What can industrial policy do?
Industrial policy is back in fashion. The new international environment is protectionist and prioritizes autonomy for reasons of security and resilience. It is the result of the converging trends of the lack of governance of globalization, rapid technological change, climate change, the pandemic, and war. The reinforcement of domestic production of goods considered essential (medicines, defense, food, etc.) is the order of the day for all the major blocs in the world, and the ownership structure of companies matters.
Europe has a productivity problem relative to the US and emerging China, and Catalonia and Spain relative to the most advanced European countries. This translates into a relative stagnation of GDP per capita, which is the foundation of our welfare state. Europe has been stranded with an industrial structure based on mature technologies and sees how the train of the digital revolution does not stop at the European station. A paradigmatic example is the automotive industry's commitment to a mature technology like the combustion engine in Europe (particularly in Germany), when the future of the sector is the electric car.
Industrial policy has shifted from choosing winning companies to investing in horizontal policies (fostering R&D, innovation, and human capital, for example), and more recently has returned to trying to favor promising sectors. There are successful examples of industrial policy in China, Japan, South Korea, and Taiwan, and there is evidence that horizontal measures are effective. For industrial policy to be successful, it is necessary to identify the market failure to be addressed; it must be pro-competitive; it must provide funding transparently through public tenders; it must do so in collaboration with the private sector and assume risks; it must periodically evaluate results and close the program if it doesn't work; and it must be agile and minimal. It can be very effective by coordinating the set of complementary assets required by large transformative projects (such as electric vehicles) and by fostering an innovative ecosystem.
The Draghi report states that the EU must overcome the fragmentation of the internal market to gain business scale. It points to the lack of collaboration between countries that dilutes spending capacity (in R&D similar to the US) across multiple national and European instruments, and the lack of coordination between industrial, innovation, trade, and tax policies. It proposes that state aid could be more generous when coordination within the EU is favored.
It also proposes a strategy with different tools and policies for different industries according to the following taxonomy: (i) Industry in which the cost disadvantage keeps Europe out of the market, where goods and technology are imported and only attempts are made to diversify suppliers (an example would be solar panel manufacturing, which is dominated by China). (ii) Industry in which the location of production is important to protect jobs, but not where the technology comes from. (iii) Industry in which it is important for European companies to maintain cutting-edge technology and production capacity for strategic and security reasons. Local content requirements would apply here, and technological sovereignty would be guaranteed through joint ventures and technology transfer. (iv) Infant industries (child) in which the EU may have a future advantage in the global market, but which need protection in order to develop until they have reached sufficient size following the learning curve. China has used this strategy repeatedly.
This taxonomy can be useful for defining industrial policy in the EU and Catalonia by classifying sectors. For example, in the automotive sector, where Europe has lagged behind, it is necessary to move from case (ii) to case (iii), because we cannot be satisfied with Chinese companies, for example, setting up plants that assemble parts without technology transfer. In this case, moreover, the value chain has been promoted in a coordinated manner in the charging network or in batteries. Policies in sectors (i) and (ii) are defensive. Sectors and segments that lean towards (iii) and (iv) should be encouraged, because this is where the future will be at stake with advanced technologies. Catalonia is strong in research, which helps us position ourselves in emerging segments. Of course, without forgetting that for the startup industry strategy to be successful, a sufficient degree of internal competition is necessary.