Industrial Policy and Vulnerable Capitalism

Abstract

This paper emphasises the linkages between corporate strategy, the macroeconomy and the role of industrial policy in this macropolicy context. While this is an aspect of industrial policy that is rarely addressed, we suggest that there is, in fact, a real and highly significant complementarity, especially in the context of modern capitalism, with its distinctive features. The underlying premise is that problems cannot be resolved easily directly at the macro level: appropriate industrial policy may be a necessary ingredient in securing better economic performance. Current discussions of exchange rate policies and the major adjustments required for eliminating external imbalances between the USA, China, Japan and Europe would seem to point to this conclusion. This paper emphasises the linkage between corporate strategy, the macroeconomy and the role of industrial policy in this macropolicy context, and points to appropriate policies that aim to rebalance the economy by shifting towards a more diffuse governance structure that deconcentrates strategic decision making and opens up the potential for new forces of dynamism.

Key Words:

• Strategic choice
• modern capitalism
• advertising
• consumption
• imbalances
• public policies

JEL Classification:

• B25
• E2
• L1
• L50

Acknowledgement

An earlier version of this paper was presented at the L’Institute Graduate Network Workshop in Bath in 2005. We are grateful to participants for comments and suggestions, and most especially Dan Coffey.

Notes

1. As Galbraith (1958) observed, advertising provides a powerful instrument for creating wants by creating psychological dependency.

2. Cowling (2006) looks at this paradoxical situation in more detail, where research suggests that life satisfaction declines as work hours increase, yet US workers are working longer hours. He argues that more intensive advertising in the US may drive such trends in that it can push people away from their underlying (or meta) preferences towards longer hours worked and less saving.

3. Wybrow (2005) points to US government figures that show that 30% of US citizens are anxious, double the figure of a decade earlier. On happiness and work–life balance, see Blanchflower & Oswald (2004) who found that the USA has the greatest problems with work–life balance.

4. For example, in terms of providing the excess capacity to deter entry. Through interview work, Smiley (1988) found investment in advertising, R&D, brand proliferation and distribution as the key dimensions of capacity for strategic managers in US industry.

5. In contrast, P&G reduced R&D expenditure by 20% over 2001–2004 (Business Week, 11 October 2004).

6. The House of Commons (2005) has been concerned over the growing influence of the large pharmaceutical firms, suggesting that ‘the heart of the problem may be the trend for the industry to become ever more driven by its marketing force’. It has called for greater restrictions to be placed on medicines promotion by such firms.

7. As noted, in 2004 Proctor and Gamble spent US$2.9 billion on advertising in the USA alone, and was followed by General Motors (US$2.8 billionn), Time Warner (US$2 billion), SBC (US$2 billion), DaimlerChrysler (US$1.8 billion) and Ford (US$1.6 billion) (TNS, 2005).

8. It should be noted that R&D includes public investment and is seen as the most dynamic element of investment.

9. Daripa & Kapur (2001) argued that the tendency for e‐commerce to increase price competition was overstated and that industrial structures may become more concentrated in online markets.

10. It can also been seen as shifting preferences in favour of private consumption rather than public consumption and perhaps reduces the willingness of citizens to ‘pay’ for the latter through taxation. This in turn may put a limit on what is seen as the ‘legitimate’ extent of government activity.

11. Some have suggested that the personal savings statistics in the USA are artificially low. Nordhaus, for example, in testimony to the US Congress in 2002, suggested that if assets such as real estate and equities were included in the savings figures, the savings rate in the 1990s would be as high as 25%. Yoo (1998) examined the effect of adding in changes in the value of households’ assets (notably the rise in equity prices). This broader measure of ‘savings’ was found by Yoo to be both higher and more volatile than the personal savings rate, as one would expect. Of key relevance here, though, is that it had little impact on how trends in savings should be viewed; Yoo found that this alternative savings measure also showed a declining savings rate over 1980–1995, in spite of rising equity prices.

12. It was Duesenberry (1967) who asked ‘why do people spend so much of their time at work?’

13. Chinese holdings of dollar denominated assets reached over US$800 billion at the start of 2006, while the US trade deficit with China rose to over US$200 billion in 2005. This is in line with projections by Bonner & Wiggin (2005) who argued that the US cannot stop itself going further into debt through such high levels of expenditure. In so doing, they drew parallels between the USA and the last days of the Roman Empire. In contrast, Bernanke (2005) claimed that the problem is a global savings glut rather than a US savings shortfall, but this is refuted by Frankel (2006) who notes that global investment rates are actually well down on levels seen in the 1980s, a scenario consistent with a US shortfall sucking in capital from the rest of the world.

14. Britain has similar problems in terms of high consumption levels, low savings and a deteriorating trade deficit. With reduced consumer confidence in 2005, it was hoped that exports would pull up overall growth rates but such export‐led growth failed to materialise, partly because of the continuing over‐valuation of sterling. The continuing de‐industrialisation of the UK economy may have effectively closed off such an export‐led growth option anyway, with manufacturing now accounting for well under 20% of GDP. Rowthorn & Coutts (2004) suggest that such deindustrialisation may have now gone too far. Too much manufacturing capacity may have been shed and the failure to develop a more dynamic manufacturing sector may have ‘serious consequences for the balance of payments and prosperity’.

15. Annual labour productivity growth over 1995–2001 in distributive trades was 5.1% in the USA as against 1.0% in EU15, and in financial services it was 5.2% in the USA as against 2.8% in EU15 (O’Mahoney & Van Ark, 2003).

16. While Schumpeter’s work does not fit within the mainstream neo‐classical approach, it influenced much of the later work on the innovation process that has become widely accepted. As Petit (1996) noted, there was something of a revival from the 1970s onwards of the Schumpeterian view that innovation is a driving force in market competition. This neo‐Schumpeterian structuralist tradition includes those such as Nelson & Winter (1974, 1982, for example) who concentrate on the microeconomics of market developments, and others such as Freeman and Soete (for example 1987) who stress the macroeconomics of long term cycles.

17. Of relevance here, this Schumpeterian world is dominated by monopoly capitalism, where large corporations are aware of their market power and actively use it. Indeed, Schumpeter expected to see non‐price forms of competition such as advertising and even anti‐competitive practices such as price‐fixing, investment in excess capacity to deter market entry by rivals, or taking over competitors as common place (Coe & Wilber, 1985). His view of what capitalism actually involves seems remarkably prescient today in terms of rivalry between giant firms.

18. Of course, it cannot be assumed that state intervention will improve matters as the latter could be used by powerful corporations to further their own interests (Cowling & Sugden, 1999).

19. This is similar to the ‘dual approach’ to development suggested by Sugden & Wilson (2002).

20. Leaving aside the issue of whether households can actually ‘pierce the corporate veil’, household and corporate savings decision are linked (see IMF, 2006).

21. The debate on why an ICT‐inspired productivity pick‐up has not occurred yet in the EU, in contrast to the USA, is on‐going. One view is that there is a lagged effect, in that the USA invested first in ICT, and saw productivity gains after only 15 years, whereas the EU invested much later and has yet to see a return (see O’Mahoney & Van Ark, 2003).