INDUSTRIAL POLICY

1. INDUSTRIAL POLICY Valanta Milliou cmilliou@aueb.gr http://www.aueb.gr/users/milliou/teaching.html

2. What is Industrial Policy? Industrial Policy (IP) includes all the actions and policies that influence the distribution of resources across sectors and within sectors. → IP influences the industrial structure of the economy. IP purposefullyaffectsincentivestoproducespecificgoodsorincentivesto enter/exitspecificgoodsmarkets. Itisnotlimitedto manufacturingand includesall typesof commercialeconomicactivities.

3. What is Industrial Policy? (con.) The degree of generality/specificity of the acts and policies that are included in IP is not clear. • Some claim that the policies that do not distinguish among economic activities, and thus they do not influence the distribution of resources among sectors should not considered as part of the IP. - For sure, IP includes all the policies that focus on particular sectors or products/services.

4. What is Industrial Policy? (con.) • Competition Policy: While it is a general policy with respect to its goals, still it is specific in its practice. Not only because it includes the treatment of particular practices that appear in specific sectors but also because it includes stated aid towards specific sectors or firms. • Research & Innovation Policy: It includes some measure that could influence the distribution of resources among sectors and within sectors.

5. Why industrial Policy? Industrial policy interventions have to be justifiedbecause if competitive markets workedadequately, anysuch intervention would: • Distort optimal allocation • Distort dynamic competition and its benefits (innovation, flexibility, consumers‘sovereigntyetc.), • Privilegespecificenterprises/industries/sectorsat theexpenseof others, • Disadvantagetaxpayersand consumers.

6. Why industrial Policy?(cont.) Industrial Policy to offset market failures: • Externalities • Asymmetric information (e.g. capital market imperfections) • Infant industries

7. Why Industrial Policy? (con.) Industrial policy to offset institutional failures: - Institutionalrigidities(such as scleroticlabourmarketregulations, deficientsocialsecuritysystems etc.) hamperadjustmentto structuraland industrialchange. - Institutionalframeworkmattersformarketperformanceand innovation.Different institutionalframeworksfoster/frustrateinnovationand growth.

8. Instruments of Industrial Policy The main instruments of IP are: • Competition Policy (state aid…) • Research & Innovation Policy • Enterprise Policy (DG Enterprise) • Additional Policies such as Standardization Policy, Trade Policy, Agricultural Policy

9. Instruments of Industrial Policy(con.) Examples of more specific instruments: - Subsidies - Tax breaks The above instruments can easily aim at specific sectors or firms that have been chosen. We should note that a number of international regulations reduce the ability of governments to use some over-protective measures.

10. Main Goal of Industrial Policy The IP aims to Increase the competitiveness of the EU economy. This goal has become more important within a globalized economy where EU faces strong competition from other countries such as the U.S.A. and Japan.