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

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

PETER NOLAN and CHRISTOS PITELIS

University of Cambridge

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

PETER NOLAN and CHRISTOS PITELIS

University of Cambridge

Governance for Economically Sustainable Competitiveness and Catching-up Christos N. Pitelis

Launch Conference Knowledge Intelligence and Innovation for a Sustainable Growth Palermo, Nov. 30th- Dec. 1st 2010

The Issue

Governance and policies for economically sustainable competitiveness and catching-up, in the context of

–Knowledge-based economy, importance of “intangible assets”

–Semi-globalization

Competitiveness

Superior performance vis-à-vis a peer group with shared objective

–Firms: superior sustainable competitive advantages (SCA) –profits

–Countries: superior SCA – per capita income

Requires looking at both demand-macro, but also supply-micro-entrepreneurial environment (focus usually on former)

Determinants of Value/Wealth Creation: Firm Level

Innovation and technology

Resources, especially human

Firm infra-structure and strategy

Unit cost economies/increasing returns to scale

Determinants of Value/Wealth Appropriation: Firm Level

Positioning

Efficiency and market power

Firm-level differentiation-identity

Integration, diversification, inter-firm cooperation

Creating and Appropriating Nationwide Value/Wealth

Similar factors as at firm level, appropriately reinterpreted and applied (plus institutional, macroeconomic and regional-sectoral milieu)

- Require appropriate public-private-civil society interactions and co-ordination

The Determinants of Value Creation at the Firm, Meso and National Levels (“The Wheel of Value”)

Institutional and Macroeconomic Environment Governance – Policy Mix

Value Added-

Creation

Unit Cost Economies,

Returns to Scale

Technology & Innovativeness

Human

and other

Resources and Capabilities

Infra-Structure &

Strategy

NATION

SECTOR-REGION

Industry Conduct- structure and regional -

locational milieu

FIRM

Main ‘Actors’ of Value Creation

Firms, for example through

– Large size and foreign direct investment (FDI) by multinational enterprises (MNEs)

– Clusters of small and medium-sized enterprises (SMEs) – agglomeration effects

Government policies (such as anti-trust, innovation, education, competitiveness)

– May impact on all determinants of value creation

Actors of Value Creation

Government Policy

Large firms, FDI

SMEs, ClustersInstitutional and Macroeconomic environment -

Governance and Policy mix

Unit Cost

Economies,

Returns to

ScaleTechnology &

Innovativeness

Infra-structure

& Strategy

NATION

SECTOR-REGION

Industry Conduct- structure and regional -

locational milieu FIRM

Value Added- Creation

Human

and other

Resources and Capabilities

Locally-based Value/Wealth Creation and Clusters

Location is of critical importance for value and wealth creation

Geographical clusters can impact on wealth creation

– Clusters are geographical agglomerations of firms and other organizations-institutions, linked horizontally and/or vertically, intra- and/or inter- sectorally, in a facilitatory socio-institutional and cultural milieu, which compete & co-operate (co-opete) in national and inter-national markets

Advantages and Disadvantages of Clusters

Disadvantages

Clusters are history-specific, thus hard to ‘transfer’

‘Success’ can breed failure (through ‘congestion’, institutional sclerosis, etc.)

Advantages

Clusters improve innovation, productivity & competitiveness at the regional & national levels, they create employment and can lead to convergence

Clusters are more bottom-up, thus help deepen democracy

Despite Problems, Clusters are Important

Alternative to clusters is large MNEs and FDI. Despite advantages in wealth creation, the poor record of MNEs with sustainability and democracy, implies that despite ‘problems’, clusters are important

– However, clusters and FDI by MNEs can complement each other

Critical Factors for “Upping the Game”

Resources, which are Valuable, Rare, Inimitable, Non-substitutable, Appropriable (VRINA)

- Appropriable innovations

- Specialized education

- Entrepreneurship

National (and/or Region-wide) Strategies for Competitiveness-Directions

Create competitive advantages, building on existing and emerging strengths

Improve operational and dynamic efficiencies – innovation capabilities

Adopt positioning strategies (low relative cost, high relative quality)

Improve “national image”

Consider integration (within EU, other?) and diversification (RICs, North Africa), economic and political power

Relative Differentiation (“Image”)

High Low

Relative Costs

Low Star Stuck in the middle(In need of direction)

High Stuck in the middle(Losing ground)

Dead wood

National and/or Regional Positioning

National and/or Regional Competitiveness and Catching-Up:

Instruments and Policies Improved competitiveness and catching-up can be effected

though:- Horizontal measures (soft and hard infrastructure)- Technology transfer – FDI- Clusters- Inter- and intra-firm and sectoral restructuring for

innovative, ‘value for money’ products and services- Acquisition of System Integration Capabilities ‘Regions of Excellence’ (‘mega-clusters’) that can

encapsulate all aspects, thus serve as strategy for competitiveness and catching-up

Policy Compatibility

Between macroeconomic and supply-side policy

Institutional context – removal of anti-incentives – institution building – culture

Competition (co-opetition for innovativeness) and regulation policy

Environmental protection

Compatible distribution of income (intra- and inter-country)

Economic Sustainability (Sustainable Global Value Creation)

Sustainability: The condition where the satisfaction of an

objective in the present does not undermine the longer-

term satisfaction of the same objective, and/or where the

pursuit of one group’s interests does not undermine the

pursuit of system-wide interests – the two often related

- Dimensions: Economic (our focus), Social, Environmental

Constraints on Sustainability

A Key Constraint

- Differing objectives (such as pursuit of value appropriation) by different groups, organisations, nations => ‘agency’ and need for objective alignment.

▫ Also time inconsistencies, mistakes.

Instances

- Intra-County: Monopoly, Regulatory capture – corruption

- Inter-Country: Protectionist and strategic trade policies, especially by more powerful countries, market power as a condition for FDI by MNEs

A Hierarchy of Agencies

Sustainability requires addressing hierarchy of agencies

between (at least):

- Firm and its shareholders-stakeholders

- Nation and firm

- Individuals nations and the world

Some RequirementsGeneral Put in place requisite governance structures at all levels (firms, nation-

wide)

Specific

Intra-Country

- Fight corruption (e.g., regulatory capture, MNEs capture, rent seeking)

Supra-National

- Recognise ‘infant’ entrepreneur, industry, firm and ‘cluster’ argument – promoters of longer-term value creation

- Tolerate ‘strategic trade’ by emerging economies, not by developed ones

▫ Recognise that need for ‘level playing field’ requires tolerance of apparent inequities in favour of worse-off

Possible Solutions to Governance for Economic Sustainability

Enlightened self-interest by agents (e.g. firms, nations)-but at short supply

Public policy-regulation (but regulatory capture)

Global hegemony (but failures of hegemony – challenge to democracy, top-down, thus limited sustainability)

Pluralism and diversity-stakeholding – more bottom-up, democratic and sustainable (thus preferable) – but adequate?

An accountable global monitor (international organization) – but capture?

Public-Private-Civil Society Nexus-based Governance

Private – comparative advantage to capture (profit) from value creating advantages

Public – comparative advantage in legitimacy, institutional, macroeconomic and overall context for value creation (subject to satisfying value appropriation needs of state principals – functionaries)

‘Civil Society’ (e.g. NGOs, consumer associations) – comparative advantage in pursuit of sustainability?

Proposition

In the context of

Innovation-knowledge promoting governance, and

Recognition of the ‘hierarchy’ of agencies

- Institutional and organisational diversity and pluralism, to include networking and (mega-) clusters, may help generate ‘mutual stewardship’ and ‘monitoring’ and serve as a policy for global and local (glocal) governance for sustainable value creation

▫ This requires a new type of ‘governance’ and government – an active orchestrator, knowledge-broker, conductor and public entrepreneur

Summary-Conclusion

Enlightened self-interest and national government regulation policies, helpful, but not sufficient (given self-interest – value appropriation)

Diversity and pluralism, to include networking and clusters, can help engender ‘mutual stewardship’ and can serve as an approximation for governance for sustainable global value and wealth creation

Accountable ‘global monitor’, might be useful to mould and enable the process to marry direction to democracy – these could include an ‘International Agency for Economic Sustainability’

- In the long term, however, the critical factor for regional success is investment in Dignity, Culture and Civilization.

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

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