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Industrial Policy – Lessons from the USA

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Several rankings indicate that the US is among the most innovative countries in the world. Often considered a country that takes a market-liberal approach to industrial policy, the state, in fact, plays quite an active role.

In two previous blog posts from our small series “The Future of European and German Industrial Policy,” we emphasized the current relevance of industrial policy and presented the main findings  of our GED Focus Paper. We now continue with the industrial policy approach of the US, especially its role in fostering innovation.

Historical development

Industrial policy in the US is, to a large extent, the result of their wars. The state has sought to own state-of-the-art technology to trump their opponents and has actively supported national industries and research institutions.

This decentralized approach has made state agencies key actors in industrial policymaking. State agencies have the power to make independent decisions on resources, cooperation opportunities, investments, and projects. Two state agencies are especially relevant for the industrial and technological development of the country – the NSF and DARPA.

The National Science Foundation (NSF) was founded five years after the Second World War to institutionalize cooperation between the state and research institutions. Since then, the role of the NSF has consistently grown with a current budget of several billion dollars to promote natural and engineering sciences.  The NSF has been fundamentally important for the development of technologies that are now largely known all over the world. Among others, the NSF financially supported the development of QUALCOMM, Google, the iPhone, and 3D printing. Similarly, the Defence Advanced Research Projects Agency (DARPA) was established during the Cold War as a result of the Sputnik crisis. In addition to its financial aid activities, DARPA also aims at facilitating cooperation between public and private actors.

Further approaches

Throughout the history of the US, most administrations have actively shaped the conditions for the development of the industrial sector. Here are some mechanisms and strategies since the Regan era:

  • Provision of credits and risk-capital for start-ups as well as for small and medium-sized enterprises
  • Tax breaks for large and multinational companies
  • Preferential treatments in public procurement procedures towards foreign companies
  • Promotion of exports via the Export-Import Bank of the United States
  • Bail-out of industries and companies in the aftermath of the financial crisis

A significant policy change of the Trump administration is its focus on tariff measures to protect US industries. This goes along with the America First policy stance, which includes a focus on tariff barriers and has caused a lot of global uncertainty.

From industrial policy to a thriving innovation model

As stated before, industrial policymaking in the US has allowed the development and establishment of a thriving innovation landscape. These are some of the mechanisms and strategies that have allowed the emergence of innovation hubs like the Silicon Valley:

  • The state as a consumer: A large part of the demand for research and technology comes from the state.
  • The state as an intermediary: The state promotes cooperation and collaboration between the private sector and research institutions.
  • Diversified investment in research and science: US investment is spread across many different sectors and levels of research. The state thus promotes innovation activities on a broad basis, not sector- or technology-specific.
  • The state as a provider of basic technologies: US authorities have a special interest in promoting basic research on products that are used for applied research or the development of advanced technologies by the private sector.
  • Facilitating the framework conditions for new technological developments: The innovation market is a capital-intensive sector. By facilitating the framework conditions of the venture capital market, the state has enabled access to a larger pool of financial resources.

These key components imply several strengths of the US model, but some issues hamper innovation capacity.

Strengths and weaknesses of the US innovation model

The US benefits from its openness and attractiveness to foreigners. Immigrants create a lot of highly innovative start-ups. More than half of the unicorns (start-ups with a valuation above $1 billion) in the US were recently established by immigrants. Start-ups have especially profited from financial access to a strong venture capital market, and there are a lot of very profitable high-tech companies.

Cultural factors in the US have contributed to innovation capacity such as the readiness to take on great risks. Other strengths that imply an active role of the state include the high domestic demand, innovative universities, and a stable as well as transparent legal framework which makes it relatively easy to set up a new business in the US.

On the other hand, tax incentives for the private financing of innovation are comparatively low in the US, and outsourcing of manufacturing processes abroad implies decreasing capabilities in applied and process innovations. Moreover, the increasing tendency to focus on short-term dividend policy (maximizing the shareholder value) leads to a prioritization of the companies’ interests, which comes at the expense of research and development spending. The lack of central coordination is another issue that leaves room for improvement because better-coordinated initiatives could increase synergy effects. Last but not least, the expansion of trade barriers and the rather negative climate towards immigration under the government of President Donald Trump is a critical point to note in respect to innovativeness since the spread of new ideas is curtailed.