. These findings are likely due to liberal
regimes’ tendencies toward moral hazard and rent seeking. Not explored by Lijphart, however, are
differential capacities for innovation across liberal and coordinated political economies. If liberal regimes
perform a necessary function by contributing radical and first wave innovations to the global stock of
knowledge, Lijphart’s conclusions may be rebuffed under the auspices of “no pain, no gain.”
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Chapter 3
Industrial Policy Regimes
As argued in the introduction to Chapter 2, an issue with much of the extant literature on industrial
policy is that it is not sufficiently analytical. Rather, it is primarily descriptive. To correct this shortcoming,
the previous chapter developed regime theory as an analytical lens useful for studying collective action
situations. Yet, regime theory in its general guise is not sufficiently descriptive to study industrial policy,
specifically. Indeed, notwithstanding superficial speculation about tendencies toward clientelism and
consensus in liberal and coordinated political economies, regime theory says little about the structure of
industrial policy regimes and the groups likely to populate them. Regime theory is therefore silent on the
consequences of participation by different types of actors in formulating and implementing industrial
policy. The task now is to develop models capable of explaining and predicting industrial policy under
specific circumstances and in specific settings.
This chapter is divided into three parts. The first part outlines a theory of technological innovation
that links patterns of knowledge transfer to industrial policy outcomes. Consistent with the literature on
the varieties of capitalism, industrial policy success is hypothesized to be a function of the type of
innovation pursued (radical versus incremental, first wave versus subsequent wave) and the institutional
characteristics of industrial policy regimes. The second part reviews the literature on economic
coordination and competition in order to discern the composition of industrial policy regimes. The third
part develops four archetypical models of industrial policy regimes based on ten hypotheses gleaned from
the previous discussion. The third part also undertakes a preliminary analysis of cross-national population
level data, which yields encouraging results. The chapter concludes with a summary of the substantive
implications of the theory.
3.1 Capacities for innovation
The introduction of this thesis posed a very big question: how is progress achieved? From there, I
went on to discuss the role of the government in managing the economy and the different ways in which
industrial policy features in that role. I then emphasized magnitude and type as useful dimensions for
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identifying and classifying industrial policy. From the discussion of type, I discerned “good” industrial
policy from “bad.” Recall that bad industrial policy is assumed to involve the reactive pursuit of sunset
industries. What qualifies as good industrial policy is more nuanced. Good industrial policy is proactive,
and can be radical or incremental, first or subsequent wave. A question left unanswered by the discussion
of industrial policy in Chapter 1 concerns what the proactive pursuit of technological opportunities entails.
This question is addressed below.
The following subsections review the literature on capacities for innovation and advance an
argument about how knowledge generation translates to economic growth. The first subsection
conceptualizes innovation as occurring along logistic growth curves, which can be classified as either
“first wave” or “subsequent wave.” The second subsection establishes that competitive economic
advantage is a function of states’ ability to exploit “opportunity niches” —specialization in high return,
diversifiable, and synergistic goods or sectors. The third subsection abstracts three types of competence
acquisition —foreign direct investment (FDI), endogenous “learning by doing” and inherited “learning by
searching”— and conveys a trade-off between short and long run advantages of each approach.
3.1.1 Radical, incremental, and subsequent wave innovation
In its everyday usage, the word “innovation” implies doing things better. More specifically,
innovation involves changing means to improve ends. Importantly, the process of innovation is path
dependent (Heilbroner 1967). Technological innovation occurs along a “product life cycle” (Stobaugh
1968; Vernon 1966). The notion is that technologies, as well as the goods and services in which they are
embedded, proceed temporally through sequential stages of metaphorical life. The process begins at birth
and ends with death. The metaphor is apt, as both technologies and species exhibit similar rates of growth
at the beginning, middle, and late stages of life. Graphically, technological and biological development
follow a logistic growth curve (otherwise known as an S-curve). During the early stages of life, growth is
slow, increasing marginally. Then, there is a period of exponential growth during which most development
takes place. At maturation, growth marginally diminishes before stagnating entirely (Perez 2010).
Figure 3.1 conveys the technological lifecycle, with time on the horizontal axis and technological
maturation on the vertical axis. Notice that each S-curve consists of three stages: infancy, exponential
growth, and maturation. Each curve is also divided into two phases: a radically innovative phase and an
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incrementally innovative phase. Notice, too, that a second logistic growth curve succeeds the first. This
second curve represents a subsequent wave innovation, which may follow directly on the heels of a first
wave innovation, or may take many years to materialize. Consequently, the history of technological
development can be conveyed as a series of logistic growth curves (Hirooka 2006).
Figure 3.1: successive waves of innovation
Although most innovation scholars make reference to logistic growth curves, there is some
ambiguity in the literature around the activities that define the stages and phases of growth (Mahajan &
Muller 1979; Nelson & Winter 1982; Wolfe et al. 2005). Moreover, there is confusion in the literature
regarding the distinction between incremental and subsequent wave innovation. Some points of
clarification are in order.
I have established that first wave technologies are completely new, by which I mean that
productive processes, and the capital required to carry them out, do not exist prior to the advent of the
technology. Note the implication: capital has to be invented, or redeployed from some other purpose, for
a wave of innovation to get underway.65 Investment in prototypical capital occurs during infancy, at the
beginning of the logistic growth curve. Investment in scale-efficient productive capital, on the other hand,
65 While Popper (1959) observes that the development of sophisticated instrumentation is often required for scientific and
technological advance, Lévi-Strauss (1966) documents an alternative path whereby old materials are repurposed for new ends.
The first route involves pure science, the second primitive science. The contrast between them is stark.
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occurs just prior to the inflection point at the beginning of the exponential growth stage. The Wright
Brother’s bicycle shop is an example of the former; a Boeing assembly plant is an example of the latter.
Thus, while many innovation scholars identify core input as a determinant of technological
trajectory, I focus on productive capital (cf. Freeman & Louçã 2001). My perspective is “Schumpeterian”
in the sense that it assumes the shape of product life cycles is a function of opportunities for capital
deployment and improvement (Schumpeter 1911; 1942). Initial investments in productive capital multiply
at the onset of technological growth as demand for the new, radically innovative product signals
investment in greater supply. There is an initial “supply push” and subsequent “demand pull” (Dosi 1982).
Then, both capital and the product are incrementally upgraded as the technology passes through its
exponential growth stage. As opportunities for product and capital improvement diminish, so too do
opportunities for market expansion and sales. The product and its corresponding industry mature.
Importantly, incremental innovation during exponential growth is motivated by the desire to
outmaneuver progressively stiffer competition. Per Schumpeter, the assumption is that entrepreneurial
firms seek temporary monopoly rents that accrue from innovation, either by being first to bring a product
to market or by achieving “differential advantage” —i.e., offering a familiar product with unique and
desirable features, such as high quality, customer service, member rewards, or club goods. Notice that
rents flowing from innovative activity are, along with cost advantage, a component of profit. As is well
known, profits are temporary in competitive markets because efficient firms will enter industries until
there are no profits to be had (Marshall 1890). Competition drives down prices and profits until firms
operate at cost. Similarly, differential advantages are fleeting because entrants will tailor their production
to profitable avenues.
It is widely accepted that free markets gravitate toward monopoly as competition thins, leaving
only largescale, cost competitive firms to remain. In a brilliant insight, Schumpeter also observed a
tendency toward technological monopoly, his theory of which complements the standard theory of
monopoly. Schumpeter argues that opportunities for incremental innovation will prompt entrants.
Empirically, this rule appears to hold even for industries with very high barriers to entry, such as aerospace
and automobiles (Caves & Porter 1977; Geroski 1995). However, as opportunities for incremental advance
are exhausted, diminishing sales prompt mergers and acquisitions in order to protect profits. Thus, the end
stage of technological growth is monopoly, which permits price increases and, consequently, profits in
the form of monopoly rents. Importantly, diminishing profits toward the end of the technological growth
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curve do not prompt firms to invest in new, subsequent wave technologies. There is insufficient incentive
to engage in costly “creative destruction” of existing productive capital, supply chains, and final demand
linkages. Rather, firms will opt to initiate creative destruction only if they are unable to obtain
technological monopolies by way of mergers and acquisitions.
It should be clear by now that, while incremental innovation involves upgrading existing
productive capital, subsequent wave innovation involves starting from scratch; it involves investments in
radically innovative prototypical capital. Although much of the literature has focused on socially
disruptive “revolutionary” technologies, the theory applies to more mundane advances as well (cf. Arthur
2009; Perez 2010; Schwab 2017). Consider the shift from carburetion to fuel injection in gasoline engines.
Or the transition from the cathode ray tube to LCD television. In both cases, productive capital and supply
chains had to be dismantled and created anew to accommodate the innovation, yet these products caused
little social disruption in the grand scheme of things. The more pertinent question, however, is whether
the innovations caused disruption in their respective industries. Given that fuel delivery is a relatively
minor component of automobile technology, the shift from carburetion to fuel injection was relatively
undisruptive (although some firms suffered considerably diminished sales as the mass market for
carburetors shifted to a specialty market). The obsolescence of the cathode ray tube was much more
disruptive, corresponding with the demise of television production in most countries outside of Southeast
Asia.
The above example reveals a link between type of innovation and amount of creative destruction.
Relatively little social disruption in the cases of fuel injection and LCD follows from the fact that these
substitutes involve upgrading. Unlike sui generis innovation, upgrading only involves creative destruction
of supply chains; it does not involve creative destruction of final demand linkages, nor does it involve
reorientation of consumer tastes and habits. For their part, while restructuring and late mover innovation
involve creative destruction —of supply chains in the former and of both supply chains and final demand
linkages in the latter— the cost of destruction is liable to outweigh the benefits of creation. This is because
supply chain and final demand industries will be more mature and presumably more competitive further
along on the logistic growth curve. If newly created supply chains and final demand linkages are
inefficient and uncompetitive, one of two things will occur: (1) inefficient supply chains and/or final
demand linkages will make the new industry less efficient on the whole, or (2) the new industry will
integrate into existing supply and/or marketing chains, in which case positive synergies associated with
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innovation are forfeited to “leakage.” Leakage is problematic insofar as investment is intended to stimulate
new economic activity (as opposed to maximize efficiency and individual profits).66 I return to these
themes in the sections to follow.
An important implication of the theory outlined in this section is that, although opportunities for
entrepreneurial profits from subsequent wave innovation may exist, we should not expect established
firms to instantiate subsequent wave innovation. While it is true that established firms do invest in
prototypical subsequent wave capital, evidence suggests that the incentive is to forestall, not prompt,
innovation that will undermine the firm’s established operations. This is accomplished by withholding
patents on new, prototypical innovations (Gilbert & Newbery 1982). If, however, competition policy
forces large firms to relinquish patents, the incentive for research and development remains, but the
behavioural response changes; firms diversify, establish subsidiaries, and integrate horizontally (Greis,
Dibner & Bean 1995; Lee 2009).
Before moving on, a point made earlier in the thesis warrants repetition. Recalling the discussion
of “good” versus “bad” industrial policy from Chapter 1, it is important to keep in mind that, although
radical innovation is at the sunrise pole of the sunrise-sunset continuum, the continuum is not intended to
convey a range from “best” industrial policy to “worst.” As discussed in detail below, niche advantage in
incrementally innovative technologies is just as good as, and perhaps even better than, niche advantage in
radically innovative technologies.
3.1.2 Competitive advantage and the opportunity niche
The previous section alluded to the fact that competition both affects and is affected by the process
of technological innovation. Graphically, competition takes the shape of an inverted parabola (Aghion et
al. 2005). Competition is non-existent during prototypical technological development, increases
66 Ethanol technology is a clear case in which competitiveness of existing final demand linkages for conventional gasoline
severely hindered the competitiveness of the new technology, as ethanol could not be piped or tanked along with conventional
gasoline. Transgenic grains constitute another case in which competition in forward linkage industries threaten the
competitiveness of new technology. However, transgenic grains are in sufficient demand that parallel marketing systems for
genetically modified and organic produce have been established. Consequently, there is more economic activity overall.
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exponentially in tandem with incremental innovation during the exponential growth stage, and falls away
as industries consolidate. Figure 3.2 shows the relationship between competition and technological growth
Figure 3.2: competition and technological development
Given the time-sensitive and contingent nature of technological development, opportunities to eke
out a competitive position appear at one moment and vanish the next. How do entrepreneurial firms effect
the right kind of innovation at the right time? That is, what, besides luck, facilitates the appropriate capital
upgrades when the moment is opportune for incremental innovation? Even more vexing is the question of
what encourages the creative destruction of capital stocks when the time is ripe for subsequent wave
innovation. These questions inquire into the sources of competitive advantage.
Competitive advantage is a function of cost advantage and differential advantage (Porter 1990).
Cost advantage is the ability to produce goods and services more efficiently than competitors. Differential
advantage refers to the ability to offer a particular product quality more effectively than competitors. As
noted earlier, differential advantage can relate to the objective quality of the good (e.g., light weight,
durable), service components (e.g., customer service, warrantees), or club goods (e.g., special offers for
members).
Although there is a general consensus that institutions, factor endowments, industrial structure,
competition, and demand conditions determine competitive advantage, this realization does not get us
very far. Moreover, we have seen that firms successful in achieving competitive advantage at one point in
time are liable to quickly lose their competitive position as capital investments are matched and surpassed
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by rival firms. The question is how to establish, sustain, and build upon competitive advantage in an
upward trajectory. That is, how does a firm go about carving out an opportunity niche?
Recall that an opportunity niche refers to specialization in high return and synergistic goods,
industries, or sectors. Along these lines, Porter (1990) notes that successful industries consist of clusters
of firms comprising “value chains” —networks of suppliers and end users who coordinate with the
purpose of creating and sustaining competitive advantage. The implication is that firms often do not
innovate on their own; rather, opportunity niches are a consequence of coordination and joint production.
According to Porter, essential ingredients for successful and sustained innovation are: competition and
efficiency, continuous investment in product improvement, and willingness to spin off into
complementary ventures (see also Grossman & Helpman 1991).
Porter’s perspective was by no means new when he wrote his eight-hundred and fifty page
magnum opus, The Competitive Advantage of Nations. Ronald Coase had been talking about coordination
and industrial integration since the 1930s. Coase’s student, Oliver Williamson, had moreover made
impressive strides in transaction cost theory by the mid-1980s (Williamson 1985). The puzzle confronted
by these economists, and the firms who hoped to learn from them, was how to forge collaboration required
for positive sum growth when wariness of exploitation (i.e., free riding) inhibits any player from making
the first move toward establishing a virtuous cycle of cooperation. That is, how do industries overcome
hold up problems preventing collective action? Phrased in analytical terms, how do industries effect joint
production when the game is a prisoner’s dilemma?
As was discussed at length in the previous chapter, collective action often requires the provision
of public goods, either because private actors do not possess all of the competencies required to achieve
their goals (and because investment in obtaining competence is hindered by hold-up) or because
transaction costs are prohibitive. Consequently, many have emphasized the importance of public
institutions —namely universities and government— in the creation of niche advantage (Etzkowitz &
Leydesdorff 1996). For instance, much like Porter, Kline and Rosenberg (1986) highlight the importance
of continuous information flows between knowledge producers and knowledge users in the creation of
productive synergies, much like Porter. But since knowledge producers and knowledge users are dispersed
throughout the economy, universities, research councils, and professional associations (all public goods)
are required to coordinate interactions and knowledge flows, which may also involve absorbing the
associated transaction costs. As mentioned in Chapter 1 and demonstrated formally in Chapter 2, the state
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will often be called upon to shoulder all or a portion of the costs of economic coordination. For the most
part, economists agree this is appropriate, especially when producers’ margins are too narrow for producer
associations to be self-financed (Humphrey & Schmitz 1996).
So far we have seen why microeconomic institutions might be necessary to obtain and maintain
niche advantage: seizing and sustaining opportunity niches demands coordinated production. Notice that
the microeconomic institutions assumed to foster competitive advantage are identical to those assumed to
govern interactions and transactions within regimes. Ergo, regimes seek to establish niche advantage. On
the subject of economic institutions, I would be remiss if I did not also mention the role of macroeconomic
institutions in the cultivation of niche advantage (e.g., capital controls, exchange rate and interest rate
manipulation, taxation and redistribution, and various other means of deliberately getting prices “right”
or “wrong”) (Amsden 1989; Neely 1999). Finance, monetary, and fiscal policies such as these bear
significantly on productive opportunities available to regime actors. Moreover, these institutions tend to
be specific to countries (Baccaro & Pontusson 2016; Hope & Soskice 2016; Zysman 1983). As we have
seen in previous chapters, and as will be discussed in more detail below, institutions germane to the
political economy have both a direct and indirect influence on opportunities available to regime actors:
direct because they affect actors’ resources and representation; indirect because they influence the
microinstitutional structure of regimes.
Virtuous cycles are not guaranteed, of course, as institutions can easily lock societies in to
suboptimal trajectories (Evans 1995). Although the retrospective lesson seems to be that societies advance
by importing the best technologies and most efficient institutions, the time-sensitive and contingent nature
of technological progression ensures that so-called “functionalist” theories explain the past much better
than they predict the future (Acemoglu & Robinson 2013; North 1990; Przeworski 2004). This fact does
not rule out the detection of regularities or debase the value of hypothesis testing, however.67 Rather, it
sensitizes us to the fact that institutional functionality should not be taken for granted. Indeed, it has been
shown that functions served by institutions may be unintended or even perverse (Hacker 2005).
The discussion to this point has established two premises. First, progress is a function of
competitive advantage, which is secured and sustained by seizing upon opportunity niches. Second,
67 Nelson and Winter (1982) acknowledge that technological progression is stochastic, uncertain, and experimental, yet
appreciate the importance of institutions governing organizational routines, the evaluation of routines, and what they call the
“selection environment” in the history of technological development
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institutions structure the process by which competitive advantage is achieved. Therefore, institutions
determine technological trajectories, which may or may not be optimal. Yet, technological trajectories do
not last forever; the logistic growth curve ends at a certain point. Thus, even if institutions and firms lock
in on an optimal trajectory, opportunities to exploit technological synergies will eventually run out.
Industries will gravitate toward monopoly, the global political economy will gravitate toward hegemony,
and political history will end (Fukuyama 2006). The implication is that society-wide creative destruction
is required to shake the polity and economy out of stasis. Although social upheaval is by no means
guaranteed to be creative (indeed, many revolutions are simply destructive), crisis or exogenous shock is
seen by many as a pre-requisite for paradigmatic change (Mokyr 1990; Olson 1982).
Although I appreciate the elegance of the view just described, it is clear that tendencies toward
monopoly in the modern economy do not constitute an empirical law. Presumably, this is because
policymakers intervene to preempt the natural course of things.68 Consequently, my skepticism is not an
indictment of economic theory, which I consider to be highly robust. The anomaly follows from the fact
that standard theory purports to explain an economic system that thankfully does not exist, at least not in
toto. Innovation does not require all-out crisis because creative destruction, painful as it may be, is ongoing
in the modern economy. Because creative destruction is painful for firms, much of it is facilitated by
governments under the auspices of industrial policy.
What does the conscious execution of creative destruction entail? Destruction is fairly
straightforward: firms stop producing and liquidate their capital. Creation, on the other hand, requires
competence, which must be acquired somehow. There are three methods for acquiring competence, only
two of which involve learning. A jurisdiction can acquire competence without acquiring knowledge if it
solicits investment from firms that keep a tight lid on their intellectual property, as is common in cases of
foreign direct investment (FDI). Conversely, a jurisdiction can acquire competence by building up its own
knowledge from available stocks —a process known as “learning by doing.” Finally, competence can be
acquired by building upon proprietary knowledge inherited from elsewhere —a process known as
“learning by searching” (Lundvall 1988). The next section investigates the determinants and effects of
each method of knowledge acquisition.
68 The end stage of the natural progression being either (a) economic breakdown, if we are to take liberal or Marxist views,
or (b) socialist dystopia, if we are to go the Schumpeterian route.
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3.1.3 The knowledge transfer trade-off
As we have seen, adequately explaining innovation requires a theory of competence acquisition.
Competence can be imported without knowledge transfer, as in most cases of foreign direct investment
(FDI). Alternatively, knowledge can be inherited from elsewhere (“learning by searching”), or developed
endogenously (“learning by doing”). The following discussion answers three questions. First, is there a
rationale for adopting one means of acquiring competence over the others? Second, does the method
chosen for acquiring competence follow from certain conditions? Third, are some institutions biased
toward specific types of competence acquisition?
The question of preference for endogenous versus outside competence acquisition evokes a
familiar conundrum: do it yourself or pay someone else to do it. Although we may regret our decisions
with the benefit of hindsight, people are usually capable of making maximizing decisions in the moment
based on the information available to them. Although soliciting services from elsewhere will be more
costly, ceteris paribus, than working for oneself, if learning is involved, the steepness of the learning curve
may produce costly inefficiencies. In such cases, it may be more cost effective to contract out. On the
other hand, if learning by doing can be seen as an investment in developing skills that have prospects for
future return, then short run inefficiencies may be offset by long run gains. Finally, between doing oneself
and contracting, there is an instructional possibility whereby competence is both purchased and
transferred. The latter avenue circumvents at least some of the learning curve while still transferring
knowledge to the purchaser.
Knowing which route to take depends on the costs and befits of each option. The rational choice
is simple: select the alternative for which benefits most exceed costs. However, if costs paid for outside
competence equal costs incurred developing knowledge in house, the choice represents a bona fide trade-
off: pay now for short-term gratification and forego long term reward, or forego short-term gratification
in exchange for long-term reward. I call this the knowledge transfer trade-off.
The knowledge transfer trade-off exists on a continuum. Consider the extremes. At one extreme,
the purchaser obtains a good or service for a one-time payment but cannot reproduce it. At the other
extreme, costs are incurred learning by doing, and possibilities for improvement and reproduction are
potentially boundless. In the middle of the continuum are intermediate cases wherein knowledge is
transferred to the purchaser. In such cases, reproduction is possible and will likely become more efficient
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with each unit produced; however, rents may have to be paid at regular intervals in the form of licensing
fees, royalties, or professional dues. Substantively, the knowledge transfer trade-off implies that importing
knowledge is cost effective in the short term but costly in the long run. Conversely, developing indigenous
knowledge can be very costly in the short term but is cost effective in the long run. Holding all else
constant, there is no inherent advantage to one method of acquiring competence over another.69
Having established there is no obvious rationale for why a jurisdiction should opt for a particular
method of acquiring competence, the next task is to determine whether some conditions are conducive to
certain types of competence acquisition. Obviously, indigenous capacity for learning and the current point
on the technological growth curve factor significantly into whether endogenous learning is advisable or
even possible. Inversely, if the price of foreign competence is high, as it may be in a monopolistic situation,
it may be more cost effective to develop competence in house, inefficient as that route may be. The ideal
situation —and one which I suspect is correlated with successful late innovation— is one in which
jurisdictions obtain foundational knowledge cheaply (e.g., at monopsony prices) and incrementally build
competence endogenously.
Clearly, a jurisdiction’s capacity to either build or buy competence are critical circumstantial
factors affecting the decision. As noted in previous chapters, the business cycle will bear to some extent
on such circumstances, as tautness in the economy drives up demand and prices for most goods, including
competence. By contrast, slack in the economy corresponds with lower demand and lower prices, as does
technology in its infant or prototypical stages. As seen in Figure 3.2, competition is low at the beginning
of the technological growth curve, implying little demand and monopsony prices.
What about institutions? Do institutions germane to liberal and coordinated political economies
differ with respect to the type of knowledge acquisition they encourage? Regime theory predicts they do.
As demonstrated in Chapter 2, the fact that institutions in liberal political economies permit cost
externalization translates to an expansive policy possibility space, meaning that any means of competence
acquisition may be pursued with comparatively little regard to cost. The institutions of coordinated
political economies, on the other hand, do not permit excessive cost externalization, yielding instead a
69 The ceteris paribus condition makes this statement tautological. The assumption is that costs and benefits associated with
each approach are equal. Skeptics may question whether this assumption ever holds in the real world. Does not the fact that the
long run is infinitely long imply that it will always be more cost effective to develop knowledge in house? The answer is no;
technological obsolescence ensures that returns to investment in knowledge acquisition will diminish over time (and in some
cases quite quickly).
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constricted policy possibility space. Consequently, regimes in coordinated political economies are
anticipated to pursue the acquisition of competence only when it is cost effective, suggesting a bias toward
endogenous learning and competence sold at monopsony prices.
Following the preceding logic, to the extent that regimes in coordinated political economies learn
by searching, they are expected to acquire low-cost, prototypical knowledge and incrementally improve
upon it in house. Regimes in liberal political economies, by contrast, are expected to acquire knowledge
any manner of ways. However, because regimes in liberal political economies are vulnerable to dissolution
as a consequence of electoral punishment for costly policies, regimes are expected to be short-lived. This
implies that regimes in liberal political economies will generally lack capacity for incremental innovation
because building that capacity requires some degree of organizational permanence and longevity. As
argued in Chapters 1 and 2, we should only expect durable regimes in coordinated political economies.
However, as also noted in Chapters 1 and 2, the ability for regimes to quickly dissolve and mobilize anew
in liberal systems is assumed to translate to greater responsiveness in the presence of opportunities.
Responsiveness, coupled with institutions that permit risk seeking behaviour, is assumed to yield liberal
advantage in radical and first wave innovation.
The hypothesis regarding liberal and coordinated advantage in different types of innovation is
conveyed in Figure 3.3. Regimes in liberal political economies are hypothesized to possess greater
advantage in radical and first wave innovation; regimes in coordinated political economies are
hypothesized to possess greater advantage in incremental and subsequent wave innovation. As discussed
in Chapter 1, liberal political economies are hypothesized to possess greater overall advantage in first
wave technologies because regimes therein are expected to bringing first wave products to market. By
contrast, liberal political economies are hypothesized to possess advantage only in the radical phase of
subsequent wave innovation because, although they are expected to patent subsequent wave technologies,
capital costs sunk in previous pursuits deters the creative destruction required to bring subsequent wave
technologies to market. Instead, regimes in coordinated political economies are hypothesized to acquire
radical subsequent wave technologies at low cost from firms in liberal political economies. Regimes in
coordinated political economies are then assumed to undertake commercialization by way of endogenous
learning. This tendency yields an overall advantage in subsequent wave innovation for coordinated
political economies.
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Figure 3.3: innovation and institutional advantage
Empirical research conducted to date has found support for the premises outlined above. As
discussed in greater detail later in this chapter, analysis of export and patent data by varieties of capitalism
scholars has found greater specialization in radically innovative technologies among liberal political
economies, and greater specialization in incrementally innovative technologies among coordinated
political economies (Akkermans et al. 2009; Hall & Soskice 2001). What is more, Dilli, Elert and
Herrmann (2018) found that, although there is more perceived opportunity for radical innovation in
coordinated political economies, there is greater incidence of radical innovation in liberal political
economies.
This section identified competition, competence, and technology as important situational variables
affecting activities pursued by industrial policy regimes. This section has also drawn attention to the
correspondence between institutions and innovation strategy. The key insight is that, although regimes in
liberal political economies are relatively free to engage in all manner of costly pursuits, liberal institutions
beget advantage in radical and first wave innovation. Institutions endemic to coordinated political
economies, by contrast, encourage the advantageous pursuit of incremental and subsequent wave
innovation. The next section closes the remaining gap between circumstance and strategy by deriving
behavioural hypotheses from the agential and structural composition of industrial policy regimes.
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3.2 Coordination and competition
As illustrated in Chapter 2, regime theory consists of both a general theory of collective action and
a general theory of regime reproduction. Regime theory elucidates why regimes mobilize, the terms and
patterns of exchange within regimes, and the basic parameters governing bargaining and exit. Questions
not answered by regime theory pertain to: (1) the identity of the actors involved in joint production, (2)
actors’ arrangement within regimes, (3) the substance of production (i.e., what is actually produced), and
(4) the details of how production is carried out. Answering these questions entails the specification of
models of industrial policy regimes.
The following subsections review three separate but complementary literatures in order to establish
expected patterns of production in liberal and coordinated political economies. The varieties of capitalism
literature posits that liberal political economies are defined by fluid organizational structures governed
predominantly by competitive market mechanisms. Coordinated political economies, by contrast, are said
to be characterized by comparatively dense organizational structures wherein cooperation is the dominant
ethos (Hall & Soskice 2001). The literature on innovation systems, industrial clusters, and the “triple
helix” emphasizes that the production of goods and services by regimes is a function of information and
resource flows between regime agents (Lundvall 1988). Finally, the literature on neo-corporatism and
networks explains how regime composition and the identities of regime participants influence
intermediation and bargaining (Schmitter & Lehmbruch 1979).
Consistent with the central thesis put forward by varieties of capitalism scholars, the following
discussion demonstrates that industrial policy regimes can be arrayed on a continuum that ranges from
fully cooperative to fully competitive. However, this discussion contributes to varieties of capitalism by
more clearly elucidating patterns of coordination and cooperation in regimes located on the liberal side of
the liberal-coordinated spectrum. The discussion makes evident that tremendous variation is possible with
respect to regime composition. Yet, I demonstrate later in the chapter that compositional variation can be
distilled into four archetypical models of industrial policy regimes, each of which is poised toward a
specific type of innovation, but not all of which are equally likely to achieve or sustain their goals.
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3.2.1 Varieties of capitalism
Varieties of capitalism scholars are interested in how national institutions encourage behavioural
patterns that lead to comparative economic advantage (Hall & Soskice 2001; Soskice 1997). Thus, a core
concept of varieties of capitalism is comparative institutional advantage. Although steps have since been
taken to “bring the state back in,” varieties of capitalism was decidedly “firm-centric” in its original
formulation (Hall & Thelen 2009; Hancké, Rhodes & Thatcher 2007). Varieties of capitalism scholars
hypothesize that successful firms adopt strategies suited to the institutional rules of the game in their
respective political economies. Similar to Porter’s (1990) argument, although the institutional milieu in
which firms are situated matters tremendously, firm strategy is assumed to determine which sectors,
industries, and nations achieve success.
Yet, institutions often grant representation to interests other than business, which requires that
accommodation be built into firm strategy (Iversen 1998). Consequently, varieties of capitalism scholars
place considerable emphasis on bargaining and interest intermediation. This emphasis is especially true
with respect to “coordinated market economies” (CME) prevalent in central and northern Europe and
Southeast Asia. Emphasis on bargaining makes varieties of capitalism theory amenable to regime theory
and vice versa. However, varieties of capitalism theory so far lacks two features that, if elaborated, would
make it a more fulsome theory of political economy. One is a formalized microfoundational account of
how firms and other partners create and maintain competitive advantages via processes of joint production.
While varieties of capitalism theory says something about intermediation and resource distribution, it is
thin on questions of compositional structure —it lacks the concept of regime. The other missing feature is
a macropolitical theory akin to the theory of regime reproduction outlined in Chapter 2 (but see Iversen &
Soskice [2009] for progress on this front).
The remainder of this section will review the institutional and behavioural hypotheses of varieties
of capitalism, outline their complementarities with regime theory, discuss the state of empirical evidence,
and summarize some of the current debates. Given that varieties of capitalism theory is concerned with
the production of goods and services, it goes further than generic regime theory in specifying relevant
actors and organizations (Thelen 2014). However, varieties of capitalism theory remains sufficiently
general that it does not delve into matters of organizational structure and exchange therein. These latter
themes are taken up in the literatures reviewed in the subsections to follow.
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As mentioned above, the crux of varieties of capitalism is that behavioural regularities follow from
two ideal typical institutional configurations. One configuration is the “liberal market economy” (LME)
whereby institutions generally encourage competition and relatively free movement of capital and labour.
The other archetypical configuration is the “coordinated market economy” (CME), wherein institutions
encourage coordination by regulating capital flows and the movement of labour. LMEs consist of the
Anglo-Saxon countries, namely the United States, Canada, Australia, Ireland, New Zealand, and Great
Britain. CMEs include Germany, Sweden, Norway, Switzerland, Finland, Denmark, Belgium, the
Netherlands, Austria, Japan, and South Korea. Importantly, no country conforms perfectly to either the
LME or CME ideal type. Rather, real-world LMEs and CMEs cluster on a continuum that spans from
most competitive to most coordinated (Hall & Gingerich 2009). Although they acknowledge some
variation within clusters, Hall and Soskice (2001) argue four behavioural regularities follow from the
institutions governing the economy. I will discuss each in turn.
First, dispersed shareholding in large, transparent equity markets encourages firm strategy in
LMEs to be based on current market valuation (i.e., profitability). The associated behavioural response is
frequent mergers and acquisitions, including hostile takeovers, which are assumed to be unregulated in
the LME ideal type.70 Because access to financing is contingent on market valuation, firms without
demonstrable profits receive support primarily through equity financing or outright acquisition, although
the latter strategy may be employed simply to snuff out competition (Cunningham, Ma & Ederer 2018).
By contrast, cross-shareholding and networked employer associations in CMEs allow information about
current and future profitability to be exchanged privately. The behavioural response is firm strategy based
on medium- and long-term agreements with reputable partners, making mergers and acquisitions less
frequent in CMEs (Soskice 1997).
Second, because vocational training is relatively unstructured, labour markets comparatively
unregulated, and industry associations fairly weak in LMEs, workers are expected to invest in general,
transferable skills, not firm- or industry-specific skills. The opposite is true in CMEs, where trade unions
and employer associations oversee collaborative training programs that provide workers with industry-
70 Interestingly, although the United States is assumed to be the archetypical LME, competition policy which regulates mergers
and acquisitions is comparatively stiff in the US by international standards. Recall from the discussion in Chapter 2 that the
United States falls in the middle of Lijphart’s macropolitical friction scale, not to one end as its status as the LME ideal type
might suggest.
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specific skills and guaranteed employment. Consequently, employees are expected to remain with firms
indefinitely in CMEs. By contrast, workers are expected to move from firm to firm, and even from industry
to industry, in LMEs.
Third, because skills development is based largely on market principles in LMEs, technology
transfer and knowledge acquisition is achieved mostly through mergers and acquisitions, patent licensing,
and contracting expert personnel. Conversely, because technical competence is tethered to specific
individuals and firms in CMEs, it is disseminated throughout industry networks (i.e., regimes) via firm-
to-firm interfacing and collaborative training programs.
Finally, top managers enjoy considerable authority to dictate firm strategy in LMEs, which may
involve substantial layoffs. This institutional feature of LMEs creates a competitive labour market that
influences the calculi of both workers and firms. Not so in CMEs, where labour representation and
corporate decisionmaking networks encourage more consensual modes of strategizing. Recall from the
discussion of social choice in Chapter 2, the more veto players involved in decisionmaking, the more
constrained the choice possibility space.
Regarding the aggregate effect of the four institutional differences, Hall and Soskice (2001)
hypothesize LME advantage in radical innovation and CME advantage in incremental innovation (they
do not distinguish between first and subsequent wave innovation). Hall and Soskice’s argument is that
liberal institutions encourage the sort of responsiveness and risk taking required for radical innovation.
Coordinated institutions, meanwhile, facilitate the synergies among producers required for incremental
innovation. Looking at export data from two periods (1983-84 and 1993-94), Hall and Soskice find clear
support for the hypothesis.
Notice that while varieties of capitalism theory and regime theory make similar predictions for
similar reasons, the institutions upon which varieties of capitalism are based are not identical to those
identified and emphasized by regime theory. Rather, varieties of capitalism is focused primarily on
institutions affecting firms, whereas regime theory is based primarily on political institutions. Although
Chapter 2 theorized about the correspondence between macropolitical friction in the polity writ large and
micropolitical friction at the regime level, it remains to be seen whether Lijphart’s (2012) macropolitical
friction index correlates positively with similar measures devised by varieties of capitalism scholars to
represent micropolitical friction.
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Drawing on Hall and Gingerich’s (2009) indexes of coordination in corporate governance and
labour relations, Figure 3.4 depicts the correlation between micropolitical and macropolitical friction.71
The scatterplot confirms that LME and CME countries cluster according to institutional density, as
varieties of capitalism and regime theory predict. To the extent that within-group variation is discernible,
it is most evident with respect to Ireland and Switzerland. Both countries fall in the lower right quadrant
of the plot, which represents the unusual institutional combination of high macropolitical friction and low
micropolitical friction.
Figure 3.4: correlation between micropolitical friction and macropolitical friction
71 The single index of micropolitical friction is generated simply by adding Hall and Gingerich’s two indexes together, hence
a range of two units instead of one.
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Based on Hall and Gingerich (2009), Lijphart (2012). Pearson correlation coefficient: 0.57, significant at 1% level.
It should be apparent by this point that the distinction between liberal and coordinated systems is
robust; the countries of the world do indeed cluster into distinct types. Notice, however, that countries not
identified as either liberal or coordinated reflect unique combinations of micro- and macropolitical
friction. Hall and Soskice identify these countries —namely, France, Italy, Spain, and Portugal— as
“mixed market economies” (MME). Others, meanwhile, have identified distinct institutional
configurations among Mediterranean and Eastern European economies as well, suggesting there are
potentially as many varieties of capitalism as there are countries in the world (Dilli et al. 2018; Gelissen
& Arts 2002; Jessop 2011). However, per the leverage principle, social science should strive to achieve
the optimal balance between explanation (i.e., variance explained) and generalization (a limited number
of variables) (King, Keohane & Verba 1994). Though achieving maximum leverage may entail the
specification of more than two varieties of capitalism, temptation toward idiography should be resisted.
On the issue of hybrid types, Schneider and Paunescu (2012) observe that many CMEs have
moved closer to the LME since 1990, leading them to conclude that there is greater variation in the
varieties of capitalism than implied by Hall and Soskice (see also Deeg & Jackson 2007). Yet, Schneider
and Paunescu acknowledge that CMEs that have gravitated toward LME institutions are also those that
have diversified into high tech (i.e., radically innovative industries), lending support to the premise that
there is a correspondence between institutional configuration and product specialization.
Others, meanwhile, have called into question the evidentiary basis of institutional advantage. For
instance, Taylor (2004) analyzed patent data over a thirty-six year period and found that almost all of the
variance observed by Hall and Soskice is attributable to the effect of the United States. Akkermans,
Castaldi, and Los (2009), however, analyzed similar data and found mixed support for Hall and Soskice’s
claims. More recently, Dilli, Elert, and Herrmann (2018) looked at entrepreneurial activity and found four
“varieties of entrepreneurship” that generally support Hall and Soskice’s premises. My own view is that,
although the jury is still out on whether institutions correspond with realized competitive advantages in
certain sectors, the rigorousness of the theory speaks to the plausibility of the hypothesis. The next task
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for researchers interested in the institutional determinants of innovation is to devise a research program
that subjects varieties of capitalism and regime theory to a relentless battery of tests.72
As mentioned in the conclusion of Chapter 2, regime theory neither reinvents the wheel nor stands
as a contender to displace established theories. Rather, regime theory complements and modestly builds
upon the current state of the art. The aim of this section is twofold. First, I have endeavoured to showcase
the complementarities between regime theory and varieties of capitalism, Second, I have tried to highlight
areas where regime theory can be used to answer lingering questions of interest to varieties of capitalism
scholars. One such question pertains to the effect of macropolitics on joint production. Another concerns
how joint production plays out in liberal political economies. According to the theory devised in Chapter
2 and the discussion of the knowledge transfer trade-off earlier in this chapter, regimes in liberal systems
execute joint production expeditiously by acquiring required competence whose costs may be externalized
with relative ease. Incidentally, macropolitical institutions determine the ability of regimes to externalize
costs —and, therefore, to act expeditiously— by granting or denying political representation to affected
groups.
As demonstrated by the preceding discussion, several implications that follow from regime theory
have been demonstrated empirically by varieties of capitalism scholars, such as the correspondence
between micro- and macropolitical institutions as well as institutional competence toward types of
innovation. Although much more empirical work remains to be done, we can be cautiously optimistic
about the robustness of these theories. With respect to questions hitherto unanswered by varieties of
capitalism scholars, regime theory provides an account of coordination in liberal regimes that is vague if
72 Three issues with current empirical research on institutional advantage stand out, all of which concern coding schemes.
Current patent coding schemes conflate radical patents with influential patents, on one hand, and improperly differentiate
radical from incremental innovation, on the other (Akkermans et al. 2009). The distinction between radical and non-radical
should hinge on a patent’s novelty, regardless of whether it is influential. With respect to the radical-incremental distinction,
technologies that manifest from combinations of existing technologies should be considered incremental, not radical.
Distinguishing between radicality and influence is crucial, as it allows researchers to observe both successes and failures in
radical innovation. Current measures of radicality capture only successful innovations. Moreover, as discussed above, while
each wave of innovation has both radical and incremental phases, there has been a tendency to confuse incremental with
subsequent wave innovation. Regarding institutions, more sensitive measures of institutional density may explain a greater
amount of the variance observed between cases than the simple LME-CME dichotomy. Although useful, Lijphart’s (2012)
index can be improved and expanded. With respect to improvement, the index could be rendered dynamic. As it stands, the
index is representative of average scores over a period spanning several decades. These data can and should be annualized so
as to make analysis more precise. Regarding expansion, the scope of the data should be extended to cover more countries and
subnational polities. The index could also incorporate measures of corporate integration and labour coordination (cf, Hall &
Gingerich 2009).
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not absent in varieties of capitalism. Moreover, regime theory links a theory of cost externalization to
capacity for innovation, thereby providing a complementary account to that given by varieties of
capitalism scholars regarding differential capacity for innovation in liberal and coordinated political
economies.
Although varieties of capitalism and regime theory appear to perform well as general theories, they
lack detail required for bona fide models of industrial policy. The next sections review the literature that
examines innovation, industrial policy, and interest intermediation with a more granular lens than either
generic regime theory or varieties of capitalism. The aim is to gain an appreciation of the agential and
structural composition of industrial policy regimes in different situational contexts. Later in the chapter, I
draw on insights from these literatures to develop four archetypical models of industrial policy regimes.
3.2.2 Innovation systems, clusters, and helixes
In the previous section, I argued that regime theory and varieties of capitalism exist at a fairly
general level of abstraction. This section and the next summarize two broad bodies of literature that
undertake more proximate analysis of innovation, industrial policy, and interest intermediation. The
literature on the determinants of technological innovation analyzed in this section focuses on relationships
between government agencies, universities, and firms. The literature on corporatism and networks
discussed in the next section focuses on relationships between government, business, and labour. Although
it lacks a theoretical orientation, the descriptive richness of the innovation literature is considered a
strength by its proponents (Nelson & Rosenberg 1993: 4). In the pages to follow, I will argue the value of
descriptive studies lies in their ability to inform model-building. That is, descriptive studies are
informative for modelling the interplay between production regimes, knowledge regimes, and policy
regimes.
The notion of innovation systems dates back to Hamilton (1791) and List (1841). The
contemporary revival of the concept, however, is attributable to the Innovation Knowledge and Economics
(IKA) group at Aalborg University, which sought to integrate insights from the French tradition of political
economy with Anglo-Saxon research on innovation (Lundvall 1988). The main insight of this literature is
that trust between knowledge producers and knowledge users encourages productive synergies and, thus,
process and product innovations (Dalum et al. 1992). Because non-proprietary knowledge is generated
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within universities and public laboratories, and because government is a major consumer of industrial
output, research directors and government officials comprise two important classes of actors. However,
the national innovation systems literature also acknowledges the importance of learning and innovation
on the part of workers on the shop floor (Freeman 1995; Lundvall 1988).
Research on industrial clusters is very similar to that on national innovation systems. As discussed
earlier, the central argument in Porter’s (1990) Competitive Advantage of Nations is that competitive
advantage follows from conscious, unceasing efforts on the part of suppliers and users in value chains to
upgrade and improve goods and services. Porter diverges somewhat from national innovation systems
scholars on the importance of competition, however. Although Porter emphasizes collaboration within
industrial clusters, he also implies that innovation systems should run parallel to one another to some
extent so as to foster domestic competition. Proactive and competitive firms are critical for economic
success from Porter’s point of view.
Like innovation systems and industrial clusters, the triple helix scholarship also envisions
collaboration among government, industry, and research institutions. To the extent that triple helix
scholars contribute novel insights to the earlier literature, it is with respect to the evolution of the
relationship between the components in the helix over time. The sentiment is that government has stepped
back while universities have become more central to IR&D (Etzkowitz & Leydesdorff 2000).
Each of these three perspectives both describes and prescribes the role of firms, universities, and
government in processes of innovation. With respect to firms, there is consensus that collective and
collaborative learning among participants within value chains is integral to forging competitive advantage
and exploiting opportunity niches. That is, focus must be on innovation, not “static efficiency” (Porter
1990). Regarding how learning is achieved, aside from competence in productive processes, Nelson
(1993) highlights effective management and clear understanding of suppliers’ capabilities and consumers’
needs. Freeman (1995), meanwhile, emphasizes willingness to interact with and learn from suppliers and
sub-contractors. Along these lines, others have noted that most of the knowledge required for innovation
does not come directly from universities but rather from other sources within the value chain (Lundvall et
al. 2002). However, Freeman plausibly associates shop floor expertise and learning with incremental
innovation, while noting that external linkages between firms and the scientific community are crucial for
appropriating radical innovations (Freeman 1995: 11).
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Regarding universities, Nelson and Rosenberg (1993) point out that while universities are
indispensable for training and basic research, university faculty are not typically incentivized to engage in
IR&D. Etzkowitz and Leydesdorff (1996), however, note a push to reorient universities toward IR&D,
often against opposition from disciplinary interests. Indeed, triple helix scholars argue that universities
have supplanted the military as major IR&D drivers (Etzkowitz & Leydesdorff 2000; cf. Weiss 2014).
Yet others have argued that epistemic institutions play a supportive (as opposed to leading) role in
successful cluster development, and instead emphasize the importance of local stocks of technical and
entrepreneurial expertise (Florida 2003; Wolfe & Gertler 2003).
On the topic of government involvement, the consensus is that the state ought to provide an
environment conducive to learning and innovation. The appropriate role for government is not “fine
tuning” or to “pick technological winners,” put rather to serve as a “pusher and challenger” (Dalum,
Johnson & Lundvall 1992: 307; Porter 1990: 681). The question is: what constitutes the right type and
magnitude of fiscal policy? As noted by Lundvall (1988: 364), “in most OECD countries the establishment
of ‘science parks’ and ‘technopolises’ has become a part of industrial policy.” Moreover, the OECD has
advised governments to go beyond the mere correction of market failures to address “systemic failures,”
which cause inadequate investment knowledge-based industries due to non-appropriability of investment
returns. As a 1997 report put it: “technology policies should seek not just to diffuse equipment and
technologies to firms but also to upgrade their ability to find and adapt technology themselves” (OECD
1997: 42). Thus, although industry should ideally help itself, government may be called upon to facilitate
restructuring, perhaps by taking some of the sting out of creative destruction (Dalum, Johnson & Lundvall
1992). Finally, both Porter (1990) and Nelson (1993) point out the crucial role of government in setting
monetary and trade policies, noting that exposure to foreign competition is generally effective, if often
bitter, medicine (see also Katzenstein 1985).
The suggestion gleaned from the literature on innovation systems, clusters, and helixes is that the
appropriate role for government is to facilitate innovation by absorbing transaction costs and providing
non-appropriable knowledge as a public good. An implication seems to be that knowledge corresponding
with early stage innovation is more vulnerable to non-appropriability (and therefore underinvestment)
than knowledge related to innovation in later stages. On this point, some economists have evoked notions
of technological consolidation to determine socially optimal levels of public support for innovation. For
instance, Malla, Gray, and Phillips (2001) demonstrate that a progressively greater share of social benefits
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from investment is captured by private firms as industries mature. The implication here is that public
assistance to mature industries is only justified when two conditions hold. First, a substantial amount of
the investment must flow to wages and/or local suppliers, not be absorbed as profit or otherwise allowed
to flee the economy. Second, the Keynesian multiplier of the local economy must be favourable. I return
to the topic of social benefits of investment later in this chapter in the context of simulation models.
How does the literature on innovation systems, clusters, and helixes inform models of industrial
policy regimes? For one, this literature anticipates that government actors facilitate coordination among
firms and between firms and other actors in production and knowledge regimes. Moreover, this literature
informs us that the knowledge required to effect incremental innovation is mostly transmitted via linkages
between firms, whereas knowledge required to effect radical innovation is transmitted through linkages
between firms and research institutes. Note, however, that the shift on the part of universities from basic
research to IR&D may mean that some incremental innovation is now undertaken in the public realm.
Although all three concepts —innovation systems, clusters, helixes— are amenable to regime
theory, the correspondence between regimes and the triple helix is arguably the closest. As Etzkowitz and
Leydesdorff put it: “the overlay system ('regime') is more complex than the trajectories and patterns on
which it rests… its dynamics entrain the development of the lower-level systems” (1996: 284, parentheses
in original). That is, clusters of firms, government agencies, and research institutions are assumed to exist
below the surface of the helix. Figure 3.5 depicts the overlay described by Etzkowitz and Leydesdorff.
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Figure 3.5: the triple helix and regime theory
Although the triple helix perspective nicely captures the simultaneous segmentation and
integration of sub-regimes in regime theory, the triple helix and the other perspectives discussed above
differ from regime theory on matters of cohesion. Recalling the discussion of type from Chapter 1, regimes
vary in their density and integration. Moreover, as discussed in more detail later in this chapter, some
regimes are expected to be populated by many actors with varied roles and competencies, while other
regimes are expected to be rather sparse and homogenous. Regimes, like clusters, may also exist parallel
to, but closed off from, one another. As Bathelt and Glückler (2011:329) note, “firms may be locked out
of knowledge processes despite being co-located.” Finally, unlike the triple helix, which places
considerable emphasis on universities, regime theory anticipates a much larger role for government and
industry. Granted, this difference may be attributable to the fact that triple helix scholars focus only on
“innovative” industrial policy, whereas my analysis includes reactive and late mover industrial policies as
well.
Keeping in mind that only individuals are capable of action —not the helixes, systems, clusters,
or regimes within which they are situated— we may ask whether actors’ location and/or competencies
have any predictable effects on agents’ behaviour. On the issue of location, Wolfe, Davis, and Lucas
(2005) observe that value chains often extend beyond national borders. Indeed, there is evidence to suggest
that innovative industries exhibit tendencies toward geographical dispersion, which evokes questions
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concerning if and how value can be locally-maximized in order to prevent opportunity leakage (Cooke
2013). A major consideration is whether efforts to capture greater segments of value chains undermine
the overall competitiveness of new industries. On one hand, investment that spurs creative destruction
along entire value chains maximizes new economic activity. On the other hand, if existing backward
and/or forward linkages are capable of accommodating new technology and are efficient, integration into
existing value chains may be necessary for innovations to be viable vis-à-vis existing industries. In other
words, opportunity leakage may be necessary for new innovations to be competitive.
Four concepts from institutional economics are also useful for understanding behavioural
consequences of location and competence: transaction costs, asset specificity, separability, and task
programmability (Mahoney 1992; Williamson 1985). Recall from Chapter 2 that transaction costs are
expenses related to search, contracting, coordination, and exchange. Unlike transaction costs, the other
three concepts pertain to qualities of individuals, capital, or both. Asset specificity refers to the extent to
which knowledge, skills, or capital are confined to one use or transferable across many applications.
Separability refers to the extent to which the contribution from an input or individual is measurable.
Related to separability, task programmability refers to the extent to which contributions can be monitored.
When assets are specific, they will command lower prices because, all else being equal, fewer
available uses for assets translate to lower demand and monopsonistic prices. The ideal situation is
therefore one in which producers’ assets are specific but the good or service produced has wide
applicability. That is, benefits are maximized when asset specificity prevents regime members from
demanding rents, on one hand, while the regime benefits from diverse applications for its goods and/or
services, on the other. Even better are situations in which the regime commands monopoly prices in the
market while its members are prevented rent seeking due to asset specificity.
When contribution to output is non-separable, or when input tasks are not programmable,
assignment of rewards and sanctions is problematic. On one hand, if rewards cannot be efficiently
assigned, goods produced by groups are collective by default. As we have seen, incentive to free ride in
the cases of collective goods provision creates disincentive to contribute. On the other hand, if tasks are
not programmable, punishments cannot be effectively levied against defectors because it is unknown
whether defection has occurred. The same prisoners’ dilemma that plagues non-separability problems
dooms low task programmability. As outlined in Chapter 2, the solution to such cases of “systemic failure”
is to have the state assume the risk. The implication is that there will be more government involvement in
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industries where hold up problems are prevalent (Gray, Malla & Phillips 2001). The solution is far from
perfect, however, because moral hazard problems are liable to be accentuated in instances of public
provision.
In terms of model building, transaction costs, asset specificity, separability, and task
programmability allow for predictions to be made regarding the motivations and strategies of regime
members. For instance, it makes little strategic sense for a member to insist on rents if the regime can
obtain identical inputs from somewhere else. Similarly, it is ill advised to cheat one’s partners if defection
is easily detected and punished. For these reasons, cooperation may evolve naturally with little
government involvement in joint production (Axelrod 1984). Other times, government will have to step
up in a big way for joint production to proceed. As I will demonstrate later in this chapter, restructuring
and late mover industrial policies are particularly vulnerable to exploitation and, thus, net welfare losses.
Recalling the discussion of type from Chapter 1, “bad” industrial policy lives up to its name.
Much like the corporatist and network studies analyzed in the next section, the search for
regularities in processes of innovation tends to instead reveal idiosyncrasy. While we can comfortably
theorize about generalities of technological progression (e.g., that progression follows logistic growth
trajectories), and while we can make some behavioural predictions based on asset specificity, task
programmability, and separability in the provision of collective goods, behavioural patterns of agents
involved in the process of innovation seem to be sector- or industry-specific (Freeman 1984; Grossman &
Helpman 1991; Mahoney 1992). Thus, although some have advocated for inductive theory building under
the auspices of “grounded theory,” such an approach will be more prone to discover complexity than
empirical regularities (Lundvall 2007). As will be shown later in this chapter, industrial policy is too
complex for inductive theory building to be effective. At best, a handful of archetypical models can be
distilled from the thousands of possible types of industrial policy.
Yet, we have already come some distance toward being able to model industrial policy. However,
innovation systems, clusters, and helixes are but vague metaphors invoked to convey that organizational
structures governing the process of innovation are both variegated and complex (Nelson 1993: 521).
Questions therefore remain concerning the different ways industrial policy regimes can be organized.
These questions, along with the role of labour, are addressed in the next section.
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3.2.3 Neo-corporatism and network analysis
Corporatism originally referred to the fascist model of political economy (Borgese 1934). The term
describes a system under which the activities and operations of private economic agents are brought into
line with the goals of the state, usually under the guise of tripartism: formal coordination and cooperation
between business, labour, and government. In the late 1960s, the term was revived by Andrew Shonfield
and Philippe Schmitter to convey that democratic forms of corporatism continued to exist in Western
Europe (Schmitter 1974; Shonfield 1965). Around the same time, “systems of interest intermediation”
were identified by Schmitter as vehicles employed by “specialized associations” to bypass “more
traditional and more general partisan and legislative structures of articulation and aggregation” (Schmitter
1977: 8). Taken together, variation in so-called systems of “neo-corporatist interest intermediation” were
hypothesized to explain variation in economic outcomes across countries.
Schmitter’s initial work on corporatism juxtaposed what he considered to be the corporatist model
of interest intermediation against two others: pluralism and syndicalism. Although he acknowledged that
the three perspectives “share a number of basic assumptions,” Schmitter maintained that corporatism,
pluralism, and syndicalism differed from one another on several dimensions, including: the number of
actors represented, whether organization is voluntary or compulsory, whether constituent units are
competitive or noncompetitive, whether units are licensed/created by the state, and whether they are
granted a representational monopoly (Schmitter 1974). According to Schmitter’s scheme, pure pluralism
falls at one end of a continuum and pure corporatism at the other. At the pluralist pole, the number of
actors is unrestricted, organization is voluntary, and units are competitive. At the corporatist pole,
participation is mandatory, restricted, monopolistic, and noncompetitive. Syndicalism falls somewhere in
the middle; it is characterized by non-exclusive, non-competitive, “bottom up” coordination.
Yet, in his introductory piece on corporatism, Schmitter also articulated two subtypes of
corporatism: one that he called state corporatism, which is analogous to pure corporatism, and another,
societal corporatism, which was attributed by Schmitter to the “slow, almost imperceptible decay of
advanced pluralism” (Schmitter 1974: 106). The latter definition opened up Schmitter’s typology to
criticism from students of pluralism, who were quick to argue that, in practice, there was scarcely any
difference between syndicalism, societal corporatism, and pluralism (Almond 1983; Heisler 1979).
Indeed, since the 1950s, students of American pluralism have been well aware that systems of interest
intermediation in the United States vary considerably with respect to structure and stability. At any given
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time, depending on the issue, one could find nearly impenetrable “iron triangles,” relatively stable “policy
subsystems,” as well as loose collections of “issue networks” operating in and around the federal
government (Cater 1964; Freeman 1955; Heclo 1978).
A flurry of case studies followed Schmitter’s initial work which sought to identify systems of
corporatist interest intermediation, both in countries where one would expect to find them (e.g., Austria)
and in countries where corporatism is expected to be absent (Canada and the United States) (Atkinson &
Coleman 1989a; Katzenstein 1984; Wilson 1982). Two related issues were made evident by these studies.
One was that scholars understood corporatism to mean different things. As it turned out, one analyst’s
pluralism was another’s corporatism (Jordan 1981). The other issue was that, in cases where corporatist
systems of interest intermediation were found to be absent at the macropolitical “peak” level, systems of
corporatist interest intermediation were often found to exist at the level of sectors, industries, and firms
(Coleman 1985; Vogel 1987).
Following the realization that interest intermediation occurs at multiple levels, research on
corporatism split into two parallel tracks: one that emphasized the overall characteristics of national
political economies, and another focused on specific economic sectors. The former sought to bring insights
from corporatist studies to Nettl's (1968) prior distinction between strong and weak states. For example,
Lehmbruch (1982) distinguished the “weak corporatism” of France from the “strong corporatism” of
Austria, Sweden, and the Netherlands, and the “medium corporatism” of Denmark, West Germany and
Great Britain. Meanwhile, researchers preoccupied with developments in British industrial relations —
namely toward abortive attempts at wage bargaining in the 1970s— emphasized the need to be attentive
to interest intermediation at the “meso level” (Cawson 1978; 1985; Rhodes 1985). These two tracks of
research ran parallel in the sense that, hypothetically, the extent of corporatist interest intermediation at
different levels and in different sectors could be aggregated (e.g., factor loaded) into a single index of
national corporatism. For instance, considering Cawson’s levels of corporatism reproduced in Figure 3.6,
index values could be generated as a function of the three distinct metrics: the density of inter-firm ties
and business-government relations at the micro-level; trade union and sectoral business association
density, as well as density of associational linkages to the state, at the meso-level; and the extent of peak
organization and concertation with government at the macro-level.
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Figure 3.6: levels of corporatism
Adapted and modified from Cawson (1985).
Although there was some promising research in the 1980s devoted to the construction of country-
level indexes of corporatism (Schmitter 1981), the project ultimately floundered for two reasons. First, by
the 1990s, interest in industrial policy —and the industrial relations undergirding it— had largely subsided
as the international free trade agenda rolled out. Second, honing the conceptual and analytical tools
necessary to study network density at the meso and micro levels led many researchers to engage with
social network analysis, which had developed independently —and intentionally so— from theories of
corporatism (Laumann 1976). Consequently, a rift emerged. Scholars interested in macro-level
phenomena largely shifted their attention toward the changing (or enduring) nature of welfare states
(Esping-Andersen 1990; Mishra 1990; cf. Hollingsworth & Streeck 1994). Meanwhile, those interested in
more proximate analysis of policymaking shifted their focus to so-called “policy networks,” which
became the subject of intense theoretical and methodological debates regarding how networks ought to be
conceptualized, defined, and studied (Coleman & Skogstad 1990; Knoke, Pappi, Broadbent & Tsujinaka
1996; Rhodes 1990; Wilks & Wright 1987).
As conveyed by Figure 3.7, studies of neo-corporatism evolved rather quickly. Originally posed
as an alternative to the pluralist conception of political economy in the 1960s, by the late 1970s,
corporatism was portrayed as a multilevel phenomenon, which evolved still further toward network
analysis in the 1980s. However, the network concept was used differently by different authors from
different disciplines, culminating in two broad but distinct approaches: network typologies and social
network analysis (Adam & Kriesi 2007). Both approaches were subject to critique. The social network
approach, while praised for its scientific rigour, was criticized for being prohibitively expensive and often
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intractable (Blomquist 2007: 278). The typological approach, by contrast, was denounced for its lack of
rigour, with critics accusing its advocates of passing off mere metaphors as models (Dowding 1995).
Although subject to several apt critiques, both social network analysis and the typological
approach are defensible. Regarding social network analysis, cost and tractability is only problematic if
researchers take an inductive approach to modelling whereby network structures are generated from
empirical data that are difficult and expensive to obtain. However, for reasons both philosophical and
practical, deductive simulation-based modelling, generated not from data but from hypotheses, is a
preferred method of model building (Axelrod 1997). The proper role for social network analysis, then, is
model testing. As for the typological approach to modelling networks, many typologies can easily be
modified so as to qualify as bona fide models of interest intermediation, despite lacking the analytical
rigour of social network analysis, by incorporating behavioural hypotheses. I will briefly examine each
method in turn, beginning with the typological literature since it followed directly from prior research on
corporatism.
Figure 3.7: corporatism and intellectual evolution
The major turning point in the study of corporatist interest intermediation came in 1984 with the
UK-based Social Science Research Council (SSRC) initiative on Government-Industry-Relations (GIR).
In a widely-read volume dedicated to comparisons of government-industry relations in the United States,
Germany, and Japan, Stephen Wilks and Maurice Wright consciously departed from strong state/weak
state distinctions, and undertook instead to build “a more fine-grained analytical schema” (Wilks & Wright
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1987: 289).73 Following the GIR initiative, others sought to typify the extent to which actors were
coordinated in each policy area at each level of analysis. Along these lines, Atkinson and Coleman
(1989a,b) advanced a dual axial, eight part typology of policy networks based on the mobilization of
business interests, on one axis, and the autonomy and concentration of the state, on the other. Not long
afterward, Van Waarden (1992) extended the number of pertinent dimensions to seven to derive an eleven
category typology of policy networks.
Needless to say, typologies of policy networks were quickly becoming unwieldy (Börzel 1998).
To complicate matters further, ideational symmetry among actors was recognized as an important variable
worthy of consideration (Hall 1986; Scharpf 1987). Ultimately, typologies were intended to serve as
models of decisionmaking in which interest representation, power asymmetries, and group cohesiveness
were considered determinants of policy influence (Coleman & Skogstad 1990a; Marsh & Rhodes 1992;
Marsh 1998). The question was whether central tendencies, if they existed, could be conveyed with
intelligibility and concision (Dowding 2001).
Shifting their attention to the politics of ideas, on one hand, and institutional feedback mechanisms,
on the other, Coleman, Skogstad, and Atkinson (1996) and Howlett and Ramesh (1998) offered a greatly
simplified take on policy networks. The main argumentative thrust of this research was that policy change
and stability did not depend entirely, or even predominantly, on macropolitical forces but rather
micropolitical processes internal to policy networks. For instance, Coleman and colleagues observed the
rate and character of policy change to be a function of the ethos governing networks, with pluralist
adversarialism associated with major and rapid change, and corporatist cooperation associated with
negotiated, incremental change. Likewise, Howlett (2002) demonstrated that policy networks closed off
to new actors and ideas promote policy stability while networks open to new actors and ideas are disposed
to policy change. Incidentally, this reorientation of policy network scholarship brought studies of neo-
corporatism into line with punctuated equilibrium theory. Despite developing independently from the
scholarship on policy networks and corporatism, punctuated equilibrium theory also considers policy
stability and incremental change to follow from close quarters bargaining among stakeholders within
73 Within this new schema, Wilks and Wright defined four distinct levels of analysis —which they called policy area, policy
sector, policy subsector, and issue area— and three corresponding forms of actor aggregation —policy universe, policy
communities, and policy networks (with policy communities corresponding to both policy sector and policy subsector.
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policy subsystems; inversely, punctuated equilibrium theory considers radical policy change to follow
from the adoption of novel ideas by subsystem actors or by policy movement at the macropolitical level
(Baumgartner & Jones 1993).
Table 3.1 distills insights from the literature on policy networks into a two-by-two typology based
on network size and preference heterogeneity among actors. Four types of policy networks, and their
attendant tendencies toward policy change, are described in the cells. Types in the left-hand column are
emblematic of pluralist, liberal, majoritarian polities; types in the right-hand column are characteristic of
corporatist, coordinated, representative polities.
Table 3.1: network and policy change characteristics based on size and member preferences
number of participants
few many
preference heterogeneity
high
culture: adversarial rate of change: high frequency of change: medium type of change: major
culture: contestation rate of change: moderate frequency of change: medium type of change: intermediate
low
culture: collaborative rate of change: high frequency of change: high type of change: incremental
culture: cooperative rate of change: moderate frequency of change: high type of change: incremental
In the top-left quadrant, adversarial networks are assumed to produce stable majorities that dominate decisionmaking, yielding policy stability until the dominant coalition is overthrown, leading to abrupt and major policy change. In the top-right quadrant, contested networks are assumed to produce unstable “cycling” majorities, yielding policy instability characterized by frequent changes of intermediate magnitude implemented at a moderate rate. In the lower-left quadrant, collaborative networks are assumed to operate efficiently, responding to contextual changes with frequent incremental policy changes. In the lower-right quadrant, cooperative networks are also assumed to operate efficiently, but respond more slowly than collaborative networks due to frictions associated with larger size. Cooperation implies negative coordination and mutual adjustment, whereas collaboration implies active problem solving. Collectives engaged in the former will be slower to respond than collectives engaged in the latter.
As seen in Table 3.1, typifying networks according to networks’ group culture and openness made
it possible to advance typological models purporting to predict and explain patterns of interest
intermediation and, consequently, propensities toward policy stability and change. However, despite an
air of parsimony, these models risked conflating structure and agency. Absent a behavioural account of
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how and why network characteristics encourage certain policy outcomes, typological perspectives do not
meet the criteria demanded of genuine models. As demonstrated later in this chapter, modelling decision
situations requires that structural context be married to behavioural explanations of social choice.
At this point, it is worthwhile to emphasize that, despite some philosophical debate surrounding
methods of modelling actor interactions, the purpose of modelling such interactions is uncontroversial, or
at least it should be (cf. Dowding 2001; Marsh & Smith 2001). The objective is to explain how
micropolitical institutions create constraints and opportunities that prevent or enable actors to pursue their
goals (Scharpf 1997). Against the charge that deductive modelling assumes facts not yet in evidence, the
task is to deduce ex ante which model (among possibly dozens) is likely to apply to a given situation and
evaluate ex post how well the model conforms to reality, offering explanations for poor model fit and
updating hypotheses if necessary. The development of social network analysis is illustrative in this regard.
Social network analysis of issues related to political economy came on the scene around the time
Schmitter was busy renewing interest in corporatism (Laumann & Pappi 1976). Yet, insofar as the social
network school’s architects —Edward O. Laumann, Franz Urban Pappi, and David Knoke— consciously
eschewed notions of corporatism because the concept was not sufficiently scientific, social network
analysis and neo-corporatist theory developed almost entirely independently of one another (Laumann &
Knoke 1987: 7). Unfortunately for Laumann, Pappi, and Knoke, social network analysis did not have the
resonance among students of political economy it probably deserved. Granted, a commitment to inductive
model building based on collection and quantification of empirical data limited the appeal of social
network analysis to a small subset of researchers possessing the resources and skills to executive inductive
network analysis (Knoke 1990; Knoke et al. 1996; Laumann & Knoke 1987; Laumann & Pappi 1976).
The bigger issue was, however, that social network analysis grew out of a quantitative school of sociology
that was at odds with the largely qualitative orientation of sociological political economy (Coleman 1973;
cf. Jessop 1990).
Thus, despite being accompanied by a theory of the “organizational state” based on Anthony
Giddens’ method of structurationist inquiry, social network analysis has, perhaps unfairly, been viewed
by many as a methodological tool —and one of rather limited value— rather than an analytical framework
(Adam & Kriesi 2007; cf. Laumann & Knoke 1987). This is despite the fact that inductive social network
analysis has been used to affirm many of the deductive hypotheses advanced, but not rigorously tested, by
typology-oriented researchers. For example, in their analysis of labour politics in the United States,
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Germany, and Japan, Knoke, Pappi, Broadbent, and Tsujinaka (1996) found quantitative support for the
thesis imbued in Table 3.2, which states that institutions determine tendencies toward conflict and
collaboration. This thesis is consistent with theory and findings from the neo-corporatist literature.
Table 3.2: typology of networks based on institutional characteristics
informal institutions (power structures)
multiple centres single centre
formal
institutions (constitutions)
presidential system
contentious (USA) autocratic
parliamentary system
collaborative (Germany)
coordinated (Japan)
Adapted and modified from Knoke et al (1996: 219). Had Knoke and colleagues studied the UK or Canada, they would have likely found reason to include an additional row for Westminster systems between presidential and parliamentary wherein the values in the cells might be labeled “conflictual-competitive” for multiple centre-Westminster, and “clientelistic” for single centre-Westminster.
It is also worth pointing out that, from the beginning, proponents of social network analysts were
not purely inductive in their approach, but rather articulated several hypotheses that were both consistent
with regime theory and could be tested deductively. Laumann and Pappi (1976: 256) advanced thirteen
propositions that “presuppose a ‘social choice’ model of integration in which there is assumed to be a
substantial likelihood that the differentiated interests of rank-and-file participants (or subunits) will
somehow be taken into account when binding decisions relevant to the social system as a whole are made.”
Extrapolating somewhat, these propositions relate to (i) the identity of privileged client groups in
networks, (ii) the homogeneity and/or complementarity of client groups, (iii) the proximity of actors’
preferences, (iv) issues of group access at multiple levels (i.e., micro, macro), (v) ideational homogeneity,
(vi) the extent to which unilateral incentives create disincentives for collective action, (vii) frequency of
choice opportunities, (viii) divisions of labour, (ix) degree of homogeneity and complementarity among
producers’ factor competencies (x) the presence or absence of coordinative actors, (xi) similarity or
dissimilarity with respect to actors’ origins and backgrounds, (xii) the extent to which external actors’
interests are aligned with those internal to networks, and (xiii) decision rules at the macropolitical level.
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Although thirteen premises is too many, in my view, it is nevertheless possible to articulate
deductive models from these premises that can then be tested against empirical evidence at the case level.
Two general methods are available. One, familiar by now, involves conceiving propositions as dimensions
in the construction of typologies, which yields an n × n correlation matrix wherein each cell represents a
possible type. The other involves operationalizing each proposition as a variable in the construction of
probability trees, an example of which we saw in the context of a Monte Carlo simulation in Chapter 2.
In the latter approach, probabilities are assigned to each branch in the tree, producing likelihood estimates
of observing combinations of values representing types. Evaluation with respect to which approach is
preferable depends on the depth and quality of analysis. Although I will argue below that tree models are
ultimately superior to n × n typologies, both can be improved by incorporating insights from social choice
and game theory.
In the previous chapter we saw the value of social choice models in which actors’ policy
preferences —conceived as preferred alternatives to the status quo— are arrayed as point coordinates in
Euclidean space. The main insight drawn from that discussion was that winsets of the status quo are a
function of actors’ preferences, the distance between them, and the number of veto players involved in a
decision situation (Tsebelis 2002). While social choice proves useful for determining the size and location
of winsets, it was also demonstrated that predicting the precise location of alternatives is possible using
game theory.
The application of game theory in policy-related studies was popularized by Elinor Ostrom and
Fritz Scharpf under the auspices of “institutional analysis and development” and “actor-centred
institutionalism,” respectively (Ostrom 1990; Scharpf 1987; Scharpf 1993; Scharpf 1997). As argued by
Sum and Jessop (2013: 61), actor-centred institutionalism is similar, but superior to, structuration owing
to the purchase game theory brings to operationalization (i.e., of concepts into variables). As we saw in
Chapter 2, the basic idea of applied game theory, which I will elaborate upon more fully later on in this
chapter, is to impute game scenarios that approximate anticipated action situations in the real world.
Applied game theory can therefore be predictive or explanatory; in either case, the test is whether
empirical realities conform to expectations of the model (i.e., games).
From a typological orientation, bringing in game theory involves assigning games and their
attendant payoff matrixes to cells in the typological matrix. For instance, Harrison (1996) invokes a four-
part typology of jurisdictional independence whereby the type of jurisdiction affects the payoffs in game
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matrixes. The model is predictive in the sense that the probability of a particular outcome is a function of
the available payoffs within the game, which can be manipulated by the researcher to suit empirical
circumstances. If the game matrix includes a dominant strategy (i.e., Nash equilibrium), the model is
highly predictive with respect to outcomes. Otherwise, prediction is probabilistic; explanation follows
from probabilities assigned to if-then conditions (e.g., “if actor A chooses B, then the outcome is C”).74
If-then conditions are even more salient in studies that invoke simulations. Here, “evolutionary” games
are played at nodes within decision trees whose arrangement of nodes and ties is modeled to reflect the
structure of action situations. For example, Smaldino and Lubell (2014) implement an evolutionary model
of simultaneous and repeated public goods games in which actors, who are endowed with varying degrees
of social mobility, are free to select partners based on reputations earned from past demonstrations of
cooperation and defection. In this scheme, agents are able to flee from inefficient collective action
situations if they are socially mobile and if there exist better, or potentially better, partners with whom
they may cooperate.
To be clear, both static and evolutionary (“nested”) variants of social choice and game theory can
be invoked as behavioural complements to structural models, whether the latter are in the form of n × n
typologies or probability trees. In both cases, structural characteristics determine the arrangement of veto
players —and, consequently, the size and location of winsets— as well as the behavioural parameters
governing games. Thus, by combining structural accounts with social choice and game theory, it is
possible to model structurally-embedded behaviour.
Recapitulating the discussion thus far, the literature on corporatism and policy networks
established that the qualities of actors involved in industrial policy formulation, their ideational and
preference homophily, and their number combine to influence organizational culture and bargaining
dynamics. Not answered by students of corporatism and policy networks are questions pertaining to what
actors in these networks actually do. Consequently, insight into what networks produce and how they
produce it must be gleaned from elsewhere. Conceptually, while corporatism and policy networks have
both been criticized for encompassing too many different things to be meaningful, I have argued that the
utility of these constructs lies, not their use value as analytical frameworks or theories, but in their potential
74 A more elaborated (and more precise) example is: “if actor A chooses B, which is expected to occur with a probability of
0.5, then the probability of C is 0.3 (else, 0), the probability of D is 0.2 (else, 0) and the probability of E is 0.5 (else, 0).”
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to inform model specification (cf. Börzel 1998; Gerring 1999). Beyond that, I have argued that
considerable improvements can be made to typological models by engaging with social choice and game
theory. The next section elaborates.
3.3 Hypotheses, models, and preliminary evidence
The previous sections revealed many insights useful for generating hypotheses and specifying
models. The following subsections complete the picture. I begin by laying out ten predictive hypotheses
concerning the causes and consequences of patterns of regime behaviour. Next, I construct four
archetypical models that convey how the structure of the situational environment affects behavioural
options and, consequently, tendencies exhibited by regimes. Finally, I present preliminary quantitative
evidence in support of the theory —evidence which is bolstered by the case analyses undertaken in Chapter
4.
3.3.1 Hypotheses
A major insight gleaned from the literature reviewed in the previous section is that there is
considerable variability within political economies regarding how coordination is achieved in processes
of joint production. For instance, holding constant both macroinstitutions and the sector under analysis,
Coleman and Skogstad (1995) observe that differences in microinstitutional structures of policy networks
significantly affect how interest intermediation plays out.75 In a comparison of economic development
policy in Quebec and Ontario, Haddow (2015) attributes within-country variation to macropolitical
legacies in each province. Wolfe, Davis, and Lucas (2005), meanwhile, attributes within-country variance
regarding cluster organization to the type of technological innovation pursued. Although observations
such as these lend support to the conclusion that political economies are too variegated for meaningful
75 That is, Coleman and Skogstad (1995) analyze a single sector (agriculture) within the liberal political economies of Canada
and Australia. Granted, Coleman and Skogstad attribute some variation to differences in macropolitical friction (e.g., federal
division of powers), highlighting the value of operationalizing the political economy variable as a continuous index.
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generalizations, I have argued that empirical variability does not so much undermine theories but rather
highlights the necessity of distilling theories into more precise models (Ostrom 2010; cf. Jessop 2011).
When social scientists talk about context, they usually mean either or both the institutional and
structural context. My preference is to use context to describe institutional milieux and situation to
describe other structural variables. Examples of the latter include the state of technology, levels of task
programmability, separability, information asymmetries, growth rate of the economy, etc. Drawing
together insights from regime theory, varieties of capitalism, the innovation literature, and research on
corporatism and policy networks, it is possible to derive five institutional hypotheses and five situational
hypotheses. They are as follows:
Institutional hypothesis 1: regime durability and responsiveness
Permanence, longevity, and responsiveness of regimes is a function of macropolitical friction.
Regimes will mobilize and dissolve frequently in liberal political economies; regimes will
mobilize less frequently but will be sustained longer-term in coordinated political economies.
Institutional hypothesis 2: representation
Representation in regimes is a reflection of macropolitical representation. Regimes will be larger,
more integrated, and more likely to include labour in coordinated political economies; regimes
will be smaller, less integrated, and not likely to include labour in liberal political economies.
Institutional hypothesis 3: types of industrial policy
Regimes in coordinated political economies will exhibit a strong tendency toward industrial
upgrading owing to restrictions on cost externalization (see situational hypothesis 3 below as
well). Regimes in liberal political economies will exhibit tendencies toward sui generis,
restructuring, and late mover industrial policies due to (i) insufficient means and incentives for
upgrading, (ii) few restrictions on risk taking and cost externalization.
Institutional hypothesis 4: factors of production
Institutions of the political economy affect factors of production available to regimes.
Coordinated political economies tend to produce industry-oriented human resources and
knowledge regimes (see situational hypotheses 2 and 3). Liberal political economies tend to
produce flexible human resources and knowledge regimes.
Institutional hypothesis 5: tendency toward decline
Countries whose institutions fall at the extreme ends of the macropolitical friction scale will
witness poorer economic performance than countries whose institutions fall closer to the centre.
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Extremely competitive institutions permit too much risk taking, too much cost externalization,
and are too responsive to achieve sustained growth; extremely cooperative institutions are
insufficiently tolerant of risk, and are too cumbersome to achieve sustained growth.
Situational hypothesis 1: opportunity costs
Availability of other economic opportunities will drive up the price paid for regime participation.
Participation costs will be higher near the peak of the business cycle, when the economy is taut;
participation costs will be lower when the economy is slack.
Situational hypothesis 2: technology and knowledge transfer
The cost of acquiring knowledge increases along the technological growth curve.
Situational hypothesis 3: knowledge acquisition and regime size/integration
Regimes that develop knowledge endogenously will be larger, more dispersed, and more
integrated (see institutional hypothesis 4). Regimes that import competence will be smaller and
less integral.
Situational hypothesis 4: opportunity leakage
Opportunity leakage is a function of competition in value chains. Late, reactive innovation is
most vulnerable to opportunity leakage; radical first wave innovation is least vulnerable.
Situational hypothesis 5: moral hazard
Task programmability and separability issues, which justify government support for industrial
policy under the auspices of correcting hold up problems, also invite free riding and cost
externalization. Ergo, moral hazard will be pronounced when task programmability and
separability are undefined.
Obviously, the ten hypotheses have numerous implications for industrial policy. Yet, determining
exact implications is difficult because consequences vary depending on interaction effects. For example,
the state of the economy and level of technological maturity are suspected to interact in complex ways
with several other variables in the model. Before delving into implications it is therefore prudent to model
contingencies in order to ascertain interaction effects. As demonstrated by Axelrod (1997), when
phenomena are too complex for mathematical solutions (as they almost certainly are here), implications
of interactions remain unknown prior to simulation. Accordingly, the next section draws on the ten
hypotheses to model four predictive types of industrial policy regimes. I then implement a computer
simulation to estimate the rate of incidence and average costs and benefits associated with each type.
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3.3.2 Modelling structurally-embedded behaviour
With the ten hypotheses outlined in the previous section in mind, it is now possible to develop
fully fledged models of industrial policy regimes. Modelling structurally-embedded behaviour is a two-
step process. The first step involves modelling the structural context. The second step involves modelling
behavioural tendencies that follow from structural and institutional constraints and opportunities. The
literature on neo-corporatism and policy networks set out to accomplish just this, but achieved only mixed
success. The research program fell short, I surmise, because its proponents either were not sufficiently
deductive (as in the case of social network analysis) or eschewed the tools of formal social science (per
typological approaches to understanding policy networks).
In this section, I demonstrate that a superior approach to modelling structurally-embedded
behaviour involves conceiving of both objective structures (i.e., the environmental, institutional, and
situational context) and decision structures (the behavioural options available to actors), not as typologies,
but as probability trees (i.e., Markov chains). This is true, I argue, regardless of the rigour of subsequent
empirical analysis. Put differently, a deductive orientation is appropriate even when information available
to researchers is thin.
Recall from Chapter 1 the discussion of industrial policy type, which was portrayed as a function
of three continuous axes representing the stage of technological development (sunrise or sunset), the
motivation for undertaking industrial policy (anticipatory or reactive), and the process by which industrial
policy is executed (negotiated or executive). As per the discussion of capacity for innovation above, we
have also learned that there is one more dimension underlying type: whether innovation is first or
subsequent wave. Unlike the other continuous axes undergirding regime type, the wave variable takes on
discrete values (either first or subsequent). Figure 3.8 reproduces and updates the typology introduced in
Chapter 1 in order to convey four industrial policy archetypes: sui generis, upgrading, late mover, and
restructuring.
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Figure 3.8: four archetypes of industrial policy
As seen in Figure 3.8, sui generis industrial policy occurs when early stage, first wave technologies
are proactively pursued. By contrast, late mover industrial policy arises when first wave technologies that
are past their infancy are reactively pursued. Industrial policy geared toward upgrading involves
proactively pursuing subsequent wave technology, usually by negotiation. Finally, restructuring entails
reactively transitioning to subsequent wave design. Although both sui generis and late mover industrial
policies are common to liberal regimes, which tend toward executive policymaking, sui generis industrial
policy is more likely to be characterized by negotiation than late mover industrial policy because there are
usually comparatively fewer large and established firms when a first wave industry is in its infancy than
when industry is mature (Aghion et al. 2005).
Where did these four archetypes come from? Recalling also from Chapter 1 the discussion of
magnitude —which is a function of coordination, production, and government involvement— the four
archetypes displayed in Figure 3.8 were generated by first constructing a typology of all possible
combinations of magnitude and type, converting the typology to a probability tree, and discerning the four
outcomes most pertinent to research on industrial policy. This is not to say that other variations are not
possible; an advantage of generating simple models from complex ones is that researchers can trace steps
back in tree structures to determine where empirical data departed from the model’s predicted course.
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Constructing a typology is simply a matter of arraying relevant variables so that all possible
combinations can be displayed as types in an n × n table. Often, variables are nested hierarchically,
meaning that certain variables, and/or certain values of variables, are prior to others. For instance, the most
causally prior variable in regime theory is the political economy, which can either take two values
(“liberal” and “coordinated”) or be operationalized as an index of institutional friction. Beyond that,
recalling the discussion of regime sub-types from Chapter 2, we may also distinguish between knowledge
regimes, production regimes, and policy regimes. Note, however, that only two sub-regimes produce
tangible outputs: production regimes and knowledge regimes. For their part, policy regimes facilitate the
production and dissemination of knowledge and material output. This role of policy regimes was evident
in the descriptions of magnitude and type introduced in Chapter 1, namely with respect to government
involvement in production and coordination and whether industrial policy is negotiated or executive.
Likewise, while the degree of policymaking centralization and devolution is no doubt an interesting
variable deserving of study, it is conveniently captured by different combinations of production intensity,
government involvement, and whether industrial policy formulation is executive or negotiated. As for
whether innovation is radical or incremental, which was also determined to be an important consideration,
this variable is captured by the sunrise-sunset distinction.
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Table 3.3: structural typology of industrial policy regimes magnitude
low production
high production
government involvement low high low high direct-indirect direct indirect direct indirect direct indirect direct indirect
coordination low high low high low high low high low high low high low high low high
government involvement lo hi lo hi lo hi lo hi lo hi lo hi lo hi lo hi lo hi lo hi lo hi lo hi lo hi lo hi lo hi lo hi
direct-indirect d
i d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
d i
t y p e
sub
seq
uen
t w
ave
su
nse
t
reactive
negotiated
executive
anticipatory
negotiated
executive
sun
rise
reactive
negotiated
executive
anticipatory
negotiated
executive
firs
t w
ave
sun
set
reactive
negotiated
executive
anticipatory
negotiated
executive
sun
rise
reactive
negotiated
executive
anticipatory
negotiated
executive
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Although this all sounds very complicated, the fact that some variables are prior to others
allows for the generation of simple archetypes, around which there exist dozens —thousands, in
fact— of subtypes. The excess of subtypes —a pathology of the typological approach— is
demonstrated in Table 3.3. Besides the fact that such a typology includes significant excess, the
fact that typological approach conceives of each dimension as discrete also means that typologies
are imprecise. When variables are nested as they are in Table 3.3, it is preferable to model the
probability of observing particular types by converting typologies to tree structures.
As seen in Figure 3.9 below, converting typologies to tree structures allows researchers to
add detail and precision while also winnowing down the number of applicable models. With
respect to precision, although not shown in Figure 3.9, many Boolean values can be converted to
more precise continuous scales, which would be appropriate in this case because all dimensions in
Table 3.3 aside from wave are continuous in reality. Put differently, all nodes to the left and right
of wave in Figure 3.9 are, in actuality, “fuzzy sets,” not “crisp sets” (Ragin 2008).76 Model
tractability and predictive leverage can also be improved by assigning probabilities to each node
—and to each continuous value within each node— in the tree. The last procedure ensures that all
possible types are not treated as equally probable. However, one drawback to converting crisp
Boolean values to fuzzy scales is that models can no longer be conveyed graphically, at least not
in a way that is easily intelligible. Rather, models assume the form of data frames from which
simulations can be run and the results therefrom reported —a topic to which I will return shortly.
76 For instance, as we have seen, the distinction between coordinated and liberal political economies is better
conceived as a score on a continuous scale of institutional friction. Similarly, sunrise-sunset values are better
conceived as a scale representing the range of the logistic growth curve introduced in Figure 3.1.
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Figure 3.9: hypothetical probability tree model of industrial policy regime structure
By converting the typology of industrial policy regimes in Table 3.3 to a tree structure like
the one seen in Figure 3.9, researchers can begin to eliminate detail —and consequentially increase
analytical leverage— in two ways. First, at the theoretical level, researchers may simplify their
predictions by assigning probabilities denoting the likelihood of observing a posterior node given
a prior one. This is a complicated way of saying probability trees are convenient for conveying
that not all types of regimes are equally probable according to theory. Second, at the empirical
level, it is possible to test whether the theorized probabilities given in the tree are accurate. If it
turns out they are not, probabilities can be updated to better reflect reality (Bennett 2015). As per
the leverage principle, the purpose of archetypes is not to “explain away every residual” but rather
the to construct the simplest models possible while maintaining significant explanatory power;
however, additional archetypes can be easily retrieved from tree structures if leverage demands it
(King, Keohane & Verba 1994). Regarding model applicability, depending on the research
question, it may not be prudent to model certain types of industrial policy regimes, even though
they are possible and perhaps even common, such as those characterized by low production or
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minimal government involvement. Inversely, it may not be worthwhile to model industrial policy
regimes with very low incidence of instantiation.
To reiterate the previous point, despite the presence of thousands of cells, ties, and nodes
in the models depicted above, when designed as probability trees, structural models are capable of
articulating a relatively limited number of reasonably precise predictions about the expected
structure of industrial policy regimes. Quite apart from expectations, it is also possible to identify
regime most likely to produce successful innovation. As conveyed in Figure 3.10, the anticipated
strategies employed by industrial policy regimes, and those expected to produce successful
innovations are not one in the same. This is because, in real the political economy, incentives to
depart from reasoned behaviour are legion. In particular, tendencies to “react” rather than
“anticipate” are likely to be pronounced, especially in liberal political economies because
policymakers in liberal systems are relatively unconstrained by institutions. Moreover, vested
interests of client groups are just that —vested— meaning there is a tendency to protect what one
already has rather than go through the pain and discomfort of proactively innovating (Porter 1990).
Figure 3.10: expected versus successful industrial policy regime configurations
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As indicated in Figure 3.10, successful strategies for liberal regimes of accumulation are
hypothesized to be sui generis, while successful strategies for coordinated regimes of accumulation
are hypothesized to entail upgrading. This is because successful strategies are considered to hinge
on propensity toward risk taking in the former case, and negotiated horizontal coordination in the
latter. Yet, institutions that create advantages pertaining to certain types of innovation also
introduce contrary incentives. Consequently, observed strategies will not always align with those
predicted by the theory to yield successful innovation. Again, this is particularly the case for liberal
regimes, whose institutions permit not only sui generis industrial policy but, in fact, encourage
restructuring and late mover industrial policies.
Having invoked probability trees to model structural contexts likely to apply to industrial
policy regimes in each ideal typical political economy, we are now positioned to integrate
behavioural predictions into the structural model by calling on social choice and game theory.
Recall from Chapter 2, joint production is an exercise in positive coordination wherein the
distribution of costs and benefits of production must be negotiated between players whose
opportunity costs —and, consequently, participation costs— vary according to the capital
endowments of regime members. Bargaining strength in social choice situations is a function of
participation costs.
Similar to the collective action problems covered in Chapter 2, Figure 3.11 portrays a social
choice scenario in which two players, A and B, share an interest in joint production but do not see
eye to eye on how resources ought to be distributed along different dimensions of the choice
situation (represented by the horizontal and vertical axes in Figure 3.11). Player A prefers greater
investment on the vertical axis, while Player B prefers greater investment on the horizontal axis.
Yet, while each player is biased toward a particular dimension, both prefer a middle ground policy
to the status quo of no policy at all. This middle ground is represented by the winset of the status
quo (shaded in grey). The point in the centre of winset radially symmetric to points A and B
represents a maximally efficient trade between Players A and B. Points further toward one player’s
preference imply rents (either monopoly or monopsony). Recall from Chapter 2, rent seeking may
lead to deadweight welfare losses if production falls as a result.
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Figure 3.11: cost disparities and regime size as a function of industrial policy type
For illustration, imagine Players A and B in Figure 3.11 represent wineries and grape growers interested in allocating a budget for genomics. Let the vertical axis represent investment in high quality varietals and the horizontal axis investment in yield improvement. If Player A (wineries) can purchase their grapes from elsewhere, but Player B (grape growers) faces a restricted market for its produce, Player A has a greater unilateral amount than B. Consequently, Player A possesses a bargaining advantage over Player B and may use this advantage to propose a policy toward the north-west edge of the winset of the status quo. Inversely, if Player A can only affordably source local produce, but Player B can sell its grapes elsewhere, the roles are reversed: Player B may try to leverage this disparity by proposing a policy toward the south-east edge of the winset. Proposals toward either side of the winset constitute rent seeking: attempts to gain advantage above that afforded by the cooperative strategy —in this case (C,C) in chicken— at the expense of the other player.
By drawing on social choice theory, we may postulate that the players should settle on a
point within the winset of the status quo. Such an outcome is not guaranteed, however, because
players may defect from the welfare-optimal solution. As also demonstrated in Chapter 2,
behavioural models may be rendered more precise by invoking game theory. If members’
bargaining strength —which, again, is a function of opportunity costs of foregone unilateral
production less the anticipated benefit from joint production— is unequal, the stronger player has
incentive to propose a policy on the edge of the winset closest to its preferred point. Such a move
can be modelled as a defect strategy in chicken or a cooperative strategy in battle, depending on
whether the scenario involves a distribution problem. Recall from Chapter 2 that, in chicken,
players’ preferences are single peaked whereas in battle they are double peaked. Consequently, in
chicken, players face incentives to defect from the cooperative strategy (wherein the solution falls
in the middle of the winset area) to obtain a rent at the expense of cooperative partners. In battle,
deference to the stronger player is the maximin strategy.
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Figure 3.12: strategies and payoffs in initiation games
A A
C D C D
B
C
3
3
4
2
B
C
1
1
3
4
D
2
4
1
1
D
4
3
2
2
chicken
battle
Payoffs correspond with social choice points in the following way: in chicken, (C,C) represents a social choice in the middle of the winset of the status quo; (C,D)/(D,C) represents a social choice biased toward the defecting party’s preferred point (on the edge of the winset); (D,D) represents a situation in which no consensus emerges, despite the presence of a winset, due to rent seeking by both players. In battle, (C,C) represents a situation in which players attempt to settle on a substantively impossible point in the middle of the winset (both players attempt to lead when the situation demands that one of them defer); (C,D)/(D,C) represent a maximin optimal bias in favour of one (“lead”) player; (D,D) represents a situation in which both players defer to the other, meaning no actor leads production, which results in inefficient joint production (or pseudo unilateral production) analogous to negative coordination.
Beyond regime initiation, I also argued in Chapter 2 that principal-agent relationships
germane to regime operation can be modelled using game theory. Principal-agent relationships are
problematic if players employ defection strategies in attempts to drift from the agreed upon
program toward agents’ preferred policies: a phenomenon known as “agency slippage.” In the
language of public choice, the defecting party free rides for the sake of self-aggrandizement at the
expense of the regime, as in the prisoners’ dilemma (Niskanen 1971). Of equal concern are
situations in which members initiate regimes, and obtain club goods provided by regimes, only to
revert to unilateral production. Such situations are captured by stag hunt. Notice the withdrawal
scenario in stag hunt closely resembles the free riding scenario in prisoners’ dilemma; in both cases
the defecting party shirks its obligations in order to obtain rents at the expense of the regime. Drift
entails rent seeking. Simultaneous defection on the part of both players equates to mutual regime
termination —however, it is important to keep in mind that actors’ intentions when employing
defection strategies may not be termination but rather drift/rent seeking.
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Figure 3.13: strategies and payoffs in operation games
A A
C D C D
B
C
3
3
4
1
B
C
4
4
1
3
D
1
4
2
2
D
1
3
2
2
prisoner’s dilemma
stag hunt
Cooperative strategies imply adherence to the regime’s program; defective strategies imply agency slippage/drift. In both games, defectors seek to obtain rents at the regime’s expense. The generic payoffs regarding defection in prisoners’ dilemma represent free riding in the extreme: benefits from joint production flow exclusively to defectors. Defective strategies in stag hunt represent reversion to unilateral production by the defecting player. Simultaneous defection represents regime termination.
Game theory is useful for two reasons. One reason is that it allows researchers to more
accurately predict the precise the complexion of policies pursued by regimes. The other reason is
that game theory provides a tool for explaining why actors fail to agree despite the existence of a
winset. Determining which games are likely to be played by regimes is facilitated by the structural
model, which can be used to predict the distribution of players’ participation costs in different
industrial policy regime types. As per situational hypotheses 1 and 3 above, and Figure 3.14 below,
late mover industrial policy exhibits the greatest disparity between the participation costs of
players, as well as the fewest veto players. Sui generis industrial policy exhibits the least disparity
in members’ participation costs and the fewest veto players. Restructuring and upgrading fall in
the middle. Moreover, per situational hypotheses 2, monopoly is assumed to increase along the
logistic growth curve of industry maturity, meaning the necessity of deference to lead actors
increases along the curve as well. Consequently, the pertinent initiation game is more likely to be
chicken for regimes attempting to effect sui generis and upgrading industrial policies, and battle
for regimes set on restructuring and late mover industrial policies. Finally, because of the
increasing disparity in participation costs moving left to right in Figure 3.14 from sui generis to
late mover industrial policy, rent seeking (i.e., defective) behaviour is expected to increase left to
right as well. That is, in the operation games of prisoners’ dilemma and stag hunt, cooperative
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strategies are expected to be more common when players are more equitably resourced; rent
seeking (defective) strategies are expected to be more common when resource disparities between
players are more pronounced.
Figure 3.14: cost disparities. regime size, and strategy as a function of industrial policy type
Thus, based on the hypotheses noted above, we may predict: (1) the approximate number
of actors in each type of regime, (2) actors’ relative participation costs, (3) the likelihood that the
initiation game will take the form of chicken or battle, (3) the likelihood that operation games will
take the form of prisoners’ dilemma or stag hung, and (4) probabilities that player strategies will
be cooperative or rent seeking. One additional consideration completes the model: tendencies
toward cost externalization.
Recall from Chapter 2 that bargaining between regime members will only result in a
decision to engage in joint production if resources sufficient to compensate integral members’
unilateral amounts (measured in opportunity costs) can be marshalled by the regime. This may
involve incurring debts in the short term to secure the membership of actors possessing
competence required by the regime. If the resources of regime members, including those amassed
by incurring short term debt, are insufficient to cover participation costs, joint production cannot
proceed unless costs can be externalized.
According to regime theory, the extent to which costs can be externalized by regimes onto
the public is a function of the representativeness of macropolitical institutions (institutional
hypothesis 1). Majoritarian institutions are tolerant of cost externalization, representative
institutions are not. Yet, even governments captured by rent seeking clients draw the line
somewhere. That line is a budget constraint that encloses the possibility space in which regime
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members’ preferences are arrayed. To illustrate, Figure 3.15 depicts government and industry as
corporate actors, each possessing a single preference point. The preferred public contribution to
production is denoted by Line B, which intersects the government’s preferred policy point, G. Line
B′, by contrast, represents the maximum amount the government is willing to transfer to the
regime.
Figure 3.15: preferences of government and industry with budget constraints
Points represent proposals with n dimensions. Diagonal lines represent possibility frontiers/budget constraints. Points above the budget constraint cannot be obtained. Government (G) has a preference for conserving its budget. Industry (I) has a preference for obtaining maximum support (rents) from government. Panel (a) represents a monopolistic industry. Panel (b) represents a competitive industry. Panel (c) represents a situation in which a budget shortfall must be incurred by industry.
If a player enjoys monopoly advantage, it may demand rents up to the point at which it is
no longer in the state’s interest to pursue industrial policy. Referring to Panel (a) of Figure 3.15, a
monopolistic I could demand that G settle on a point directly on the budget line B′. The cross
section of the shaded winset is the size of the monopoly rent. It is appropriate to consider this
difference a monopoly rent because I would accept a point closer to G if circumstances were
different. For instance, consider a situation in which industry is competitive. Referring now to
Panel (b) above, if Ik demands that G settle on its budget frontier, G is free to negotiate instead
with Ij and Ii, the latter of which is willing pay the “competitive price” for its participation
(assuming of course that the quantity supplied is equivalent for all actors I). If Ik is aware that bids
are competitive, it will be willing to compromise on a point within its winset since any point up to
and including those on its preference frontier is preferable to the status quo ante.
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Finally, there is are cases in which government is a monopsonist, meaning industry does
not have the option of producing unilaterally for the market. Referring again to Panel (a), assume
I’s preference frontier represents a situation in which price equals cost. In this situation, I cannot
accept a point outside of its preference envelope without incurring losses, but it will accept a point
directly on its frontier. If G is a monopsonist, it may insist on settling at the point within the shaded
winset closest to G even though it would accept a point closer to I under different circumstances
(such as those in which I is a monopolist, as we saw in the first example).
Also worth considering are situations in which government is unwilling or unable to
dedicate sufficient resources for joint production to proceed. A situation such as this is depicted in
Panel (c) of Figure 3.15. Depending on available opportunities for unilateral production, industry
may opt to make up the difference by ramping up efforts to marshal its own private resources to
extend the budget frontier to line B`. Wholly private mobilization follows a similar logic but
without any government involvement whatsoever. Just as with social choice situations among
industry players, industry and government may also play strategic games when deciding on the
specifics of industrial policy. Again, if the supply of production is negatively affected by the terms
of the bargain —that is, the price to be paid for industrial policy to proceed— society incurs a
deadweight welfare loss.
With all of the insights described above in mind, I constructed a Markov chain simulation
model to discern central tendencies with respect to regime processes and outcomes.77 The
simulation begins by generating a structural context according to parameters similar to those
displayed in Figure 3.9. Next, depending on the (randomly-determined) state of technology, a
regime ranging in size from two and four players assembles and plays either battle or chicken;
which game, the number of players involved, as well as their resource endowments and
opportunity costs, are determined by the structural context, which includes a random variable to
represent the state of the economy. Player strategies are a function of opportunity costs, with higher
opportunity costs corresponding with greater incidence of defection. If all players cooperate, the
regime mobilizes with minimal rents extracted (but keep in mind that battle, which is the
mobilization game for pursuits further along the technological growth curve, necessitates that
77 The simulation is available for download at https://www.researchgate.net/profile/Matt_Wilder2
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players with higher opportunity costs obtain modest rents). Industrial policy is initiated if the
regime possesses resources above a certain threshold after a contribution from government.
Similar to the Monte Carlo example in Chapter 2, I ran the model one thousand times with
government adhering to a hierarchical decision rule, one thousand times with majority rule, and
one thousand times with unanimity rule. Also like the Monte Carlo example in Chapter 2,
government consists of three decisionmakers and employs “soft vetoes” (i.e., deferral to the least
costly option preferred by decisionmakers with proximate preferences). If the government does
not extend the regime sufficient resources to cross the threshold between mobilization and
operation, and if the regime members’ endowments are insufficient to cover the discrepancy, the
simulation terminates. If the cost burden is met, the regime carries on to operation, in which
outcomes from prisoners’ dilemma or stag hunt games determine whether and the extent to which
rents are extracted by regime members. After rents are extracted, appropriations are requested from
the government, which decides among three options: (i) extend the regime moderate subsidies, (ii)
extend the regime modest subsidies, or (iii) do not subsidize the regime. Again, the choice is
governed by the decision rule. If the threshold for operation is met by the combination of regime
members’ remaining endowments and the public subsidy, the sequence of operation and
appropriation carries on up to four more times before the simulation terminates.
As mentioned above, the purpose of simulation modelling is to gain insight about complex
phenomena that is not readily apparent (Axelrod 1997). The first such insight is that, with the
vagaries of the economy affecting the number of regime members and their resource endowments,
the decision rule within government does not cause significant differences in rates of mobilization
unless the threshold is adjusted significantly upward. The suggestion is that the decision rule does
not affect rates of mobilization unless ample government support is critical for industrial policy to
proceed. However, as expected based on the Monte Carlo simulation in Chapter 2, unanimity
decision rules significantly affect the extent to which regimes are sustained by appropriations (the
effect is barely noticeable for majority rule).
Given the probabilities assigned in the structural model, the hierarchical and majoritarian
runs of the simulation gravitate toward sui generis, restructuring, and late mover industrial policies.
However, it is noteworthy that under hierarchical and majoritarian decision rules, restructuring is
disproportionately preempted at the mobilization stage (approximately 20% more frequently than
the other archetypes). In other words, regimes lack sufficient resources to mobilize toward
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restructuring. Of course, we should not expect real-world politicians to be so calculating and public
minded when clients ask for assistance.
For its part, unanimity rule is biased toward upgrading, as expected, but also sui generis
and late mover industrial policies. The fact that the model does not preclude these options
structurally or situationally may explain the anomaly. The suggestion gleaned from the model is
that macropolitical institutions do not rule out sui generis and late mover industrial policy in
coordinated systems either. Yet, Hall and Soskice (2001) convincingly argue that micropolitical
institutions —namely, cooperate governance and worker training— are not conducive to either sui
generis or late mover advantage in high friction systems. According to the model, this is mixed
news for coordinated political economies. On one hand, the model predicts sui generis industrial
policy to yield high rents but high returns under all three macropolitical decision rules. On the
other hand, late mover industrial policy seems to require ample public support across all three
decision rules, but leads to the extraction of very high rents when it is implemented in coordinated
systems. This is presumably because there will generally be more small members for large players
to exploit in coordinated political economies compared to the small regimes that characterize late
mover industrial policy in liberal political economies.
With respect to performance, comparing levels of investment to return, the simulation
predicts that sui generis industrial policy will have a net social benefit across all three decision
rules. However, the model does not account for the fact that profits are often deferred for several
years in cases of sui generis industrial policy. The model does however pick up on the fact that
significant rent extraction is immediate, which may explain why sui generis industrial policy is
anticipated by the model to be prevalent in coordinated systems despite the fact that theory and
evidence point to the contrary. Upgrading also has a net social benefit across all models. By
contrast, restructuring does not cover its investments under any decision rule. What is more, even
when output from restructuring is amplified by a local Keynesian multiplier, restructuring still has
a negative net social benefit on average. Finally, late mover industrial policy produces negative
returns to investment across all three decision rules. However, if multiplier effects are included in
the tally, net social benefit is positive for late mover industrial policy in liberal systems. This
126
implies that late mover industrial policy may be appropriate in slack economies.78 As mentioned
above, late mover industrial policy performs very poorly in coordinated political economies.
Although more work remains to be done to hone the simulation, the model’s predictions
are in line with the theory and evidence discussed so far. The model predicts very high returns
from sui generis industrial policy in all cases, and ample returns from upgrading in coordinated
systems. Since the model does not incorporate incidence of technological failure, I cannot say at
this stage whether one type of innovation produces greater returns than the other. Empirical
investigation undertaken in the remainder of this thesis may shed some light on this puzzle.
3.3.3 Preliminary evidence
Up to this point, this thesis has relied exclusively on theory, logic, deductive modelling,
and secondary accounts to inform and substantiate its claims. Yet, a theory that does not stand up
to empirical muster is worthless, no matter how eloquent. This section reviews some of the
quantitative evidence in support of the theory. It sketches the associational composition of national
economies, examines aggregate data on spending and distribution, analyzes rates of economic
growth, and looks into differential rates of policy responsiveness across political systems.
Although all of the analyses herein are illuminating and supportive of the theory, much more work
remains to be done to shore up regime theory. The evidence presented below is preliminary and
tentative.
The earlier discussion of varieties of capitalism and neo-corporatism suggested that
associational membership factors large in whether and to what extent economic coordination
occurs. Although many argue that economic coordination has been on the wane since the 1980s,
varieties of capitalism scholars have demonstrated that coordinated market economies (CME)
persist (Hall & Soskice 2001; Soskice 1997; Thelen 2014). Moreover, I have implied throughout
this thesis that low friction, liberal political economies have maintained —and may have even
increased— their capacity to effect industrial policy. As discussed in Chapter 1, although the
78 The local economic multiplier used in the Markov chain model is generous, however, in that it assumes elastic
aggregate supply, and leakage is limited to marginal propensity to save.
127
federal government’s share of industrial subsidies has declined since the early 1990s, provincial
governments in Canada have continued to subsidize business to the tune of $9.3 billion per year.
And while the federal government may have lost some of its appetite for direct subsidies
(averaging $6.8 billion per year since 1990), the fact that Industry Canada’s annual budget has
averaged $5.2 billion since 1990 suggests that Canadian governments maintain considerable
involvement in the economy.
Unfortunately data comparing cross-national commitments to industrial development are
non-comparable and otherwise unreliable. A cursory glance at data on aggregate government
expenditure is, however, illuminating for several reasons. First, the data confirm my suspicion that
governments in liberal economies spend just as much, if not more, than governments in
coordinated political economies. Second, the data suggest that, consistent with popular belief,
governments in liberal political economies devote fewer resources to redistribution through social
policy and more resources to redistribution through individually targeted policies, like industrial
policy. Third, the data confirm that levels of government debt are fairly similar across liberal and
coordinated political economies, despite stark differences in spending priorities. The third
observation supports the contention that both approaches to economic coordination are different
but equally viable in terms of sustainability (granted, whether either approach is sustainable is a
matter for debate). A separate question is whether the two approaches perform equally with respect
to social outcomes. Here, the evidence is more favourable to coordinated political economies.
Figure 3.16 reports.
128
Figure 3.16: economic indicators and macropolitical friction
Based on Freedom House government spending index (2010), Lijphart (2012), World Bank World Development Indicators (2013), Lijphart (2012), CIA World Fact Book. Pearson correlation coefficient −0.38, significant at 5% level (top left); Pearson correlation. coefficient: −0.51, significant at 1% level (bottom left).
129
As seen in the top left panel of Figure 3.16, tendencies toward government spending are
greatest in low friction settings and blunted as macropolitical friction increases. This observation
is consistent with the hypothesis that governments in lower friction systems will exhibit greater
responsiveness (institutional hypothesis 1). Yet, as seen in the top right panel of Figure 3.16, public
debt is somewhat higher in coordinated political economies, despite greater propensity to spend in
liberal political economies. The suspicion that spending priorities differ between the two systems
is supported by data in the lower panels of Figure 3.16. The Gini coefficient —according to which
lower scores indicate greater economic equality— decreases as macropolitical representation
increases. Meanwhile, GDP per capita tends to be slightly higher in coordinated political
economies. These observations are consistent with expectations that greater representation is
associated with more equitable outcomes (e.g., institutional hypothesis 2).
Although the data in Figure 3.16 are consistent with the regime-theoretic premise that
lower institutional friction corresponds with greater policy responsiveness, the data by no means
affirm the hypothesis. Recalling the discussion of punctuated equilibria from Chapter 2, a true test
of institutional hypothesis 1 requires assessment of whether the sharpness of expenditure change
corresponds with institutional friction. In other words, we would like to know whether highly
punctuated patterns of policy change are more prevalent in liberal political economies, and whether
smoother patterns of policy change are more prevalent in coordinated political economies.
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Figure 3.17: density of annual change in subsidy expenditure
Calculated based on OECD Government Expenditure by Function, central government revenue and expenditure main aggregates (SNA94)
As is customary in tests of punctuated equilibrium, Figure 3.17 conveys the density of
annual change in subsidy expenditures across OECD countries (cf. Jones et al. 2009). A more
pronounced central peak indicates greater status quo bias around zero percent annual change,
broader shoulders indicate greater responsiveness, whereas long tails indicate severe punctuations.
The density plot demonstrates that coordinated political economies exhibit greater status quo bias,
as the theory predicts.
For a more definitive test, we may employ regression to determine the effect of institutional
friction on tendencies toward policy change. Because liberal political economies exhibit status quo
bias as well —indeed, status quo bias is an empirical regularity of public budgeting— time series
regression is not a suitable option. An alternative is to count the number of years in each time
series with incidence of change over some threshold, convert that count to a percentage of years
with major change, and regress macropolitical friction on these percentages. A disadvantage with
131
this approach is that the sample size is reduced significantly. To improve the sample size, I
included data from Canadian provincial governments in the following analysis, for an N of 35.
Table 3.4: least squares estimates, annual per cent change in economic subsidies
A B C
LME
28.92***
(7.08)
-
2.78 (10.29)
Other
10.58 (8.46)
-
0.94 (8.18)
Macropolitical friction
-
−13.40***
(2.42)
−12.51**
(4.08)
(intercept)
28.92***
(5.35)
40.56***
(2.73)
39.31***
(5.86)
R2 0.28 0.46 0.43
N 35 35 35
Dependent variable is percentage of years with punctuations exceeding 10%.
Standard errors are in parentheses. Two tailed t-test.
† = p < 0.10 * = p < 0.05 ** = p < 0.01 *** = p < 0.001
Based on OECD Government Expenditure by Function, central government
revenue and expenditure main aggregates (SNA94), Statistics Canada
Government sector revenue and expenditure, provincial economic accounts
(CANSIM Table 384-0004), Lijphart (2012). Includes Canadian provinces.
Table 3.4 reports regression results whereby the dependent variable is the percentage of
years in each series with punctuations exceeding 10% (note that punctuations are absolute values,
and so capture both positive and negative change). Column A reports the effect the type of political
economy has on tendencies toward policy change. Column B reports the effect of the alternative
metric —macropolitical friction— on policy change. Column C reports the effect of both the type
of political economy and macropolitical friction on policy change and verifies collinearity between
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type of political economy and macropolitical friction.79 The analysis supports the contention
macropolitical friction is a superior measure of policy responsiveness than type of political
economy, as the latter loses its significance when macropolitical friction is included in the model
with no improvement of the R-squared measure of model fit. Interpreting the best fit model
(Column B), a one unit increase in macropolitical friction corresponds with a 13.4 percentage point
reduction in the number of years with punctuations greater than 10%. Interpretation is facilitated
by the scatterplot in Figure 3.18.
Figure 3.18: macroinstitutional friction and major punctuations in subsidy expenditures
79 A combined measure of institutional friction that incorporates Hall and Gingerich’s (2009) indexes with Lijphart’s
(2012) institutional friction index could not be used because the former, microinstitutional friction, index has not been
calculated for a sufficient number of cases.
133
Vertical axis measures the number of years with punctuations greater
than 10%. “PVN” = average for Canadian provinces. Based on OECD
Government Expenditure by Function, central government revenue
and expenditure main aggregates (SNA94), Statistics Canada
Government sector revenue and expenditure, provincial economic
accounts (CANSIM Table 384-0004), Lijphart (2012). Two tailed t-test.
Pearson correlation coefficient −0.69 significant at 1% level.
As seen in Figure 3.18, incidence of policy responsiveness tracks nicely with
macropolitical friction. Greater friction corresponds with lower policy responsiveness and vice
versa. This is particularly true for countries identified by varieties of capitalism scholars as
coordinated and liberal. Notice, though, that Korea is nominally a coordinated market economy,
yet has a low friction political system and high policy responsiveness. Some countries identified
as “mixed market economies” by varieties of capitalism scholars (namely France, Spain, Italy and
Greece) deviate from the model’s predictions, while others adhere to them (Israel, Luxembourg,
Portugal). Interestingly, the two archetypical liberal and coordinated political economies, the
United States and Germany, exhibit very similar policy responsiveness. These countries are not,
however, terribly distal on the macropolitical friction scale.
Having established that even governments in liberal political economies amply, if quietly,
intervene in the economy, and having established that governments in liberal political economies
routinely engage in horizontal industrial policy, we may ask to what extent the private sector is
poised for joint production. Recall from the earlier discussion on “meso corporatism” that labour
and business associations are assumed to be the organizational fora in which economic
coordination takes place in liberal political economies (Cawson 1985). As shown in Figure 3.19,
although associational membership has declined in most coordinated political economies, it has
increased quite dramatically in Canada since 1990. Of particular note is the increase in industry
association membership (labour union membership is mostly attributable to public sector unions,
which are not involved in joint production).
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Figure 3.19: associational membership in coordinated and liberal political economies
Source: European Values Study and World Values Survey
The suggestion so far seems to be that coordinated and liberal institutions are differ
markedly from one another, yet both are viable approaches to economic organization. More
precisely, the strength of one type of political economy is the other’s weakness. A remaining
question concerns whether more is always better. That is, should countries with liberal tendencies
aspire to be more liberal? Conversely, should countries with tendencies toward coordination
increase their efforts? Conversely, much of the discussion in Chapter 2 suggested that extreme
tendencies were pathological, promoting too much conservativism in coordinated, high friction
systems and too much recklessness in liberal, low friction systems (institutional hypothesis 5).
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Figure 3.20 assesses the effect of institutional friction on rates of economic growth.
Combining the micropolitical friction index derived from Hall and Gingerich (2009) with
Lijphart’s (2012) macropolitical friction index, the data presented in Figure 3.20 seem to support
the contention that extreme tendencies are pathological. With the exception of Spain and France,
economic growth seems to follow a quadratic function, meaning that growth is lowest at the
extreme ends of the institutional friction scale and highest toward the middle. Australia, New
Zealand, and especially Ireland have witnessed very high growth, some of which followed
institutional restructuring toward higher friction (e.g., electoral reform). For their part, the
coordinated political economies have witnessed, on average, lower growth than the liberal political
economies.
Figure 3.20: institutional friction and average annual growth since 1990
136
Horizontal axis is a function of both microinstitutional friction and microinstitutional fiction. Based on Lijphart (2012), Hall and Gingerich (2009), OECD National Accounts at a Glance.
The evidence reviewed in this section has lent tentative but encouraging support to the
theory developed in this thesis. Granted, much more quantitative work remains to be done,
particularly with respect to the premise that regimes in coordinated political economies inherit and
improve upon radical knowledge generated in liberal political economies. The next chapter
continues to test the empirical mettle of the theory in the context of detailed case studies.
3.4 Propositions and implications
Having derived four archetypical models of industrial policy regimes, it is prudent at this
point to summarize the propositions of the analytical approach developed in this thesis and outline
their substantive implications. Notice that the five institutional hypotheses given in Section 3 of
this chapter are generalizable insofar as institutions are reasonably stable, which they often are.
Indeed, as demonstrated in Chapter 2, institutions may serve as the basis of general theories. Thus,
the five institutional hypotheses articulated in this chapter convey how regime theory bears on
industrial policy. The five situational hypotheses, on the other hand, deal with less predictable
variables. The purpose of situational hypotheses is to fill remaining gaps not covered by regime
theory. Situational hypotheses complete precise models of industrial policy regimes.
Box 3.1 lists the propositions and substantive implications of the discussion thus far.
Consistent with varieties of capitalism, several trade-offs are apparent. Also consistent with
varieties of capitalism, gravitation toward one side of the trade or the other is predetermined to
some extent by institutional competence —or “comparative institutional advantage” in the
varieties of capitalism vernacular— which is theorized to produce the aggregate patterns analyzed
in the previous section. To the extent that regimes are tempted to pursue opportunities for which
they are institutionally ill equipped, the expectation is failure. The case studies analyzed in the next
chapter are illustrative in this regard.
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Box 3.1: propositions and implications
Proposition 1: A higher number of veto players translates to greater institutional friction,
which impedes both policy initiation and policy change.
Implication 1: Political systems with less macroinstitutional friction will be more responsive
than political systems with more macroinstitutional friction. Policies will
therefore be more difficult to enact but will be sustained longer term in high
friction systems. Regimes will exhibit similar tendencies with respect to
microinstitutional friction; they will be difficult to mobilize, will exhibit status
quo bias, and adapt incrementally.
Proposition 2: Representative macropolitical institutions foster negotiated decisionmaking.
Non-representative macropolitical institutions enable executive
decisionmaking.
Implication 2: Regimes in coordinated political economies will be representative; they will
tend to be larger, more integrated, make decisions via negotiation and will
adhere to the positive coordination plus negative coordination plus bargaining
(PC+NC+B) mode of coordination, which does not permit cost externalization.
Regimes in liberal political economies will be clientelistic; they will tend to be
smaller, less integrated, make decisions expeditiously by fiat or majority vote,
and will adhere to the positive coordination plus bargaining (PC+B) mode of
coordination, which permits cost externalization. Cost externalization permits
responsiveness but evokes punishment at election time. Cost internalization
avoids electoral punishment but at the expense of responsiveness (see
Preposition 1).
Proposition 3: Low representation and institutional friction translate to propensity for risk
taking. High representation and institutional friction translate to tendencies
toward cooperation and collaboration.
Implication 3: Regimes in liberal political economies will tend to pursue risky ventures. With
respect to industrial policy, regimes in liberal political economies will tend
toward sui generis, restructuring, and late mover industrial policies. Regimes in
coordinated political economies will tend to pursue less risky ventures. With
respect to industrial policy, regimes in coordinated political economies will tend
toward upgrading.
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Proposition 4: Institutions affect national factors of production, namely human resources,
capital, and entrepreneurial knowledge. Coordinated political economies
encourage labour, capital, and knowledge development that is oriented toward
existing industries. Liberal political economies encourage labour, capital, and
knowledge development that is basic, general, and theoretical.
Implication 4: Coordinated political economies are better poised for incremental adaptation
on existing technology (i.e., technology past its theoretical, prototypical stages),
including scale up and commercialization. Liberal political economies are
positioned to effect radical innovation, including design and prototype work,
but lack means and incentives to commercialize many innovations.
Proposition 5: Extreme tendencies are pathological.
Implication 5: Institutions that encourage too much risk taking, too much risk aversion, too
much emphasis on existing industry, or too much emphasis on theoretical
knowledge and product design hinder competitiveness. Comparative
institutional advantage arises from institutional synergies that allow
opportunity niches to be exploited. Capturing greater shares of value chains
necessitates some diversification with respect to competence and
specialization. The line is a fine one, however, as too much emphasis on
diversification undermines advantages that accrue from specialization.
Proposition 6: Opportunity costs determine the motivation and behaviour of actors.
Implication 6: Cooperation, collaboration, and joint production is a function of opportunities
for unilateral production.80 The cost of securing participation in joint production
will therefore be greater when other opportunities are available to agents.
Moreover, incidence of rent extraction (i.e., defection, free riding, agency drift)
is likely correspond positively with opportunity costs.
Proposition7: The price paid for knowledge increases along the technological growth curve,
regardless of whether it is imported or developed endogenously.
80 Because transaction costs are a fact of life, the default preference is assumed to favour unilateral production over
joint production, ceteris paribus, rather than the other way around. It is important to recognize, however, the
assumption that transaction costs always outweigh utility gained from interaction ignores: (i) incentives to amass
social capital, (ii) incentives to learn from partners in production, and (iii) incentives to gain other, potentially
unrelated, information valued by the actor.
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Implication 7: Industrial policy that seeks to accomplish late innovation will be more costly than
that which engages technology earlier on in the product cycle. An important
caveat is that, although upgrading involves late arrival, the anticipatory and
negotiated mode of endogenous learning is assumed to prevent cost escalation.
Still, the earlier upgrading occurs on the technological growth curve, the better.
Proposition 8: Regime size and integrity are a function of the method of knowledge acquisition.
Implication 8: Endogenous knowledge acquisition corresponds with larger, more dispersed,
and more integrated regimes. Exogenous knowledge acquisition corresponds
with smaller, less dispersed, and less integral regimes. Consequently, the
economic benefits flowing from FDI are comparatively low.
Proposition 9: Opportunity niches are most profitable: (i) when the good or service produced
has wide market applications, and (ii) when jurisdictions capture a greater share
of the value chain.
Implication 9: Extensive markets for jointly produced goods are beneficial. However, loss of
forward and backward linkages to competitors (opportunity leakage)
undermines returns to industrial policy.81 Because creative destruction affects
entire value chains in cases of radical innovation, opportunities are greater in
cases of sui generis industrial policy.
Proposition 10: Principal-agent problems are ubiquitous in collective action situations. They are
especially salient when it comes to industrial policy.
Implication 10: Moral hazard problems affect all industrial policies, highlighting the importance
of effective monitoring. Yet, circumstances most befitting of industrial policy —
i.e., those in which production is stunted by hold-up— are also those in which
monitoring is undermined by low task programmability and non-separability.
Ironically, radical first wave innovation, worthy as it is of industrial policy
intervention, is most vulnerable to free riding.
81 Insistence on capturing rents along the entire value chain is problematic, however, if supply, extension, and/or
marketing can be accomplished more efficiently and effectively by outsiders. Indeed, efforts to ensure national
ownership of the value chain could compromise the competitiveness of the entire industry.
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Chapter 4
Case Studies
This chapter is dedicated to testing the mettle of the theory developed in the preceding
chapters. Three empirical cases receive discussion: British Columbia’s aluminum shipbuilding
program (1994-2000), federal-provincial agricultural biotechnology policy in support of the canola
industry (1985-2001), and Ontario’s green energy manufacturing strategy (2009-2015). As
explained in Chapter 2, given Canada’s liberal political economy, we should expect regimes in
Canada to be clientelistic. Yet, as explained in Chapter 3, within liberal political economies,
situational nuances give rise to industrial policy regimes that can be idiosyncratic. Qualities of
local industry, government, and associational organization bear significantly, not just on what is
produced and who produces it, but also on the organization and process of joint production.
Moreover, as was also hypothesized in Chapter 3, the technology pursued via industrial policy is
liable to affect the types of actors involved as well as the relationships and interactions among
them.
Methodologically, recall from Chapter 3 that while quantitative social network analysis
may be a best practice for model testing, researchers are often preempted from taking a quantitative
social network approach for two reasons. One is its prohibitive cost. The other is the near
impossibility of conducting quantitative social network analysis on events that occurred in the past.
Three complementary alternatives are available to researchers, however. One is to instead rely on
deductive tests of typological models based on the local constitution of society. Another employs
game theoretical techniques to model interactions with the purpose of predicting or explaining
outcomes. The third alternative makes use of simulations to model how probable patterns of actor
interactions in repeated games produce a limited set of solutions. In each approach, the researcher
evaluates the extent to which events align with expectations of the model. Together, these
alternatives make up the approach to model testing taken in the following case studies.
The analyses undertaken herein affirm many of the hypotheses and theoretical implications
advanced in Chapter 3. Recall that late mover industrial policies aimed at catching up to
international competition are anticipated to be forged in relatively closed regimes, whereas sui
generis industrial policies aimed at developing novel products are expected to be negotiated in
relatively open regimes. More specifically, it was hypothesized in Chapter 3 that late moving
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jurisdictions lacking either or both knowledge and capital to compete internationally will foster
industrial policy regimes more closed off than those found in jurisdictions where knowledge and
capital are locally diffuse and relatively competitive by international standards. This is because
competence acquired through FDI privileges foreign clients over local ones, the former of whom
will take lead roles in late mover industrial policy regimes, relegating what few local participants
might be involved to second tier status. By contrast, sui generis industrial policy will not
unequivocally advantage particular participants because low immediate returns on investment,
horizontal integration, and dependency relationships foster both a collaborative culture and afford
mutual —if not always equal— gains to regime members. Finally, cases of upgrading and
restructuring fall between the extremes of the late mover and sui generis development. The
upgrading type is particularly suited to highly coordinated systems. Indeed, upgrading is
characterized by many of the same tendencies as sui generis industrial policy, the main difference
being that upgrading is geared toward late innovation. Meanwhile, restructuring is more reactive:
it privileges large local firms whose commitment is required for successful industrial reform.
Principal-agent relationships characterize all four scenarios just described, but in different
ways and to different degrees. In late mover industrial policy —which often takes an FDI approach
to competence acquisition— extraction of monopoly rents by foreign partners is a major concern.
While knowledge transfer agreements may increase the value of foreign investment, foreign
partners can also demand a premium for proprietary knowledge if industries are monopolistic.
Likewise, firms in industries undergoing restructuring face rent seeking and moral hazard
incentives to extract as many benefits, and assume as few costs, as possible. Rent seeking during
restructuring is particularly problematic when lead firms are not threatened with insolvency in the
short term, but rather possess sufficient resources to delay restructuring and continue to produce
unilaterally. Again, effective contracting at the outset can discipline rent seeking behaviour.
However, it is not always possible for players to agree on terms, especially when the success of a
project is uncertain. Conversely, in sui generis and upgrading situations, where industry mobilizes
proactively, the expected direction of exploitation is reversed; lead players who assume the costs
of coordination are threatened by free riding on the part of their smaller partners. Consequently,
institutions designed to collect levies and allocate common resources are often a prerequisite for
what might otherwise appear to be spontaneous regime mobilization. As discussed in Chapter 1,
the state often absorbs a large portion of these coordination costs.
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Although none of the cases analyzed in this chapter constitute pure types described above,
they do approximate them. In the case of aluminum shipbuilding in British Columbia, a desire to
restructure an ailing conventional shipbuilding industry toward second wave design witnessed the
mobilization of a semi-closed, moderately-sized regime that was financed, coordinated, and
directed by the state but whose fate was largely in the hands of private partners. Indeed, private
agents controlled capital integral to the project’s success. Consequently, they were able to extract
significant rents from their public sector principals. Conversely, in the case of agricultural
biotechnology, honing the competence needed to compete in a radically novel industry involved
mobilizing a large and rather porous regime. Principal-agent problems were offset in the
biotechnology case thanks to two mechanisms. One was self-financing through the use of levies.
The other was the use of knowledge transfer agreements, negotiated and financed by the state at
relatively low cost. While governments did not enjoy a complete monopsony in all of these
transactions, monopolistic rents were not paid to proprietors of crucial knowledge, either. The
same cannot be said for the case of green energy manufacturing in Ontario, where the dual
objectives of climate change mitigation and reindustrialization culminated in an attempt to catch
up to foreign producers of a mature first wave technology. Consequently, the closed Ontario
regime, which consisted of only government officials, large foreign multinationals, and secondary
local partners paid a premium for foreign competence and foreign capital, the likes of which we
would expect from the FDI approach.
Consistent with the regime theoretical premise that liberal institutions invite cost
externalization, all of the regimes analyzed in this thesis seized the opportunity to externalize costs,
but not nearly to the same extent. In the biotechnology and green energy cases, externalized costs
were attributable to the price of competence, which would have involved tremendous risk if it had
been pursued endogenously. Yet the public paid a much lower premium for competence
surrounding biotechnology than it did for expertise in green energy. Agricultural biotechnology
was relatively new and unprofitable. Green energy technology, on the other hand, was already
mature and competitive. Consequently, knowledge proprietors required compensation for high
opportunity costs. By contrast, in the case of restructuring toward aluminum shipbuilding in British
Columbia, externalized costs were mostly attributable to risk associated with learning. Given that
the aluminum shipbuilding industry was maturing as the regime sought to secure niche advantage,
technological setbacks detracted from firms’ competitive position in the blossoming industry.
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Ultimately, for better or worse, it was determined that the British Columbia aluminum shipbuilding
industry was uncompetitive and unsustainable.
Each of the three studies begins with a brief overview of the case. From there, each case
study proceeds in three steps. The first step provides an analysis of regime mobilization. The
second step details regime operation. The third step assesses the politics of dissolution and
reproduction associated with regime outcomes. The penultimate section of this chapter compares
the case findings and evaluates the extent to which the hypotheses and implications outlined in
Chapter 3 apply across the cases. It is demonstrated that the premises of the theory are generally
affirmed.
4.1 Aluminum shipbuilding in British Columbia
In May of 1994, the Government of British Columbia announced an ambitious plan to
revitalize and revolutionize both the ailing West Coast shipbuilding industry and the ageing fleet
of the government owned and operated British Columbia Ferry Corporation. The plan involved
diversifying away from conventional steel, monohulled ships toward an emerging second wave
aluminum twin-hull catamaran design. Although other jurisdictions —namely, Australia, Sweden,
Norway, and Finland— had a head start on BC shipbuilders, the novelty of the technology meant
that lead times were modest. Indeed, the first car-carrying aluminum catamaran of modern design
had only been introduced to market in 1990. Moreover, BC-built ships were to be the largest and
fastest in the world, capable of carrying 250 vehicles and 900 passengers at a speed of 37 knots —
four knots faster than the biggest, fastest 151 vehicle ship in operation at that time.82
The idea of utilizing large, vehicle-carrying, aluminum-hulled catamaran vessels on British
Columbian ferry routes was not new when the Harcourt New Democratic Party (NDP) government
took office in November 1991. Just one year earlier, the outgoing Social Credit government
considered and rejected a proposal by former Social Credit cabinet minister and marine
82 The technology was rapidly accelerating, however. Sweden’s Stena Line had ordered four vessels capable of
carrying 376 vehicles in early 1994. Thus, while BC-built ships may be the fastest car-carrying vessels on the market
by the time they were built, they would not be the largest.
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entrepreneur, Sam Bawlf, to invest in aluminum catamaran ferries designed by the Australian firm
Incat. Instead, the British Columbia Ferry Corporation —known colloquially as BC Ferries—
opted to invest in two Century Class “super ferries.”
Like the subsequent decision to build aluminum catamarans, the super ferries program was
also part of an industrial policy intended to stimulate and revitalize the BC shipbuilding industry.
However, after the BC Ferries procurement order was filled at a cost of $130 million per vessel,
anticipated international orders for super ferries were not forthcoming. The consortium formed to
build the vessels wound down in late summer of 1993 and the shipbuilding industry again fell on
hard times. Between 1992 and 1996, three of BC’s largest shipyards closed and the industry shed
more than 1,200 workers. Such was the economic, social, and technological context in which
British Columbia’s aluminum shipbuilding regime mobilized.
4.1.1 Mobilization
There was already something of a buzz about “fast ferries” in British Columbia when the
BC NDP won a majority in November 1991. As mentioned above, the outgoing Social Credit
government had previously considered integrating high speed aluminum catamarans into the BC
Ferries fleet. Around the same time, British-owned Sea Containers began operating an 80 car, 300
passenger Incat-built “SeaCat” aluminum catamaran on its Victoria to Seattle route. Canadian Fast
Ferries Corporation, a short-lived private ferry operator founded in August 1991, also employed
Norwegian-built aluminum catamarans in its “Royal Sealink Express” passenger-only ferry
service from the mainland to Vancouver Island.
Yet, fast ferries did not reappear on the formal government agenda until a cabinet retreat
the following September, the purpose of which was to hammer out the government’s strategic plan.
The first year of the Harcourt administration was thus largely dedicated to settling unfinished
business started by the Social Credit government. The super ferries program was a major item on
the list of unfinished business.
The super ferries policy followed on the heels of the federal government’s 1990
cancellation of the $689 million Polar 8 icebreaker contract, which had been awarded to BC’s
Versatile Pacific Shipyards. The cancellation of that contract, along with $22.5 million in pulled
modernization grants, was cause for government intervention. The intervention took the form of a
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$120 million super ferry contract initially awarded to Versatile but ultimately executed by a
consortium managed by Versatile’s successor company, Integrated Ferry Contructors Ltd. —a
shell company set up by BC Ferries when Versatile entered receivership in winter 1991. Despite
public and internal opposition, the incoming NDP government decided to honour Social Credit’s
commitment to build two vessels and authorized the construction of the second ship in February
1992. Having failed to achieve the program’s goal of securing additional orders for super ferries,
Integrated Ferry Constructors folded the following fall.
With the super ferries project behind it, the government outlined its ambitious plan for
economic renewal. Cabinet documents reveal that a component of the government’s original plan
was to “develop a ‘Caisse’ style investment strategy” that would “centralize investment funds [for]
investment in key industries.” Two major transportation initiatives mentioned in the document
were a rapid transit line to the Coquitlam suburb of Vancouver (which was not built until 2016)
and fast ferries.83 These measures, which were part of a development strategy that later took the
name BC 21, were to be overseen by the Ministry of Employment and Investment and the Crown
Corporations Secretariat.
After a nine month transition, and with the strategic plan in place, Bob Williams, director
of the Crown Corporations Secretariat and head of the government transition team, brought in Sam
Bawlf to advise on the feasibility of incorporating fast ferries into the government’s Mid-Island
Transportation Strategy. The strategy, which involved several departments, was initially overseen
by the Ministry of Finance. When Finance Minister, Glen Clark, was shuffled to the new Ministry
of Employment and Investment in September 1993, responsibility for the Mid-Island
Transportation Strategy went with him. Oversight of the Crown Corporations Secretariat was a
component of Clark’s mandate throughout his eight year tenure in government.
As noted above, Sam Bawlf was an earlier proponent of fast aluminum catamarans. Before
the 1990 decision to pursue super ferries, Bawlf had commissioned Vancouver engineering firm,
Sandwell Inc., to assess the feasibility of aluminum catamaran ferries on BC Ferries routes. What
is more, Bawlf’s company, Cancat Catamarans Inc, held a license for the use of Australian Incat
83 See BC Office of the Premier cabinet documents 1 October 1992.
146
technology in British Columbia. Both Williams and Bawlf had been long time critics of super
ferries and vocal proponents of fast catamarans.
The appeal of fast ferries was especially pronounced on BC Ferries’ Vancouver to Nanaimo
route, where considerable terminal congestion followed as an unintended consequence of the 470
vehicle super ferries. Sensing an opportunity, a private operator called Halcyon Transportation
devised a plan to operate a 150 passenger fast ferry from Vancouver to Nanaimo after obtaining a
technology transfer license from Incat. Neither the Vancouver to Nanaimo route nor Incat
technology were the only plans considered by the ferry industry, however. In December 1993,
Robert Ward of Pacific Fast Ferries submitted a proposal to BC Ferries to replace conventional
ships on its northern Vancouver Island routes with aluminum car-carrying catamarans built locally
with Norwegian technology.
Amid the stir of excitement around fast ferries, Glen Clark undertook an information
gathering mission to Europe in early 1994, where he was apparently sold on the fast ferries concept.
Yet, by all indications, BC Ferries was hesitant to adopt fast ferry technology. In reaction to
Bawlf’s 1990 proposal, BC Ferries technical director, T.G. Blyth said in a communication to
management “It is difficult finding any sensible argument as to why B.C. Ferry Corp. should ever
consider such a type of vessel.” Four years later, the corporation continued to express reservations
about the technology in its ten year capital plan, in which it proposed trials using a leased vessel
(Morfitt 1999). However, in March 1994, the Crown Corporations Secretariat took control of the
BC Ferries capital plan and submitted a proposal to cabinet justifying fast ferries on “Route 2” —
Vancouver to Nanaimo— under the auspices of potential cost savings and the government’s
industrial policy goals.84
Despite the removal of the BC Ferries board as veto player, the proposal obtained only
qualified approval from cabinet, whose recommendation was to “revise the approach to [the Mid-
Island Transportation Strategy] by deferring conversion of Route 2 to fast car ferries until BCFC
can demonstrate that the technology has been proven and the risks to the province are minimized.”
Importantly, the projected cost for three aluminum hulled fast ferries contained in the business
84 See BC Office of the Premier cabinet documents, 29 April 1994.
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plan submitted to the Treasury Board by the BC Transportation Financing Authority was $125
million —a cost of $41.6 million per vessel.85
Three weeks later after apprising the media of the project, Clark took the $800 million
capital plan back to the Treasury Board in late May 1994. There, the fast ferries project was
approved in principle. The text of the Treasury Board decision from 1 June reads: “The exact
specifications of the replacement vessels have yet to be defined, and further planning and
evaluation in this regard is still required. A final decision on the specifications would be made by
BC Ferries' board subject to fiscal parameters established by the government” (BC Office of the
Premier 1994).
In July 1994, Frank Rhodes, Clark’s deputy, was re-instated in his previous position as
president and CEO of BC Ferries to oversee the implementation of the capital plan. At the same
time, former president of Vancouver Shipyards, Tom Ward, was appointed to BC Ferries as senior
vice president of engineering and construction to manage the shipbuilding component of the
project. Interestingly, Rhodes had rejected Sam Bawlf’s 1990 proposal to integrate high speed
aluminum catamarans into the BC Ferries fleet.
The government put out a call for bids on the ferries’ design later that summer, with the
stipulation that foreign designers would have to partner with, and transfer their design technology
to, one or more BC companies to qualify. John Bruce, vice president of Sandwell Inc. —a firm
that had intermittently conducted feasibility studies on fast ferries since Sam Bawlf’s 1990
proposal— was retained to assist in evaluating bids. Proposals were received in October and a
decision was made a month later in favour of a design submitted jointly by Phillip Hercus of Incat
and Robert Allen, a Vancouver-based naval architect. Incidentally, Phillip Hercus was a long-time
business associate of Sam Bawlf. The approved design was for a craft 102 meters long with a
capacity of 240 cars and 800 passengers, to be built at a cost of $70 million per vessel. The first
ship was expected to go into service in 1996 with two more to follow. The plan was to solicit
competitive bids from the shipbuilding industry, but technology transferred from the designers was
to be vested with BC ferries.
85 See BC Office of the Premier Treasury Board minutes, 1 June 1994.
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At that time, planners knew that a state of the art ship building facility would need to be
outfitted. Planners hoped the largest shipyard in the province, Seaspan’s Vancouver Shipyards of
North Vancouver, would bid to lead the project. Indeed, Bawlf’s enthusiasm for the technology
was apparently premised on an earlier assessment he had received from Tom Ward of Vancouver
Shipyards claiming a 113 meter vessel could be constructed by Vancouver Shipyards at a cost of
$70 million (quoted in Gordon 1999). Recall also that the British Columbia Transportation
Financing Authority estimated only $41.6 million per vessel in its submission to the Treasury
Board. According to such projections, British Columbia had both a differential and cost advantage
over the international competition, making the venture very attractive from an industrial policy
standpoint. However, by the time bids were solicited in early 1995, Vancouver Shipyards was at
best lukewarm on the project.
The possibility that BC Ferries would need to be directly involved in production was
approved in principle following a submission to cabinet by Glen Clark in June 1994 requesting
“approval for government to encourage Crown corporations to vigorously pursue entrepreneurial
activities outside of their traditional core functions to create new wealth and jobs in the
province.”86 As the government prepared for direct involvement in production, three Vancouver
Island companies formed a consortium under the name Consolidated Pacific Industries in June
1995 with a plan to bid on modular fabrication work. The consortium consisted of Point Hope
Shipyards, Ramsay Machine Works, and Alberni Engineering. While BC’s second largest yard,
North Vancouver’s Allied Shipbuilders, expressed interest in partnering with the consortium, only
Vancouver Shipyards had facilities large enough to complete the hull and bridging work.
Apart from a company “go it alone” policy, Vancouver Shipyard’s reluctance to join the
project stemmed from lack of control over marketing the new vessels. Tom Ward, who had
connections at Vancouver Shipyards from his days running the company, set about trying to get
Vancouver Shipyards on board. After obtaining a partial (verbal) commitment from Vancouver
Shipyards, planners announced the construction of a $9 million assembly facility in October 1995
(later revised to $12.4 million), at which time the project was four months behind schedule,
86 See BC Office of the Premier Cabinet documents, 16 June and 3 October 1994.
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pushing back the commercial launch date to early 1997. The plan was to have the other two vessels
completed by the end of 1997.
Contracts were scheduled to be awarded on a fixed cost basis in November 1995, but they
never materialized. In December 1995, Detroit Diesel-Allison of Surrey BC was awarded a $40.5
million contract to supply and maintain twelve German-made engines required for the three ships.
Later that month, the BC Ferries board of directors approved establishing a subsidiary, Catamaran
Ferries International (CFI), to coordinate the project and oversee the ships’ final assembly.
However, it was not until March 1996, after premier Mike Harcourt resigned following the
“bingogate scandal,” that CFI was formally established by an Order in Council approved by the
new premier of British Columbia, Glen Clark. In the interim, a second technology transfer
agreement had been signed with the Finnish shipbuilder, Finnyards, in February, the purpose of
which was to “use their modular construction know-how [to] enable Canadian shipbuilders to pass
the Australians and challenge the higher quality of the European Construction” (Catamaran Ferries
International 1997). The first order of business for CFI was to appoint Alexander Hamilton, a
renowned Scottish shipbuilder, to the post of vice president and general manager of the new
company.
With CFI established and the technology transfer agreements in place —and with the
project and the construction of the assembly facility significantly behind schedule— memoranda
of understanding on labour and overhead were signed between the government and the smaller
yards in late December 1996 (Gordon 1999). Subsequently, in July 1997, two Vancouver area
companies —ABD Aluminum Boats and Fraser Shipyards— formed a joint venture called A&F
Aluminum Catamarans, which was brought on to build the ships’ superstructures. Later that year,
Delta-based aerospace parts manufacturer, AVcorp, was awarded a $2.6 million contract to
manufacture lightweight interior fixtures. Although costly, aerospace-grade fixtures were required
to minimize the ships’ overall weight.
Meanwhile, in the knowledge regime, the program to train shipyard workers in aluminum
welding techniques was managed though a joint venture between the shipyards and their unions.
The contract to train project instructors in aluminum welding techniques was awarded to
Tasmania’s TAFE Hobart, an Australian technical college located approximately ten kilometers
from Incat’s headquarters. With respect to interior design, contracts were initially awarded to
Vancouver architectural firm Busby and Associates but were later transferred to Figura, a Swedish
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design company. The rationale for the switch was aesthetic; the intention was to match and surpass
European shipbuilders’ differential advantage in interior design.
Although the regime was mobilized in the winter of 1995-1996 under the directorship of
CFI, the CFI board of directors was not formed until spring 1996 and did not meet until late June
of that year. Up until that point, the regime was coordinated by the Crown Corporations Secretariat
and its advisers from Sandwell Engineering. Importantly, although construction on the first ship
began at Vancouver Shipyards in April 1996, a memorandum of understanding between the
government and Vancouver Shipyards did not materialize until May 1998 —after the first ship
was already built (Morfitt 1999).
In what turned out to be an abortive effort to distance the project from the government, the
original CFI board of directors was selected for its business acumen and private sector expertise.
It was chaired by Lucille Johnston, who had previous experience chairing the board of Integrated
Ferry Contructors, the consortium responsible for the super ferries project. The rest of the board
consisted of: Frank Rhodes, BC Ferries president and CEO; Michael Goldberg, dean of the
commerce faculty at the University of British Columbia; Kevin Murphy, senior vice president for
development for Concord Pacific; Kenneth Bagshaw, a law partner at Ladner Downs; Glen Brown,
BC Ferries vice president of finance and Corporate services; and Tom Ward, BC Ferries senior
vice president for engineering and construction. This board served for less than one year, from
June 1996 until April 1997, after which it was staffed entirely by BC Ferries personnel.
Figure 4.1 depicts the organization of the British Columbia aluminum shipbuilding regime.
CFI and BC Ferries, along with Tom Ward and Frank Rhodes, constitute the core where the policy
regime, knowledge regime, and production regime overlap. The main actors in the policy regime
are Glen Clark, Bob Williams, and Sam Bawlf, all of whom were favourable to the policy of
integrating fast aluminum catamarans into the BC Ferries fleet. Sandwell Engineering, which
worked closely with Sam Bawlf, is also a component of the policy regime. The production regime
consists of Vancouver Shipyards, the firms comprising Consolidated Pacific Industries, the A&F
Aluminum Catamarans joint venture, and Detroit Diesel-Allison. The knowledge regime is
composed of TAFE Hobart Australia, Finnyards, Robert Allen Ltd., and Incat, the latter three of
which are also part of the production regime. Owing to their technical assessment functions, BC
Ferries and Sandwell Engineering are part of both the knowledge and policy regime. Glen Clark’s
relationship with his former deputy, Frank Rhodes, is conveyed by a tie, as is the connection
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between the Crown Corporations Secretariat and BC Ferries, the link between Sam Bawlf and
Phillip Hercus of Incat, the link between Tom Ward and Vancouver Shipyards, and the association
between BC Ferries and CFI.
Figure 4.1: the British Columbia aluminum shipbuilding regime
The discussion so far has touched upon all of the components of the theory of regime
mobilization developed in previous chapters. Recall that the conditions affecting regime
mobilization can be understood in terms of means, motive, and opportunity. As discussed in
Chapter 2, given that governments are free to engage in deficit financing, the issue of means is
closely tied to motive. That said, the fast ferries program narrowly missed the proverbial boat, as
cabinet began to prioritize waste reduction and fiscal constraint in February 1995, following
extensive consultations with prospective voters. Consequently, in June 1996, the Treasury Board
announced a $260 million freeze on planned capital projects pending efficiency and cost
effectiveness reviews. While construction on the first fast ferry was allowed to proceed on the
argument that the province had already made commitments to shipyards, the freeze temporality
postponed construction on the second and third vessels.
With respect to motive, although the desperate situation facing the BC shipbuilding
industry in the early 1990s was politically salient, it was not evident that fast aluminum ferries
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were an appropriate solution to the problem. Indeed, fast ferries were pitched by Sam Bawlf in
1990 and rejected in favour of super ferries. Yet, the super ferries themselves became an object of
criticism, not least because they contributed to traffic congestion at the terminals servicing the BC
Ferries Vancouver to Nanaimo route. In other words, super ferries created a problem that
necessitated a novel solution.
The opportunity to pursue a different (but by no means new) solution came with the change
of government in 1991. That change brought with it a fortuitous turnover in personnel, namely the
appointment of Bob Williams as head of the government transition team and the appointment of
Glen Clark to the post of Finance Minister. Williams, who was hostile toward super ferries and
favourable toward high speed aluminum catamarans, quickly became director of the Crown
Corporations Secretariat and granted government access to fast ferry entrepreneur, Sam Bawlf, on
an advisory basis. By 1994, after becoming Minister of Employment and Investment and head of
the Crown Corporations Secretariat, Glen Clark was also an avid proponent of high speed
aluminum ferries.
Although Williams, Bawlf, and Clark all fulfill the criteria of “policy entrepreneur,” only
Clark had the means to mobilize the regime. Yet, mobilization was no easy task. Although the
responsiveness of Canadian provincial governments is facilitated by comparatively little
institutional friction, there was nevertheless considerable resistance to the project by veto players
within the Treasury Board and BC Ferries. The BC Ferries veto was effectively nullified when the
Crown Corporations Secretariat took over responsibility for BC Ferries’ ten year capital plan in
March 1994. The Treasury Board, meanwhile, reluctantly succumbed to political pressure to go
forward with the program the following June, but with the stipulation that craft design would have
to be approved by the BC Ferries board of directors. As we will see in the next section, both the
Treasury Board and BC Ferries were victims of principal-agent problems of asymmetric
information. Indeed, several sources contacted for this study suggested the whole government was
captured by a small cadre of technocrats favourable to the fast ferries policy.
4.1.2 Building competence
As discussed above, the fast ferries project was premised on the assumption that a
partnership involving Vancouver Shipyards could produce the vessels at a cost of $70 million a
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piece. However, the expectation that Vancouver Shipyards would lead the venture was dashed by
the industry’s unwillingness to proactively reorient operations toward second wave aluminum
design. As stated in the November 1996 fast ferries project description, “BC Ferries has to provide
the leadership to the industry, which is lacking capacity, skills, technology and commitment” (BC
Ferries 1996). Thus, CFI was established as a subsidiary of BC Ferries to oversee and coordinate
the project. The major partner —Vancouver Shipyards— was to construct the ships’ hull and
bridging. The lesser partners —Consolidated Pacific Industries and A&F Aluminum
Catamarans— were to fabricate modules and the ships’ superstructures. The geographical
dispersion of the regime members is conveyed in Figure 4.2.
Figure 4.2: geography of the BC aluminum shipbuilding regime
Besides being among the largest and fastest aluminum catamarans in the world, the
FastCats as they came to be known, were to be the first ships to integrate water jet engine
technology. Moreover, compared to conventional monohulled ferries, the horseshoe design of the
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vehicle decks would allow the FastCats to be simultaneously onloaded and offloaded, creating
time savings for operators. With assistance from Incat and the Canada Export Development
Corporation, CFI expended considerable resources on marketing the design and engineering
advantages of the vessels both domestically and abroad.
Restructuring the British Columbia shipbuilding industry away from a mature first wave
design toward a new but quickly emerging subsequent wave technology involved significant
investment. Design and fabrication know-how had to be acquired from Incat, Robert Allen Ltd,
and Finnyards. Skills training had to be provided by TAFE Hobart and local colleges. Considerable
upgrades had to be made to partners’ facilities, all of which were primarily oriented toward steel
welding and fabrication. Most of all, the CFI assembly facility had to be built from scratch. The
expenses involved in positioning the regime toward joint production are summarized in Table 4.1.
Table 4.1: major coordination expenses of the BC aluminum shipbuilding regime
(millions)
Planning $5.9
Materials handling $1.5
Yard upgrades Alberni Engineering $0.1
Yard upgrades Ramsay Machine Works $1.2
Yard upgrades Vancouver Shipyards $2.5
Yard upgrades (other) $5.0
Equipment $4.7
Fast ferries facility $12.4
Skills audit TAFE Hobart $0.4
Skills training $3.7
Engineering Robert Allen $1.0
Technology transfer Incat $1.5
Technology transfer Finnyards $2.5
TOTAL $42.4
Source: CFI corporate files. Does not include marketing costs. 1996 CAD.
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As noted above, the original intention of the government was to assume only the
coordination costs of industrial restructuring. Yet, by 1995, it was clear the province would have
to assume production costs as well. After the establishment of CFI as a crown subsidiary of BC
Ferries, the revised plan was to create a “provincial champion” by positioning CFI for eventual
privatization. It was acknowledged that getting the industry through restructuring would require
furnishing a state of the art assembly facility, assuming the costs of product line development, and
partnering on the construction of three vessels of the flagship design. Although Vancouver
Shipyards surprised planners early on by turning down the opportunity to lead the project, the
general sentiment was that Vancouver Shipyards would absorb CFI when restructuring was
complete. This did not happen. Instead, just as the theory developed in Chapters 2 and 3 predicts,
the regime succumbed to significant principal-agent problems, rent-seeking on the part of large
producers, and considerable cost externalization.
After regime participants balked at the prospect of fixed cost contracts during mobilization,
the alternative was to institute cost-plus agreements. This method of coordination permitted CFI’s
partners to overrun their budgets without consequence. Not only did such an arrangement invite
moral hazard problems, the monitoring apparatus was virtually non-existent for the construction
of the first vessel and remained wanting by the time the third ship was completed. Figure 4.3 breaks
down the budgeted and actual cost of alloy production for each party to the regime.
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Figure 4.3: production costs by participant in the BC aluminum shipbuilding regime
Source: calculated from CFI corporate files. Bars represent alloy hours and related labour cost for each ship (HSF001-HSF003). Projected amounts represent the initial targets established by CFI in 1996. Reported in 1996 CAD.
As evident by Figure 4.3, the budgeted cost of the program did not constitute a hard budget
constraint. Rather, overages were externalized, first onto BC Ferries’ corporate debt and,
subsequently, onto the provincial treasury. Although the coordination cost of facilities upgrading
was significant, the bulk of the overrun is attributable to production costs incurred by shipyards.
One shipyard billed over $1 million in overtime on the first vessel alone.
There are two explanations for why the project ran drastically over budget. On one hand,
while all industrial policy is vulnerable to principal-agent problems, industrial restructuring is
especially prone to moral hazard and rent seeking behaviour, as existing firms have unilateral
opportunities to fall back on conventional methods of production. On the other hand, per the
knowledge transfer trade-off introduced in Chapter 3, in house technological development
involves steep learning curves, inefficiency, and costly mistakes. The two explanations are not
necessarily mutually exclusive. I will explore each in turn.
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As noted earlier, although construction began on 1 April 1996, the CFI board of directors
did not convene until late June. By the time the CFI board got up to speed, it was apparent that the
project suffered from cost containment issues. In November 1996, with the first ship roughly 40%
complete, the board established “optimistic” and “pessimistic” budget forecasts for the project.
The optimistic projection estimated a total cost of $240 million; the pessimistic projection
estimated a total cost of $284 million. In budgetary terms, the projections were $30 million and
$95 million above target.87
Given that a cost per vessel greater than $70 million would jeopardize the industry’s
competitive advantage and undermine its export potential, the CFI board of directors quickly
sought to identify the source of the overages. In a February 1997 correspondence with the president
of one of the shipyards, Tom Ward identified three floor managers as the source of the problem.
While noting that labour strife “had an overall adverse effect on productivity,” Ward pointed to
resistance on the part of the “old guard” to adopt best practices transmitted from the knowledge
regime as the main impediment to production efficiency. In his letter, Ward stressed that “it is
vitally important that this first ship be brought in on budget, and be highly visible during the final
session of the Asia Pacific Economic Cooperation Conference in November when many of the
world leaders and most of the world press will be on the Vancouver waterfront.”88
Following that correspondence, the CFI board carefully considered options for cutting the
yard out of the regime. It determined that the second largest partner —Allied Shipbuilders— was
too “cautious” and otherwise preoccupied with contracts for conventional steel ships to assume
additional responsibilities. With few options, the CFI board arrived at the following decision in
early March:
…we should push for the replacement of three of [the yard’s] management
team. Should this request be rejected we will consider a lease option of
[the yard’s] fast ferry facility whereby CFI would operate, bringing about
the efficient use of both manpower and facilities.89
87 See CFI board meeting minutes, 28 August 1996.
88 See CFI internal memos, 28 February 1997.
89 See CFI internal memos, 7 March 1997.
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By April, 1997, as cabinet was quietly considering bailout options for BC Ferries, private
sector members of the CFI board were organizing a coup against the problem yard. In a 17 April
presentation to the board, Andrew Hamilton reviewed cost estimates prepared by Sandwell
Engineering regarding the possible expansion of the CFI facility as a “backup option.” At that
meeting, Michael Goldberg requested additional financial analysis, pointing to the fact that “the
additional facility could serve to do more than just threaten [the yard]” —rather, an expanded
facility might facilitate privatization of the project. Goldberg also hastened to point out that “the
mandate to keep shipbuilding alive in this region was not restricted to specific shipyards, but to
the industry in general… because ship workers are free to move from yard to yard, CFI would still
be creating and keeping jobs alive.” Kevin Murphy echoed Goldberg’s sentiment, stating that
“having such a facility would provide CFI with more leverage and would result in a change of
attitude from the industry.” Frank Rhodes, who had close ties to the NDP executive and was
president and CEO of both CFI and BC Ferries, requested a detailed report be submitted at the
next board meeting.90 However, by the end of the day, the original CFI board of directors had been
asked to resign. With the board went the idea to dump the problem yard.
A replacement board was formed the following week. It consisted of a new chair, Jack
Munro, as well as Curtis Eaton, Shirley Chu, Paul Gill, Keith Haigh, and Ash Katey —all of whom
were on the BC Ferries board of directors. Frank Rhodes and Tom Ward retained their positions.
The only remaining executive not affiliated with BC Ferries was vice president and general
manager, Andrew Hamilton. Hamilton stayed on until January 1998, at which point he was
replaced by John Wells, a former BC Ferries engineer and general manager for Versatile Pacific
(which, recall, built the super ferries). Interview sources indicate Hamilton, like the original CFI
board, was pressured to resign over conflicts with the problem yard.
Based on the data I have analyzed to this point, it is speculative but probable that Tom
Ward and Seaspan’s new owner, Dennis Washington, discussed plans for Vancouver Shipyards to
acquire CFI during meetings held in the spring of 1997 (recall that Vancouver Shipyards is owned
by Seaspan International). Washington’s company —the Washington Marine Group— submitted
a proposal to purchase CFI’s assets in spring 1998, just prior to the launch of the first FastCat,
90 CFI board of directors minutes, 17 April 1997.
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HSF001. Less than a year earlier, Frank Rhodes retired from BC Ferries/CFI and accepted a
consulting position with the Washington Group. Reluctance on the part of the BC Ferries and CFI
executives to alienate private interests in the industry can therefore be viewed as a symptom of
clientelism. Given the NDP’s social democratic and pro-union leanings, the government was
probably uneasy with the notion of laying blame for low productivity on the “old guard.” What is
more, seeing that planners had intended for Vancouver Shipyards to eventually lead the industry,
it is clear that Vancouver Shipyards was not simply an agent of government but a client as well.
The premise that BC Ferries and CFI executives were captured by industry is evidenced by
tendencies on the part of BC Ferries and CFI executives to deliver misinformation about the
performance of BC’s shipyards. Recall that it was Tom Ward’s analysis submitted to Sam Bawlf
—which allegedly stated that Vancouver Shipyards could build the vessels for $70 million
apiece— that inspired initial confidence in the venture. Even more telling is Ward’s insistence in
a 1997 letter to the federal Minister of Transport that “although the production learning curve has
been quite steep, productivity at [the BC shipbuilding industry] is already approaching that of
Australia.”91 As indicated by the difference between budgeted and actual hours in Figure 4.3,
productivity was nowhere near Australia’s in 1997 or at any point thereafter.
As CFI was changing management, the political executive —which had turned to a policy
of fiscal restraint the previous year— scrambled to find a way to finance the BC Ferries’ mounting
debt. Over objections from the Committee on Legislation, cabinet approved increasing BC Ferries’
debt allowance from $730 million to $1 billion dollars. The option of increasing the government
subsidy to the corporation was considered but rejected in favour of keeping expenses related to the
capital plan on the BC Ferries books and out of the public accounts.
As noted above, the other explanation for cost overruns hinges on technological issues,
namely the short run disadvantages of developing technological know-how in house. Although
knowledge and expertise had been transferred from Incat, Robert Allen, Finnyards, and TAFE
Hobart, learning-by-doing was a major component of the fast ferries program. On this point, ship
builders complained that drawings were often late, incomplete, and inaccurate. As a consequence,
many components of the first ship had to be built and fitted multiple times, creating bottlenecks
91 See CFI internal memos, 7 January 1997.
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and other costly inefficiencies. Along these lines, reviews conducted in 1999 by the Crown
Corporations Secretariat and the Auditor General found that revisions and modifications to design
drastically undermined productivity and drove up the cost of production (Gordon 1999; Morfitt
1999).
The project also suffered from unrealistic timetables. For instance, the November 1997
unveiling of HSF001 at the Asia Pacific Economic Cooperation Conference was ill-advised from
a business standpoint, as it necessitated that incomplete modules be temporarily fitted to the vessel,
only to be removed and reworked later. Similarly, the premature launch of HSF001 in June 1998
meant that work on the ship’s interior could not proceed efficiently. In both cases, there was
political pressure to showcase what was essentially a Potemkin ship.
That all said, for all of the problems with HSF001, the regime apparently could not produce
a vessel for much less than $105 million. Figure 4.4 graphs the regime’s learning curve for three
ships. The diminishing marginal rate of productivity suggests that, absent substantial modifications
to its corporate structure, it is unlikely the BC regime could ever attain cost advantages over the
international competition.
Figure 4.4: marginal rate of productivity, HSF001-HSF003
Recall the initial conditions for the theory of regime operation are the objectives, resources,
and expertise that private, public, and third sector agents bring to the regime. As hypothesized in
Chapter 3, in the restructuring type of industrial policy, objectives, resources, and expertise work
at cross purposes. Incentive to seek rents and resist effective restructuring on the part of major
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partners serves to undermine collective goals. Commitment to restructuring is also likely to be
lacklustre when regime members have options to revert to unilateral production using old
technology. Moreover, as in a stag hunt, partners have an incentive to extract rents only to abandon
the regime as it suits them.
Although Vancouver Shipyards never abandoned the regime outright, after its parent
company submitted what was determined to be an unacceptable proposal to acquire CFI in 1998,
Vancouver Shipyards began to drift from the regime. In 1999, Vancouver Shipyards pulled out of
the regime’s joint marketing group and acquired its own aluminum ferry technology from the
Norwegian firm, Kværner. This move placed Vancouver Shipyards in direct competition with CFI
in the under 70 metre ferry market (Catamaran Ferries International 1999).92 The irony here is that
a 1993 bid by Pacific Fast Ferries to implement Norwegian fast ferry technology in BC was
rejected by planners who were biased toward Australian technology. Recall, this bias was an
artefact of Sam Bawlf’s relationship with Philip Hercus of Incat. As noted in Chapter 3, industrial
restructuring will tend toward semi-closed regimes of moderate size because participants must be
properly aligned with (and disposed to) the particular technological route pursued by the regime.
Consequently, Pacific Fast Ferries was not invited to be part of the BC aluminum shipbuilding
regime.
On the issue of unilateral amounts, the second largest shipbuilder —Allied Shipbuilding—
did not show much more interest in the future of the venture than Vancouver Shipyards. In fact,
Allied had secured orders for conventional Century Class 100-vehicle vessels in 1998 and was
working on financing future orders for conventional ships through its union’s pension fund. Low
productivity on the fast ferries project may be explained by its preference for unilateral production,
implying a defect strategy in stag hunt.
With respect to technology, the British Columbia aluminum shipbuilding industrial policy
was geared toward a second wave design in the incremental stage of development, meaning that
competition was becoming intense just as the regime was mobilizing (see Figure 4.13 below). As
discussed in Chapters 2 and 3, being a liberal political economy, British Columbia lacks the
institutions to effectively and equitably coordinate subsequent wave, incremental innovation.
92 In September 1999, Vancouver Shipyards and CFI worked out an agreement whereby Vancouver Shipyards would
compete with CFI on ships under seventy meters and would work with CFI for orders over seventy meters.
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Instead, the fast ferries policy was both costly and ineffective. On the issue of cost, there were few
safeguards against rent seeking.
I have argued in previous chapters that regimes in liberal political economies are likely to
be clientelistic. Moreover, I have argued that public sector principals in liberal regimes are liable
to be captured by private sector agents. Regarding inefficacy, the British Columbia aluminum
shipbuilding regime exhibits several pathologies identified in Chapter 3 regarding industrial
restructuring and endogenous knowledge and skills development. Per the knowledge transfer
trade-off, the theory predicts low initial productivity as a consequence of design problems, learning
curves, and coordination issues. While it is clear from Figure 4.4 that a learning curve exists in
this case, it is doubtful that the regime could ever cultivate a niche advantage in aluminum
shipbuilding without the imposition of hard budget constraints and other institutions foreign to
liberal political economies.
4.1.3 The politics of policy termination
The most notable thing about the so-called “fast ferries fiasco” is the extent of subterfuge
exhibited by officials responsible for the program. Although CFI executives were aware of cost
overruns almost from the beginning, there is (and continues to be) denial about who knew what
and when. Rumors in the air since 1997 became facts in January 1999, when the BC Ferries board
of directors was apprised of the fact that the cost of the project had climbed $106 million over
budget to $359 million and counting (Morfitt 1999). At that time, HSF002 was approximately 60%
complete and HSF003 15%. Tom Ward immediately resigned from his joint post at BC Ferries
and CFI. Shortly thereafter, the Crown Corporations Secretariat issued an audit of the program. It
was followed by a review by the Auditor General. The first of these audits culminated in the
resignation of the rest of the BC Ferries and CFI boards in late February.
Throughout 1999, the media lambasted the project and the officials involved for soaring
costs. Technical reports proved initially favourable and so hope that CFI would be viable as a
private entity was sustained for the duration of the year. In August 1999, one month after HSF001
entered its troubled and short-lived service life on BC Ferries Route 2, Glen Clark was forced to
resign as premier over an unrelated scandal, shifting the torrent of criticism for fast ferries onto
Clark’s deputy and interim premier, Dan Miller. Meanwhile, CFI received an expression of interest
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from the US firm, Hydrolink, for two 72 metre vessels for use on Lake Ontario and the Bahamas.
The following month, an independent confidential review of CFI’s business plan by AGRA
Engineering Global Solutions stated “the plan makes an almost overwhelming case for CFI getting
out of the fast ferry business.”93 By October, with a total project cost of $454 million and an asset
book value of only $9.6 million, CFI’s focus was on divestiture. The hope was that the Hydrolink
deal would facilitate the transfer of the corporation into private hands.
In February 2000, Ujjal Dosanjh became the leader of New Democratic Party and premier
of British Columbia. Unlike Dan Miller, Dosanjh had little to do with fast ferries and so opted to
wash the executive’s hands of the project, joining the Liberal opposition in its criticism of the
program. With few defenders left, and with relentless technical issues, BC Ferries removed the
FastCats from service. Meanwhile, CFI entered discussions with the British Columbia
Government and Service Employees' Union (BCGEU) regarding “new work practices” necessary
to achieve the 35% labour reductions required to make CFI viable as a private entity. Ultimately,
however, after considering two options for transitioning CFI to the private sector —one of which
would entail provincial subsidies of $9 million and the other $16 million— cabinet opted in March
2000 to dispense with CFI on an “as is basis and obtain the best possible salvage value.”94
With that, the fast ferries saga came to an end. In February 2000. One billion dollars of BC
Ferry debt was rescinded by transferring it back to the government —although not without ample
cabinet discussion about how to lessen its political sting. In the 2001 election, after a lethargic
campaign by the NDP, the Liberal Party obtained a landslide, reducing the NDP to two seats.
Although the Liberals did not need to campaign on the issue of fast ferries (the NDP had already
nixed the policy), fast ferries have been a mainstay of British Columbia politics ever since. Once
in office, the Liberals commissioned a combined governance review of BC Ferries and a technical
review regarding “alternative uses for the fast ferries” (Wright 2001). After unsuccessful attempts
to offload the three fast ferries, they were mothballed and auctioned in 2003. The Washington
Marine Group entered the winning bid —$20 million for all three ships— and subsequently sold
the vessels in 2009 to a company in the United Arab Emirates for an undisclosed amount.
93 See CFI internal memos, 28 September 1999.
94 See BC Office of the Premier Cabinet documents, 16 March 2000.
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According to the theory of regime outcomes, distributive, social, and normative conditions
produced by regimes are evaluated by voters, parties, and the media. Regimes are then reproduced
or terminated via the electoral process. The high cost of the fast ferries program was certainly
seized upon by the media. Moreover, the public had turned against public sector entrepreneurialism
prior to the 1996 election, favouring instead a policy of fiscal constraint. Given the widespread
attitude that the policy was indefensible, it did not take a general election to overturn the regime,
however. Rather, changes to the NDP leadership in early 2000 foreshadowed the 2001 election as
both the new NDP leadership and the Liberal opposition harshly criticized the fast ferries project.
I return to the question of how well regime theory explains the case of British Columbia’s
aluminum ship building industrial policy in the penultimate section of this chapter. There, readers
will find a more rigorous application of the tools developed in earlier chapters to the story of
aluminum shipbuilding in British Columbia.
4.2 Agricultural biotechnology: the case of canola
The agricultural biotechnology industry consists of several overlapping knowledge,
production, and policy regimes concerned with microbial organisms, plant breeding, and
transgenic processes. For the sake of brevity and intelligibility, I will focus on plant breeding and
transgenetic biotechnology related to canola during the last fifteen years of the twentieth century.
The focus is appropriate, as it captures key events in the development of the industry and
technology.
Canola is the product of selective breeding of the brassica plant —otherwise known as
rape— undertaken to eliminate undesirable characteristics stemming from erucic acid, iodine, and
glucosinolate content. When the canola moniker was introduced in 1978, seeds qualifying as
canola were required to exhibit less than 5% erucic acid and less than 3mg per gram of
glucosinolates. Since 1986, seeds qualifying as canola contain less than 2% erucic acid and 30
micromoles of glucosinolates per gram. Whereas erucic acid and glucosinolate in naturally-
occurring rapeseed make its meal and oil both unpalatable and hazardous for consumption,
bioengineered derivatives have been regarded as safe for human consumption since the 1980s.
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This case documents the transformation of rapeseed oil from its conventional use as a
marine engine lubricant in the 1940s to the one of the world’s most popular and healthy edible oils
in the 1990s. The canola industry emerged in the 1980s as a result of a sui generis industrial policy
regime loosely centred in Saskatoon, Saskatchewan. Gray, Malla, and Phillips (2001) document
four stages of the Canadian canola industry from genesis to maturation. The first stage spanned
the 1944-1967 period and was dedicated to basic research conducted predominantly in government
labs. The second stage, 1967-1973, witnessed the initial organization of industry associations
dedicated to branding, market research, outreach, and extension. The regime truly mobilized in the
third stage, 1974-1990, when the initial product was perfected, regulatory hurdles were cleared,
transgenic processes were introduced, and private actors became noticeably active in the industry.
The fourth and final stage, 1990-1999, saw the exploitation of canola’s potential with respect to
herbicide tolerance, yield improvement, hardiness, insect resistance, and novel applications. The
fourth stage also culminated in the vertical integration of the industry in private multinational
corporations.
Figure 4.5: significant events in canola development
As seen in Figure 4.5, the 1985 to 2000 period covers the better part of one technological
growth curve, from infancy to maturation. Notable events include the commercialization of canola
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in 1978; the introduction of national and provincial biotechnology strategies in the early 1980s;
the introduction of herbicide tolerant (HT) canola in 1984; the incorporation of the main steering
organization for agricultural biotechnology in western Canada, Ag-West Biotech, in 1989; the
effort to attract international investment to Saskatoon in the early 1990s; and the first genetically-
modified (GM) crop of canola in 1997. Although developments are ongoing, the industry had
largely consolidated by 2001. Consequently, the regime actors that effected the radical innovation
necessary for commercialization have either parted ways or turned their attention to other ventures
related to biotechnology. The following sections chronicle the regime’s mobilization, operation,
and windup.
4.2.1 Polycentric initiation
Canadian production of rapeseed began with a garden crop of Polish seeds planted in
Shellbrook, Saskatchewan in 1936. In the early years, given its unpalatable flavour, colour, and
odor, rapeseed oil was used primarily as a marine engine lubricant, while its meal was used as
animal feed and fertilizer. Allied naval demand for Canadian rapeseed oil spiked during the Second
World War when European and Asian supplies were cut off. In 1942, the first commercial scale
rapeseed crop was planted in Saskatchewan and Manitoba to supply the war effort. The program
was overseen by the Forage Crop Division of the federal Department of Agriculture.
Scientific research on rapeseed began shortly after the wartime scale up in 1944 at the
National Research Council’s Prairie Regional Lab in Saskatoon. Major scientific advances
coincided with the introduction of commercial crushing and extraction to Saskatchewan. Between
1957 and 1963, researchers at the Prairie Regional Lab in Saskatoon and the Dominion Forage
Lab in Winnipeg acquired gas-liquid chromatography (GLC) units and perfected methods for
efficiently analyzing the chemical composition of minute oil samples. In a major breakthrough,
Keith Downey, B. M. Craig, and Bryan Harvey —three Agriculture Canada researchers at the
Prairie Regional Lab— developed a method whereby half a seed could be GLC tested for chemical
composition while the other half could be planted. This technique allowed thousands of seeds to
be tested in 1962 and 1963. Using this process, Agriculture Canada scientists discovered and bred
Liho, the first low erucic acid rape from an Argentinian seed in Winnipeg in 1960. Colleagues at
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the Saskatoon lab followed up Liho with low iodine Nugget in 1961, high yield Tanka in 1963,
and the first Canadian low erucic acid variety, Oro, in 1968 (McLeod 1974).
With the advent of low erucic acid rapeseed, the stage was set for commercialization. Early
movers included the prairie pools, Western Canadian Seed Processors (later Canbra Foods), and
Canada Packers. Regarding extension, the prairie pools and Svalof —a Swedish seed and
agrobusiness firm— had a marketing arrangement for Swedish transplants dating back to the
1950s. With respect to oil production, crushing and extraction capacity began in the late 1940s, as
Manitoba Pool Elevators and the Saskatchewan Wheat Pool assisted officials in the war effort. The
pools entered the commercial crushing business in 1956, one year after the establishment of Agra
Vegetable Oil (later CSP and Canamera), a joint commercial venture involving the Saskatchewan,
Manitoba, and Alberta pools. The same year, rapeseed production spread to Alberta. In 1960,
Western Canadian Seed Processors opened a crushing plant in Lethbridge, Alberta.
Meanwhile, Canada Packers’ Toronto and Montreal facilities began producing bleached
and deodorized shortening and salad oils from rapeseed supplied by the prairie pools.95 In 1958,
following a temporary production stoppage over possible health risks, the Edible Oils Institute
obtained sanction from the Food and Drug Directorate to use rapeseed oil in foodstuffs. By the
early 1970s, it was known that the 1958 approval was made in error, as erucic acid from rapeseed
was found to cause heart and kidney damage in animals. The point was moot by then, however, as
Canada Packers had patented a low erucic acid salad oil after samples obtained from the Liho plant
were sent to the company’s Toronto laboratory for evaluation (Boulter 1983).
A small regime was therefore already in operation by the time food-grade rapeseed oil was
invented. However, as Gray, Malla, and Phillips put it:
steady development by the public sector of rapeseed as an oil crop had
reached a threshold, where more investment in both product development
and in market structures was required, but no single institution had the
means or incentive to undertake the work alone. The industry faced a true
hold-up problem with the benefits of any individual's investments likely
being shared with a wide variety of free-riders. (Gray et al. 2001: 91)
95 Sales began in 1956, but production was halted, and oil recalled, by the Food and Drug Directorate in late July of
that year (Boulter 1983: 69).
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As a solution to the hold-up problem, a producer association was formed in 1965 —the
Rapeseed Association of Canada (RAC)— whereby levies were collected from producers on a
voluntary basis and directed toward product and market development, research, and extension (i.e.,
getting seeds into farmers’ fields). Saskatchewan and Manitoba established provincial associations
shortly after the formation of RAC, followed by Alberta in the 1970s and Ontario in the late 1980s.
The provincial associations were focused on extension, agronomy, and policy development,
leaving the bulk of market development and pre-commercial research to the national association
(Gray et al. 2001). From 1971 to 1991, the RAC’s budget was also supplemented by a federal
$12.5 million Rapeseed Utilization Assistance Program (Darcovich 1973). Along with the
establishment of the producer associations, the industry was legitimated in 1965 with the setting
of iodine, refractive index, and erucic acid standards for rapeseed oil by the Edible Oils Institute
(Boulter 1983).
In 1974, improvements with respect to toxicity and pungency were achieved when B.R.
Stefansson and Z.P. Kondra at the Dominion Forage Lab developed the low erucic acid, low
glucosinolate variety, Tower —a twice-removed relative of Oro. Although the development of
“double low” rape was a major breakthrough, early progress was largely confined to the brassica
napus genus, which is suited to Alberta, the Peace River region, and northern Saskatchewan. It
was not until 1978 that Keith Downey’s team at the Prairie Regional Lab successfully bred Candle,
a double low brassica rapa variety suited to the high yield regions of the central and southern
prairies. With the introduction of double low brassica rapa, the RAC registered the canola
trademark as a designate for rapeseed oils containing less than 5% erucic acid and 3mg per gram
of glucosinolate. In 1989, the RAC changed its name to the Canola Council of Canada (CCC) and
began researching and promoting the health benefits of canola.
As the policy discourse on intellectual property rights for plant breeders got underway in
the early 1970s, the prairie pools entered into an agreement to cooperate on new crop development
—an effort facilitated by the pools’ existing relationship with Svalof (Phillips 2001b). Under the
agreement, the Alberta pool was assigned canola, while the Saskatchewan and Manitoba pools
focused on cereals and specialty crops, respectively. Interviews and primary source material
confirm that the impetus for this agreement (and many others like it) was to ensure novel
innovations were suited to the Canadian environment, and to secure affordable and early adoption
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of emerging technologies.96 Accordingly, the Alberta Pool forged connections with plant breeders
at the University of Alberta in 1981. However, by the 1980s, conventional plant breeding was
approaching its zenith and would soon be supplanted by developments in the new field of
transgenics.
Around the same time Canadian researchers were busy breeding the first double low rape
varieties, a world-changing event took place in 1973 when American scientists, Stanley Cohen and
Herbert Boyer, successfully transplanted recombinant DNA between bacteria in vitro. Following
the Cohen-Boyer discovery, initial success in transgenic agricultural biotechnology —so called
“green biotech”— revolved around three plants: carnations, tobacco, and canola. As one
interviewee put it, “canola was the only food crop, so it got a lot of people’s attention.” For
instance, Calgene, a southern California startup (since acquired by Monsanto), patented
agrobacterium transgenetic processes in the early 1980s and extended its work to canola by mid-
decade. Consonant with the shift from conventional plant breeding to transgenics, Agriculture
Canada, the prairie pools, and the Canola Council of Canada organized a transgenic plant breeding
program at the University of Alberta in the late 1980s. Under the arrangement, the prairie pools
obtained exclusive rights to resulting varieties, one of which was Quantum —a hearty and high
quality strain commercialized in the early 1990s (Phillips 2001a; Stringham & et al. 1995).
On the policy front, following Calgene’s early success, a federal taskforce was assembled
in 1980 to assess Canada’s potential to exploit transgenic biotechnology. The taskforce reported
favourably in 1981 and a strategy was implemented in 1983 focusing on three sectors: food,
forestry, and energy. That year, Agriculture Canada labs across the country began to aggressively
pursue transgenic biotechnology. In 1981, the Saskatchewan NDP government convened a
provincial council on biotechnology. After a change of government from the NDP to the
Progressive Conservative Party in 1982, a provincial biotechnology policy was announced in 1985.
Alberta, Manitoba, and Ontario announced their own provincial biotechnology policies shortly
thereafter.
Phillips (2001a) attributes the emergence of the Canadian agricultural biotechnology
industry to the amenability of Canadian law to the new technology, namely intellectual property
96 See, for example, E.K. Turner’s files regarding the strategic plan of the Saskatchewan Wheat Pool (Turner 1985).
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rights and regulatory approval for genetically-modified (GM) crops. Although intellectual
property rights for whole plants were not established in Canada until 1990, and although regulatory
clearance for commercial GM crops was not granted until 1997, Phillips argues that expressed
intentions from the late 1970s onward were sufficient to both stimulate private activity in
agricultural biotechnology and attract private firms to Canada. Yet, while a favourable regulatory
environment may have been necessary to prompt investment, regulation alone was insufficient to
mobilize the regime. Rather, active policy measures were required to entice actors with needed
competence. Specifically, the regime required actors specialized in transgenic processes and
agrochemicals. As expected in cases of sui generis industrial policy, given the low opportunity
costs associated with emerging technology, the private sector was eager to participate.
In the late 1980s, Brent Kennedy, the Canadian operations manager of the agrochemical
giant, AgrEvo, arranged with the federal government to have Agriculture Canada transgenic canola
researcher, Wilf Keller, relocated from Ottawa to Saskatoon as part of AgrEvo’s effort to ramp up
its canola operations. This move had the effect of transferring the core of the federal agricultural
biotechnology program from Ontario to Saskatchewan. In the early 1990s, with the NDP back in
power under the leadership of Roy Romanow, the Saskatchewan government arranged for several
foreign firms to establish operations in Saskatoon by offering grants, loans, and equity financing
though the Saskatchewan Economic Development Corporation (SEDCO), the Saskatchewan
Opportunities Corporation (SOCO), the Crown Investments Corporation (CIC), and private
financial partners (namely CIBC and Royal Bank). Notable firms enticed by this strategy include
Belgium’s Plant Genetic Systems (PGS); US-based Monsanto, Pioneer Hi-Bred, and Dow
AgroSciences; and France’s Groupe Limagrain.
Government was also responsible for providing public goods and absorbing coordination
costs. In 1977, the province assumed control of Canamino’s Protein, Oil, and Starch (POS) Pilot
Plant to facilitate scale up and commercialization. In 1983 the federal government expanded the
Prairie Regional Lab to establish the National Research Council (NRC) Plant Biotechnology
Institute (PBI) at the University of Saskatchewan. In 1987, the Saskatchewan Research Council
(SRC) opened Genserv, a public genetics lab oriented toward commercialization. In 1989, the
Saskatchewan government established Ag-West Biotech Inc, an arms-length not-for-profit
company with a mandate to coordinate the sector. Finally, SEDCO invested several hundred
million dollars in Innovation Place, which was originally built to attract and incubate an
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information technology industry in Saskatchewan in the late 1970s, but was reoriented toward
agricultural biotechnology in the early 1980s. Innovation Place continues to house the core of the
Saskatchewan agricultural biotechnology cluster.
Figure 4.6 depicts the Saskatchewan agricultural biotechnology regime. Funding and
collaborative relationships are conveyed by links, although the relationships depicted are not
exhaustive by any means. As anticipated by the theory developed in Chapter 3, the sui generis
regime is comparatively large and amorphous. The main coordinating entities, Ag-West Biotech
and the canola associations, are located at the centre of the regime. The prairie pools and several
multinationals with operations in Innovation Place are major players in the production regime,
notably Plant Genetic Systems (PGS), Limagrain, Monsanto, and AgrEvo. Other important firms
in the production regime include Cargill-Intermountain, Canada Packers, Svalof (since merged
with BASF), and a number of mid-sized multinationals, Canadian start-ups, and off-shoots from
research institutes, such as Targeted Growth (Seattle), University Technologies Inc. (UTI)
(University of Calgary), SemBioSys (University of Calgary), Biomira (University of Calgary),
Performance Plants (Queen’s University), MCN Bioproducts (Saskatoon), and Fytokem (Plant
Biotechnology Institute). End users, such as Frito Lay, American Home Products (now Wyeth),
Mobil Oil, and Procter and Gamble, are also included.
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Figure 4.6: the canola regime
Agriculture Canada, NRC, and SRC are important entities in the knowledge regime, as are
several Canadian universities, albeit to a lesser extent than Agriculture Canada and NRC. The
NRC also runs the Plant Biotechnology Institute (PBI) at Innovation Place, while SRC runs
Genserv. Until 2012, the province of Saskatchewan owned and operated the POS Pilot Plant, which
undertakes scale-up work.
On the policy side, important government departments include Saskatchewan Economic
Development and Trade, Industry Canada, federal and provincial ministries of agriculture, and
Western Economic Diversification (WED). Important arms-length funding entities include the
International Centre for Agricultural Science and Technology (ICAST) (since absorbed by Ag-
West), the NRC’s Industrial Assistance Research Program (IRAP), SEDCO, SOCO, and CIC, the
Western Grains Relief Fund (WGRF), and the research and development arms of the
Saskatchewan Canola Association —the Saskatchewan Canola Development Commission
(SCDC) and CANODEV.
While there are far too many individual actors to list, a few entrepreneurial individuals
must be acknowledged. As mentioned above, NRC’s Keith Downey was instrumental in the early
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coordination of the regime. Interviewees also credit Downey for establishing a communicative
culture that persists to the present at Ag-West Biotech. Other important individuals include
AgrEvo’s Brent Kennedy, Maurice Moloney of the University of Calgary, and E.K. Turner of the
Saskatchewan Wheat Pool. As already discussed, Kennedy was behind the relocation of Wilf
Keller and, consequently, the Canadian canola research effort to Saskatoon. Moloney was
responsible for research into novel industrial applications for canola and was an important
advocate for commercialization. Turner was instrumental in getting the prairie pools involved with
biotech.
The story to this point has documented how the means necessary for joint production came
to be established in Saskatchewan. The motives for setting up the industry were legion, extending
far beyond the initial wartime need for marine engine lubricant. One interviewee put it succinctly:
The early biotech strategy was pretty nebulous and undifferentiated. It wasn’t
particularly focused. The players were thinking ‘this is important technology.
We’re not quite sure how it is going to be used, but there are about a thousand
different ways it could change the world. So we’re going to support it.’
Yet, pestilence, plant disease, and drought were salient problems for Canadian farmers in
the 1980s. Moreover, a growing concern with soil erosion led farmers to adopt no till practices that
had the effect of exacerbating weed infestation. At the same time, environmental and health
concerns about toxins in conventional agrochemicals necessitated a shift toward organic weed and
pest control systems. Finally, the failure of two consecutive canola crops in 1989 and 1990 made
it apparent that improvements would have to be made if largescale canola production was to be
viable.
With respect to opportunity, aside from the emergence of the technology itself, the advent
of intellectual property rights for plant breeders, the approval of GM crops, and financial
deregulation in the 1980s made agricultural biotechnology an attractive ground-floor investment
for private firms and financial institutions (Phillips 2001b). Then there was, of course, commitment
to the industry from both levels of Canadian government. The emergence of biotech in the late
1970s was fortuitous, as governments everywhere were trying to combat recession and promote
long term growth by tapping into new areas of competitive advantage. Given the ease with which
transgenic agricultural biotechnology was applied to canola, the industry was an obvious candidate
for public support.
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The impetus for regime mobilization came from all sides —government, academia, and
industry. In the terminology introduced in earlier chapters, initiation was polycentric and dispersed
across the three components of the triple helix. I will hasten to emphasize that, although regime
mobilization was sui generis, it was not prompted entirely by market incentives or private
entrepreneurs. Mobilization was not “spontaneous.” Rather, government and the third sector
played instrumental roles in the establishment of the industry. On one hand, important policy
entrepreneurs —such as Keith Downey, E. K. Turner, and Brent Kennedy, among many others—
supplied initiative and ideas needed to get the regime off the ground. On the other hand, public
and third sector entities marshalled and reallocated resources required for collective action. As
anticipated by the theory, and as argued by Phillips (2001a), government and third sector
coordination was necessary to allay fears of free riding. In particular, government and third sector
involvement was necessary to provide appropriate incentives to mobilize large producers whose
competence was required by the regime. The next section examines the details of the distribution
of costs and benefits among regime actors and the public.
4.2.2 Cultivating knowledge
As noted above, Innovation Place is the hub of the Canadian agricultural biotechnology
regime. Located next to the University of Saskatchewan campus in north-east Saskatoon,
Innovation Place housed several important players in the regime, such as the Saskatchewan Wheat
Pool, Ag-West Biotech Inc., the NRC’s Plant Biotechnology Institute (PBI), the POS Pilot Plant,
SEDCO/SOCO, the Saskatchewan Canola Growers Association, as well as more than sixty
agricultural biotechnology firms. As a crown corporation, Innovation Place has been able to offer
incentives for prospective tenants, including rent deferral and equipment.
On the subject of enticements, financing has come from a variety of avenues. The Royal
Bank of Canada and the Canadian Imperial Bank of Commerce (CIBC) partnered with the federal
Department of Western Economic Diversification in the early 1990s to supply seed money to
knowledge-based industries. Provincial funding is also funneled through government investment
entities —namely SEDCO, SOCO, and CIC— as well as Ag-West Biotech Inc. Ag-West has
operated as a non-profit coordinating, networking, and investment entity since 1989, and absorbed
the International Centre for Agricultural Science and Technology (ICAST) investment portfolio in
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1997. Then there are direct government subsidies from various funds administered by government
ministries.
Government support to the industry began in the early 1980s, accelerated in the mid-1990s,
and began to subside by 2000. Much like the growers’ associations, the prairie pools also received
consistent but modest public support —totaling approximately $10 million between 1985 and 2001
(in 2017 CAD). The prairie pools became viable as standalone entities in the 1990s before being
bought up by multinationals in the early 2000s.
The question of whether government subsidies have been modest or substantial is a matter
of interpretation. Less debatable is the observation that the regime has done a reasonable job of
internalizing costs. As I will discuss in greater detail below, from the mid-1980s to the mid-1990s,
the pools and growers’ associations devoted significant portions of their budgets to research and
development partnerships, many of which paid off handsomely. Although investments made
through SEDCO, SOCO, CIC, and Ag-West are not expected to be lucrative, the fact that
investments are extended as loans (as opposed to subsidies) discourages moral hazard and allows
some losses to be recouped. Of the $11.97 million invested by Ag-West from 1989 to 2012, Smyth
et al (2013) found $4.75 million had been repaid. With ICAST write-offs omitted from the
calculations, Ag-West’s investment success rate was fifty per cent.
Between 1985 and 2001, there were four types of collective action undertaken in the
agricultural biotechnology regime. One type involved producer-financed investment through
canola councils and associations. Another involved private-public partnerships through SEDCO,
SOCO and CIC. A third type involved private-third sector partnerships, in which either or both
Ag-West and one or more of the prairie pools partnered with the private sector to execute joint
production. A fourth type involved subsidization through government ministries as a means of
covering firms’ opportunity costs.
Regarding the first type of collective action, producer associations ramped up their
involvement in research and development just as large agrochemical businesses turned their
attention to canola in the late 1980s. The impetus for a producer voice in research and development
was to secure continued influence over the direction of the industry. To finance their R&D efforts,
the producer associations of Alberta, Saskatchewan, and Manitoba implemented mandatory levies
of $0.50/tonne of canola seed for growers, crushers, and exporters in 1989, 1991, and 1996,
respectively. However, by the mid-1990s, levies paid by exporters and crushers were seen by many
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as making Canadian canola uncompetitive, as levies were passed on to consumers. The response
was to reduce levies from $0.50 to $0.30/tonne for crushers in 1994 and for exporters in 1997. The
reduction had two effects. One was that overall research and development on the part of industry
associations was reduced. The other was that growers’ interests became more salient in producer-
financed research and development, shifting the collective focus to non-competitive pre-
commercial research at the farm level (Gray et al. 2001).
Unlike investments undertaken by growers’ associations, investments by SEDCO, SOCO,
CIC, Ag-West, government and private financial institutions, and the prairie pools were oriented
toward commercial production. Four investments in particular enticed firms with competence
required by the regime to locate their operations in Saskatchewan. The first was an investment in
Plant Genetic Systems (PGS) of Belgium organized by the government through Royal Bank in
1993.97 The purpose of this investment was to tap the PGS’s proprietary genetic markers as well
as its In-Vigor hybridization process. The second investment came the following year with a $6
million SEDCO/SOCO investment in French seed giant, Groupe Limagrain, which located its $13
million global canola research centre in Innovation Place as a result. The third major investment
was a $0.5 million ICAST and Ag-West Bio enticement to Mycogen (US), owner of several Bt
genes, in 1997. The fourth investment was a $7.6 million SOCO and CIC investment in plant
acclimation experts, Performance Plants, of Kingston, Ontario, executed in 1999.
Other notable investments include: an Ag-West development loan extended in 1990 to Esso
Ag-Biologicals (later Cominco and Agrium) to relocate the operations from Toronto to Saskatoon;
a 1994 Ag-West investment in Prairie Plant Systems, which focused on scale up and
commercialization; a 1992-1996 Ag-West, Western Economic Diversification, Saskatchewan
Wheat Pool/Canamera partnership to develop Brassica Juncea —a mustard variety closely related
to canola; a 1996-1999 $0.5 million Ag-West investment with Dow AgroSciences for further
varietal development; a 1996 Saskatchewan Wheat Pool partnership with Calgene to exploit
complementarities between the former’s proprietary germplasm and the latter’s transgenic patents;
and a follow up 1997 investment in PGS worth $0.6 million, undertaken by Ag-West for hybrid
development. Other companies —such as Allelix, DuPont, Ciba-Geigy, Procter and Gamble, and
97 The terms of the investment remain unknown but are reported to be modest.
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Zeneca, to name but a few— have also received assistance through government ministries (see
Table 4.2 below). Meanwhile, efforts to entice Pioneer Hi-Bred and Cargill to set up operations in
Innovation Place were unsuccessful, although both established operations in Saskatoon.
With respect to direction and coordination, consistent with the model of sui generis
industrial policy developed in Chapter 3, there has been both a supply push from the knowledge
regime and a demand pull from industry, but little “vertical” government direction. Rather, the role
of government has been supportive (i.e., “horizontal”). As one interviewee put it, “It had virtually
nothing to do with politics; it was about scientists saying ‘this is something we think we can do
and do well in Saskatchewan.’” In other words, the agricultural biotechnology regime is
government-supported, but science and industry directed. Given that the Ag-West board of
directors is comprised of industry representatives, it is common for firms to gain representation on
the Ag-West board and take part in the management and direction of the regime going forward
(Smyth et al 2013).
While Ag-West and other players seek to entice firms in order to exploit their knowledge
and competence, acquiring access to contacts and knowledge that may benefit companies’
international or global operations is one incentive for firms to set up operations in Saskatoon. Chief
among the concerns of companies like AgrEvo, Pioneer, and Monsanto was access to the extension
networks provided by the prairie pools and United Grain Growers. Access to these networks was
integral to competing for market share in herbicide tolerant (HT) canola varieties, which are plant-
product specific, and so have the effect of locking farmers into a particular supplier. For instance,
AgrEvo’s Liberty herbicide works only on plants engineered to resist the herbicide. Such is also
the case for Monsanto’s Round Up and Pioneer’s Pursuit, the latter of which was developed using
mutagenesis, not transgenes, by Cyanamid and Allelix (an Ontario public-private partnership). A
second advantage of locating in the Saskatoon hub is that physical proximity facilitates mergers
and acquisitions. Figure 4.7 shows that, although the agricultural biotechnology regime is
dispersed across North America, Saskatoon is an unmistakable focal point of activity.
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Figure 4.7: geographical dispersion of the Canadian agricultural biotechnology regime
Recall that it was not evident at the outset just what, aside from canola oil, the regime
would ultimately produce. Procter and Gamble, in a partnership with Canamera and Calgene (since
acquired by Monsanto) began production of Laurical canola —which is used to make detergent—
in Saskatchewan in 1997. University Technologies and Biomira Inc (both associated with the
University of Calgary), along with Mycogen, began exploring the use of canola in industrial oil
and plastics in the early 1990s. Biomira was also involved in plant protein research for medical
applications. SemBioSys, also a University of Calgary spinoff (since acquired by Dow), entered a
$17 million partnership with Ciba-Geigy/Novartis in 1998 to develop a canola-based anticoagulant
for medical purposes. Fytokem, a spinoff of NRC’s Plant Biotechnology Institute (PBI) has been
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oriented toward cosmetic applications for canola products since it began operations in 1994 and
has since expanded its focus to pharmaceuticals and nutraceuticals.
Whatever the end uses, the immediate concern of large multinationals in the 1980s and
1990s was crop market share. While yield, cold tolerance, insect and disease resistance (especially
regarding black leg fungus) were all taken seriously, herbicide tolerance was top priority.
Agriculture Canada and the University of Guelph had commercialized triazine-tolerant canola in
1984, but the plant’s oil had an unbecoming red pigment and lower oil yields than conventional
canola. Shortly thereafter, in what would arguably be the most important collaboration of all,
Agriculture Canada and AgrEvo partnered to introduce AgrEvo’s transgenic techniques, which
were perfected in Germany, to canola germplasm owned by the Canadian government. This
partnership resulted in AgrEvo’s Liberty Link system, which AgrEvo then marketed through the
prairie pools. Monsanto followed with its Round Up Ready system, perfected in 1991. Meanwhile,
Pioneer acquired mutagenesis technology developed by Cyanamid and Allelix in 1989 for its
Pursuit system, which it then marketed through United Grain Growers. In each case, the
company’s proprietary HT seed is compatible only with its patented herbicide and vice versa. As
of 2010, following the obsolescence of Pursuit, 47% of the Canadian canola crop was seeded with
Round Up Ready canola, while 46% was seeded for use with the Liberty Link system, leaving only
7% of the market to other varieties (Canola Council of Canada 2017). The next section summarizes
the consolidation of the industry within a few private corporations.
4.2.3 Engineered to maturity
Mergers and acquisitions have characterized agribusiness since its beginnings. The advent
of biotechnology —especially transgenic biotechnology in the 1980s— introduced a dose of
competition to agricultural industries as start-ups appeared and as multinationals restructured their
operations toward the emerging industry. Per the parabolic competition curve introduced in
Chapter 3, the industry was maximally-competitive as the technology diffused. Competition then
subsided as avenues for further technological advancement diminished. Just as the theory predicts,
a desire to obtain technological rents led firms to seek out the required know-how to exploit the
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potential of transgenic canola, which led to the acquisition of start-ups by large multinationals and,
subsequently, mergers and acquisitions among the large firms that remained.
Most observers contend that AgrEvo, Monsanto, Pioneer, and Dow were the four most
important firms involved in GM canola in Canada, with Svalof and Zeneca qualifying as notable
mentions. We have also seen that Plant Genetic Systems and Limagrain factored significantly in
the story. The prairie pools, Canada Packers, the growers associations, and Ag-West Biotech Inc.
all played a vital role with respect to regime coordination. The following discussion summarizes
the sequence of events that led to the industry’s consolidation in the early twenty first century.
AgrEvo was established in 1984 by a merger of German firms, Hoechst and Schering, both
of which were already active in Canada. As mentioned above, one of the first orders of business
for AgrEvo was to partner with Agriculture Canada as a means of positioning the new company
toward HT canola. The end product was Liberty, commercialized in 1994. AgrEvo then acquired
controlling interest in Plant Genetic Systems (PGS) in 1996 and completed the purchase in 2000.
A complicated series of mergers followed involving AgrEvo’s parent company, Hoechst, and
Rhone Poulenc, a French company that had been working on HT canola in partnership with the
University of Manitoba. The resulting company was Aventis CropScience, which was acquired by
Bayer in 2002.
At the same time AgrEvo was developing Liberty HT canola, Monsanto was doing its own
transgenic research and development in-house by acquiring germplasm from numerous seed
companies around the world. These efforts culminated in Monsanto’s battery of Round-Up Ready
HT seeds. Round-Up Ready canola was granted regulatory approval in Canada in 1995 and
appeared in farmers’ fields in 1997. The next move for Monsanto involved acquiring controlling
interest in Calgene, which had established connections with end users, Mobil and Procter and
Gamble, to develop and market Laurical canola products. Recall that Calgene, like AgrEvo, had a
marketing arrangement with the prairie pools and their subsidiary, CSP-Canamera Foods. Access
to the prairie pools extension network was required by Monsanto if Round-Up Ready canola was
to be competitive with AgrEvo’s Liberty Link system. In 1997, Monsanto also purchased 49%
equity in Limagrain Canada, giving Monsanto access to the massive cooperative of French farmers
that owned Groupe Limagrain. The following year, Monsanto forged a strategic alliance with
Cargill, the world’s largest producer of edible oils and owner of Intermountain Canola, which
specializes in novel commercial applications for canola products (Phillips 2001b). In 2001,
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Monsanto obtained 100% ownership of Limagrain Canada. By that point, Zeneca, Pioneer and
Svalof had licensed the Round-Up Ready gene from Monsanto for insertion into their seeds,
leading to the obsolescence of Pioneer Hi-Bred’s Pursuit system.
Pioneer Hi-Bred was formed in Iowa in the 1920s and specialized in corn until the mid-
1980s, when it diversified into soybeans, sunflower seeds, and canola. Pioneer’s entrance into the
canola industry was facilitated by the 1990 purchase of Allelix Crop Technologies, an Ontario-
based public-private partnership. From this deal, Pioneer accessed a marketing network established
by Allelix and the United Grain Growers cooperative. In 1991, Pioneer bought two million shares
in Mycogen (US) to obtain insect resistant and other Bt genes. As mentioned above, Pioneer also
licensed Round-Up Ready genes from Monsanto in 1992. Between 1997 and 1999, DuPont
acquired full ownership of Pioneer and progressively oriented its operations toward value-added
products, partnering with American Home Products (which merged with Cyanamid in 1994) and
Frito Lay along the way (Phillips 2001b). A lengthy legal dispute between DuPont-Pioneer and
Monsanto over gene licensing followed, finally being settled in 2013. DuPont then merged with
Dow Agrosciences to form DowDuPont in 2017.
Dow AgroSciences formed as a result of a merger between Dow and Eli Lilly in 1989. The
new company focused its operations on value-added varieties. In 1997, Dow purchased Eli Lilly’s
interest in the company after obtaining Bt genes owned by Mycogen by purchasing Mycogen
shares from Pioneer. Dow then forged alliances with Canadian university start-ups, SemBioSys
and Performance Plants, as well as Ottawa’s Natunola Health, which specializes in nutraceuticals
and plant-based personal care products. Although SemBioSys ceased operations in 2012, Natunola
and Performance Plants remain in business, the latter of which has become a large biotech
multinational. In recent years, Dow has focused on non-GM hybrids in order to tap “GM-free”
markets. These markets have been significant in Europe and Japan since the beginning of
agricultural biotech, and have been growing in North America in recent years.
Svalof, which had been active in the canola industry from its genesis, merged with Weibull
seeds in 1993 and the German chemical company BASF in 1999. In 2000, the company acquired
the Cyanamid Agricultural Division from American Home Products. This move gave Svalof-
BASF access to the United Grain Grower’s marketing network first established by the Ontario
public-private partnership, Allelix. In 2010, BASF broke off from Svalof, taking the plant
biotechnology division of the company with it.
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Zeneca had been active in the regime since the early 1990s. After developing an HT variety
compatible with Monsanto’s Round-Up in the late 1990s, Zeneca acquired the Dutch company,
Mogen, to further its expertise in disease resistance. Zeneca then merged with Novartis (previously
Ciba-Geigy, Switzerland) to form Syngenta. Syngenta then entered into a joint venture with
DuPont called GreenLeaf Genetics in 2006 before acquiring full ownership of GreenLeaf in 2010.
After rejecting a $40 billion offer for acquisition from Monsanto in 2014, Syngenta was acquired
by the Chinese state-owned enterprise, ChemChina, in 2017. Syngenta’s Canadian operations are
currently located in Guelph, Ontario.
As detailed earlier, Canada Packers was heavily involved in the Canadian canola business
in the early years. The apex of Canada Packers’ canola-related activity was the construction of its
Toronto canola oil processing plant, which was built in 1980 with $4 million of provincial
assistance. The construction of the plant was part of a broader company-wide effort to diversify
Canada Packers’ operations, which entailed many ventures in several countries. In 1991, Canada
Packers merged with Maple Leaf Mills to become Maple Leaf Foods.
As for the pool cooperatives, the Saskatchewan Wheat Pool severed its cooperative roots
to become a publicly traded company in 1996. The Alberta and Manitoba pools merged in 1998 to
form Agricore Cooperative Ltd. In 2001, United Grain Growers joined Agricore under the banner
of Agricore United, at which point the venture ceased to be a farmer-owned cooperative. In 2002,
the Saskatchewan Wheat Pool sold CSP foods to Dawn, and Agricore sold Canamera to Bunge in
2004. In 2007, the Saskatchewan Wheat Pool launched a successful campaign to take over
Agricore, resulting in Viterra.
Finally, with consolidation proceeding apace, Ag-West Biotech reoriented its core focus in
2001 away from canola toward, nutraceutical, medical, and veterinary biotechnology applications.
An analysis of Ag-West’s returns on investment suggests that competitive advantage was much
more easily obtained in canola-related ventures, compared to other areas (Smyth et al. 2013). One
reason for comparatively greater success in canola hinges on absolute and comparative advantage
—Saskatchewan is simply the best jurisdiction for canola development. Another reason may be
that alternative biotech applications are further along their respective technological growth
trajectories by this point and are therefore more competitive.
While Phillips (2001b) notes that strategic alliances and contracts were the favoured
method of collaboration among the players that remained in 2001 (with equity exchange being a
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component of only 11% of deals reported), the completion of a $63 billion merger between Bayer
and Monsanto in 2018 marks the pinnacle of consolidation. In the absence of intervention under
the auspices of competition policy, monopoly will likely be sustained until a subsequent wave
technology supplants the first.
The theory of regime reproduction anticipates that voters, signaled by political parties and
the media, undertake a crude cost-benefit analysis of government programs at election time. The
public (externalized) cost of the agricultural biotechnology regime is summarized in Table 4.2. It
is notable that the cost of the industrial policy was spread both over time and across a number of
governments. As Olson (1965) argues, diffusion of costs hinders countermobilization, even if such
costs are substantial and benefits are concentrated. Yet, costs have been kept in check by two
factors, one institutional and one situational. Institutionally, the implementation of producer levies
and repayable loans has had the effect of internalizing costs of production. Situationally, the fact
that agricultural biotechnology was in its infancy when governments decided to pursue the industry
meant that opportunity and participation costs were low. Indeed, Plant Genetic Systems (PGS) had
no revenue when it was solicited in 1993.
Table 4.2: public transfers to entities in the agricultural biotechnology regime
(millions)
SK MB AB ON FED TOT
POS Pilot Plant. 4.0 0.3 41.5 45.8
Cargill 5.8 19.3 5.3 30.4
Allelix 5.5 14.4 19.9
Ag-West Biotech Inc 19.6 19.6
Dow 0.2 15.6 15.8
Canada Packers 2.1 2.6 9.8 14.5
Performance Plants 10.6 10.6
Targeted Growth 10.2 10.2
Groupe Limagrain 9.1 9.1
Biomira 1.8 6.2 8
Canola Council of Canada 0.1 7.1 7.2
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Alberta Terminals Canola Crushers 7.1 7.1
Plant Biotechnology Institute (PBI) 6.3 6.3
Alberta Wheat Pool 16.2 16.2
Ciba-Geigy 3.6 3.6
Canamino 2.8 2.8
SemBioSys 2.7 2.7
Canadian Canola Growers Association 2.7 2.7
MCN Bioproducts 2.0 2
Pioneer 1.9 1.9
Hoechst 1.7 1.7
Saskatchewan Canola Growers Association 1.5 1.5
Canbra Foods 1.3 0.1 1.4
Esso AG Chemical 0.6 0.6 1.2
CSP/Canamara/Agra 0.2 1.0 1.2
Procter and Gamble 1.2 1.2
DuPont 0.3 0.7 0.2 1.2
AgrEvo 0.9 0.9
Innovation Place 0.8 0.8
Saskatchewan Wheat Pool 0.7 0.7
University Technologies 0.6 0.6
Performance Plants 0.4 0.4
Prairie Plant Systems 0.3 0.3
Bayer 0.3 0.3
Canodev 0.2 0.2
Newfield Seeds 0.1 0.1 0.2
Zeneca Seeds 0.1 0.1 0.2
TOTAL $75 $2 $51 $11 $112 $250.4
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Source: calculated from public accounts, annual reports. Does not include financing for basic research, NRC, or Saskatchewan Research Council. Totals for 1985-2001. List of companies is not exhaustive. Series for Alberta only to 1997. 2017 CAD.
To repeat a previous point, whether government outlays in support of the agricultural
biotechnology industry are substantial or modest is a matter of opinion. One thing is certain: the
public cost of supporting the agricultural biotechnology regime was not an electoral liability for
any of the many governments that have supported the industry across Canada and over time.
Assuming for the moment that costs were sufficient to overthrow the regime, a possible reason for
its sustenance hinges on Olson’s theory of diffuse costs and concentrated benefits mentioned
above. By Olson’s logic, diffuse costs make it difficult to mobilize opposition to a policy,
regardless of how widely held the negative sentiment may be (see also Wilson 1973). What is
more, given that rents have been extracted by several governments over a long period of time, it
would be difficult to detect externalization and, if externalization were detected and quantified, it
would be difficult to know where to direct opposition (Baumgartner & Jones 2015; Pierson 1993).
An alternative explanation for why the regime was sustained is that the societal benefits of
the regime outweighed its costs. In other words, there are more winners from agricultural
biotechnology than there are losers. The regime has certainly led to the employment of many
scientists and technicians and, consequently, to the modernization of Saskatchewan and the city of
Saskatoon, in particular. Farmers also generally perceive themselves to be much better off as a
result of agricultural biotechnology in terms of yield and crop protection. However, just what
constitutes “better off” has been the subject of heated normative debate around biotechnology since
the 1980s.
It is with respect to normative consequences that the agricultural biotechnology regime,
and the governments that supported it, drew the most fire. Normative arguments surrounding the
negative social, ethical, and environmental consequences of agricultural biotechnology, along with
concerns around consumer safety and biodiversity, were articulated in the media and by some
politicians and academics against the technology (Kneen 1992; Pitsula & Rasmussen 1990; Shiva
2000). However, unlike in Europe and Japan, public backlash was not sufficient to undo the
regime.
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4.3 Green energy Ontario
Ontario’s green energy industrial policy was the centerpiece of the McGuinty Liberal
government’s response to the Great Recession. The policy was intended to simultaneously mitigate
climate change while revitalizing the rustbelt in southern Ontario. The 2008 crisis hit North
American industrial centres hard. In the United States, Congress blunted the possibility of one
million layoffs in the automotive sector with a $700 billion bailout. Canada followed suit with its
own $13.7 billion relief program to curb layoffs in Canada’s southern Ontario auto hub. Yet, the
Canadian automotive industry, along with the rest of the manufacturing sector, had been declining
prior to the crisis and has continued to struggle since. As seen in Figure 4.8, manufacturing
employment in Ontario has leveled off following the Great Recession, but has failed to rebound.
Figure 4.8: manufacturing employment in Ontario, 2000-2017
Source: Statistics Canada Labour Force Survey estimates
Faced with 167,000 layoffs by manufacturers, the Ontario legislature passed the Green
Energy and Green Economy Act in September 2009. This landmark legislation included a feed-
in-tariff electricity generation schedule which promised to pay producers of renewable energy rates
well above market prices, so long as they adhered to local content requirements for wind and solar
generation equipment. The hope was that the incentives would attract green energy investment to
the province, encourage realignment of the ailing southern Ontario industrial base toward green
energy manufacturing, and create thousands of jobs. The plan worked, albeit not without some
additional nudging on the part of government. The same month, following eighteen months of
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closed-doors negotiations, it was announced that government officials had secured a $7 billion
investment deal with Korea’s state owned electricity utility, KEPCO, and Samsung C&T.
The following sections document the origins, operation, and outcomes of Ontario’s late
mover industrial policy toward green energy manufacturing. Several aspects of the theory are
confirmed: initiation began within government; monopolistic rents were conceded by the political
executive; the ensuing regime was relatively small and dominated by major foreign firms; regime
operation was characterized by bargaining with side payments; and unrepresented groups
mobilized to overturn the regime.
The case of green energy Ontario is much more recent than the two cases analyzed earlier,
which poses both advantages and disadvantages. An advantage is that events are fresh in the minds
of interview participants. A disadvantage is that many official documents remain classified.
Consequently, the following case study lacks the specificity of the two cases analyzed earlier in
this chapter. Moreover, some aspects of the case will be tentative, and some facts hazy, pending
the public release of documents currently unavailable.
4.3.1 Inside initiation
Ontario was well behind other jurisdictions when the provincial government signaled in
the winter of 2009 that it would implement a feed-in-tariff for renewable energy. Denmark,
Germany, Spain and Quebec had all already introduced policies to stimulate domestic demand for
renewables. Ontario was also a late mover on the technology itself. Indeed, wind and solar
technology had been maturing for decades prior to the green energy blitz that characterized
governments’ response to the Great Recession. As anticipated by the theory outlined in Chapter 3,
both wind and solar technologies were initially developed in liberal economies and later perfected
in coordinated systems (Dubarić et al. 2011; Sampaio et al. 2018). Along these lines, South Korea’s
Samsung C&T announced plans to diversify into renewables in April 2009, citing synergies
between its heavy industries division and wind turbines, on one hand, and the appropriability of
its LCD and consumer electronics technology to photovoltaics, on the other.
Although Ontario was a late mover into renewables, officials were already considering a
green energy industrial policy when the financial crisis struck. Simple arithmetic suggests that
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talks with the so-called “Korean consortium” began in early 2008, several months before Samsung
announced it was diversifying into renewables. Yet, the consensus among representatives from
Canadian companies seems to be that, prior to the agreement’s announcement in September 2009,
few were aware of the impending deal. As one industry representative put it: “the ink hadn’t dried
on the [Green Energy Act] and they were changing the rules by giving preferential treatment to
multinationals... it caught everybody by surprise.” In fact, nine months of negotiations had already
taken place between Samsung and government officials by the time the Green Energy Act was
tabled in February 2009. Moreover, community representatives from the Six Nations of the Grand
River had been involved in siting talks, and had even hosted surveyors, earlier that summer.
Negotiations between Samsung, KEPCO, and the government of Ontario occurred over the
course of almost two years. Talks mainly involved deputy premier and Minister of Energy and
Infrastructure, George Smitherman, and premier Dalton McGuinty. After a tense cabinet meeting
in late October 2009, at which members of McGuinty’s cabinet allegedly expressed strong
reservations about both the content of the deal and the fact that they had been kept in the dark
about its development, the Green Energy Investment Agreement (GEIA) went into force.
Though amended twice, once in 2011 and again in 2013, the terms of the original GEIA
were as follows. The Korean consortium consisting of Samsung C&T and KEPCO would invest
$7 billion in 2,500 megawatts of generating capacity over five phases, with the last phase
completed by 31 December 2014 (and operational by the end of 2016). In return, the consortium
was scheduled to receive $437 million paid out over twenty five years under power purchase
agreements with the Ontario Power Authority and the Independent Electricity System Operator
(IESO). The original rate under the power purchase agreements was 13.5 cents per kilowatt hour
for wind and 82 cents per kilowatt hour for solar. These rates were considerably higher than the
5.7 cents per kilowatt hour paid by Ontario consumers at that time. Importantly, these rates were
available to any producer that qualified under the Ontario feed-in-tariff program; however, the
consortium was guaranteed scarce transmission space. The latter became a point of considerable
frustration among other developers —particularly small, local ones— some of whom were denied
access to the grid. Finally, on top of the power purchase agreements, the consortium was scheduled
to receive a $437 million “economic adder” in exchange for opening four manufacturing facilities
and creating 900 jobs by 2015. One factory was slated to manufacture wind towers, another wind
blades, while the other two would be assembly facilities for solar modules and inverters. In all, the
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original GEIA was to cost the public $10.9 billion, all of which would be paid in electricity rates
over twenty five years.
Although the consortium had conducted siting tests in the summer of 2009 with the
cooperation of the Six Nations, and had even signed a memorandum of understanding with Six
Nations community representatives, final decisions regarding the location of the generation and
manufacturing facilities were deferred until after the GEIA came into effect. The regime mobilized
over the next two years, during which Samsung and KEPCO arranged supplier contracts and siting
with regional economic development agencies.
In the meantime, other consortia mobilized to take advantage of Ontario’s feed-in-tariff.
Siemens and Brookfield Renewable —both of which are foreign corporations— entered into a
partnership in 2009 to build two wind facilities, totaling 215 megawatts. Likewise, three Ontario
companies —Pro-Power, CWind, and Linamar— also formed a partnership in the fall of 2009 with
the intention of exploiting offshore wind opportunities on the Great Lakes. It is notable that this
partnership was the product of a proactive restructuring effort by auto parts maker, Linamar, to
diversify its operations. However, interview respondents indicate that it was difficult for local
firms to get the government’s attention. Consequently, while the Siemens-Brookfield projects were
successful, the consortium of Ontario firms floundered by 2011 when the government placed a
moratorium on offshore wind projects. In terms of the theory outlined in Chapter 2, outside
initiation failed. The moratorium on offshore generation also preempted a major partnership
between Toronto’s Trillium Power and Danish wind turbine manufacturer, Vestas, which would
have involved Vestas opening manufacturing facilities in the province.
After publicly denouncing the GEIA for privileging the Korean consortium, Siemens
entered into a partnership with Samsung in the spring of 2010. At that time, Siemens produced
nacelles for wind turbines in Kansas, wind blades in Iowa and Denmark, and was considering
opening a wind blade plant in Ontario (Siemens already produced gas turbines in Hamilton,
Ontario). By partnering with Samsung, the Siemens wind blade plant would fulfill one of the four
manufacturing investment obligations under the GEIA. Perhaps to the chagrin of officials who
were hopeful for independent investments from both Samsung and Siemens, Samsung instead
contracted Siemens to fulfill part of its obligation under the GEIA by transferring some of the
forthcoming economic adder to its new partner.
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A major US energy firm, Pattern Energy, also joined up with Samsung and Siemens in the
spring of 2010, alleviating KEPCO of its role as generation facilities manager. Korea’s CS Wind
—which had connections with Samsung typical of chaebol— entered the regime later that year as
a manufacturer of wind towers, thereby fulfilling the second of four manufacturing requirements
under the GEIA. In early 2011, SMA Solar and Celestica (both multinationals) were brought on to
open the third plant, which produced solar inverters in the north part of Toronto. Finally, in spring
of 2013, Canadian Solar joined the regime with plans to open the fourth factory required by the
GEIA: a photovoltaic module plant in London, Ontario.
In terms of factory siting, after several months of intense competition between regional
economic development agencies, CS Wind settled on the city of Windsor for its wind tower
factory. Siemens chose Tillsonburg among eight potential sites for its wind blade factory —a
decision that evoked criticism from workers at the Siemens gas turbine factory in Hamilton, which
closed after a lengthy wind-down in the summer of 2011. As noted above, Toronto and London
were selected for solar equipment production.
Regarding the location of the generation facilities, although the Six Nations of the Grand
River had signed a memorandum of understanding with Samsung and KEPCO prior to the GEIA,
Six Nations representatives broke off negotiations in February 2011 citing unfavourable terms
from Samsung. Subsequently, the government-owned Ontario Realty Corporation became
involved and began a process of evicting tenant farmers from two-thousand hectares of land
bordering the Six Nations territory. The land, located in South Cayuga, was set aside in a land
bank created by the Ontario government in the 1970s and never sold.
Though siting negotiations created significant unexpected delays, the absence of the Six
Nations from the regime ended up being temporary. Following two years of increasing public
opposition to the Samsung deal, as well as a successful WTO challenge to domestic content
requirements in the Green Energy Act, the Six Nations and the rest of the regime eventually settled
on a siting agreement. The final task was to secure financing for generation facilities. Capital was
secured in the fall of 2013 by the Toronto-based private financial group, Connor, Clark and Lunn.
Figure 4.9 depicts the composition of the Ontario green energy regime, including St. Clair
College and the University of Windsor, two technical schools that provided “green collar” training
approved by the Ontario Power Authority. Also included are electricity infrastructure firms that
later partnered with Samsung on the generation component of the GEIA. They are: US-based
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Pattern Energy, Edmonton-based Capital Power, and Quebec’s Axium Infrastructure. Inside
initiation on the part of government is conveyed by a single link between George Smitherman of
the Ministry of Energy and Infrastructure and Samsung/KEPCO. This single link also captures the
executive-dominated and expeditious nature of the initiation process. Notice that the regime is
relatively small and dominated by large multinational firms, as is expected of late mover industrial
policies. Also expected by the theory is the relatively disintegrated and segmented regime
structure, which suggests the crisp divisions of labour and specialization characteristic of late
mover industrial policy.
Figure 4.9: the Ontario green energy regime
To recap the discussion so far, the motivation for regime initiation had to do with both the
environment and the economy; climate change mitigation was a high priority for the McGuinty
Liberals, as was economic recovery. Means and opportunity, although eventually forthcoming,
were not assured, however. Both cabinet and industry representatives expressed serious
reservations about the GEIA when it came to light. Opposition mounted steadily after the GEIA
went into force. Indeed, three elections were fought on the issue of green energy, as numerous civil
society organizations mobilized against the Liberals’ energy policy. Moreover, the European
Union and Japan launched and won a WTO complaint against Ontario for its use of illegal domestic
content quotas in the Green Energy Act.
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To calm opponents, and to get in line with international trade law, the Liberals revised their
energy plans several times. First, the Liberals quietly abandoned plans for offshore wind
development following protest from shoreline residents. Next, realizing they had set the feed-in-
tariff rate much too high, the Liberals scaled back the rate for solar electricity from 82 to 64 cents
per kilowatt hour in January 2011. Upon the WTO verdict in May 2013, the Liberals phased out
domestic content requirements.98 Finally, after it became apparent that the province had an excess
supply of power —and after the Auditor General reported that $2 billion worth of green energy
had been purchased and wasted by the IESO— the Liberals limited the feed-in-tariff program to
projects under 500 kilowatts. While installations already approved were allowed to proceed at the
rates established by the Green Energy Act, future large scale projects were to be priced
competitively. The next section analyzes how resources were exchanged among actors within and
without the regime in the course of joint production.
4.3.2 Mortgaging competence
As mentioned above, Ontario’s $437 million investment in a green energy industry was to
be paid out entirely through power purchase agreements over a twenty five year period. In that
sense, the Ontario government mortgaged the cost of acquiring competence in green energy
manufacturing from overseas firms headquartered in coordinated political economies. A second
major aspect of the case is that, although Ontario’s green energy industrial policy was initially an
executive undertaking with few veto players, demands placed on government from groups not
represented by the regime forced the province to make side payments to perceived victims of the
GEIA. In other words, the government and regime assumed the cost of financing compliance. I
will discuss each of these two aspects of the case in turn.
As noted in the previous section, what began as an industrial policy negotiated behind
closed doors between a small group of South Korean industrialists and provincial government
98 The local content rules were as follows. There were no requirements for wind projects under 10 kilowatts; for
projects over 10 kilowatts, domestic content started at 25% and increased to 50% on 1 January 2012.Solar under 10
kilowatts had a domestic content requirement of 50%. Solar over 10 kilowatts increased from 50% to 60% on 1 January
2012.
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representatives became bogged down rather quickly. The Korean consortium and their Six Nations
partners had difficulty coming to terms, causing Six Nations officials to temporarily walk away
from talks. The consortium’s response was to work instead with the Ontario Realty Corporation
and to negotiate with individual land owners. Although the Ontario Realty Corporation could, and
did, compensate tenant farmers to relinquish their land leases, negotiating with individual
landowners was a cumbersome process that delayed breaking ground on generation projects.
Because of the frictions associated with bargaining, the GEIA was renegotiated downward
twice —once in July 2011 and again in June 2013. Both times, the issue was that Samsung was
behind on deadlines established in the GEIA. In 2011, Samsung forfeited $327 million from its
economic adder in exchange for a one year extension on its promise to produce its first 1000
megawatts of electricity. The source of the delay was the aforementioned breakdown in
negotiations with the Six Nations and unanticipated health and environmental impact assessments
demanded by citizens groups and mandated by Health Canada. In 2013, the GEIA was revised to
1,369 megawatts (down from 2,500) to be produced from three instead of five phases of generating
capacity, reducing the total cost of the project to $5.4 billion (down from an original amount of
$10.9 billion). The rationale for the 2013 reduction was simply that the electricity wasn’t needed;
it was apparent by early 2013 that the province had overestimated its demand for renewable energy,
making phases four and five of the original agreement unnecessary. Thus, although failure to meet
its deadlines significantly reduced rents paid to the regime, the government’s cancellation of two
of the five planned phases of generation capacity was a more significant contributor to the
reductions. These cancelled phases were never sited, but were to consist of approximately 750
megawatts of wind power and 250 megawatts of solar.
Figure 4.10 shows the geographical dispersion of the Ontario green energy regime. Of
particular note is the area consisting of the Haldimand Tract. As will be made evident shortly,
politics in this region were significant in shaping how the GEIA played out.
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Figure 4.10: geographical dispersion of the Ontario green energy regime
As Samsung was struggling to site its generation facilities, and while the government was
learning it had agreed to pay for much more electricity than it needed, public opinion was mounting
against wind and solar farms. The 2009 Green Energy and Green Economy Act had circumvented
local and regional approval of infrastructure projects on non-indigenous lands, giving provincial
agencies virtually sole veto authority over siting. Even so, notwithstanding Six Nations territory
and lands owned by the Ontario Realty Corporation, finding vacant land on which to place wind
towers and solar panels was arduous. Although the compensation paid by Samsung to land owners
is not part of the public record, Samsung reported meeting with some prospective hosts forty five
times (Greenberg 2011). Government concessions made in late 2012 requiring projects to be
approved by local councils, as well as a new set back requirement regulating the distance between
wind towers and homes, slowed the process further.
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The above concessions were achieved following countermobilization on the part of citizen
groups, such as Wind Concerns Ontario, the Haldimand Federation of Agriculture, Chatham-Kent
Wind Action, and Bluewater Against Turbines. The aim of these groups was not to achieve
compensation, but rather to cease or delay wind development. Although the complaints were
eventually dismissed by environmental review tribunals, health and environmental impact
assessments demanded by citizen groups substantially held up breaking ground on a number of
projects. For instance, the Haldimand chapter of Wind Concerns Ontario petitioned government
in May 2011 to agree to an independent epidemiological study of the health impacts of wind farms.
It was not until July 2012, however, that evidentiary hearings were scheduled, and not until
December 2012 that the matter was dismissed.
In the run up to the 2011 election, the Liberals acquiesced their veto power over local
government. Given that the Haldimand County Council had approved a moratorium on industrial
wind projects the previous March, side payments were required for the GEIA to proceed. In
September 2011, the first community vibrancy fund was established in Haldimand County. It
allocated $40 million dollars from Phase 1 of the GEIA to the county over twenty years. The
completion of the second segment of Phase 1 in 2013 allocated an additional $15 million to the
Haldimand fund. Samsung also introduced annual payments of $1,500 per year to residents living
within one kilometer of a wind turbine. A $5.4 million vibrancy fund was also established in May
2012 as part of a deal between the municipality of Bluewater and the independent wind producer,
NextEra Energy, which uses General Electric turbines. The Southgate solar project —a post-GEIA
initiative by Samsung and Pattern Energy with financing from Connor, Clark and Lunn— is
scheduled to contribute $1.5 million to Holstein County over twenty years.
In similar vein, after three years of negotiations with the City of Windsor regarding solar
siting on lands owned by the city’s airport but occupied by tenant farmers, Samsung struck a $20
million twenty-year lease agreement with the city in 2014. As for the Samsung-Six Nations
agreement, the Six Nations obtained one hundred percent of the lease revenue from development
on Ontario Realty Corporation lands, at a value of approximately $9.5 million over twenty years.
The Six Nations also acquired 10% equity ownership in the Grand Renewable Energy Project at a
cost of $19.5 million, three quarters of which was guaranteed by the province, as well as a $20,000
per year scholarship commitment and a $400,000 donation from Samsung. The estimated net profit
to the Six Nations is roughly $61 million over the twenty year life of the project.
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Recall from Chapters 2 and 3 that negotiations among veto players often take the form of
battle or chicken games, depending on whether or not unequal distribution is required. The
Samsung-Six Nations negotiations were two such instances. In the first round in 2011, both sides
opted to defect, leading Samsung to focus on lands owned by the Ontario Realty Corporation. With
the aid of guarantees from the province —namely, loan guarantees on equity financing and a
hundred percent of Ontario Realty Corporation lease revenue— the two sides were able to reach
an agreement in 2013. As discussed in Chapter 2, compensation paid by the regime is part of the
cost of joint production. As we also saw in Chapter 2, such costs are often externalized. While
many of the costs assumed by the Ontario government were paid for the sake of regime
mobilization, the impetus for concessions to disaffected groups was political. The next section
looks into the politics of regime reproduction.
4.3.3 Dimming the switch
The Green Energy Act and the GEIA have featured as issues in every provincial election
since 2009. In fact, the GEIA was an election issue prior to the erection of the first wind turbine
under the agreement. Although the causal link was misplaced, the media and opposition associated
drastically rising electricity rates in 2011 with the GEIA (in fact, rate increases were primarily due
to upgrades to the transmission system). Progressive Conservative candidate, Tim Hudak,
promised to “rip up” the Samsung agreement if elected —a statement which mobilized support for
the GEIA, and the Liberals, in constituencies scheduled to benefit from the manufacturing
component of the agreement (Greenberg 2011).
The bigger issue in the 2011 election revolved around concerns over turbine siting in
Chatham-Kent and Haldimand County. Consequently, while the Liberals held on to two out of
four seats in the Windsor-Essex riding slated to host the CS Wind tower plant, the Liberals lost
almost every riding in the outlying areas of southern Ontario, including Oxford County where the
Tillsonburg Siemens plant was scheduled for construction. Yet, opposition to the Liberals’
program was not enough to oust them from power; rather, the Liberals formed a minority
government with a little over a third of the seats in the provincial legislature.
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As mentioned earlier, the Liberals had adopted a conciliatory stance toward the losers of
the GEIA and Green Energy Act in the months preceding the 2011 election. In summer 2010, in
the face of rising electricity rates, the Liberals implemented a ten per cent rate subsidy. Now with
a minority, the Liberals had to contend with a scathing report by the provincial Auditor General
released in December 2011. The report concluded the Liberals ignored advice from the
bureaucracy concerning the terms of power purchase agreements and, consequently, spent billions
of dollars under the auspices inspiring greater “investor confidence” than any other jurisdiction in
the world. Equally jarring was the discovery that premium rates had been paid by IESO when there
was no domestic demand, leading the utility to export Ontario’s green energy at a loss.
The Auditor General’s report, though embarrassing, came at a time when the Liberals were
safe in their seats. Moreover, both the 2011 and 2013 downward revisions to the GEIA had been
widely publicized by the Liberals. Also publicized was the elimination of the inflated feed-in-tariff
rate for large projects in 2013, as was the end of premium rates for power when there was no
demand for it. Janus-faced, the Liberals, trumpeted the successes of McGuinty’s bold green energy
vision while admitting its excesses. The message was that, although they had a rocky start, the
Liberals had gotten the energy portfolio right by mid-2013 (albeit, not without four cabinet
shuffles).
After losing two by-elections in 2012 that would have returned the party to a majority,
Dalton McGuinty resigned as premier in 2013. Interim premier, Kathleen Wynne, was able to steer
the Liberals back to a majority in the 2014 election. Although electricity rates were an election
issue in 2014, they were not as salient as popular Liberal promises surrounding transit
infrastructure. As demonstrated in the next section, media sentiment toward green energy in
Ontario, although somewhat polarized, has been more positive than negative. What is more, media
mobilization against the Green Energy Act and the GEIA had subsided for the most part by mid-
2012.
Rates became more salient following the 2014 election, with on-peak prices climbing from
13.5 cents per kilowatt hour in May 2014 to a high of 18 cents per kilowatt hour in May 2016. In
March of 2016, an independent report by the Ontario Society of Professional Engineers also
revealed that, despite earlier claims by the Liberals to the contrary, premium rates were still being
paid by IESO for excess power, which cost the utility $1 billion in 2016 alone (Ontario Society of
Professional Engineers 2016). Yet, as evidenced by the media analysis in the next section, rate
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increases and green energy policies were not linked by most journalists. Nevertheless, faced with
consumer outrage, the Liberals implemented a twenty five percent rate subsidy in April 2017,
reducing the on-peak price to 13.2 cents per kilowatt hour.
On the manufacturing side, although hundreds of CS Wind towers and Siemens wind
blades had supplied the three generation phases of the GEIA, the Tillsonburg Siemens plant was
scheduled for closure after a slowdown in July 2016. Part of the reason for the closure was that the
49 metre blades manufactured at the Tillsonburg plant were threatened with obsolescence by larger
blades the factory did not have the means to produce. Presumably, neither Siemens nor the
government had the will to finance capital upgrades and the plant closed later that fall.
It was correctly predicted that the Liberals would likely lose the 2018 provincial election.
As seen in Figure 4.12, media sentiment toward green energy issues turned decisively more
negative between 2016 and 2018, reflecting citizen dissatisfaction with hydro rates and the way
electricity had been managed in the province. One of the first orders of business by the incoming
Progressive Conservative government was to fire the directors of Ontario’s power utilities.
As the theory predicts, low political friction produced a policy contrary to the wishes of
unrepresented groups who then mobilized against the policy and the party that implemented it. As
discussed above, counter mobilization to the green energy regime resulted in the Liberals losing
seventeen seats, and their majority, in the 2011 election. Although the Liberals held on to power
as a minority government, and even formed a majority in 2014, the salience of cost externalization
associated with the Green Energy Act and GEIA contributed to their defeat in 2018.
Although they were ultimately punished for their green energy experiment, damage control
performed by the Liberal government between 2011 and 2017 is noteworthy. In an attempt to avoid
electoral punishment for costly policies, the Liberals backtracked on previous decisions, shifting
from an executive style of policymaking to one that was more negotiated. This move had the effect
of re-introducing vetoes previously stripped by the Green Energy Act with respect to local
government approval of generation sites. Consequently, side payments were required for the policy
to proceed. The way in which this and other features of the case correspond to the theory developed
earlier in the thesis is taken up in the next section.
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4.4 Evaluating the evidence
As evident from the cases summarized above, industrial policy is complex and nuanced.
This section puts the case evidence into perspective by linking empirical observations to the theory
and hypotheses developed in Chapters 2 and 3. The concluding chapter deals with substantive
implications.
The first question to ask is whether the basic premises of regime theory are sustained by
the case evidence. Specifically, we would like to know whether regimes mobilize, operate, and
reproduce according to the expectations of regime theory. With respect to mobilization, it is quite
clear that means, motive, and opportunity are prerequisites for policy initiation. Moreover, it is
clear that one or more policy entrepreneurs must seize upon opportunities afforded by
circumstances. Had it not been for Glen Clark, George Smitherman, or the group of polycentric
entrepreneurs involved with plant biotechnology, none of the industrial policies would have come
to fruition. It is similarly apparent that resources and motivations held by actors internal to regimes
determine patterns of exchange and distribution therein. It is also obvious that macropolitics
determines whether regimes are sustained or dismantled. I return to matters pertaining to regime
operation and reproduction below.
The next question is whether the cases conform to the expected archetypical models of
industrial policy introduced in Chapter 3. Recall that, owing to majoritarian decision rules and the
positive coordination plus bargaining (PC+B) mode of coordination, liberal political economies
are expected to tend toward three types of industrial policy —sui generis, restructuring and late
mover— even though liberal political economies are only hypothesized to be competent to effect
sui generis industrial policy. Conversely, coordinated political economies are expected to both
engage in, and excel at, upgrading. Figure 4.11 conveys the state of technology pursued in each
of the cases.
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Figure 4.11: state of technology in three cases of Canadian industrial policy
As seen in Figure 4.11, Canadian governments have a tendency to pursue industrial policies
for which liberal political economies are not institutionally equipped. As discussed in Chapter 3,
the type of industrial policy pursued depends on circumstances facing society, namely the
industrial structure of the local economy and the state of technological progression. Governments
cannot turn back the clock on technology; rather, they must cope with the fact that industry will
often lag behind international competition and seek assistance to catch up. Given the relative
frictionlessness of liberal institutions, governments will often oblige —even if it is contrary to
society’s interests to do so. The assumption is that the industrial policies analyzed above would
not have come to fruition in more representative systems. Rather, they would have been preempted
by veto players. We may invoke counterfactuals to assess the plausibility of this claim.
In the British Columbia case, recall that there was considerable resistance to the inclusion
of fast ferry technology in the Mid-Island Transportation Strategy and the BC Ferries ten year
capital plan. Indeed, integrating the aluminum ferry industrial policy into these plans required that
the Crown Corporations Secretariat usurp authority from BC Ferries, effectively nullifying the
latter’s veto. What is more, opposition internal to the government attempted to put the brakes on
the policy at two points, once when Glen Clark took the initial plan to cabinet in March 1994 and
again when the Treasury Board froze capital spending pending efficiency and cost effectiveness
reviews in February 1995. Both times, opposition was overridden by proponents of the policy.
Finally, had industry players enjoyed greater political and associational representation, as they are
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assumed to in coordinated political economies, advocates of alternative technologies would have
had a greater voice. Proponents of Norwegian technology would likely have been accommodated
instead of ignored, the regime would have been larger, more integrated, and negotiated, and the
bias toward Australian technology would have been curbed.
In Ontario, representative political institutions would have likely ruled out the
expeditiousness with which the provincial executive solicited Samsung and KEPCO in favour of
a more negotiated strategy. Indeed, cabinet opposition expressed in October 2009 would have been
effective in slowing or stopping the Green Energy Investment Agreement (GEIA). Moreover,
political representation of domestic industry would have almost certainly led to greater local
involvement in Ontario green energy industrial strategy. As with the British Columbia case, greater
industry representation would have corresponded with a larger, more integrated, and more
negotiated regime than mobilized in the case.
While preemption may have avoided the implementation of ill-advised policies, it is not
necessarily the case that greater industry representation in regimes would have led to greater
success. On the contrary, the Markov chain model discussed in Chapter 3 predicted significant rent
seeking and exploitation on the part of large members in cases of late mover industrial policy in
large, negotiated regimes. Recall that exploitation is hypothesized to follow from the fact that lead
members enjoy a monopoly on competence required by the regime when technology is far along
the logistic growth curve. The tendency is to defect in games played during regime mobilization
and operation so as to extract monopoly rents. It is evident in the Ontario case that Samsung and
KEPCO extracted significant monopoly rents during mobilization. Samsung was, however,
subsequently humbled by its inability to meet deadlines set out in the GEIA. Consequently,
Samsung adopted a cooperative strategy in the renegotiation of the GEIA.99
With respect to restructuring, while large, lead members do not enjoy a monopoly on
technological competence, the option of reverting to unilateral production encourages defect
strategies in stag hunt games played during regime operation. Thus, although Allied Shipbuilders
and Vancouver Shipyards did not abandon the British Columbia aluminum shipbuilding regime
99 Samsung’s cooperation during operation is anticipated by the theory in the sense that monopoly rents accrue from
competence, which Samsung failed to demonstrate.
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outright, defection and a general lack of commitment on their part was clearly a consequence of
opportunities for unilateral production.
Regarding agricultural biotechnology industrial policy in support of transgenic canola, the
theory anticipates that the necessity of cost externalization and various frictions would have ruled
out sui generis industrial policy in coordinated political economies. Although costs externalized
were comparatively modest, widely dispersed, and largely invisible, and although much of the cost
associated with agricultural biotechnology was internalized by producer associations, externalized
costs would still likely have been sufficient to blunt governments’ commitment to the technology
and its support infrastructure. For instance, the multi-million dollar investment in Innovation Place
in the late 1970s was viewed as a government failure until the facility was repurposed for
agricultural biotechnology in the 1980s. The initial $9 billion injection into Ag-West Biotech
would have also likely been vetoed in a more representative political system, as would have
enticements offered to foreign multinationals. Most importantly, in light of effective
countermobilization against GM crops in Europe, representation of non-material interests in
government would have significantly dampened commitment to transgenic technologies.
The success of the agricultural biotechnology policy toward canola is attributable to cost
externalization being kept in check. Situationally, costs were controlled owing to the fact that the
price paid for competence leaned further toward monopsony than it did monopoly. For instance,
the crucial investment in Plant Genetic Systems was offered at a time when the company had no
income stream whatsoever. Similarly the prairie pools entered into their lucrative arrangement
with Calgene when that company’s opportunities were still limited.
Institutionally, equity financing, repayable loans, and financing through member
contributions and levies kept tendencies toward moral hazard at bay in the canola case. Financing
through member contributions and producer levies are especially useful for combating free riding
as a result of low task programmability and non-separability as they spread adverse selection risks
across regime members. Although moral hazard should have been most difficult to combat in the
canola case, free riding was more prevalent in British Columbia and Ontario. In British Columbia,
effective monitoring could have easily kept alloy costs from increasing. Moreover, CFI could have
simply refused to pay overages (including the $1 million in overtime charged by Vancouver
Shipyards for HSF-001). In Ontario, the government could have built in stipulations to the GEIA
preventing Samsung and KEPCO from fulfilling the manufacturing aspect of the agreement by
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soliciting help from firms that were already considering opening facilities in Ontario (i.e.,
Siemens). The Ontario government could have also built in safeguards that would have spared it
from paying premium rates for green energy when there was no demand for it. Finally, the
government could have nullified the GEIA outright at several junctures, and could have even
sought damages from Samsung, but opted not to.
The fact that governments appear hesitant to impose or enforce institutional checks on
defection in restructuring and late mover industrial policy suggests governments are willing to
tolerate exploitation in order to secure competence. Put differently, the price of defection can be
understood as a component of participation costs. The question arises as to whether clientelism or
capture are ever in government’s interest.
Recall that the media is an agent (along with parties and voters) in the theory of regime
outcomes. The panels in Figure 4.12 report sentiment scores in news media articles for the duration
of each policy. Positive scores indicate positively-valenced articles, negative scores indicated
negatively-valenced articles. The average trend over time is reported as well.
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Figure 4.12: media sentiment toward industrial policies over time
(a) Shipbuilding in British Columbia
(b) Canola
(c) Green energy in Ontario
Calculated based on newspaper media containing the words ‘catamaran,’ ‘fast ferries,’ and ‘British Columbia’ (N = 321); ‘biotechnology’ and ‘canola’(N = 544); and ‘green energy, ‘Samsung,’ and ‘Ontario’ (N= 470) in the LexisNexis database. Samples are representative of national, international, and local news. Sentiment scores based on VADER method (see Hutto & Gilbert 2014).
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Analysis of media sentiment toward the three cases yields interesting results. Bad press
from the inception of the British Columbia’s aluminum shipbuilding industrial policy is expected,
given that Canada’s low friction and executive-dominated political system permits government to
implement unpopular policies. The suspicion here is that government opts to privilege certain
client groups —in this case, shipbuilders— at the expense of disaffected voters. “Bad” industrial
policy evokes the anticipated response. Regarding canola, negative press is associated almost
entirely with concerns over the health and environmental effects of GM technology. Although
normative opposition to the technology is quite salient, positive coverage has outweighed negative
in thirty out of thirty-five years. Most surprising is positive sentiment toward Ontario’s green
energy industrial policy. This finding suggests that the media discounted the cost of the program,
and placed greater emphasis on the purported economic benefits of the GEIA, its environmental
impacts, or both. This is despite the fact that the GEIA did not accomplish its industrial policy
goals (see Figure 4.13 below).
The take away from the sentiment scores conveyed in Figure 4.12 is that restructuring is
generally regarded as bad industrial policy by those who are not direct beneficiaries of the project
(i.e., clients). By contrast, sui generis industrial policy is generally regarded as good, even when
normative concerns mobilize vocal opponents. The appropriate conclusion to be drawn regarding
late mover industrial policy is more difficult to discern. We cannot know what the response to the
policy would have been had the it not also been directed toward the goal of climate change
mitigation. A comparison of media sentiment toward the Ontario Liberals’ multi-million dollar
enticement of French video game designer, Ubisoft, would be illuminating in this regard. At this
stage, it may be concluded that late mover industrial policies will be tolerated by the public if they
are perceived to fulfill other social priorities.
Regarding society’s interest, the last question to address is whether and which of the three
industrial policies examined in this thesis have been successful. Figure 4.13 reports balance of
trade statistics for the British Columbia shipbuilding industry, Canadian canola, and green energy
manufacturing in Ontario. The figures indicate that while the British Columbia shipbuilding
industry did witness a recovery during the aluminum shipbuilding industrial policy, growth was
not sustained after the policy was dismantled. Growth in canola exports, meanwhile, has generally
increased although experienced a decline in the late 1990s as opposition to GM technology
mounted (especially in Europe and Japan). Finally, although Ontario’s balance of trade has
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improved since the implementation of the GEIA and Green Energy Act, it is evident that Liberal
policies did not have their intended effect of making Ontario a green energy manufacturing
powerhouse.
Figure 4.13: balance of trade statistics
(a) Shipbuilding, British Columbia
(b) Canola products, Saskatchewan
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(c) Green energy manufacturing, Ontario
Source: Statistics Canada Canadian trade balances (HS 89, HS 1514, HS 850231, HS 854140)
What makes canola so lucrative compared to shipbuilding and green energy? As discussed
in Chapter 3, the fact that canola has several different applications, many of which involve large
markets, makes the industry especially viable. What is more, although there is some opportunity
leakage into other provinces and the United States, a large amount of activity related to canola has
remained in Canada (and in Saskatoon, specifically). On the subject of opportunity leakage, it is
worth mentioning that unease over GM technology has necessitated the construction of parallel
value chains for GM and non-GM canola. That is, the introduction of transgenic canola prompted
creative destruction along the entire value chain, not just part of it. Although inefficiencies are
produced as a result, there is greater economic activity with two value chains than would be the
case with just one. Importantly, if there was not sufficient demand for GM canola, parallel forward
linkages would hurt the industry more than help it. However, the dual market has turned out to be
a blessing from a Schumpeterian standpoint.
By contrast, Ontario has failed to secure competitive advantage in green energy products.
Stiff competition around the world —the likes of which is expected of technology nearing
maturation— necessitated that Ontario put in place very attractive incentives to entice investment
to the province. The dual strategy of the feed-in tariff rates and local content requirements was
intended to spur the industry. However, the WTO ruled against local content, meaning that
electricity producers could source their equipment from more competitive jurisdictions and still
reap the benefits of the feed in tariff rates. In analytical terms, the WTO ruling created a significant
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opportunity leakage. Not long afterward, the government rethought its policy of subsidizing
industrialization through power purchase agreements.
4.5 Conclusion
The case evidence examined in this chapter aligns remarkably well with the expectations
of the models developed in Chapter 3. While encouraging, further qualitative and quantitative
analysis is needed to affirm the tenability of regime theory, the propriety of the four archetypical
models of industrial policy, and the ten hypotheses. Indeed, the cases dealt with in this thesis
include only three of the four industrial policy archetypes, and only speak to how they perform in
liberal political economies. Although much more work remains to be done, many useful insights
can be gleaned from the three case studies and the preliminary quantitative evidence presented in
Chapter 3. The implications of the research are discussed in the concluding chapter.
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Chapter 5
Conclusion
This thesis began with a discussion of how progress has been understood over the history
of economic thought. In that discussion, I noted the persistence of three salient themes: technology,
distribution, and the administrative state. Against that backdrop, I defined industrial policy as
conscious effort on the part of government to influence the composition of firms in its jurisdiction.
I then articulated a justification for industrial policy under the auspices of public goods provision.
Specifically, I argued that public goods are required to solve many collective action problems,
including those that hold up technological advance.
Not all industrial policies are equally viable, however. Accordingly, Chapter 1 summarized
the debates for and against industrial policy before sketching a theory of how industrial policy
originates, how it works operationally, and why it is sustained or terminated. Regarding arguments
in favour of industrial policy, I drew attention to the role of industrial policy in economic
development, generally, and in Canadian economic history, particularly. The crux of the argument
is that industrial policy that facilitates technological innovation is beneficial, while industrial
policy that subsidizes inefficient “sunset” industries is not.
The second and third chapters developed social scientific tools to analyze and understand
industrial policy. Chapter 2 elaborated upon the three “sub theories” undergirding regime theory,
which was presented as a general theory of policymaking in the positive political economy
tradition. In that chapter, I showed how macropolitical institutions determine the structure of
micropolitical institutions governing organizational entities that serve as vehicles for collective
action. I called those entities regimes. I then articulated a theory of regime mobilization, a theory
of regime operation, and a theory of regime outcomes.
Regarding regime mobilization, I demonstrated that regimes come into being when
conditions warrant collective action and when there is an agent willing and able to assume the
transaction costs associated with mobilizing regimes. The conditions were conceived in terms of
means, motive, and opportunity. Drawing on Austrian economics, the agent responsible for
mobilizing regimes was conceived of as a policy entrepreneur.
With respect to regime operation, after demonstrating that collective action is achieved
through the exchange of resources in exercises of “positive coordination,” I identified the extent
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to which regimes externalize costs of production as a critical variable in the policymaking process.
Emphasizing the institutional basis of regime theory, I juxtaposed two modes of coordination —
“positive coordination plus bargaining” (PC+B) and “positive coordination plus negative
coordination plus bargaining” (PC+NC+B)— and noted that respect for the Pareto principle is a
function of political representation. In other words, whether negative externalities can be imposed
on actors is a function of whether those actors possess veto power to prevent the imposition of
externalities.
Under the PC+B mode of coordination, the Pareto principle is assumed to apply to actors
internal to regimes but not outside actors. Conversely, under the PC+NC+B mode of coordination,
the Pareto principle is assumed to apply universally. The implication is that more representative
polities —namely those with proportional representation electoral systems— will tend toward
PC+NC+B, whereas less representative polities —namely those with majoritarian electoral
systems— will tend toward PC+B. Consequently, representative political systems were assumed
to be characterized by regimes that internalize costs, whereas majoritarian political systems were
assumed to be characterized by regimes that externalize costs. I called the former coordinated
political economies, and the latter, liberal political economies.
From there, I demonstrated that policy options under the PC+B mode of coordination
comprise a much larger solution space than policy options under PC+NC+B. In the former case,
the policy solution space is hypothetically boundless; in the latter, policy solutions are restricted
to those that can be pursued with resources held by actors internal to the regime. I then invoked
the concept of opportunity costs to construct a formal, microfoundational theory of distribution
within regimes, the gist of which is that actors’ participation in collective action is a function of
what can be attained unilaterally. The key insight gained from this discussion was that actors with
competence required by the regime to accomplish its objectives are liable to have monopolistic
opportunity costs, meaning that rents must sometimes be paid to solicit participation. The effect
of monopoly (and monopsony) advantage was conveyed using social choice and equilibrium
analysis, which demonstrated that deadweight losses are associated with the extraction of rents. I
then invoked game theory to model actor strategies under different conditions of monopoly and
monopsony.
Regarding outcomes, I argued that regime reproduction is a function of electoral reward
and punishment. Specifically, governments who oversee regimes that externalize costs onto
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society were hypothesized to be punished by voters at election time. Because the PC+B mode of
coordination is both germane to majoritarian political systems and permits cost externalization, I
hypothesized that liberal political economies will exhibit comparatively punctuated patterns of
regime mobilization and dissolution. Inversely, because the PC+NC+B mode of coordination is
both germane to representative political systems and discourages cost externalization, I
hypothesized that coordinated political economies will exhibit comparatively smoother patterns of
regime mobilization and dissolution. Moreover, because policy initiation and policy change are
more difficult in representative systems owing to institutional friction, I argued that liberal political
economies possess an institutional advantage with respect to policy responsiveness, while
coordinated political economies possess an institutional advantage with respect to policy
durability. I then extended the logic to argue that policy durability translates to increased ability to
build technical competence required for incremental innovation, whereas policy responsiveness,
risk tolerance, and cost externalization translates to an increased ability to effect radical innovation.
In Chapter 3, I distilled insights from regime theory to articulate four archetypical models
useful for understanding industrial policy under different circumstances. I began by
conceptualizing segmented waves of technological innovation. I then linked technological
innovation to economic performance by invoking the concept of the opportunity niche, which
posits that benefits obtained from industrial policy depend on the size and scope of value chains.
Next, I outlined the knowledge transfer trade-off, which stipulates a trade-off between developing
competence endogenously and acquiring competence from elsewhere. That is, long-run
advantages associated with endogenous learning are offset by short-run costs associated with
learning (i.e., learning curves). Inversely, short-run advantages associated with importing
competence from elsewhere are offset by long-run disadvantages that stem from failure to acquire
knowledge for oneself.
The insight gained from the discussion of knowledge transfer was that acquiring
competence related to established technologies is costly, regardless of whether it is imported or
developed in house. Advantage in late innovation is thus assumed to follow from low cost
acquisition of competence related to radical innovations on subsequent waves of technological
development. Firms in liberal political economies were hypothesized to initiate R&D on
subsequent wave designs, but were not expected to commercialize them. The reason is that sunk
costs in existing production disincentivizes firms from engaging in creative destruction. Radical,
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subsequent wave patents are liable to be licensed by regimes in coordinated political economies,
however, which are assumed to possess competence to commercialize subsequent wave
innovations.
Next, I outlined five institutional hypotheses based on regime theory, and five situational
hypotheses informed by the previous discussion on innovation, coordination, and competition. I
then went through the steps necessary to model industrial policy regimes. After reviewing the
strengths and weaknesses of inductive and deductive approaches, I demonstrated how a limited
number of parsimonious models can be deductively derived from a high number of propositions.
By transforming a complex typological model into, first, a probability tree and, subsequently, a
data frame, I advanced four models of industrial policy: sui generis, upgrading, restructuring, and
late mover. Drawing on the earlier discussion, I explained how and why coordinated political
economies are poised toward upgrading. Likewise, I explained how and why liberal political
economies possess an advantage in sui generis industrial policy but exhibit tendencies toward
restructuring and late mover industrial policies as well.
Finally, I implemented a simulation model to discern central tendencies associated with
each type of industrial policy under different political systems, controlling for variation in
technology and other noise in the economy. The results suggested that upgrading and sui generis
industrial policy are generally sound (although very high returns to sui generis industrial policy
correspond with very high rents being paid to lead members). The model found that restructuring
is generally a bad idea, even when the Keynesian multiplier is favourable. Results were not
especially encouraging for late mover industrial policy, either, with aggregate gains being
conditional on multiplier effects.
The penultimate section of Chapter 3 reviewed cross national quantitative evidence in
support of the theory. The findings, although tentative, were encouraging. With respect to
distribution, expectations were met regarding propensity to spend, accumulate debt, and
redistribute across coordinated and liberal political economies. Hypothesized tendencies toward
policy responsiveness and status quo bias in liberal and coordinated political economies were also
affirmed by the quantitative evidence. Lastly, hypothesized tendencies toward decline at the
extreme ends of the institutional friction continuum —which were observed in the context of a
Monte Carlo simulation in Chapter 2— were also supported by the empirical data. I concluded
Chapter 3 by outlining the ten propositions and substantive implications summarized in Box 3.1.
213
Chapter 4 examined three cases of Canadian industrial policy: British Columbia’s
aluminum shipbuilding industrial policy (1994-2000), which was a case of industrial restructuring;
federal-provincial agricultural biotechnology policy in support of the canola industry (1985-2001),
which was a case of sui generis industrial policy; and Ontario’s green energy manufacturing
strategy (2009-2015), which was a case of late mover industrial policy. All three cases conformed
to the expectations of the theory. As expected of liberal institutions, cost externalization occurred
in all three cases but was more pronounced in restructuring and late mover examples. Cost
escalation was also attributable to the comparatively more advanced stage of technological
development in these cases. Although, British Columbia and Ontario pursued different approaches
to acquire competence, both were costly. Per the knowledge transfer trade-off, Ontario paid a
premium for mature foreign competence, which was immediately forthcoming but did not include
any long-run benefits with respect to knowledge transfer. Conversely, British Columbia assumed
significant learning costs in the short-run as local shipbuilders slowly honed skills transferred to
them at relatively low prices by Australian and Finnish firms.
Behaviourally, as predicted by the models of industrial policy outlined in Chapter 3,
defective strategies were played in stag hunt by industry players not sufficiently motivated to
restructure in the British Columbia case; cooperative strategies were played by competent firms
enthusiastic about participating in the agricultural biotechnology regime; and mixed strategies
were played by foreign partners in the Ontario regime. Defection, followed by cooperation, in the
Ontario case can be explained by the fact that Samsung and KEPCO were initially able to extract
monopoly rents in exchange for their competence during regime initiation but were disincentivized
from further defection during regime operation after failing to meet production deadlines.
Expectations regarding regime size and structure were also met by the cases. Endogenous
knowledge acquisition corresponded with a large, integrated, and porous regime in the canola case.
Conversely, an FDI approach to competence acquisition in the Ontario case corresponded with a
small, segmented, and closed regime. The British Columbia aluminum shipbuilding regime fell
between these extremes. That is, learning by searching yielded a moderately-sized, semi-integrated
regime dedicated to the uptake of Australian and Finnish technology by BC shipbuilders. Firms
disposed to other technology were shut out from the regime, however.
With respect to success and failure, only the agricultural biotechnology case can be
considered an unequivocal success. Achievement in this case is attributable to the political will to
214
pursue a new, radically innovative industry from scratch and the relatively low participation costs
involved with developing nascent technology. The British Columbia aluminum shipbuilding
industrial policy was an abject failure. The Ontario green energy industrial policy mostly
accomplished goals unrelated to industrialization. The failure of the Ontario green energy regime
to accomplish its industrial policy goals can be attributed to the fact that significant portions of the
value chain went uncaptured by Ontario firms. That is, the policy and regime were undermined by
“opportunity leakage.” Recall that the initial logic of the policy rested on domestic content
requirements, according to which electricity producers hoping to reap above market rates on
generation were required to source a majority of their equipment domestically. When the WTO
ruled domestic content requirements to be in contravention of international trade law in 2013, the
Ontario government rolled back rates offered to wind and solar producers under the 2009 Green
Energy Act. Thus, although Ontario’s green energy industrial policy no doubt stimulated the
domestic green energy industry, the balance of trade figures presented in Chapter 4 indicate that
Ontario failed to secure niche advantage in green energy manufacturing.
Surprisingly, the type of industrial policy most prone to principal-agent and moral hazard
problems least exhibited these tendencies in the cases examined. Low task programmability and
non-separability, which was most pronounced in the agricultural biotechnology industry, should
prompt free riding in cases of sui generis industrial policy. Yet, moral hazard was not an issue for
the agricultural biotechnology regime. Rather, free-riding, principal-agent, and moral hazard
problems were more pronounced in the Ontario and British Columbia cases, where the government
could have monitored and punished defection with relative ease but failed to do so. In both cases,
the government was criticized in the media for allowing costs associated with rent seeking to be
externalized on to the public. However, it is apparent that industrial policy led to electoral
punishment only in the British Columbia case. In Ontario, it is arguable that a public sympathetic
to the goal of climate change mitigation overlooked the government’s poor management of
industrial policy.
The case studies and quantitative evidence analyzed in this thesis lend support to the
propositions and implications outlined in Box 3.1. The quantitative evidence presented in Chapter
3, as well as discussion of counterfactuals in the penultimate section of Chapter 4, lend support to
proposition 1, which states that a higher number of veto players translates to greater institutional
215
friction. The implication that there will be predicable differences with respect to policy
responsiveness across political systems is discernible in the data.
Proposition 2, which predicts clientelistic regimes to mobilize as a result of executive
decisionmaking under non-representative macropolitical institutions, is also affirmed in the case
analysis. In the case of British Columbia shipbuilding, the executive was arguably captured by its
clients in the local shipbuilding industry. Moreover, government exhibited a clear bias in favour
of Australian partners over others. In the case of green energy manufacturing in Ontario,
government’s preferred clients were the “Korean consortium,” comprised of Samsung and
KEPCO, and the Six Nations of the Grand River. In the case of agricultural biotechnology policy
in support of canola, government was less discriminating than governments in the shipbuilding
and green energy cases but nevertheless sought out clients in the early 1990s, namely Plant Genetic
Systems, Limagrain, Pioneer Hi-Bred, and Zeneca. Granted, more empirical work is required to
verify that regimes in coordinated political economies do indeed adhere to the PC+NC+B mode
of coordination.
Proposition 3, that low representation and low political friction enable regimes to behave
in risk seeking ways, is affirmed by the case evidence and counterfactual analysis undertaken in
Chapter 4. Recall that had vetoes not been overruled by executives, costly policies would have
been preempted. The implication is that liberal political economies will tend toward sui generis,
restructuring, and late mover industrial policies, but are only expected to excel at sui generis
industrial policy. These tendencies are supported by the cases.
Proposition 4, which stipulates that institutions bear on national factors of production, is
affirmed by the cases in the two ways. First, industry was poorly coordinated in the case of
restructuring in British Columbia, a factor which detracted from the project’s success. Of particular
note is the fact that industry had few mechanisms in place to retain the workforce after the fast
ferries program wound down. Second, regarding transgenic agricultural biotechnology, a flexible
and supportive regulatory environment facilitated the establishment of an industry the likes of
which was not forthcoming in the coordinated political economies of Europe or Asia.
The notion, imbued in proposition 5, that too much bias toward expeditiousness or
coordination is harmful is mostly affirmed by the quantitative analysis in Chapter 3. That said, the
case evidence suggests that even minor checks and balances would have saved the public
significant sums. For instance, in Ontario, the fact that the Green Energy Investment Agreement
216
(GEIA) was revised significantly downward in 2013 suggests that the government could have
secured more favourable initial terms. In British Columbia, had the original board of directors of
Catamaran Ferries International (CFI) not been asked to resign on a whim, costs of the fast ferries
program would have been more effectively controlled.
Proposition 6 asserts that opportunity costs determine the motivation and behaviour of
actors. The implication is that regime members with opportunities for unilateral production will
seek rents. This behavioural tendency was certainly observed in the British Columbia case, as
evidenced by low productivity on the part of the two shipbuilders with the highest participation
costs. The high premium initially paid to Samsung and KEPCO in the green energy case is also
consistent with proposition 6. The comparatively low rents obtained by partners enticed into the
agricultural biotechnology regime, by contrast, is also in line with the proposition.
Proposition 7, that the price paid for knowledge increases along the technological growth
curve, is sustained by the cases. Moreover, the implication underlying the knowledge transfer
trade-off —that the price of knowledge increases regardless of whether competence is acquired
endogenously or imported from elsewhere— is also evident. For instance, in the British Columbia
case, learning by searching was costly due to pressure to achieve competitive levels of
productivity. That is to say, the cost of competence is relative; and the cost of honing competence
in British Columbia was high relative to competing jurisdictions. Meanwhile, the high
participation cost paid to the Korean consortium in the Ontario case was an artefact of the maturity
of green energy technology. By contrast, the comparatively low participation costs paid to firms
like AgrEvo and Plant Genetic Systems by the agricultural biotechnology regime followed from
low demand for infant technology.
Predictions about the size and integration of regimes undergirding proposition 8 also seem
to be affirmed by the cases analyzed, although more research is required on this front. The
implication is that endogenous knowledge acquisition correlates with larger, more dispersed, and
more integrated regimes, whereas competence exogenously acquired corresponds with smaller,
less dispersed, and more segmented regimes. As evident by the figures conveying regime structure
and dispersion in Chapter 4, the proposition appears to be sound.
Proposition 9, which posits that opportunity niches are most profitable (1) when
goods/services produced have wide applications, and (2) when local jurisdictions are able to
capture greater shares of value chains, is not controversial. Indeed, this is tantamount to saying
217
that production is profitable for a jurisdiction when demand exists and when supply is local.
Nevertheless, the proposition and its implications resonate in illuminating ways with the cases.
For instance, the transgenic canola and its downstream products are so lucrative for Canadian
industries because a critical mass of the value chain is located in Canada. By contrast, the Ontario
green energy manufacturing strategy failed to meet its objectives due to “opportunity leakage” —
failure to capture significant portions of the value chain with respect to backward and final demand
linkages (granted, the towers made by CS Wind are manufactured with Ontario steel).
Finally, as noted above, the cases surprisingly do not affirm proposition 10, which
anticipates principal-agent, moral hazard, and free rider problems to be most pronounced in cases
of sui generis industrial policy due to low task programmability and non-separability of
contributions to joint production. The empirical anomaly can easily be explained, however. In the
case of agricultural biotechnology, institutions were put in place, first to overcome hold up
problems and, second, to ensure the sustenance of the regime. These institutions were producer
levies, equity financing, repayable loans, and ample investment in coordination through Ag-West
Biotech Inc. By contrast, in the green energy and shipbuilding cases, governments had ample
opportunity to monitor and punish defection. They simply opted not to.
Having established that industrial policy is often necessary to overcome collective action
barriers to technological progress, the lessons to be imparted from this thesis relate mostly to policy
design. Industry should assume risk wherever possible in order to discourage moral hazard. Even
modest R&D levies collected and managed by industry associations would inspire commitment,
encourage self-monitoring, and dissuade free riding. Equity financing and bank loans are
preferable instruments to cash grants and subsidies for similar reasons. Of course, a less direct and
common solution is to offer incentives for proactive capital upgrades. Capital incentives are not a
panacea to ills of restructuring, however, because capital incentives cannot by themselves
coordinate create destruction along value chains: only negotiated regimes can do that.
Aside from these lessons, it is worth reiterating that there is a fairly strong case to be made
against liberal political economies attempting late innovation. With respect to restructuring, the
theory and evidence is quite clear: if industry is unwilling or incapable of restructuring on its own,
it is probably a bad idea for government to get involved. Although late mover industrial policy
may be useful for accomplishing ancillary goals (e.g., climate change mitigation), insofar as our
focus is on technological advance, there is scarcely a case to be made for late mover industrial
218
policy, either. Insofar as governments remain incentivized to engage in restructuring and late
mover industrial policy, the same lessons that apply to sui generis industrial policy should blunt
some of the harm that follows from restructuring and late mover industrial policy. Again, good
industrial policy benefits from effective monitoring, loans instead of cash grants, financing through
producer levies, and capital injection in exchange for equity.
219
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