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European Industrial Policy and Competitiveness: concepts and instruments

Thomas C. Lawton

University of London
School of Management

International Studies Association

March 1998

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Introduction

When the principle of industrial policy is invoked, it is associated with the politics of mercantilism and the business of protectionism. It conjures up images of market distorting policies and trade restrictive measures. Tariffs, quotas, state aid, procurement, and research subsidies are commonly regarded as amongst the most interventionist instruments of industrial policy. This is not the true nature of modern industrial policy. The essence of the concept has transformed as the global economy has become a reality. Economic liberalization has ensconced itself as the dominant ideology of the international order and governments have moved accordingly from the protectionist policies of the 1960sand 1970s to a policy set which seeks to enhance the global competitiveness of business and industry.

This paper does not seek to absolve the past sins of industrial policy as an economic instrument of government. We accept that in most cases, industrial policy has - regardless of motivating factors - served to distort markets and restrict fair competition. The intention instead is to chart the increasingly complex nature of contemporary industrial policy and catalogue the diverse instruments employed by industrial policy makers. We argue that global liberalization has precipitated a move away from traditional interventionist and protectionist instruments of industrial policy. Accepting that government involvement in industrial affairs is a fait accompli however, we identify the means by which government has reinvented its industrial policy mandate, focusing more on, often indirect, means by which to facilitate or promote industrial competitiveness. What emerges is a hybrid model which contains many contrasting and conflicting instruments. Although the policy emphasis is on supporting industry more as a partner than as a big brother - what the European Commission has termed, "an industrial competitiveness policy" 1 - several traditional protectionist devices remain in force.

Nowhere is this industrial competitiveness policy more evident than within the European Union. Industrial affairs have, since the early 1980s, been at the forefront of Europe's search for common areas of action. The creation of a single Union-wide industrial policy may be viewed as another substantial step towards economic and political union. Whereas other works concentrate on the European Monetary System (EMS) for instance, and test its success or failure as a policy of integration, we look at industrial policy and endeavour to place it in the context of the integration process and the business environment.

This paper has two main objectives. The first is to advance a clear and comprehensive conceptualisation of modern industrial policy; the second is to illustrate how industrial policy and its individual mechanisms serve as an instrument of European economic integration.

We argue that European industrial policy should be reconstituted for the twenty-first century and seen for what it is: a complex, multi-faceted, multi-layered policy sphere which has both market protecting and business promoting elements. The unique feature of this paper is its clear, generic conceptualization of European industrial policy. The main instruments of this policy area are clearly delineated, grouped, and analyzed. Moreover, the paper constructs a link between industrial policy and European integration and contends that industrial policy constitutes a central element of economic and political union. Overall, the paper is a study of public policy and therefore emphasis rests upon the management and impact of governmental strategies for industrial competitiveness.

The industrial policy debate

To focus debate on whether or not government should involve itself in the market economy is misleading and detracts from the real issue. As Nester argues:

The real issue has not been whether government should develop the economy, but rather how and where it should do so (1997, p.2).

Industrial policy, in one form or another, has always existed and is present in every country. Even in the United States, where industrial policy is taboo and Alexander Hamilton's efforts to create a comprehensive industrial policy for the nascent United States were rejected, policies since - tariffs, infrastructure development, antitrust - have served to establish a de facto set of government policies for industry (Nester 1997, p.2). The point therefore esthete rather than engaging in academic disputes over the rights and wrongs of industrial policy as an instrument of government, we should attempt to comment on the nature and market effect of existing industrial policies. This approach is a more realistic means by which to pinpoint and dispel the market distorting elements of government policy for industry. As Barberis and May argue, the success of industry is in part dependent on government's pursuit of the "right" measures, be they active or passive (1993, p.3).

Nester advances a rather general notion of industrial policy. He contends that it has two meanings: the first is an expansive, long-term government plan for advancing the entire economy; the second is the way in which a government attempts to target and develop a specific industry (1997, p.4). A country such as France has tended to pursue the first form, whilst the United States is a good example of a nation which employs the latter approach. Industrial policy can therefore exist in either a structured or a fragmented form. Schultze refers to industrial policy as not so much a single theory as a loose collection of similar diagnoses and proposals (1984, p.7). As a rule, industrial policy is essentially reactive in nature: responding either to apparently successful industrial policies elsewhere ("picking winners") or to the process of deindustrialisation ("protecting the losers"). This interpretation is now largely outdated, as governments have moved beyond employing industrial policy as a clumsy, knee-jerk response to global competition. Government attempts to "pick winners" have been abandoned, with even the renowned Japanese Ministry of International Trade and Industry (MITI) proving incapable of predicting which firms would prove competitive on the open market 2 . As DuchÍne and Shepherd argue, industrial policy can refer to efforts which exploit and promote industry (1987, p.8). Messerlin contends that two definitions of industrial policy exist, based on the work of Corden (1980).The first is the sum of micro-economic measures applied to selected industries and is manifest through the encouragement of infant industries and new technologies, the creation of "national champions", nationalization, and the direction of resources to influence the labour and capital markets. The second understanding of industrial policy includes macro-economic policy, on top of the aforementioned features. This incorporates influences such as fiscal and monetary policy, which are less explicit in their impact (1987, p.76). Molle simplifies the definition, stating that industrial policy instruments can be grouped into two broad categories: financial and regulatory 3 (1997, p.274).Financial instruments can be direct (subsidies) or indirect (tax relief) in nature. Regulation devices include technical standards and norms, government procurement, and trade policy tools such as antidumping and voluntary export restrictions (Molle 1997, p.275). Although insightful, Molle's conceptualization neglects important elements of contemporary industrial policy. In particular, he under-emphasizes the market liberalizing and policing mechanisms and the environment enhancing devices like training and infrastructure development. In general, Molle pays more attention to the more restrictive and interventionist industrial policy instruments than to the market friendly dimensions.

Thompson states that one of the main problems with industrial policy is its diversity of objectives and shortage of instruments (1989, p.59). He contends that the industrial policy remit if usually too broad, encompassing areas and issues where it is not effective or not needed. The author advances a list of policy areas which have been traditionally articulated with industrial policy in most Western countries. These include tax, defence, social, regional, trade, education/training, and competition policy. Contrary to the argument advanced in this paper, Thompson sees linkages or even fusion existing between industrial policy and the aforementioned policy areas, whereas we argue that they are all in fact instruments of a generic industrial policy set.

Thompson argues that two broad conceptions of industrial policy emerge from the literature and debates: the first (more traditional view) articulates industrial policy as focusing on employment objectives and defense policy; the second (contemporary perception) expresses it as a mixture of trade, international competitiveness, and domestic competition concerns (1989, p.63).

Williams et al. (1989) identify the three core elements of industrial policy as strategic investment, process technology, and market protection. They argue that any industrial policy should strive to achieve a balance between all three features. Chipping advances one of the most comprehensive definitions of industrial policy. He states that three different categories exist:

the first one covers all measures involving a direct transfer of funds from the public budget to industry, like subsidies. A second group of measures are those which benefit industry without involving government expenditures. They involve mainly trade and competition policy. These two categories constitute industrial policy in the "traditional" sense, since they are targeted at a limited number of sectors. The third group of measuresÖcomprises all government action aiming to improve the overall investment conditions, e.g. spending on infrastructure, education, training, etc. (1997, p.490).

The US industrial policy debate

As Thompson points out, the US federal government has always had an industrial policy, operationalised primarily through the federal tax system, the Department of Defense, and agencies such as NASA (1989, p.12). The early to mid-1980s witnessed a vigorous debate over the nature and scale of US industrial policy. This was precipitated by the increasingly global nature of the US market and of US companies, together with potent new competition from East Asia and a perceived "de-industrialization" of the US economy. Commentators such as Magaziner in fact instruments oand Reich (1982), Zysman and Tyson (1983),Johnson (1984), McKenna et al. (1984), Philips (1984), Thurow (1983), and Cohen and Zysman (1987), called for a co-ordinated US government response to the competitive "threat" facing US business and society.

Magaziner and Reich perceive industrial policy as a measure of nationalco-ordination - a dynamic interaction between government and industry in which government plays a supportive role to ensure industries' competitiveness, rather than an intrusive one of over regulation or control (1982, p.362).Government's role is to aid structural adjustment and support business in the struggle to achieve and sustain international competitiveness. Reich expands on this definition in a later work 4 when he contends that the real choice forgovernment when formulating an industrial policy is between either protecting an economy from a changing world economy or adapting it to engage in the new realities of international competition 5 . This equates with Curzon Price's(1981) discussion of positive and negative industrial policy.

Perhaps the main analytical point to emerge from the "industrial policy as renewed international competitiveness" approach is the attack it levels against the notion of comparative advantage. There is a growing recognition that competitiveness is more and more a matter of organized strategies in which governments lead and less and less a product of natural endowments (Thompson1989, p.40).

Competitive advantage is defined by Zysman and Tyson as "the relative export strength of the firms of one country compared to the firms of other countries selling in the same sector in international markets" (1983, p.28). The authors further argue that industrial policy can distort this balance and can in fact artificially create advantage over time. The concept of national (or European Union) competitiveness may be defined as:

the degree to which a nation can, under free and fair market conditions, produce goods and services that meet the test of international markets while simultaneously expanding the real incomes of its citizens 6 .

It is the nation's ability to stay ahead, technologically and commercially, in those goods and services likely to constitute a larger share of value-added in the future. The critical determinants of competitiveness are, according to Tyson (1988), productivity improvements, and technological innovation. The US President's Commission on Industrial Competitiveness (1985) outlined four key indicators of competitiveness: labour productivity, real wage growth, real returns on capital employed, and the position in world trade (Thompson 1989,p.46). On all of these measures - bar its position in world trade (and investment) - Europe fares poorly compared with the United States and Japan. This is sufficient cause for concern to warrant attempts by policy-makers to develop an optimal model for European industrial competitiveness.

The European industrial policy debate

The first explicit recognition of the EU's role in industrial policy emerged in a 1990 Commission paper 7 outlining a new Community approach to industrial policy. This was subsequently endorsed by two consecutive meeting of the European Council 8 in late 1991, paving the way for a clearer and more co-ordinated European-level industrial policy.

There are several reference works on the details and nature of EU industrial policies, most notably Schout (1990), and Nicolaides (1993). None of these advance a typology of the instruments of industrial policy. Several works have emerged in recent years pertaining to European industrial policy 9 . However, there is often little or no attempt to assess the politics of the EU policy process or the European integration initiative, or to advance any public policy interpretations of EU competition, trade, and industry policies. Most are state-centric and fail to focus on the policy mechanisms.

In much of the literature, definitions of industrial policy are limited. In fact, they often correspond with what commentators term "technology/R&Dpolicy". No rationale is advanced for not using such terms, nor to explain what differentiates their notion of industrial policy from established notions of technology policy. Industrial policy should instead be construed as a more generic concept, comprising many different policy tools and styles. According to Lord, EU industrial policy is primarily defensive and reactive, manifest through R&D support, capacity management, commercial policy, and regional development (1996, pp.228-34). Lord's analysis is limited and tends to neglect the less intrusive elements of European industrial policy.

No clear consensus exists between EU Member States or even within the European Commission as to the preferred nature of European industrial policy 10 .Consequently, as with many areas of EU policy, a compromise has been reached. The result is an industrial policy which contains features of all the main capitalist systems in Europe: an ever-strengthening competition policy in line with British liberal economic principles; an emphasis on training and employment, corresponding with the social capitalism predominant in Germany and some of its neighbours; and a supportive R&D framework, conforming to France's Colberist nature.

Contrary to arguments advanced by authors such as Kipping (1997), industrial policy is not largely in the hands of EU Member States. Instead, we perceive a tripartite division of responsibility: predominantly EU, predominantly national, and shared responsibilities. Moreover, as Lawton (1997b) illustrates, industrial policy has played an important role in the EU's plans for deeper economic integration.

Kipping summarises contemporary European industrial policy as focusing on horizontal incentive measures on the one hand (infrastructure development, training initiatives, etc.), and market liberalising and policing measures on the other (1997, p.510).

The Treaty on European Union sets four objectives for European industrial policy: first, to speed up industry's adjustment to structural changes; second, to encourage an environment in which initiative can thrive and which companies- particularly small and medium sized enterprises - can develop; third, to encourage a favorable co-operative environment; and fourth, to foster a better exploitation of the results of research and technological development(R&TD) 11 . The EU therefore professes to be developing a favorable set of conditions within which business can compete and that it is then up to firms to establish their own competitive advantage. Building on the four objectives of European industrial policy, there are two types of action which the EU takes in order to create a favourable competitive environment for European industry. The first is actions relating to the operations of markets. This places emphasis on both competition and trade policy as competitive promoting instruments. The second is actions that relate to factors that affect industry's capacity to change. The main devices here are the promotion of technology and of training, as well as the development of common, high quality standards throughout the EU.

A European industrial competitiveness model

The EU's core industrial policy is inspired by the 1993 Treaty on European Union. As discussed earlier, this places emphasis upon encouraging, through assorted measures, the competitiveness of European business. In official documentation, the EU describes these measures as falling into two categories: actions related to the operations of markets (trade and competition rules), and actions relating to factors that affect industry"s capacity to adapt to change(R&D, quality standards, human capital development). This is not a comprehensive model of European industrial policy though. In particular, it fails to account for those policy instruments which remain firmly or partially within the national domain and which have an equal and sometimes greater impact on the competitiveness of European industry. We argue that European industrial policy (EU and national together) has nine primary elements. We do not claim that this is an exhaustive list but do believe it to focus on the instruments of government policy for industry which are most influential and extensive in their competitive impact. Table 1 lists these instruments and provides some examples of their actual market manifestations.

Table 1

Instruments of European industrial competitiveness policy

Policy instrument \tSample applications\t\tR&D initiatives (EU +national)\tFramework Programmes, Eureka.\t\tCompetition rules

(EU)\tAntitrust; monitor state aid and mergers and acquisitions.\t\tTradepolicy

(EU)\tAntidumping, rules of origin, local content, voluntary export restraints.\t\tInward investment incentives

(national)\tProvision of low-cost green field sites; period of tax relief orimmunity. \t\tExport promotion (national)\tCredit guarantees for export-ledfirms.\t\tFiscal incentives

(national)\tTax relief or exemptions for start-ups or for companies undertakingrestructuring.\t\tProcurement (national)\tPublic sector contracts tofirms.\t\tTransport and infrastructure

(EU)\tDevelopment of air, road, rail, and sea transport and communicationnetworks.\t\tTraining and education

(EU + national)\tPromotion of human capital; employment initiatives. \t\t

Social policy, regional policy, and environmental policy are associated features of European industrial policy but do not constitute direct instruments aimed at improving European corporate competitiveness. Instead, they serve to shape the context within which industrial policy is formulated and implemented.The primary purpose of these associated policies has often more to do with improving working conditions and health and safety standards for the individual, than with promoting or protecting industry. However, they do affect the way in which business operates and must be viewed as linked external variables in any analysis of industrial policy.

Venture capital provisions are still a relatively neglected dimension of European industrial policy. The EU has undertaken to improve access to loans and grants for small and medium sized enterprises but much more needs to be done to encourage entrepreneurship and a vibrant start-up culture in Europe.

R&D initiatives: technology and competitiveness

Knowledge and its rapid and effective application is the key to competitiveness in the global information age. This fact provides a convenient rationale for the continuance of one of the most controversial dimensions of industrial policy - support to R&TD activities. Responsibility for European technology policy shifted in the early 1980s towards Brussels. The dismal failure of national technology policies led most European countries to the conclusion that more advantage may be accrued if they pooled their resources and centrally co-ordinated their activities. Countries like France continued with a significant national technology policy in parallel but technology policy has since emerged as the main pillar of EU industrial policy. The EU's R&TDpolicy has shifted from a top-down and interventionist approach in the 1980s to one where the EU acts more to foster co-operation and exploit and disseminate results. Whilst controversial in terms of cost and practical output, EU technology policy has undoubtedly encouraged greater intra-Europeanco-operation and in this way has contributed to the part which industrial policy plays in furthering the European integration project.

Competition rules: promoting and policing the single market 12

EU industrial policy and competition law appear to represent contradictory trends in European integration. Industrial policy and competition rules havelong been considered to be logical opposites. Industrial policy is traditionally seen as state planning and public intervention in the economy,and has long remained the competence of the Member States. Competition policy is usually seen as exclusively concerned with removing private distortions of the market process, and, with some important exceptions, has long been primarily pursued at the Union level. Yet recently, the Member States have adopted increasingly effective national competition policies, whereas under the1993 Treaty on European Union, the EU has obtained an industrial policy competence.

The economic order at the EU level is that of a market system which provides legal guarantees for individual economic rights. However, legitimate public policy goals can justify exceptions from market policies at the EU level as well, subject to limited judicial review. This makes it possible for the EU tohave both a market-oriented industrial policy, and a competition policy which can take industrial policy arguments into account. For this reason, industrial and competition policy have converged, both at the EU level and at the national level.

Apart from placing limits on the industrial policies of the Member States, competition policy forms an instrument of industrial policy at EU level. This is possible since the competition rules leave room to internalise industrialpolicy considerations. The competition policy of the EU goes beyond the protection of the process of competition, and may on occasion give preference to considerations of market structure, so long as the fundamental requirements of competition law are respected. Hence the industrial and competition policy of the Community are in principle compatible and complementary. This complementary nature is due to the market orientation of the EU approach to industrial policy, and the open texture of EU competition policy. It may be concluded that the promotion of structural adjustment forms part of the development of the socio-economic dimension of integration. The amendments introduced by the Single Act and the Treaty on European Union have not replaced national intervention by Community intervention. Instead they have promoted the rationalisation of public policy toward more precise objectives, including industrial policy objectives. This occurred within an overall context of liberalization and harmonisation, leading to the creation of an organised European space which is more than a marketplace.

Trade tools: holding the fort or declaring open house? 13

The distinction that traditionally existed between trade and industrial policies has become increasingly blurred. The erosion of tariffs as instruments of economic policy solved one of the great problems of trade relations in the early twentieth century. However, the decline of tariffs merely served to throw greater light on the domestic economy of a given state, and more pointedly how these internal arrangements affected international trade. European Union trade policy may be examined by exploring the relationship between externally-generated liberalization and that coming from within. The success of the Single Market programme was, to paraphrase Streeck's comment, proof that on economic matters, Margaret Thatcher had won and Jacques Delors had lost. The liberalization introduced has discredited the grand scale industrial policy of old. In place are much more diffuse horizontal measures which appear more compliant with World Trade Organisation (WTO) regulations regarding subsidies.In this context, anti-dumping and other safeguard measures may have been scaled back to a more modest purpose - to protect an economy from "shocks" - rather than act as instruments of trade policy.

Inward investment: incentives and controls to market entry

As a region, the European Union continues to record the biggest foreign direct investment (FDI) inflows and outflows in the world (UNCTAD WIR 1997, p.46).Asian investment in the EU increased from an average of $100 million during1989-91 to an annual average of $5 billion during the early 1990s. North America remains the preferred investment location for such companies outside of Asia but manufacturing and services investments in the EU have gathered momentum. There is much room for increasing this sum further as it constitutes a mere 4 per cent of Asian outward investment stock (WIR 1997, p.84). The majority of this investment is located in the relatively liberal northern European economies of Britain, Ireland, the Netherlands, and Germany:

Governments of European Union countries could liberalize further FDI frameworks and remove any remaining impediments to foreign investors. Governments of member countries and the European Commission could also make greater efforts to assist prospective Asian investors in establishing themselves in Europe (WIR1997, p.84).

Inward investment incentives have emerged as one of the most controversial elements of industrial policy. Nationally controlled and co-ordinated, they often serve to divide, rather than unite, Europe. Accusations of "social dumping" have been levied against the United Kingdom and other countries by France for instance. Many governments have been willing to resort to inventive inward investment devices - such as offering cheaper labour or lower corporate tax rates - in order to attract foreign investment and the jobs and revenue which come with it. In so doing, they often jeopardise their relationship with other Member State governments. Inward investment policies are therefore an important element of industrial policies in Europe but in lacking any co-ordination mechanisms, tend to impede and not enhance European integration.

Export promotion: gaining advantage through export credit

Again, a national industrial policy instrument, this refers to the export credit insurance policy which is offered through official agencies in countries such as Britain, France and Germany. In considering this mechanism, one must deliberate to what extent their performance was influenced by, first, a changing international economic environment and second, the regulatory framework introduced through the European Union. The relative success and failures of specific national strategies in the Europeanisation process are evaluated by contrasting the developments in this policy sector with the experiences of the 1980s. Export credits generally work in tandem with trade policy and are especially useful in export-led economies. As such, export credit policy is important to most countries in Western Europe. The central management of this policy would contribute another element to a strong and legitimate European-wide industrial policy.

Fiscal incentives: tax competition and co-ordination

Tax remains firmly within the control of national industrial policies and is linked closely to inward investment policies. The European Commission acknowledges that establishing the EU as a common taxation area has long been apolitical arduous and difficult task. The Single Market programme has exerted pressure on Member States to co-ordinate taxation and proposals have been advanced to develop a common value added tax (VAT) system in particular. The Commission has adopted a work programme for creating a common VAT system, based on collection in the country of origin of the goods or services. On excise duties, the Commission has adopted the principle of taxation in the country of consumption as part of a structure for more closely aligned national rates.

Taxation is one of these most politically sensitive industrial policy devices within the EU. Member States maintain a firm control over it as the right and ability to collect tax is at the base of any state's very existence. Any developments in the transfer of tax policy to Brussels can be interpreted as a strengthening of EU industrial policy and a significant advancement in the process of European integration.

Procurement policies: liberalizing public sector contracts 14

In recent years, the exercise of public procurement in the form of the purchasing of goods, works and services by the state and its organs has undergone a great deal of constructive criticism and has been the subject of an evolving transformation which has undoubtedly imposed considerable financial as well as performance burdens on both the demand and supply sides. Public procurement, as a fiscal discipline acquired a significant role within the context of European integration, but more importantly at domestic level, where national administrations have been required to implement and comply with a newly established legal regime which aims at integrating the public markets of the European Union. Interestingly, at the same time of this evolutionary era in the direction of the regulation of public purchasing in the common market, the supply side has been facing considerable challenges. The industrial structure of the European Union reveals strong tendencies towards industrial concentration through mergers and acquisitions, rationalization and restructuring of firms, downsizing, outsourcing and optimization of human and capital resources within the sectors of the European industries 15 . The integration of public markets has threatened to bring about an end to long-standing dependency purchasing patterns which have undoubtedly sustained certain industries in the Member States of the EU. The European Commission's White Paper for the Completion of the Single Market 16 and two notable scientifically and empirically based studies during the mid-1980s 17 illustrated the fact that protectionist public purchasing in the Member States of the EU constituted a significant non-tariff barrier to intra-EU trade, as well as a considerable obstacle for the uninhibited functioning of the common market. The underlying motivation behind the regulation of public procurement in uniform, non-discriminatory and transparent patterns throughout the common market has been the achievement of savings for the public sector, as preferential purchasing patterns have been deemed to perpetuate price discrepancies attributed to factors other than quality.

Transport and infrastructure: building a competitive environment 18

As an instrument of industrial policy, transport policy has operated on two levels: on the level of the individual transport sector and as a horizontal policy, designed to provide the supportive framework for the development of competitive economic activity. Both levels focus on the efficiency of service delivery to firms and consumers. The link between economic and industrial development and the quantity and quality of infrastructure has long been recognised as important, both by member states and by the European Union itself.

The role of the EU in all this is as a facilitator of infrastructural development and not as the prime mover or architect of it. The role of member states remains paramount (practices vary between member states) and there has been reticence on the part of member states to agree to funding at European level. The policy instruments are in place for the development of TENs, the challenge now is to convince member states (currently struggling with attempts to control public expenditure in preparation for EMU) to take steps to develop infrastructure with a trans-European dimension, a challenge which has been taken up with enthusiasm by Commissioner Neil Kinnock but not always with success.

Training and education: competing through human capital

Most advanced economies realise the importance of human capital development to their future economic development and competitive advantage. Influential works such as that by Reich (1991) emphasise the centrality of training and education to a country's economic performance in the era of the global information economy. Human capital development is therefore increasingly perceived as an important element of modern industrial policy. In Europe, education policy remains firmly under the control of national governments. The EU does play a supportive role though. Steps have been taken at an EU level to co-ordinate the recognition of educational qualifications and to facilitate trans-European educational exchanges through schemes like the Socrates programme 19 . As European labour becomes increasingly mobile, such steps are necessary and do contribute to gradual European cultural integration. In the area of worker training, the EU is developing an ever widening role. With a 1995-9 budget of ECU 620 million, the Leonardo da Vinci programme fosters vocational training in Member States and encourages new training methods and continual training practices. In particular, it is intended to encourage the emergence common training systems across the EU, further adding to the cause of European integration.

Conclusions

The global acceptance and policy application of economic liberalism has led to more complex interpretations of industrial policy. It is now generally accepted that government policy for industry has elements which both distort and promote market competition. Such a hybrid model is most evident within the European Union. Attempts to reconcile the diverse capitalist traditions which exist in western Europe result in the emergence of a European industrial policy which contains liberal and mercantilist elements. Evidence indicates that the liberal instruments are generally more evident and active since the early 1990s.

Few existing analyses encapsulate the entire range of industrial policy instruments existent in Europe. Industrial policy needs to be conceptualized according to the model outlined in this paper so as to first, understand all of the diverse policy devices which directly affect industrial competitiveness;and second, how industrial policy, as a policy set, has a considerable impact on the shape and pace of European economic integration.

The main weakness in European competitiveness is the lack of a vibrant venture capital culture. European governments offer significant incentives to non-European companies to invest, whilst neglecting to foster an investment culture for their own indigenous start-ups. Policies to encourage or at least facilitate Europe's indigenous start-ups and SMEs are central to the enhancement of European competitiveness. Whilst the EU has made a start in facilitating access to loans for start-up companies, considerable progress still has to be made in this area. The Irish government has proven that support for domestic start-ups can and should be conducted in tandem with innovative inward investment policies. The recent success of the Irish economy is built upon such a dual-pronged government industrial policy.

The industrial policy of the EU requires both measures of negative integration(removing market barriers) and positive integration (the pursuit of common public policy objectives). Overall, the EU concept of industrial policy is clearly a liberal market-based one. The main change in perspective regarding industrial policy took place at the national level, not at the EU level. A horizontal industrial policy competence for the Union emerged once it had become clear that national industrial policies of sectoral intervention had failed. Yet it should be emphasized that EU industrial policy is different from the interventionist national industrial policies which preceded it. Industrial policy is one of the pillars of a Commission effort to set the agenda for integration beyond the internal market programme. The 1993 Delors White Paper on growth, competitiveness and employment has cast industrial policy as a central element of the growth strategy of the EU. It may be seen as a flanking policy to Economic and Monetary Union. As the EU moves from negative to positive integration, industrial policy has become part of a general strategy which aims to harness structural adjustment in the pursuit of wider social and economic goals. Hence, the new industrial policy competence of the EAU must be seen in the context of the transition from negative integration to positive integration, and increased European policy co-ordination.

Acknowledgements

Thanks are due to Chris Bovis, Steve McGuire, Wolf Sauter and G.P.E. Walzenbach for their contributions and to Kirstin for some last minute editorial advice and proof-reading.

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NOTES

Note 1: Commission of the European Communities, An Industrial Competitiveness Policy for the European Union, Communication from the Commission to the Council, COM(94), 319 Final, Brussels, September 1994. Back.

Note 2: MITI experienced some significant failures in its attempts to "pick winners"in Japan. Its efforts to keep Honda out of the automobile market is a clear case in point, as were its attempts to develop a Japanese aerospace industry(Schultze 1984, p.14). Back.

Note 3: Molle's definition is based on the works of Rothwell and Zegveld 1981 and Buigues et al. 1995. Back.

Note 4: Robert Reich, The next American frontier (1983). Back.

Note 5: Cited in Grahame Thompson (ed.) (1989), Industrial policy: USA and UK debates, p.30. Back.

Note 6: This definition of competitiveness is taken from Cohen and Zysman (1987) andis based on a definition introduced in a report issued by a commission established by President Reagan in 1983 to study US competitiveness problems. Back.

Note 7: Commission of the European Communities, Industrial Policy In An Open And Competitive Environment, Brussels, 16 November 1990 Back.

Note 8: The European Council is a (usually) biannual meeting of the fifteen European Community member countries heads of government (and head of state, in the case of France). Back.

Note 9: These include Buigues, Jacqueimin, and Sapir's, European Policies on Competition, Trade, and Industry (Edward Elgar, 1995), Wolfgang Streeck, The Governance of Industry: Upgrading Industrial Policy in Europe (Monitor-FAST,1994), and Hayward's Industrial Enterprise and European Integration (1995). Back.

Note 10: This argument is borne out by works such as Kipping (1987, pp.498-502) and Lawton (1997). Back.

Note 11: Extract from the Treaty on European Union cited in the Union's policies -industrial policy, Europa, internet homepage of the European Union. Back.

Note 12: The discussion of EU competition policy is largely derived from an abstract of Wolf Sauter's chapter, "Competition rules: promoting and policing the Single Market", in Thomas C. Lawton (ed.), European industrial policy and competitiveness: concepts and instruments, Basingstoke: Macmillan (1998, forthcoming). Back.

Note 13: The discussion of trade policy is taken from an abstract of Steve McGuire's chapter, "Trade tools: holding the fort or declaring open house?", ibid. Back.

Note 14: The discussion of procurement policy is derived from a draft of Christopher Bovis's chapter, "Procurement policies: liberalizing public sector contracts", ibid. Back.

Note 15: See the European Commission's Concentration Memorandum, Competition Series, Study no 3, Brussels 1966: "The problem of Industrial Concentration in the Common market". For a detailed analysis of industrial concentration in the European Community see C. Bovis, ìBusiness Law in the European Unionî, Chapter 2, Sweet and Maxwell, 1997. Back.

Note 16: European Commission, White Paper for the Completion of the Internal Market,(COM) 85 310 fin., 1985. Back.

Note 17: Commission of the European Communities, The Cost of Non-Europe, Basic Findings, Vol.5, Part.A; The Cost of Non-Europe in Public Sector Procurement, Official Publications of the European Communities, Luxembourg, 1988; the Cechinni Report 1992 The European Challenge, Aldershot, Wildwood House, 1988. Back.

Note 18: The discussion of transport and infrastructure policy is taken from an abstract of Debra Johnson and Colin Turner's chapter, "Transport and infrastructure: building a competitive environment", in Lawton, op.cit., (forthcoming 1998). Back.

Note 19: The Socrates programme is a framework for European co-operation between schools, higher education systems, teacher training, adult education ,and distance learning. It provides the framework and resources needed to encourage travel and experiences of other European countries. To an extent it helps develop a sense of shared European identity. Back.