TThe he LogiLogic andc and t the Methe Method ofhod of ...tips.org.za/files/TIPS_Pietrobelli_IND_POLICY_Gaborone_9_Dec_2008.pdf · TThe he LogiLogic andc and t the Methe Method ofhod

1 [email protected] CREI, University Roma Tre

The Logic and the Method of Industrial The Logic and the Method of Industrial Policy: Concepts and Practices Policy: Concepts and Practices

Carlo Pietrobelli Carlo Pietrobelli Director of CREI, University of Rome 3, Italy

email: email: [email protected] url: url: www.pietrobelli.tk

TIPS, Gaborone, 9 December 2008


Ø Ø Final aim Final aim is always development promotion development promotion Ø Over time different paradigms different paradigms prevailed in thinking how to do it…

Ø … basic needs, capabilities, structural adjustment, “market friendly” environment, ….

Ø … often only “cosmetic” changes and little consequences on actual policy strategies

Ø Now “Industrial Policy” and “Private Sector Development (PSD)”! Following a simple logic: Private sector Private sector è è growth growth è è poverty reduction poverty reduction

Ø Interest confirmed by several policy papers. E.g. European Union Strategy for Africa (October 2005)


• Review/Discuss the theoretical foundations of industrial policy in the economics literature

• Present a consistent and encompassing approach • Overview selected practices of industrial policy and PSD policies, to disclose and discuss their intrinsic logic – with empirical evidence and cases of best, good and bad practices –

• Draw implications for governments (and donors)

Aim of this seminar Aim of this seminar


• Traditionally (market failures approach): identify and remedy distortions that prevent competitive market functioning, e.g. taxes and subsidies. • Heavier and widespread interventions (in theory) fell in disrepute in many countries, due to inefficiencies and waste. Yet, often Yet, often remained remained in place in place. • Now a revival of respectability…: “….Policies that may promote the overall productivity of an economy. It has been proposed to call them productive development policies (PDPs). The final objective is to raise growth….(IADB and Rodriguez Clare, 2008). • • Rodrik Rodrik and Harvard group: “A policy to speed up the process of structural change structural change towards higher productivity activities, ….. And to assist firms in their search and discovery processes search and discovery processes for new lines of comparative advantage” (Hausmann, Rodrik, Sabel, 2008) • • Micro Micro foundations foundations of industrial policy (Lall and others)

Definitions of Industrial Policy Definitions of Industrial Policy


1. Market failures vs. government failures 2. The microeconomic foundations. Technological Capabilities and market failures in technology and learning

3. When the “system” fails 4. Coordination failures 5. Who should identify and address these failures? 6. New Industrial Policy: Search Networks and System Integrators

7. Examples of current practices

The economic rationale for industrial policies The economic rationale for industrial policies


• Market is the optimal way of allocating scarce resources • Public policies to offset preexisting market failures; Skeptical stand towards government intervention.

• Typical market failures: externalities, market power, information problems (asymmetries, incompleteness), public goods, …. E.g. frequent for the market for R&D and knowledge creation.

• Yet existence of market failures does not by itself establish the case for intervention. – Design of interventions require information and skills, – Effective implementation requires autonomy, skills, impartiality. – Thus Governments may “fail”, and the related costs may more than offset the benefits of intervention.

• Ideological assumption that Governments are bound to fail more frequently in developing countries, and that Governments never learn.

1. Market failures vs. Government failures


• Neoclassical case against interventions based on a particular conceptualization of technology at the enterprise level ;

• An alternative is the “technological capability (TC)” approach to understand innovation and learning in developing countries. TCs are the skills technical and managerial – firms need to utilise technology efficiently and improve upon it.

• This draws on the evolutionary approach, and on concepts such as tacitness of technology, and technological efforts;

• Thus, technological change is not exogenous but complementary to production. No essential difference between absorbing, adapting and improving technologies and “breakthrough” innovation.

• A learning process is always needed, and needs to be learnt. • The macroeconomic environment and the policy support framework strongly affect the development of TCs.

2. The microeconomic foundations. Technological Technological Capabilities Capabilities and market failures in technology and learning


1. …. TCs may explain differences in production performance (efficiency, productivity)

Production Factors (L,K, Skills, organization, …)

“Production Function” (often a black black box box, the “firm”)

Outputs (produced with different different levels of efficiency efficiency and performance performance, ….):

WHY? WHY?

capabilities needed to carry out functions such as • (pre)investment, • production (productprocessindustrial engineering), • linkage with markets and technology, ….


1. Many Possible Categorizations of TCs (Lall) FUNCTIONS

Linkages (with TechnologyMarkets)

Production Investment Degree of COMPLEXITY

SIMPLE, ROUTINE (Experience based)

BASIC

INNOVATIVE, RISKY (Based on research, purposive effort, advanced forms of collaboration)

ADAPTIVE, DUPLICATIVE (based on search, experimentation, interfirm cooperation)

ADVANCED

INTERMEDIATE


3. When the “system” fails • Building on the idea of “… national, regional, local “systems” of innovation that influence the development, diffusion and use of innovation” (Freeman, Nelson, Lundvall, Edquist …);

• Innovation is not sequential but the result of interactions among many actors within a system;

• Institutions shape the actions and incentives of firms through laws, technical standards, public funding, social rules, …

• Innovation is contextspecific and interactive; • The flows of knowledge within the system are crucial (access to complementary knowledge is prerequisite for firms to innovate);

• Differences between developed and developing countries….. Often focus on different organizations;

• Policies need to address the failures of the system.


4. Coordination Failures • Production and investment decisions in upstream and downstream segments of industry are often interdependent interdependent;

• Firms’ productivity also depends on the actions of other firms and organizations influencing infrastructures, intermediate goods and public goods provisions, regulations,….

• When market failures emerge in these markets for (intermediate) goods and services, the economy could be trapped in a low trapped in a low investment equilibrium investment equilibrium;

• RosensteinRodan’s notion of underdevelopment traps underdevelopment traps: no sector would be profitable industrializing alone.

E.g. Build an airport with no hotels, train personnel in fashion design with no firms….

• • Failure to coordinate individuals Failure to coordinate individuals’ ’ actions leads to an equilibrium that is actions leads to an equilibrium that is worse for everyone worse for everyone than an alternative equilibrium where many sectors were industrializing simultaneously

• Coordination failures frequently occur at the local (cluster) level, but it is right in clusters that such failures may be addressed.


5. Who should address/identify these failures?

Old and difficult question • Not anymore an alternative between two extremes: State vs. Market, or Government vs. Private Sector

• In fact, greater reliance on markets needs a more proactive role for the government (not vice versa)

• The issue is: How to exploit the best capacities of both? • Build a clever, dynamic and pragmatic partnership – inducing smart and effective forms of collaboration.

• Policies to promote industry and the private sector should be seen as a process of economic selfdiscovery in a broad sense, with an interactive process of strategic cooperation between the public and private sectors to elicit information on business opportunities and constraints, and also generate policy initiatives in response.

• • Partnerships Partnerships at the national national as well as at the local local level


6.”New Industrial Policy”. Search Networks and System Integrators

Somehow along similar lines the approach proposed by Rodrik • Aims at “…. Solving economic development problems without picking winners”.

• Focus is on – – bridging private bridging private public institutions public institutions (Fundación Chile) – Business networks linking global and local (i.e. search networks search networks) like innovation clusters & value chains, diasporas)

– Best performers in public and private sectors. • Target to generate missing connections generate missing connections – without allowing rentseeking – and start a process of discovery discovery have low enough cost to be profitable.

• • System integration System integration: move from good programs to good systems (Tekes, Corfo, …)


Analysis of several approaches followed in specific projects (not a detailed evaluation)

1. Enterprise clusters as a tool for industrial policy

2. Domestic and international interfirm linkages

3. Scientific and Technical support organisations

4. Business Development Services

5. Entrepreneurship Promotion

Some selected ideas on these approaches

“Best”, “Good”, “Bad” PRACTICES


Drawing from earlier research (Pietrobelli and Rabellotti for HUP 2007 and others….)

• Economic performance may be improved in clusters due to collective efficiency collective efficiency (external economies and joint actions)

• Clusters may help remedy market and coordination failures remedy market and coordination failures • • Policies need to be context Policies need to be context specific specific and – in several regards – cluster and sectorspecific. Take into account:

ü local specificities and cluster’s collective efficiency, ümode of governance of value chain(s), üLocal sectoral and cluster (filière) specialization

• • No general recipes No general recipes are valid everywhere, regardless local history, idiosyncrasies and peculiarities.

• Policies need to evolve over time evolve over time

1. Enterprise clusters as a tool

[email protected] CREI, University Roma Tre

On Evolution of Policies: the Chilean On Evolution of Policies: the Chilean Salmon Cluster Salmon Cluster

1996today: “Globalization”: productivity increase and technology transfer, environmental management, biotechnology (diseases and genetic handling)

198695 “Maturing”: physical infrastructure, export promotion and marketing, innovation and development of suppliers (cages, nets, food)

197885 “Initial learning”: regulation, technology transfer, investment in precompetitive research

Policies have evolved over time

Tremendous performance:

⇒ From 0 to 25% of world salmon farming

⇒ Exports: 1985 US$ 1 mill., 2002 US$ 1,000 mill.


Year Chilean Salmon and Trout

Production (.000 tons)

% Chile in World

Production

Estimated Prod. In 10th Región (.000

tons)

Exports (US$ million

FOB)

1987 2 1.5 % 1 8.0 1990 26 7.9 % 20 140.0 1993 69 17.1 % 60 291.4 1996 165 24.4 % 150 525.0 1999 201 22.1 % 180 817.8 2001 405 32.4 % 350 964.3 Fuente: APSTCH, SalmonChile, diversos años.


National eggs production, Forward linkages (process), Salmon development cycle, systems of automated control of water, light, etc., vaccines and food, Sustainability of the whole system

Backward linkages (fish farming) Quality certification Increased production scale

Experimental fish farming Knowhow in fattening

Technological challenge

Wholesalers (supermarkets) Strategic alliances or integration with final retailers

Brokers, associative channel of national production Salmoexport

Direct sale and cooperatives Commercializa

tion channels

Fillets and portions to the US market diversification: Japan, US, niches in Europe and emerging markets

Pacific coho, frozen, mainly to Japan

Product: fresh Pacific coho (élite market) Market

Destination

Increase productivity Increase volume of production

Survival of the fish Main objective

GLOBALISATION 19962003

from 150,000 t. to 400,000 t. price: US$ 2.84.5/kg

MATURING 19861995

from 1,350 t. to 143,000 t.

price: US$ 45/kg

INITIAL LEARNING 197885

from 50 tons to 900 t. price: US$ 910/kg

Table 2.2 Stages in the Life Cycle of the Salmon Cluster and Evolution of Policy Framework


Source: Maggi in Pietrobelli and Rabellotti, 2007.

Productive system inserted in a global production chain – commercialization

Associative will between producers

Pioneering public and private efforts

Social capital – setting

Dissemination of good practices Access to suppliers Critical mass achieved

“Demonstration effect” Externalities

Specialized local SMEs Large presence of highly specialized TNCs

Major outsourcing, local companies gain professionalism

Few and precarious. Companies seek self sufficiency

Type of supplying company

Large enterprises (integration and concentration), some TNCs.

SMEs with Presence of foreign groups

SMEs Type of company within the cluster

§ environmental handling § increase of productivity and transfer of technology (technology missions) § biotechnology (diseases and genetic handling)

§ Physical infrastructure § promotion and marketing (missions) § innovation and technology development of suppliers (cages, nets, food)

§ regulation § transfer of technology § investment and precompetitive research

Public policies

GLOBALISATION 19962003

from 150,000 t. to 400,000 t. price: US$ 2.84.5/kg

MATURING 19861995

from 1,350 t. to 143,000 t.

price: US$ 45/kg

INITIAL LEARNING 197885

from 50 tons to 900 t.

price: US$ 910/kg


• ….. Global Value Chains and local firms • Foreign Direct Investments, Transnational Corporations and Spillovers on domestic firms

2. Domestic and international inter 2. Domestic and international inter firm linkages firm linkages


• In the present context of globalization and rapid technological changes, countries need to create and upgrade new skills to manage technical change,

• New role for technical support organizations in standards, standards, metrology, quality, testing metrology, quality, testing, R&D, productivity, SME R&D, productivity, SME extension extension to complete and improve the “technology technology system system”

• Industrial policies in advanced countries are often truly often truly Science, Technology and Innovation (S&T&I) Policies Science, Technology and Innovation (S&T&I) Policies

• The practice of the European Union • Industria 2015 in Italy (and similar efforts in France and Germany)

3. Scientific Research and Technical Support Organizations


Drawing from recent comparative studies of entrepreneurship promotion programs (Kantis, 2005 IADB).

• no single prescription for success: strategies are always contextdependent; significant differences in the strategic, geographic, and budgetary reach;

• Knowledge of the initial conditions is essential; • common to combine generic (national and sectoral) and niche based strategies (the latter oriented to local and social groups);

• Sustainability crucially depends on involvement of the private private sector and of civil society sector and of civil society;

• The style of interventions must be itself “entrepreneurial”; • A flexible strategy requires efficient monitoring and evaluation.

4. Entrepreneurship Promotion


Ø Ø no easy recipes no easy recipes to copy, no ‘ideal’ best practice. Ø BDS centres have a role, but the market may do a lot without public subsidies.

Ø Ø Embeddedness in the local business environment Embeddedness in the local business environment is crucial (deep involvement of private sector, sectoral specialisation, location close to potential customers).

Ø Managerial and technical skills in the Centres and capabilities capabilities are key

Ø The density density of their presence matters.

5. Business Development Services (BDS) or real services, for their impact on structural features of company behaviour, and on their

competitiveness


Ø A role in stimulating demand of new services stimulating demand of new services from firms. This requires anticipating tacit, unexpressed needs in collaboration with firms and convincing them of their relevance for future competitiveness

Ø An alternative: help BDS Centres act as “network network facilitators facilitators” ”; ;

Ø But in poorer countries, a Centre is often bound to operate on its own, and should first improve its skills and capabilities;

Ø Ø Evaluation Evaluation is difficult but necessary (quantify benefits, costs, impacts, and repeat evaluations regularly).

5. Business Development Services (BDS)


Ø A process process (dynamics not statics)

Ø a mindset mindset?: not a bigbang, once for all reform: trial trial and error and error with continuous efforts and learning

Ø experimentation experimentation, gradual transformation through self correction and identification/removal of obstacles.

Ø Ø Public Public private dialogue and active collaboration private dialogue and active collaboration for effective policies (e.g. Fundación Chile) Ø there is still “policy space policy space” in the WTO regime

Concluding: Implications (1/3)


Ø Starting point is always the firm firm level. level. Analysis of firm level weaknesses – notably in innovation and learning – should drive policymakers and donor agencies. Øaddress market and coordination failures, but also systemic systemic imperfections imperfections” in markets, and notably in knowledge & technology, i.e. target components as well as their relationships. ØTarget the coherence of the whole system of policy coherence of the whole system of policy support support. Beyond good “projects” to good good “ “systems systems” ” of consistent and integrated programmes and interventions (e.g. CORFO) Ø Ø Improve capabilities Improve capabilities for strategic policy design, formulation, implementation.



Ø Ø Benchmarking Benchmarking with other experiences. This may also provide firms and organizations with the incentives to act and improve.

Ø Starting point is the firm firm level. level. Analysis of firmlevel weaknesses – notably in innovation and learning –.

Ø Experiment with indirect inducements indirect inducements instead of direct interventions, i.e. building appropriate institutions and incentive mechanisms incentive mechanisms

Ø Ø Open dialogue, transparency, accountability and constant Open dialogue, transparency, accountability and constant evaluation evaluation in policy design and implementation (….minimize corruption and private capturing of all benefits)


What concrete practices to improve the effectiveness of policy interventions, of their design and delivery?


Thank you !!!! Thank you !!!! Prof. Carlo P ietrobelli Prof. Carlo P ietrobelli Director of CREI, Director of CREI,

University of Rome 3, I taly University of Rome 3, I taly

[email protected] www.pietrobelli.tk


Is the idea of cluster cluster used in your country? Is the idea used for (industrial) policy used for (industrial) policy purposes? What is the approach approach to cluster development followed in

your country (if any)? At what level what level do you work? Enterprises, networks of

enterprises, support institutions, policy level, ..? What are the motivations motivations and objectives and objectives of your cluster development activities? For example: SME development, poverty alleviation, new firms creation, export, etc.

Questions for group work and Questions for group work and presentations by participants presentations by participants

Documents

TThe he LogiLogic andc and t the Methe Method ofhod of ...tips.org.za/files/TIPS_Pietrobelli_IND_POLICY_Gaborone_9_Dec_2008.pdf · TThe he LogiLogic andc and t the Methe Method ofhod