This is the second post in our series on globalization and innovation as drivers of new industrial policy in the EU and Germany. See the first post here.

 Over the last few years, industrial policy has become an increasingly more relevant topic for German and European policymakers. This interest has been rather controversial, leading to a complicated political and academic debate about the pros and cons of state interventions in the industrial sector. At the center of this debate lies the question of how German and European politics should approach industrial policy in the future and whether it can trigger sustainable and long-term economic growth in the middle of the Fourth Industrial Revolution.

The latest GED Focus Paper

In our latest study, “Can we learn from Trump and Xi? Globalization and Innovation as Drivers of a New Industrial Policy” (available in German only we contribute to this debate by looking at the historical development of international industrial policy and presenting case studies on the innovation systems in China and the US. The study’s main takeaways are:

Active, passive, and strategic industrial policy?

Whether in the US, China, the EU or Germany, industrial policy has played an important role in shaping the environment where firms can develop. Depending on the stage of a country’s economic development or its political landscape, industrial policy has historically fluctuated between an active approach, where the state is actively involved in shaping its economic structure, or a more passive approach, where it tries to maintain the existing structure of the economy. Nonetheless, the current international environment, determined by increasing economic integration and digitalization, has made a strategic industrial policy necessary for the future of many economies. This third approach specially aims at targeting and expanding sectors that will help industries keep up with the rapidly changing international environment. More importantly, it aims at fostering the innovative capacity of an economy, which will allow the economy to participate in and take advantage of the Fourth Industrial Revolution.

Are China and the US good role models?

In addition to considering the future effect of globalization and digitalization on the industrial sector, the European and German debate about industrial policymaking has also been triggered by the actions of China and the US. On the one hand, the geopolitical rivalry between the two countries has shown that the core principles of multilateralism and international cooperation have changed. On the other hand, in comparison to Europe and Germany, both China and the US have managed to establish strong and growing innovation landscapes. In our recent study, we focus on the latter.

Specifically, our study sheds light on key characteristics of the Chinese and US innovation models, thereby identifying strategies and policies that have been implemented in both countries to face challenges similar to those faced by Germany and the EU.

industrial policy

How can Europe and Germany do better?

In our study, we identify five important factors that require attention and should be considered when planning a future German and European industrial policy. The first one is the stagnating or even decreasing innovation capacity of European countries. The EU has constantly been losing innovation capacity (i.e., total factor productivity) since the 1960s, reaching a level of below 1% in 2016. This has led to the second and third factors identified in our study – the loss of competitiveness in technology markets and the slow growth of future innovation markets. In addition, the lack of venture capital markets and skilled labor in technology-related fields, because of demographic changes, further deteriorate the environment for technological advances in Germany and Europe.

While Germany and Europe can learn from the different policies and strategies used in other countries, they must create their own mechanisms and strategies that are linked to German and European economic and social goals. Five fields of action for an innovation-promoting industrial policy in the EU and Germany emerge from our study:

 

  1. Implementing a long-term innovation strategy
  2. Expanding the venture capital market
  3. Fostering a “cluster approach” at the EU level
  4. Rethinking and strengthening cybersecurity at the EU level
  5. Creating standard and fair conditions of competition

 

In addition to these fields of action, which are relevant both for the EU and individual member states, industrial policies in the following three areas could be particularly useful for Germany:

 

  1. Improving framework conditions for research and development
  2. Making the education and research system more geared towards reasoning and innovation
  3. Positioning the state as a thought leader and pioneer in new technologies

Thinking ahead

Approaching these goals requires a strategic European and German industrial policy that properly balances the protection and promotion of legitimate self-interests, and defense against economically damaging protectionism and unappropriated state interventionism. More importantly, industrial policy should serve as a means to counteract social challenges (e.g., globalization, digitalization, demographic change, climate change) and be coherently shaped to meet clear objectives. Furthermore, industrial policy should be driven in parallell with different actors. It should be a joint effort of business and politics, where the state ensures good conditions that promote competition while private actors implement concrete actions.

If you are interested in our study, don’t forget to check our blog over the next few weeks. We will continue the discussion on different approaches to industrial policy with case studies from the US and China.