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European Competition and Industrial Policy: An Assessment and a New Framework

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Innovation, Growth and Competitiveness

Part of the book series: Advances in Spatial Science ((ADVSPATIAL))

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Abstract

This chapter discusses alternative perspectives on private–public interactions and supply-side competition and industrial policies in theory and in practice. It also critically assesses recent European policies in this context. It then develops a new framework that emphasises the sustainability of value creation at the firm, meso and national levels, and explores its policy implications. It views current EU policies as a step in the right direction, but argues that they need to pay more attention to the issue of economic sustainability, the link between corporate, public and global governance, and the impact of different power structures and hierarchies of agencies on industrial policies for sustainable value creation. The limitations of self-monitoring and diversity suggest the need for a global competition and regulatory policy regime that place sustainability at the core of its Agenda.

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Notes

  1. 1.

    Industry usually refers to manufacturing. This, however, tends to recede, given an emerging fuzziness of the boundaries between manufacturing and services; see Pitelis and Antonakis (2003) and Amsden (2008) for a discussion.

  2. 2.

    For other definitions and a discussion of competitiveness, see Aigigner (2006a, b) and Pitelis (2009).

  3. 3.

    Thus Structure, Conduct, Performance (SCP) model, see Scherer and Ross (1990) for an account.

  4. 4.

    For an account of alternative approaches to competition and competition policy within and without IO, see Hunt (2000), Pitelis (2007b).

  5. 5.

    From the aforementioned economic theories-critiques, it is only Penrose and Cyert and March that really entered the “black box” of the firm, (Coase “merely” tried to explain its existence). Penrose focused on intra-firm resources and knowledge-creativity; Cyert and March considered intra-firm decision making and conflict. It is therefore hardly surprising that these two economic theories proved to be very influential to non-economists (Pitelis 2007), with Penrose claiming motherhood of the currently influential resource-based-view (RBV) and the dynamic capabilities (DCs) approach (Teece 2007). We explore these theories and their implications on industry structure in the next sub-section.

  6. 6.

    The above is a big debate that cannot be addressed satisfactorily in an entry of this length. However, some points are worth making. On the realism of assumptions, Friedman (1967) claimed that it is predictive ability that counts, not the realism or the assumptions per-se. On this basis, traditional theory is claimed to fare well. On “objectives”, profit maximization has been re-justified in terms of survival of the fittest arguments and the market for corporate control (takeover of ineffective firms). Alchian and Demsetz (1972) claimed that markets and firms do not really differ, firms are simply “internal markets”; the crucial issue for them being incentive alignment through monitoring and self-monitored “residual claimants” of profits. The view that even firms (hierarchies) are markets could serve as a pure neo-classical MFT. However, both Alchian and Demsetz have subsequently conceded that markets and firms could not be seen as being the same (Pitelis 1991).

  7. 7.

    That might be wrong. The resilience and strength of MFT is quite amazing and needs explaining. First, most currently popular discussions of organisation and strategy, notably transaction costs economics, the RBV and corporate governance, rely heavily on ideas originally developed within economics, (even as critiques of the mainstream paradigm). Importantly the very mainstream paradigm still serves as the only available analysis of the role of industry structure on firms price-output decisions, profitability and performance and has led to the first conceptual framework for the industry-based analyses on firm performance in the context of Porter’s (1980) five-forces model of competition. Porter’s approach was fully reliant on the neo-classical IO model of industry structures, where Porter himself had contributed significantly before turning to business strategy.

  8. 8.

    Other potential purposes of the mainstream approach are that it serves as a benchmark against which to compare reality. In addition, in mature industries, characterized by stability, and high knowledge of the environment, the mainstream model can even help approximate reality (Pitelis 2002). In addition, the model may help provide a neat, rigorous diagrammatical and mathematical exposition, which can help facilitate student learning. For others, however, the static, unrealistic models used by mainstream economists do not lead gradually to a more nuanced understanding of reality described above, but are often seen as the reality, especially by younger students. This does not help them be critical and think outside the box. To many, it is responsible for the failure of neoclassical economists to predict the latest financial crisis.

  9. 9.

    Last, but not least, it is not clear that less progress would have been made in economics and organization scholarship, were the mainstream approach not so dominant.

  10. 10.

    Another dimension of competition relates to its strength, and the role of proximity and location. This links to the work of Richardson, but has been developed by Porter (1990), Krugman (1991), Audretsch (1998), Dunning (1998), and others (see Jovanovic 2009). For example, Porter claims that local competition is more potent than distant (foreign) for example competition. This may have important implications in devising public policies.

  11. 11.

    Other well-known mainstream arguments relating to the problem of government failure are Bacon and Eltis’ (1976) claim that services, including state services, tend to be unproductive and Martin Feldstein's (1974) view that pay-as-you-go social security schemes reduce aggregate saving- capital accumulation. The reason is that rational individuals consider their contributions to such schemes as their savings, and reduce.

  12. 12.

    For definitions and a discussion of competitiveness, see Aiginger (2006a, b) and Pitelis (2009).

  13. 13.

    On the link between industrial and macroeconomic policies, see Michie and Pitelis (1998) and Bailey and Cowling (2006).

  14. 14.

    See Bianchi and Labory (2006) and special issues of the International Review of Applied Economics (2006), the Journal of Industry, Competition and Trade (2006), and Policy Studies (2007).

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Acknowledgments

This chapter draws on Glykou and Pitelis (1993) and Pitelis (2007a). The authors are grateful to David Bailey and Roger Sugden for useful comments and suggestions on earlier drafts.

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Authors and Affiliations

  1. Ministry of Finance, Athens, Greece

    Ioanna Glykou

  2. Judge Business School and Queens’ College, University of Cambridge, Cambridge, UK

    Christos N. Pitelis

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  1. Ioanna Glykou
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  1. VU University Amsterdam, De Boelelaan 1105, Amsterdam, 1081 HV, Netherlands

    Peter Nijkamp

  2. (ESRI), Economic and Social Research Institute, Whitaker Square, Sir John Rogerson's Quay, Dublin, 2, Ireland

    Iulia Siedschlag

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Glykou, I., Pitelis, C.N. (2011). European Competition and Industrial Policy: An Assessment and a New Framework. In: Nijkamp, P., Siedschlag, I. (eds) Innovation, Growth and Competitiveness. Advances in Spatial Science. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-14965-8_15

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