Missing infant industrial policy

The evaluation of current and past industrial policies or strategies is a telling mixed message. On one side they focused product and innovation-based productivity, but the recent decades turned policy narrative toward social and common good objectives. This may have led to accidental avoidance of economic value, growth and competitiveness goals. The societal and sustaining goals are important but not at the cost of whole society by living on accelerating debt only.

What are the key lessons we have to gain from recent decades to avoid the mistakes that led to this massive debt and outsourcing of economy?

1. Praise competitiveness and growth at the global market rather than being small local champion
2. Use shadow innovation system and goverment venturing model with shareholder’s agreement to direct picked winners in collaboration with private VC's
3. Regional growth policies should strongly support the local SME'S growth (with implementation of Small Business Act)
4. Innovation structures and entrepreneurial policies should foster forward looking hubs capable providing talents, diversity and economic results
5. Future is invented and created by competing on the markets, by reshaping of value chains, by taking over monetarization models with new ones and establishing new markets faster than competition.
6. Government strategic and planned intervention are accelerating solutions to regions on decline path.
7. The societies should not consider economic growth and capabilities in complete isolation from wider cultural, welfare, life and environmental factors.
8. No local technical engineering education focusing on local SME impact, global export and jobs creation as higher education leadership in not familiar with industry's role in regional economy.

The new policy should be built around regional intellectual "technology" capital:

• local technology business sectors education and venturing programs
• product development (export competitiveness) catapults
• innovation (commercial success) accelerators
• innovation cocreation hubs and places
• sustaining economic environment
• safety and wellbeing of people

Europe has fallen far behind while local companies has invested insufficiently in to their competitive position at demanding and advanced markets, the strategic engineering and business model skill shortages and a legacy of old poorly managed and owned firms has left EU with significant numbers of poorly performing firms investing very little to innovation, new product, product lines, production technology, markets and customer engagement. Europe has a high proportion of public servants without understanding or relation own local innovation, entrepreneurs, SME's and industries. The loss of societal technological civilization has turned Europe and former innovations leaders on decline spiral. This twist is result of "global common good" only policy first rather than balancing local long-term economic sustainability and prosperity of people. Whilst the Europes social, cultural and public infrastructure is generally excellent, there is severe sings of pinch points, such as the radical pension level and system changes, increasing number people living on government housing benefits, declining export value and two-digit debt growth around the society both public and private sides.

What is value adding regional industrial policy for transition and structural change regions:

• It is focused technology capability-based agenda with a focus on the special role of product and production development in the economy.
• It is a broad horizontal capability-based policy intervention taking in any structural transition area where government needs to intervene to overcome a damaging short-term equilibrium or market asymmetry to regain sustaining economic state.
• Industrial policy is today very much about politics as it about sustaining economics, preserving society and protecting environment.

Two of the leading OECD, EU and UK industrial policy expert J. Dupont and R. Howard write in their very recent "post Brexit era" facing industrial strategy:

"From the very beginning, industrial policy was controversial with classical liberals. Adam Smith’s (1776) "The Wealth of Nations", the founding text of modern economics, was written largely as a response to mercantilism, the industrial policy of the day. In turn, Alexander Hamilton’s (1791) "Report on Manufactures" and Friedrich List’s (1841) "National System" were written in response to Smith. Using what we would now recognise as the ‘infant industry’ argument, the two intellectual fathers of industrial policy argued that free trade might be good for mature industries, but new companies needed some protection as they developed the economies of scale needed to compete."

What EU and member states are doing for their own local 'infant industry’ compared to USA and China? Where is the European “Small Business Act” passed over 60 years ago to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns" to provide “small businesses a ‘fair proportion’ of government contracts and sales of surplus property”. The nationalistic ‘infant industry’ oriented “Small Business Act” from 1953 in Public Law 85–536 and approved July 18, 1958 clearly states the national interest in 15 U.S.C. 63 section § 2.a. by stating:

“It is the declared policy of the Congress that the Government should aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterpristo insure that a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government (including but not limited to contracts or subcontracts for maintenance, repair, and construction) be placed with small enterprises, to insure that a fair proportion of the total sales of Government property be made to such enterprises, and to maintain and strengthen the overall economy of the Nation.”

The USA “Small Business Act” is classical ‘infant industry’ industry policy not limited to public money use toward local and regional small business but also an act which support the local small business expansion to international markets in 15 U.S.C. 63 section § 2.b.1 by stating:

“Department of Commerce and other relevant State and Federal agencies, should aid and assist small businesses, as defined under this Act, to increase their ability to compete in international markets by:

(A) enhancing their ability to export;

(B) facilitating technology transfers;

(C) enhancing their ability to compete effectively and efficiently against imports;

(D) increasing the access of small businesses to long-term capital for the purchase of new plant and equipment used in the production of goods and services involved in international trade;

(E) disseminating information concerning State, Federal, and private programs and initiatives to enhance the ability of small businesses to compete in international markets; and

F) ensuring that the interests of small businesses are adequately represented in bilateral and multilateral trade negotiations.”

The annual magnitude of this nationalistic ‘infant industry’ oriented local technology small businesses government intervention is summarized as following:

• $4,0 billion financial capital to ‘infant industry’ Small Business Investment Company (SBIC)
• $2,5 billion investment to ‘infant industry’ through Small Business Innovation Research (SBIR) and Small Technology Transfer Research (STTR) funds
• $4,0 million support for local national high growth entrepreneurial ecosystem facilitation

In total close to $50 billion to research-intensive American small businesses by handing out over 150 000 ‘infant industry’ grants annually delivering over 10 patens a day.

This is not only legal act that is promoting national interest in business and industry. The Buy America Act (BAA) 41 U.S.C. §§ 8301-8305 from 1933 governs procurement of goods at federal level, while EU lack similar directives. According to EU studies this Act forces mandatory measures, also known as “Buy American restrictions”, for government-funded purchases, including supply and construction contracts of goods and products. The anti-free trade, free competition and open market act takes restrictive measures in several forms: 

• prohibit government entities from purchasing foreign goods and services,
• require a certain amount of local content, and
• give domestic suppliers a preference in evaluating bid prices

This Buy America Act (BAA) was supplemented by Executive Order 10582 of 1954 by allowing government and federal entities to reject foreign bids and firm invoking national interest and security clauses. Despite trade free trade agreement all negotiated US trade agreements have given states the choice to retain their state procurement rules or accede to the agreement. There are exceptions in Trade Agreements Act of 1979 (TAA) (19 U.S.C. § 2501 but the complexity and overlapping makes the act challenging in context of anti-free trade, free competition and open market. The WTO-GAP, DOD and Free Trade Agreements have eased trade on product and industry categories not listed in the agreement.   

The massive intra-firm trade and U.S. protectionism in information technology is making “free trade” and “open markets” arguments seem like idealistic jokes in media, textbooks, policy reports and academic papers. This development is market failure lead by political nationalist driving policies that allow some nations neglect local privacy laws and to carve monopolistic profits by avoiding competition, rivalry and evolution to take place.

The idealistic “open market”, “serving global common good” and “free trade” have for long been just political jargon to hide the real stealth national innovation systems acting in favour of the local “infant industry” and "global digital data monopolies". The “infant industry” argument is more valid than ever and Europe should implement at new “intangible innovation triple helix” (IITH) model combining “Small Business Act” (“infant industry”), “Buy America Act” (“federal procurement”) and “Small Business Investment Company” (“venture capital”) views in similar way other economic regions have done to boost innovation, jobs and economic growth. The foundation of this IITH model is endogenous “Intellectual Capital” (IC) growth capabilities of regions and nations. Special focus should paid on local European "infant software industry" to boost competition and innovation from regions with IITH model.

Your innovation evangelist helping regions and nations under sudden structural change,

Mika