Local economies in a globalizing world: The role of European industrial policy

Europe needs industry—and industry needs Europe

‘Europe needs industry—and industry needs Europe’ declared the European Commission (EC) in setting out its fresh approach to industrial policy in the document: An Integrated Industrial Policy for the Globalisation Era: Putting Competitiveness and Sustainability at Centre Stage (EC, 2010b), published in October 2010. Against the background of the economic crisis, the crucial importance of manufacturing for the EU and the need for a new growth model for the European economy was recognized and documented. Industry and its associated business services account for about 50 percent of EU private sector employment, 75 percent of exports and 80 percent of private R&D. Industry also provides solutions to societal challenges such as health, ageing and environmental problems. At the same time, in the age of globalization and complex international value chains, policies for industry must increasingly be coordinated and made at the EU level.

In this article, we set out some of the background to the Commission’s analysis of the challenges for European industry and outline some of the proposed policy responses. In particular, we focus here on how local and regional policies could both contribute to and benefit from European industrial policy.

The opportunity and challenges of globalization for EU industry

Globalization and the accompanying emergence of new and fast growing markets represent a major opportunity and many challenges for European industry. The rapid emergence of new large economic powers in Asia and South America will reshape the world economy as we know it, and create new markets and opportunities for EU industry. Up until the economic crisis, industrial exports consistently provided a driver for EU economic growth and the recent economic recovery has benefited from the rebound in world trade (EC, 2010c). Over a longer-term horizon, despite intensifying international competition, the EU has broadly managed to maintain its market share in world trade in comparison to declining shares for the US and Japan. Indeed between 1996 and 2006, some EU industrial sectors even increased their share of world exports. ³ However, globalization also presents some crucial challenges for EU industry. First, the new emerging economies are increasingly serious competitors in their own rights for high value added products. EU firms will have to adapt to this newreality by becoming more competitive through increased productivity and innovation to produce new and better goods and services. Second, increased competition for energy and raw materials will raise prices and put further emphasis on the need for energy and resource efficiency. Third, the need to combat climate change increases the pressure to ‘de-carbonize’ the economy: a substantial reduction in greenhouse gas emissions by at least 20 percent by 2020 and the transition to a competitive low carbon economy by 2050 are major challenges especially for energy-intensive industries.

A fresh approach to industrial policy

In the face of these globalization trends and in the wake of the economic crisis, a fresh approach to industrial policy was developed by the Commission as one of the key flagships of the Europe 2020 strategy (EC, 2010a). Thedocument made clear that whilst in a market economy the major responsibility for industrial competitiveness and sustainability lies within industry itself, the EU, Member States and individual regions also have the responsibility to establish the right institutional framework for doing business in Europe. The new policy framework thus included concrete actions for both the European institutions and the Member States, including both horizontal measures to improve the overall framework conditions for EU industry and sectoral measures that address the particular problems of individual industrial sectors to ensure that they are ready to face up to the challenges of the global economy.

In particular, the strategy document of October 2010 emphasises actions to pursue the following main priorities.

First, it was important to capitalize on the strengths of the European integration process. The EU constitutes a market with more than 500 million consumers, more than 220 million employees and more than 20 million entrepreneurs. But the Single Market needs to be strengthened further and made more efficient. A well-integrated European market would allow better conditions for industry specialization and trans-national cooperation. In the face of fierce new competition on a global scale, Europe cannot afford to continue with a slow and piecemeal approach of further economic integration. In particular, cross-border infrastructure links need to be modernized and improved, and competition increased particularly in energy markets. The integration of the market for business services needs to be speeded up following the implementation of the Services directive and measures need to be taken to develop the European system of intellectual property rights, in particular through an EU patent system to foster research and innovation.

Second, there is a need for Europe to speed up the introduction of new technologies and become better at turning ideas into marketable goods and services. Closer cooperation of Member State and EU technology policies is required, together with more timely internal market legislation and standardization in order to create a vibrant market for innovative goods and services. A High Level Group of experts is currently examining how to speed up and improve the commercialization and deployment of key enabling technologies, such as nanoelectronics, nanotechnology, industrial biotechnology, advanced manufacturing, advanced materials and photonics (High Level Expert Group, 2011). A similar process is needed to embrace and facilitate the transition to a resource-efficient, greener economy. Industry must turn the growth potential from unmet societal needs, such as the demand for green and sustainable products, or for an ageing society, into new market opportunities. The development of clean and energy-efficient vehicle technologies, for instance, can substantially contribute to the reduction of the environmental impact of Europe’s transports system and support the market leadership of European automotive sector. As a result there should be more innovation, more competitive jobs in industry and industry-related services, while industry is enabled to pay attractive salaries.

Third, with globalization the specialization and the fragmentation of value chains increase. Therefore, it is vital for European competitiveness to think in terms of internationally integrated value chains rather than isolated national sectors. Promoting certain sectors at the expense of others would come at a price. The Communication stresses that all sectors and all jobs are important. For instance, energy-intensive industries, already world leaders in energy efficiency, play a crucial role in the European industrial value chains and contribute substantially to the production of goods with CO₂-reducing effect. Therefore, there is a need for energy intensive and traditional and low-tech industries as much as for new, green and high-tech ones.

Fourth, there is still a certain ‘silo’ mentality when policies are designed, and therefore policies often do not sufficiently recognize the strong interaction between different policies. Environmental policies do not only have an impact on the environment, social policies do not only impact on social security, and transport and energy policies do not only affect the transport and energy systems. They all also impact on industry, its competitiveness, and its business models and opportunities. It is necessary to become more aware of these interactions and interdependencies and try to optimize the relationship between them to the benefit of sustainable growth, jobs and the international competitiveness of our industries. In particular, there is a need for ‘smart regulation’ that uses efficient and market-based instruments, reduces costs and promotes industrial competitiveness and innovation, whilst achieving the core purpose of the legislation.

Finally, there is a need for reinforced EU-level governance. As the pace of globalization has accelerated, EU Member State economies are increasingly closely interlinked with each other and with the international economy. The concepts of national industries and national policy making are becoming less and less relevant. It is now becoming essential and urgent to focus on European industries and to develop more coordinated EU-wide industrial policies. However, the policy outcome would be improved only if policy makers and regulators in Europe would work closer together. The division of labour between actors at the local, regional, national and European level should be improved, with stronger governance at the European level. This requires a stronger monitoring of what is going on at the national and regional level and a learning process that promotes best practices. The experience of recent years has shown what happens if national imbalances are also allowed to build up in the industrial competitiveness position of individual Member States. On the world stage, the increased need for global governance and the need to reconcile the different growth models pursued in different regions of the world make it necessary for Member States to work more closely and ambitiously together.

Implications for regional and local policies

To be successful, the new approach to industrial policy at the European level must be complemented by a closer link between EU and national level policies and between the EU level and regional and local authorities. Indeed the policy implementation of the proposed approach and priorities of the Communication is often best carried out through appropriate local and regional policy interventions.

Globalization paradoxically makes the role of local and regional policies more important. On the one hand, the internationalization of value chains makes it imperative to promote better local access to resources and input factors such as knowledge, new technologies, qualified human capital and finance, especially for SMEs. Recent studies demonstrate empirically the importance of the positive externalities from local clusters or concentrations of firms in improving productivity and competitiveness within globalized value-chains (Giuliani et al., 2005; Humphrey and Schmitz, 2002). At the same time, globalization has made it imperative to benefit from activities with location-specific competitive advantages, whilst avoiding potential vulnerabilities from over-specialization.

Consequently it is not surprising that clusters and cluster policies have received a lot of emphasis in industrial policy. Cluster policies are a wide range of different policy instruments implemented at local and regional level to foster both specialization and innovation. However, contrary to the past, we cannot only look at clusters policies as measures to improve regional competitiveness (Porter, 2000). For example, the ability to produce innovations in certain technologies at regional level helps determine the overall competitiveness of the EU in those technologies (EC, 2011). It follows that successful policy making must take full account of the comparative advantages of EU regional economies and clusters, identifying priorities and coordinating the local interventions.

It is in this perspective that we need to frame the EU’s local and regional industrial policy efforts for clusters. But, with respect to the past, it is obvious that more can and must be done: empirical evidence using European Cluster Observatory (EC, 2008) data shows that the average region in Europe is less concentrated than the average US region, suggesting a weaker degree of specialization of the European local economy. While the upside of this is that European regions are less exposed to sectoral economic shocks, there is a need for a better networking of clusters across Europe in order to exploit the benefits of economies of scale and specialization. The new EU industrial policy therefore, along with regional policies, puts more focus on smart specialization (EC, 2010d; Foray et al., 2009) strategies that call for local and regional innovation in a few globally competitive areas, usually focusing more on the application than the research side. However, the practical implementation of the smart specialization concept is not an easy task and much work is still required to make it operational. For instance, smart specialization requires multi-level governance for innovation and competitiveness interventions (EC, 2010e) and thus weak policy synchronization between EU, national and local authorities needs to be overcome and replaced by a clear policy agenda and common priorities. Of course, strengthening policy coordination will not be an easy task. It will require taking into account regional and local priorities, overcoming lack of mutual knowledge and trust, and bringing together what are currently competing national policy models.

More coherent multi-level policy governance will also contribute to the accomplishment of the Communication’s objectives of legislative simplification and reduction of administrative inefficiencies. In a time of scarce resources, local policy makers can act to reduce bureaucracy, minimize administrative costs and improve the business environment, especially for SMEs. In addition, an enhanced policy learning process could substantially improve the quality of local and regional support mechanisms for innovation and competitiveness and help identify and eliminate policy redundancies, incoherencies and gaps.

In conclusion, EU industrial policies will need to be complemented by well thought out national, regional and local policies. A main strength of the European economy is that it is built on numerous important world-class clusters that have naturally developed over decades, sometimes acting as big global players. These existing clusters are themselves proof of the presence of a successful competitive advantage: it will be the goal of the overall industrial policy to help identify and leverage the comparative advantages of each agglomeration thus enabling the overall European economic growth.