The inefficiency of industrial and innovation policy in France

Karl Aiginger, 3 October 2011

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Both inputs and outputs in the French innovation system are disappointing. Research and development (R&D) expenditure has stagnated at about 2% of GDP (of which a large share is for defence and space), and education outlays are decreasing. France is an innovation follower according to the European Innovation Scoreboard, coming in eleventh place. Sweeping changes in the innovation system (including enforcement of regional poles and a generous tax credit) did not change this. The share of manufacturing in GDP is shrinking in the direction of 10%; in general and for technology-driven industries France has a trade deficit. Government documents partly deny these problems, by referring to specific successes and to the absolute amount of researchers and outlays ("fourth largest" in the world). The French innovation deficit is as much a problem for Europe ‘at the high end’ of the quality spectrum as the deficits of the peripheral countries are ‘at the low end’. We hypothesise that it stems from low competition (domestic and imports) and from reluctant acceptance of the challenges of globalisation and sustainability in France. Innovation systems lacking ‘pushes’ and ‘pulls’ do not excel.

(1)       Industrial policy has changed from a separate policy to a twin industrial-plus-innovation policy (with links to education, regional policy, and labour-market policy). In future, industrial policy will have to develop into a Systemic Industrial and Innovation Policy (SIIP), which fits into the socioeconomic system of a country and which has to be derived from the final goal of the economy and society (ie welfare, see "beyond GDP" discussion).

(2)       SIIP (i) relies on inputs in research and education, (ii) comprises small as well as large firms, and (iii) needs close firm relations with universities. Education policy has to provide equal opportunities at the start as well as promote lifelong learning. Innovation systems are superior if they actively draw from the common international knowledge pool, integrating not only international researchers, but also migrants and newcomers. The manufacturing sector remains competitive if an economy is open to imports and inward FDI so that it can make use of the division of labour along the value chain.

(3)       Industrial policy in Europe went through different phases. After a postwar phase of intervention and nationalisation came a phase of sectoral policy (from sectoral planning and state aid inter alia via Marshall Plan assistance) followed by the dominance of horizontal or competitiveness-oriented policy (fostered by EU policies, reduction of tariffs and state aid, internal market and deregulation policy, and research framework programmes).

(4)       Today the old distinction between vertical and horizontal policy is losing its discriminative power. France today has fewer grand projects and no clear set of preferred sectors. All countries develop and promote some regional clusters. Most countries specifically supported the car industry during the crisis, promoted ICT in the 1990s, and now pursue strategies for biotechnology and the energy sector. The European Commission now promotes a primarily horizontal approach but acknowledges that the general measures have a different impact across industries and should be complemented by sector-specific strategies (in qualification, standardisation, etc.). This approach has been labelled the “matrix approach” by Aiginger and Sieber (2006) and is now extended to an Integrated Industrial Policy focusing on mission-oriented R&D, eg thematic innovation funding on grand challenges such as climate change or nanotechnology.

(5)       France has changed its industrial policy over the past years: (i) from focusing on grand projects, preferred sectors, and defence to focusing on a broader approach to innovation, including small- and medium-sized enterprises and regional policies; (ii) from top down to bottom up, supporting existing clusters and competition for funds; (iii) supporting excellence initiatives and firm/university relationships; (iv) reforming universities, competition, mergers, and trilateral programmes between universities, labs, and firms; (v) above all, installing an impressive tax credit; and (vi) launching a larger number of new or refocused transfer institutions.

(6)       The status of the input into the innovation system is nevertheless disappointing for France. Above all the share of R&D in GDP has fallen to 2.2% (with a slight recovery lately), miles away from the Lisbon target. The French goal of 3% for 2020 is unambitious for a rich country (even if the jump from the present share to the goal is high); 3% is exactly the European goal for 2020, although the ‘nationalisation’ of the EU 2020 strategy recommended higher targets for western European countries (acknowledging that southern countries and catching-up economies will not be able to invest 2%). Expenditures on education are falling relative to GDP, and Program for International Student Assessment (PISA) results are below average. The European Innovation Scoreboard's broader spectrum of indicators ranks France eleventh, making it an innovation follower.

(7)       Outcomes in terms of macroeconomic performance are average for France; in terms of industrial performance it is disappointing. The share of manufacturing is falling quicker than the EU average, from 22% in 1960 to 10% in 2010. France now has the second-lowest industrial share (compared to the EU 15 at 13.7% and Germany at 18.6%). Judged by outcome, the industrial structure shows above-average shares of technology-driven sectors in value added and exports. But the trade balance in technology-driven industries is negative since imports are higher and faster growing than exports.

(8)       The outcome of the innovation system is disappointing. This result may have occurred for three reasons. First, time is just too short since the changes have taken place, and success may be on the way but may not yet show in the data. Second, the changes may not be ambitious enough or they may not fit into the French innovation system. The measures are, to some extent, a systems change (for example, to small- and medium-enterprises or to tax incentives) and on the other hand they maintain elements of the ‘old’ French approach (competitive poles). Third, the innovation system in the narrow sense may not be adequately supported – neither pushed nor pulled – by the total socioeconomic system. Three such barriers could be:

  • In France, globalisation is not seen as an opportunity worth seizing but as a threat necessitating shelter by government. Education is concentrated in the first phase of life and close networks are built at elite schools and universities. Globalisation is seen as good only for large firms, not citizens, understating the strong price and cost-dampening factor of imports and the pressure for innovation coming from new competitors.
  • In France, economic competition is not seen as a very important driver of innovation and growth. Labour markets are highly regulated. The transport and energy sectors are concentrated and partly sheltered against competition. Innovation is concentrated in large firms. Training rights cannot be transferred if employees change jobs and upward mobility is low.
  • France is not embracing the challenges to its socioeconomic model from changes in society and ecology. The manufacturing model is built on cheap energy, provided by large enterprises partly sheltered from competition (albeit investing abroad), and nuclear energy is seen as a cheap and reliable energy source. Neglecting the opportunities to decentralise production arising from alternative resources hampers innovation. The openness of the economy as measured by the sum of exports and imports (‘trade openness’) is far less than in other countries and the difference is increasing.

(9)       SIIP will not combat market failures alone. It will have a dynamic forward-looking component and it will in some measures have to differentiate between industries. But these sectoral components should build on current or future expected competitive advantages, it should be done under competitive pressure (domestic as well as international) and should target sectors in which government has interests and sets priorities, such as health, the environment, and new energies.

(10)     International empirical investigations indicate tentatively that innovation and industrial policy are able to exploit the benefits from inputs to the innovation and education system only if society is ready for change and tries actively to find its place in a world economy without borders. Innovation inputs will increase if competitive pressure exists, and if the innovation sector is actively used to serve societal goals, specifically ecological excellence. The Nordic European countries could be a role model for SIIP. Europe should go for a ‘New Growth Model’ with high efficiency, social cohesion, and excellence in sustainability. Such an economy needs a strong basis in manufacturing, competition, and openness and a Systemic Industrial and Innovation Policy.

References

Aghion, P, J Boulanger, E Cohen (2011), “Rethinking Industrial Policy”, Bruegel Policy Brief, 04/2011.

Aiginger , K (2007), "Industrial policy: past, diversity, future", Introduction to the Special issue on the Future of Industrial Policy, Journal of Industry, Competition and Trade, 7(3+4):143-146.

Aiginger , K (2007), "Industrial policy: a dying breed or a re-emerging phoenix", Special issue on the Future of Industrial Policy, Journal of Industry, Competition and Trade, 7,(3+4):297-323.

Aiginger, K and S Sieber (2006), "The Matrix Approach to Industrial Policy", International Review of Applied Economics, 20(5):573-603.

Aiginger, K (2006), "Competitiveness: From a Dangerous Obsession to a Welfare Creating Ability with Positive Externalities", Special Issue on Competitiveness, Journal of Industry, Competition and Trade, 6(2):161-177.

Aiginger, K (2009), “Evaluation of the Finnish National Innovation System”, Policy Report.

Topics: Productivity and Innovation
Tags: EU 2020 Strategy, globalisation, industrial policy, innovation policy

Economist, Austrian Institute of Economic Research (WIFO)