Transcript Competition, Innovation and the Myth of National Champions

Competition, Innovation and the Myth
of National Champions
discussion points
(FG, 6/5/2006)
“Distance to the Frontier, Selection, and Economic Growth “
by P. Aghion, D. Acemoglu and F. Zilibotti, JEEA, 2006
•
countries that are far away from the technology frontier can pursue
an imitation-based strategy
•
imitation works well with:
1.
Large firms
2.
a bank-centred financial system which establishes long-term relationships
between firms and banks, that allow for monitoring of the adaptation of wellknown technologies
3.
slow turnover of managers—for the same reason as above—and thus of
ownership
4.
hands-on approach by the government ( MITI, IRI, keiretsu )
All of this contributed to Europe’s success up to the 1970s
(and later Japan and even later Korea)
• But closer to the technology frontier, there is less room for copying and
adoption of well-established technologies
• When Europe came closer to the technological frontier innovation
became the critical factor for growth
• But the very institutions that were responsible for the success of the
1960s became the main hindrance to growth
What is needed on the frontier where new technologies are
developed?
“Competition and Innovation: An Inverted U Relationship”
by P.Aghion, R. Blundell et al. QJE, 2005
The relationship between product market competition and innovation is
an inverted U-shape:
1.
competition creates the incentive to innovate
2.
on the other hand, competition may also reduce innovation
incentives
Innovation thus requires the balance of two factors
• competition, that is an environment where old firms close down and
new firms are allowed to replace them (“creative destruction”), since it is
mostly in the new firms that technology is developed
but, at the same time
• firms that are not too small, and thus have a scale and a market power
sufficient to generate the right incentives to innovate
Neither is observed in Europe (no wonder there is little
innovation)
European governments
• protect incumbents, providing them with subsidies, thus limiting creative
destruction
• dream of creating “domestic champions” which do not innovate for two
reasons:
– they are not large enough
– but at the same time they enjoy too large monopoly power on the domestic
market
Entry barriers in selected countries
7
6
5
4
3
2
1
0
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
FRA
DEU
ITA
NZL
UK
•Countries: Germany (DEU), Spain (ESP), France (FRA), United Kingdom (UK), Italy (ITA), United States (USA), New Zealand (NZL).
•Index of entry barriers measured by the indicator BEVI.
USA
ESP
Small, protected local champions are bad at innovating
The example of the Italian service industry
Hourly
Productivity
Growth
Overall
Contribution from
Manufacturing
Services
(Non ICT services)
1981-95
Germany
2.3
0.8
1.0
(0.4)
Italy
2.2
1.0
0.9
(0.4)
Germany
2.0
0.4
1.2
(0.3)
Italy
0.7
0.2
0.1
(-0.5)
1996-2000
Brussels shares the wrong view that they way to promote
innovation is
• grants to centrally chosen projects (the “industrial projects of the future”)
• subsidies protect incumbents
From a recent Commission document
(the red is mine)
• “Research and innovation generally thrive best in open and competitive
markets
• However, market failure may hamper the delivery of optimal levels of
research and innovation
• State aid can tackle market failures and change the incentives of
market participants, thus facilitating research and innovation
• While existing rules already provide wide possibilities for Member
States to support research and innovation through State aid, the
Commission has announced that it will review its rules to better reflect
Community policy priorities and the need for a more research and
innovation-friendly system.”
Germany
• Angela Merkel will spend 25 billion euro on subsidies to firms and on
infrastructure investment in the hope to that this will spur innovation and
growth
France
• Jean Louis Beffa (CEO, Saint Gobain) put in charge of an Agence pour
l’innovation whose purpose, thanks to a 6 billion euro government grant,
is to support the “industrial projects of the future”
Name of the
program
Start
date
R&D area
Concorde
1962
Electronic flight
equipement
Plan Calcul
1966
Computers
Nucléaire civil
1968
Nuclear
Airbus
1969
Aerospace
Spatial
1973
Ariane missile
Réacteurs
1973
Train à Grande
Vitesse
Name of the firm
Government grant
Aérospatiale
€ 3,9 billion between
1970 and 1990
UNIDATA e Bull
€ 8 billion
CEA, EDF
n.a
Aérospatiale e Airbus
€ 3 billion at the start
Aérospatiale e Air
Liquide
n.a.
Engines for Airbus
CFMSG
n.a
1974
Fast speed trains
Alstom
€ 2,1 billion for the first
TGV line
Minitel
1978
Telephones
France Telecom
€ 1,2 billion for PTT
Plan composants
1989
Microchips
Thomson, diventata ST
Microelectronics
n.a.
United States
•Think of IBM in the 1970’s
• It was the threat posed by the success of Apple that convinced IBM to
speed up the introduction of the personal computer
• Hadn’t Apple been able to enter the market, and had the U.S.
government subsidized IBM, the IBM PC would have come years later
France: an interesting question
• Is Airbus about innovation or imitation?
• and the TGV ?
Two lessons
• Closer to the technology frontier, there is less room for copying and
adoption of well-established technologies
• The relationship between product market competition and innovation is
an inverted U-shape”
The way ahead
• allow creative distruction, which requires
– allow old firms to die
– allow new frims to be created
– abandon bank-centered financial systems
– encourage turnover of management by encouraging turnover of ownership
• allow pan-European firms