Europe in the world technological competition

Structural Change and Economic Dynamics 6 (1995) 167-183

ELWVIER

STRUCTURAL CHANGE AND ECONOMIC DYNAMICS

Europe in the world technological competition Bruno Amable,“* Robert Boyerb a INRA-CEPREMAP,

63-65 Boulevard de Brandebourg, 94205 Ivry ’ CNRS-CEPREMAP-EHESS, Paris, France

Cedex,

France

Abstract This paper compares the relative positions of European countries, Japan and the United States regarding competitiveness and growth, and more particularly the links between technology and the economy. Recent performances in the domains of research (both applied and fundamental), external trade and growth are presented and compared with long term productivity growth and market positions. From the long term perspective, European countries have caught up with the US. In many sectors, European productivity levels are broadly similar to US levels. This long run trend must be compared with the more recent erosion of Europe’s competitive positions in many markets, particularly those related to information technologies or electronics. Europe witnesses a slow weakening of its competitive positions, lacking dynamism in innovation. This paper argues that Europe has difficulties in adjusting to an important structural change related to the emergence of a new production model. The problems specific to Europe illustrate the end of the so-called ‘linear’ concept of innovation and suggests that new interactions between technology and the economy should be considered. Keywords:

Europe; Competitiveness;

JEL class$cation:

Technological

change

033; 057

1. Introduction

For a decade, the issue of competitiveness has permeated the economic debates, particularly regarding Europe. Most European countries have grown very slowly and unemployment has been kept at an unusually high level compared with Japan or the United

States.

The

macroeconomic

performance

of Europe

* Corresponding author. 0954-349X/95/$09.50 C 1995 Elsevier SSDI 0954-349X(94)oooO7-7

Science B.V. All rights

reserved

has led us to wonder

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whether Europe was not suffering from a poor ‘competitiveness’ vis-a-vis the other members of the triad. Competitiveness is basically a microeconomic concept. Firms compete with other firms in a given market. The more competitive firms increase their market shares whereas the less competitive ones see their market positions deteriorate. The concept may be extended to a sector; one can then take a group of firms from one country, operating in a given sector. By extension, a country will be said to be competitive in a given activity if the firms from this country are SO. Going one step further, one may apply the concept of competitiveness to a whole country, considering all the sectors and all the firms. This last extension is both problematic and incomplete. A country’s economic performance is more than the combined performances of all the firms operating domestically. Besides,some domestic firms may have an activity abroad and reciprocally, foreign firms may operate domestically. Broadly speaking, a country’s competitiveness may be expressed as the ability to grow as fast as countries with the samelevel of development without incurring trade deficits, or the ability to increase the standard of living and implement the most efficient production methods. Concentrating on trade alone, one may also say that competitiveness is the ability to maintain its world export share. The two ‘definitions of competitiveness may not coincide (Hughes, 1993), depending on whether a country’s growth is inward or outward oriented. The concept of competitiveness is even more fuzzy when applied to a group of countries such as Europe, even if these countries may be considered to have roughly the same level of development. Each country competes with the others, as well as firms within these countries. This article will adopt a broad conception of competitiveness, including the ability to grow ‘fast’, improve the standard of living .and maintain trade shares.A seriesof factors must be taken into account from the point of view adopted here. First, increased internationalisation makes economies more interdependent. This challenges the conventional view of competitiveness as a race between nations or national firms. When firms organise their production on an international basis, the adequation between a national firm’s competitiveness and a country’s competitiveness is very loose. Besides,links have been established between some countries, which make their respective economic performances evolve more dependently of the others. European countries are an example of joint dependence. Another point concerns the new sources of growth (and employment). Important structural change largely linked to technological change means that new sources of comparative advantage have appeared. The technological debate of the past decade has been centered on the importance of Information and Communication Technologies ([CT). It may seem vital for European countries to be able to sustain their world market positions on ICT products for a variety of reasons: ICT products enjoy a faster growth, they are the basis of the new ‘technological paradigm’, etc. In this context, the question of Europe’s competitiveness may be expressed as follows. Europe has enjoyed a rapid productivity convergence vis-a-vis the United States after WWII. The European ‘miracle’ during the 1960smade the European model attractive even to Americans. N,ow, eurosclerosis is regarded as something to avoid. Japan’s export success,in spite of this country’s recent economic difficulties, seemsto have condemned the European model. Therefore, where does Europe stand now? Are

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European countries able to compete in a world economic competition which seems increasingly determined by technology? Section 2 recalls the economic convergence performance achieved by the European countries under the ‘Fordist’ regime. Section 3 argues that the source of competitiveness have changed under the influence of technological change and an increased internationalisation of economic activity. The old Fordist productive regime has given way to a new regime which implies different sources of growth. But this evolution does not mean that nations have no importance (Section 4) since institutions are mostly defined on a national basis. Section 5 defines the possible growth trajectories that Europe could follow and Section 6 presents a brief conclusion.

2. Economic convergence under Fordism The post:war period is characterised by an exceptional rate of growth that seems, in retrospect, to have been the outcome of an unprecedented set of institutions concerning capital/labour relations, modes of competition, public interventions and international systems, which entered in synergy with the implementation of new technological processes and launching of new goods. A strong deepening of the division of labour has been prominent since 1945. Conventional scientific management instituted a clear distinction between tasks: conception and execution, production and maintenance, marketing and finance, and so on, both within the firm and between firms. Ideally, the more specialised and divided the various activities, the faster productivity should increase. Mechanisation then took the form of highly specialised equipment designed in order to embody the technical knowledge available to engineers. The taylorist ideal, renewed by the invention of the assembly-line, was to mechanise the productive process so much that even a worker with low or no education could efficiently fulfill the very limited and specialised task (s)he was in charge of. Symmetrically, foremen, technicians and engineers would provide the technical and organisational knowledge necessary for the functioning of the firm. Mass production of standardised goods was the logical outcome for reaping the corresponding increasing returns to scale. First, the firm had to be sure of a large, stable and if possible increasing market, in order to reorganise the assembly-line process. Second, a high capital : output ratio implied a high breakeven point, a feature which limited the implementation of typical Fordist principles to mass production of final consumption goods. In the management literature, the well-known productprocess-matrix summarised this correspondence between the characteristics of the market and the choice between batch production, assembly line and a continuous process. For very specific intermediate products, the large firm passes orders on to subcontractors, organised along batch or customised production. Good and rising wages were the cost firms had to pay in order to have rather repetitive and tedious tasks performed by blue-collar workers. Consequently, social peace and low levels of absenteeism or manpower turnover were obtained via an implicit or explicit compromise about productivity gains sharing. The Fordist management style and organisation of industry have been key

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ingredients in the implementation of the very specific growth regime observed after WWII. On one side, the increasing division of labour and mechanisation enhanced productivity growth. On the other side, the quasi institutionalisation of real wage increases in most OECD countries stimulated the growth of demand for mass produced goods. Fordism as a method for organising the production process (Ross, 1989) helped in promoting a genuine virtuous circle of growth (Aglietta, 1982; Boyer, 1988) that included a management style, new institutions concerned with the forms of competition, public interventions, a monetary regime and of course international trade and the international financial system. The high growth rates fostered by the diffusion of the new management and production methods have initiated a large movement of convergence in income and productivity levels among industrialised countries, a movement well documented in Abramovitz (1986) and Baumol (1986). The large productivity advantage that the US had over Europe and Japan after WWII tended to diminish drastically during the Fordist growth period (Table 1). The result is that the productivity levels of the most advanced European countries and Japan, through still below that of the US, are now very near it. Differences are more pronounced when one looks at the manaufacturing industry (Table 2), but results are contrasted when one looks at Table 1 Compared

hourly

productivity

levels for the whole

economy

1870-1987”

1870

1913

1950

1973

1987

82 56 50 41 19 88 104 100

61 48 50 37 18 69 78 100

42 40 30 31 15 46 57 100

64 70 64 64 46 77 67 100

86 94 80 79 61 92 80 100

Belgium France Germany Italy Japan Netherlands UK USA a Source:

Maddison,

1991.

Table 2 Compared

hourly

productivity -

France Germany Japan Netherlands UK USA a Source:

Van Ark

levels in manufacturing

1950-1989”

1950

1965

1973

1979

1989

32 39 18 46 40 100

44 67 29 67 44 100

62 80 56 92 52 100

75 96 70 100 54 100

76 82 82 96 58 100

and Pilat,

1993.

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specific industries (Dollar and Wolff, 1993). Despite being the world leader for overall manufacturing productivity, the US is not the technological leader in every industry. Several factors are behind this movement of convergence in productivity and income levels. Convergence depends on a set of economic and institutional factors (Amable, 1993). Indeed, when one estimates convergence equations, it is necessary to control for a certain number of variables related to investment in equipment, the innovative activity and the eduction level of the population. Even after controlling for these variables, and even in the presence of a tendency to converge, i.e. an ‘advantage in backwardness’ (Gerschenkron, 1962), it is not guaranteed that convergence to the high income level of the US actually takes place. Growth patterns are characterised by cumulative causation between growth, investment and innovation. When one looks at the growth performances of a large sample of countries, tendencies to diverge are present too. In this respect, the growth paths followed by Japan and the European countries after WWII are far from being a universal model. Some countries have shown a very clear tendency to catch up with the US productivity level (the European and East Asian countries), but African countries do not belong to this ‘convergence club’. The post-war growth model has its roots in the US and spread to Europe and Japan, via the Marshall plan and the productivity movement according to which managers, unionists and civil servants went to North America in order to grasp the major features of Fordism as an organisational model for firms. Nevertheless, each country did not merely copy the American manufacturing system but translated it and adapted its core principle to the existing social, economic and political context.

3. Paradigmatic

change: the end of national sources for competitiveness?

Important changes have since occurred which challenge the previous organisational model and cast some doubts on the ability of nation-states to monitor them. Information technology, globalisation and the paradigmatic shift in the interrelations between technology and competitiveness are the most often cited factors. 3.1. Information

technologies

Economists and historians studying technical change often refer to a taxonomy of innovation. The distinction between ‘radical’ or ‘major’ innovations and ‘incremental’ or ‘minor’ ones is very common. The former represent a discontinuity in the existing methods of production, affecting not only the equipment used, but the mode of organisation of firms as well. The impact of a radical innovation spreads beyond the particular activity where it takes place. The latter type of innovations integrates all the gradual improvements that can be realised with existing techniques and within the currently defined methods of production and organisation. Of course, categorizing innovations this way is not necessarily easy nor universally accepted. The problem of the border between what is a gradual improvement and what is a radical departure from the existing technology is not readily solved, but even such

172

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a simple taxonomy has proved to be useful in the past. The systemic aspects of some innovations, around which several innovations of smaller impact are developed, has been stressed by many :scholars, for instance by Gille (1978). The dichotomy can be extended in order to consider ‘technology systems’, which are formed by inter-related clusters of innovations, to which the concept of technological paradigm may be linked (Dosi, 1982), and even ‘technological revolutions’ or changes of ‘techno-economic paradigms’ (Freeman and Perez, 1988), which associate a technological paradigm and a set of related institutions. It has been argued that the new information and communication technologies (ICT) form the basis 01‘ a new technological paradigm. They concentrate a certain number of key technologies that have a pervasive impact on the economic structure, and around which a very large number of new products and techniques can be developed, ICT products have grown very rapidly over the past 20 years (Freeman, 1993), and this does not concern only the industries that manufacture ICT artifacts, but also service activities that relate to the implementation of these techniques (software, data banks, networking services, etc.). The ‘pervasive’ character of ICT is expressed by their potential to alter the more ‘traditional’ industries, affecting the methods of production within these industries as well as the mode of organisation of the industry. Indeed, changes in management styles and inter-firm relationships are involved in the diffusion of ICT as a new technological paradigm. 3.2. Globalisation For some analysts, globalisation has two forms: the surge of foreign direct investment (FDI), especially coming from Japan since American FDI was a common feature of Fordism, and the fact that technological activities of firms are increasingly made on an international basis. First, a recent intensification of ‘globalisation’ in understood as a widening of the geographical basis for firms’ activities. As a result, there is an increase in the level of foreign direct investments and in general more complex forms of international activities than simple foreign trade flows are developed. A new fact is that Japan is the first foreign investor (in flows) in the European Community: approximately 40% of FDI flows from Japan went to the UK and above 25% to The Netherlands, at the end of the 1980s (Greenaway, 1993). Only 6%-X% went to either France or Germany. The importance of foreign firms varied across European countries around the end of the 1980s: over 50% of turnover in manufacturing in Ireland, nearly 30% in the UK and France. and between 10% and 20% in Germany, Italy or Denmark. By contrast, foreign multinationals only contribute to less than 5% of the turnover in manufacturing in Japan, and around 15% in the US. Different origins of the foreign multinationals are summarised in Table 3. Japanese firms invest mostly in the US, and within Europe mostly in the UK. Sectoral differences matter: in computers, foreign multinationals represented respectively 80x, 74% and 79% of the industry’s turnover in Germany, France and the UK. Second, globalisation is understood as the fact that multinational firms do not limit their technological activity to their domestic country. This trend is captured by

8. Amable,

R. Bnver/Structural

Table 3 Origin of the foreign for the manufacturing

Change

and Economic

multinationals in the US, Japan, Industry in 1990 (%)”

Dytzamics

Germany,

6 (1995)

France

173

167-183

and the UK

Origin

USA

Japan

Germany

France

UK

USA Japan Europe

15.4 63.0

59.0 31.9

49.0 1.7 31.8

34.5 1.7 41.1

56.3 5.8 17.1

a Source:

OECD.

1903.

patent statistics. One many differentiate between the individual inventor’s nationality and the geographical origin of the firm where (s)he works. For instance, 13% of EC’s patents (European patent system) are applications from foreign extra-European multinationals operating in one of the Community’s countries. From this point of view, there is a high heterogeneity among European countries: for instance the weight of foreign multinationals in the UK patents was 41% in 1990, against 17% and 18% for Germany and France respectively (OST, 1993). One may consider the European industrial network: the European firms within and outside Europe, compared with Europe as a geographical entity (all the firms operating in Europe) (OST, 1993). European firms abroad apply for less patents than foreign (i.e. extra-European) firms operating in Europe. Japan is in the same position, but US firms in Europe apply for more patents than foreign firms in the US. Therefore, the technological activity of US firms is more international than that of firms from Japan or Europe. 3.3. From linear to interactioe technological

change

The productivity slowdown of the 1970s the rise in the unemployment rate, particularly in Europe, and the trade imbalances of the recent years have pointed to demise of the dominant Fordist model of growth. The success of this model is largely explained by the implementation of methods derived from taylorist methods and scientific work management: scientific bre
is defined

as the relative

(to the world

average)

number

of citations

by publications.

174

B. Amable,

Table 4 Compared -

academic

Change

and Economic

Dynamics

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167-183

research” -

(1) (2) (3) (4) (5) (6) (‘7) -

R. BoyerlStructural

Europe

USA

Japan

0.38 10525 39.9 21.1 38.7 0.97 1.0

0.29 13032 51.2 35.8 50.1 0.98 1.4

0.18 2836 10.8 8.0 11.2 1.03 0.8

Europe

USA

Japan

Share of Expenses Share in Share in Share in Relative Indicator

a Source:

Table 5 Compared -

academic research in GDP (1988) in % for academic research in 1988 in million the triad the world scienlific production (1991) the scientific prsduction of the triad efficiency of academic research = (5)/(3) of scientific impact -

OST,

1991 and 195’3.

research

-

and dev:lopment” -

1.1) R&D expenses/industrtal 1.2) R&D expenses in G$ in (3) Share in the triad (%) 114) Share of researchers and 1991 03 (5) Researchers and engineers (6) Share in the triad (%) (7) Share in total US patents (8) Share in the triad (%) (9) Share in European pati:nr (LO) Share in the triad (%) (11) Relative efficiency of the (12) Relative R&D efficiency a Source:

dollars

OST,

production 1989 engineers

in 1989 (%)

in the population

in 1991 (thousands) grants

in 1991 (%)

applications research = (8)/(3)

in 1991 (%)

personnel

= (g)/(6)

in

2.3 60.6 30.0 1.9

3.2 95.9 42.5 3.8

2.1 45.6 21.5 4.7

611.4 28.5 20.1 22.2 42.6 47.5 0.78 0.74

848.3 44.3 45.6 50.3 24.7 26.9 1.14 1.26

582.8 21.2 25.0 27.5 24.4 26.6 1.01 1.22

1993.

With the linear model of technical change in mind, supposing that Europe or Japan catch up with the US in automobile or mechanical industries, the American technological potential should be a major asset in the conversion of the US productive system towards high technology industries or services related to ICT. Innovation rents extracted from the Fordist sectors should have fed the expansion of new industries, and many theories would lead to expect the pursuit of the American economic and technological hegemony. However, the US seems to be slowly losing its competitive positions (Table 6) and the productivity slowdown is more pronounced there than in Europe and, above all, Japan. This points to a change in the relationship between innovation and economic performance, and particularly in the US. Indeed, the developrnent of some important inventions and then innovations points to the inability of an efficient transition from a technological breakthrough to the

B. Amable,

R. BoyerlStructural

Change

and Economic

Table 6 Indicator of self-sufficiency (production/consumption) index with 1980 = 100 between square brackets

Dynamics

6 (1995)

by industry

167-183

in 1989 and

Japan

Industries

Europe”

USA

Aerospace Electronics Pharmaceuticals Equipment goods Automobile Chemicals Other industries

106 11041 87 [89] 106 [96] 117 [98] 108 [94] 108 [99] 99 [loo]

119 90 103 99 83 106 95

[98] [89] 1973 [90] [91] [95] [97]

14 [132] 124 [97] 96 [loll 115 [99] 128 [90] 105 [99] 98 [97]

Total

102

96

1951

106

a Europe

is Germany,

France,

Italy,

[98] UK

175

[99]

and The Netherlands.

successful mass production of cheap goods of high quality. The American engineers have invented most of the consumer electronics products, and large firms have commerciahsed them. In spite of this early lead, American producers have been unable to meet the demand for new generations of products, demand which is now addressed to Japanese producers. The same applies to semi-conductors and American Authorities would not want the story to repeat itself in the field of aerospace if joint ventures with Japanese firms are developed. Many official reports and academic papers (Burton, 1990; Zysman and Cohen, 1988; Dertouzos, Lester and Solow, 1989) have pointed to the origins of such failures. A successful innovation is no guarantee of an efficient production, nor the ability to meet consumer demand. The simple causal links between science and technology as well as technology and competitiveness put forward by the linear conception of technical change are broken. A new, interactive, model of technological change must be considered, integrating the three areas of research, production organisation and markets and putting the emphasis on the feedback mechanisms between each area. Considering these feedback mechanisms, the success of a systemic approach of innovation calls for a new form of organisation within the firm, and a new system of relationships between the firm and its subcontractors or partners. The Fordist industrial organisation was analogous to the divisional and hierarchical structure that existed within the firm. Such structures were congruent to a linear pattern of innovation: a strong division of labour between departments and a succession of hierarchically ordered tasks, from research to development, production and commercialisation. In an interactive conception of technical change, both the internal organisation of the firm and the pattern of relationships between firms need rethinking. Parallel to the emergence of new models of internal organisation inspired by the ‘Japanese firm’ (Aoki, 1990, 1992) new patterns of external relationships of the firm with its environment (partnering firms, subcontractors, banks, public agencies) emerge. An important point is that the new attributes of these firms are interconnected and form together a new, coherent, pattern of organisation of the

170

B. Amable,

R. BOJW, Structural

Change

and Economic

Dynamics

6 (1995)

rnYOTIsn

FoRLmn

Neu New

technologies

Work

f zed

Need

lou

large

skills

A-

' Polyvalent

market

workers

for

and

stable

organization

markets

M

COST REDUCTION

t

Respond the

oroducts

for

dffferentiated products

organizatfon \d

Search

167-183

BUT BUILT-IN

-L FLEXIBILITY,

RIGIDITY

COST REDUCTION

AND HIGH QUALITY ARE NO KftE CONTRADICTORY

Fiy.

1. The Fordist

and new models

in a nutshell.

firm. Therefore, the problems faced by American firms may come from a strong inertia of the management and organisation methods inherited from the Fordist period (Adler, 1991). Consequently, the difference between American and Japanese producers of automobiles or electronics may not lie so much in the technology as in the industrial organisation: catching technological opportunities is one of the factors of productivity, not the only one, however, since the synchronisation of decisions within the firm or the cumulativeness of learning effects matter as much.

4. The position of Europe The emergence of a post-Fordist productivity regime does not seemto come from Europe. If the Fordist regime was associated with the US, many elements point to Japan as the country that may have developed a new and original model. If so, the question is whether Europe is able to import and adapt it.

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177

4.1. Nations still matter for competitiveness Let us imagine for a moment that the new Japanese model of organisation could be the equivalent of the American Fordist model; is it that sure that a one-best-way would diffuse automatically? Going back, the diffusion of Fordism might be enlightening. For instance, this model was imperfectly transferred to Britain as far as automobile production is concerned (Lewchuk, 1992). The technical aspects of mass production were easily transmitted through technical journals, personal visits, etc., but it never worked entirely because of the reluctance of British management to follow the American-style labour control practices. British managers favoured instead other methods based on their perceptions of how labour should be managed. Social and institutional characteristics altered the technology. Ironically, the British system of labour control through internally generated group effort norms and a system of incentive payments, at odds with the successful Fordist system of the post-war, seems closer to some aspects of the new Japanese-style system. Another point concerns FDI as a mechanism for transferring productivity improvements from company to company. Foreign transplants would allow the implementation of superior production and management methods by supposedly putting a competitive pressure on lagging domestic companies. One then expects positive spillovers from the establishment of foreign transplants, held to be instrumental in the implementation of new ‘best practices’ with domestic firms. However, one must not forget that foreign firms do not invest abroad in order to help domestic firms to close the technology gap but to establish their production on an international basis, learn how to operate in different national contexts and improve their own management model. Symmetrically, the Japanisation of western firms mainly takes place via direct importation of management methods from Japan. 80% of Japan’s FDI concerns the service sector and not the manufacturing industry where the technology gap is supposed to be important. For instance, the structure of foreign investments differs between the US and Japan. Whereas 80% of US FDI in Europe is related to production within the Union, 70% of Japan’s FDI is related to exports of Japanese goods to Europe (Greenaway, 1993). At the end of the 1980~ the bulk of Japan’s FDI in Europe were still a way to dodge ‘Fortress Europe’ rather than to export production methods. 4.2. Why Europe may have problems In the context of a change of technological paradigm, many indicators seem to point to the difficulty of Europe in adapting to the new model. The 1980s were characterised by a slow European growth (2.0% average annual GDP growth vs. 4.1% for Japan and 2Xx for the US) and loss of market shares in high tech industries. The innovative performance is weak, compared with a world average of 100 for the US patents/GDP ratio in 1991, the ratio is 76 for the EC, 164 for the US, 222 for Japan (See also Table 7). The lack of innovative dynamism surfaces in the specialisation pattern of Europe’s patenting. The EC is specialised in the less dynamical technological classes, i.e. classes where global patenting is increasing slowly

178

B. Amable, Table World

R. Boj erlStructura1 7 share, in US patent

Change

grants

and Economic

by industry

Dynamics

6 (1995)

167-183

in 1991 (%)

Industries

EC

USA

Japan

Aerospace Electronics Pharmaceuticals Equipment :oods Automobile Chemicals Other industries

26.4

42.5 44.8 50.0

23.2 35.9 25.0 35.9

19.7

43.6 32.1 49.7 47.6

20.1

45.6

25.0

13.9 26.3 21.0 22.9 24.1

Total a Source:

OST

15.0

19.3 18.6

1993.

(C)ST, 1993). In 1991, the four weakest domains in US patent grants of the EC were: informatics, semi-conductors, optics, audio-visual technologies, i.e. exactly the four strongest domains for Japan. This means that the technological specialisations of Europe and Japan are 13pposite. This in itself would not mean something else than international specialisation if the domains concerned were not the core of the new technological paradigm. This fact and the pattern of international specialisation could reveal that Europe has some trouble adapting to the new industrial model (Table 6). Of all sectors considered, only aerospace can be regarded as a success, Europe is self sufficient, which was not the case in the 1970s. But if one looks at electronics (a key sector if one believes that the new technological revolution is based on ICT), Europe has tFe weakest performance of the triad. The picture is even less attractive when one considers patenting activity (Table 7). The innovative performance of Europe lags behind that of Japan. Ideally, the new paradigm calls for a set of interrelated private and public arrangements. The interaction between research,production and marketing supposes mobility and communication both within and outside the firm and adequate decision processesin order to optimize economic performance. Efficient learning is central to competitiveness and rests on a satisfactory basic education and a continuous upgrading of skills. The availability of an abundant skilled workforce has often been presented as one of the most important causesof economic growth (Maddison, 1989). Most industrialised countries have adapted their educational systemsto the requirements of a modern economy, The systems have some similarities, but significant national differences remain, acknowledging the influence of history. The new technologies basedon ICT call for a richer cognitive content hence skill enhancement for both manufacturing and service workers. Competitive pressure tends to increase the skill level requirec. in each advanced industrialised country. Therefore, the efficiency of the education and training system becomes an important determinant of international competitiveness. Europe, because of its relatively weak innovative performance, is not very well positioned to make radical breakthroughs in some key technologies, particularly

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those related to ICT, but this is not a disadvantage which is impossible to overcome. How to use efficiently the most advanced techniques is as essential as creating them. Learning by using may allow to progressively enlarge competencies and ultimately to innovate. But this means an adequately skilled work force. In this respect, Europe is not homogeneous. In France 43% of employed workers have no vocational training or education of any sort. Only 20% of German workers are in the same situation. The scarcity of skills is no better in the UK where no unified educational system existed before the end of the XIXth century (Walker, 1989). Indeed, the lack of efficiency of the education system and the consequences of a low competitive performance of the UK is a recurring theme in the literature (Keep and Mayhew, 1988). Such a mismatch between the skill profile required by technological change and the existing distribution of skills in the population was not left unnoticed by the Public Authorities. Many attempts were made to reform the existing systems in most European countries. Not all of them succeeded fully for deep underlying reasons: incompatibility with wage differentials, adverse industrial relations, lack of incentives for firms to train their employees. 4.3. Why institutional

inertia is so important

Institutions are not as malleable as contract theory could have us believe. It is commonplace to say that although institutions produce collective benefits, they generally are not designed to explicitly promote economic efficiency or welfare, that they outlive their inventors, that they serve many different and possibly conflicting purposes, etc. All this points to the difficulty of the teleological explanations of institutions and introduces the influence of history (David, 1992). This influence may be precised by the concept of path dependence, about which four points may be stated: (1) Historical experience has a role in the formation of structures of mutually consistent expectations that enable coordination without centralisation. Compatibility of expectations plays a crucial role in selecting an equilibrium among a set of expectations-driven equilibria. Even in the absence of conflicts of interest, agents usually experience many difficulties in changing any convention, owing to pure coordination problems (Boyer and Orlean, 1992). Even if the adoption of new conventions is in everybody’s best interest, signals for switching to a different mode of coordination are missing. (2) There is a resemblance between the information channels and codes that organisations require in order to function, and physical capital. These channels have a sunk cost aspect: they have to be created by firms mostly before they start to operate and they are to some extent irreversible. Such organisational investment may be huge. Sunk costs are an essential ingredient in the modelling of hysteresis effects in economics (Amable et al., 1992). Therefore, in this context, organisations may be subject to hysteresis effects. (3) Achieving consistency and compatibility among the constituent elements of complex organisations is necessary. Organisations have ways of treating (filtering, processing, diffusing) mformation, monitoring participants, etc. There are many

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different ways to perform these tasks. Since organisations have to communicate with each other, some internal infrastructures will prove to be more efficient than others when they are considered collectively. A parallel may be drawn between technical interrelatedness and institutional complementarity. Some characteristics of technology choice in the presence of economies of scale (Arthur, 1989) are present in institutional arrangements: lock-in effects and possibly to an inefficient configuration, importance of initial conditions or early events, etc. (4) At a macro level, obsolete institutional forms which were functional in the previous technological paradigm may hinder the viability and diffusion of private organisation embedding the new paradigm, even if the micro compatibility conditions are fulfilled and the local coordination problems are solved. For instance, conflicting unions may block the minimal cooperation implied by the new paradigm. Central wage bargaining may induce insufficient incentives for the accumulation of competence. .4 financial system may emphasize short-termism and favour routine investments over innovation. These influences explam the ‘systemic’ aspects of institutions, the importance of complementarities between institutional forms, etc. For instance, the control by the main bank, the long term growth objectives of managers, job stability and continuous upgrading of skills seem largely complementary in the Japanese productive system (Aoki, 1993). Thus, a drastic financial deregulation does not only imply a change in the financing regime of the Japanese firm, but may also imply a complete breakdown of the set of institutional arrangements that constitute the environment of the firm. A contrario, the inability to reform national institutions may thwart otherwise viable lolcal innovations. 5. Which growth

pattern for Europe?

Whereas the old Fordrst regime was characterised by mass production of standardised goods, the new paradigm seems to imply a different type of market expansion. The demand is now more driven by differentiation and quality improvements, as reflected in new growth models (Romer, 1990; Grossman and Helpman, 1991). These markets tend to be more international than they were previously and thus national growth is the outcome of this innovation race. These features have some consequences for the sources of growth. Given the previous characterisation, what are the chances for Europe? Different theoretical growth models deliver contrasted appreciations of the possible growth paths. Taking a Schumpeterian perspective, if the new technological era is strictly defined by ICT, Europe is in a bad position indeed. The recurring weakness in all electronics-related industries, despite important efforts in industrial targeting, and the lack of dynamism in innovation seem to imply that European countries are technological followers barely able to catch up, let alone forge ahead. There would then be a possibility for Europe to be excluded from the world technological competition, leaving high growth rates to Asia and North America. If ICT are not only t.he leading sector but the source of a complete restructuring

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of all sectors, it is not necessarily detrimental not to have competitive electronic firms provided any other sectors may use electronics products competitively. However, this argument rests on the possibility of European countries mastering a technological change that has its origins elsewhere. Such a possibility demands that two conditions be fulfilled. First, European countries must be able to propose products from their own industries or services that correspond to a growing world demand, and there may not be too many of them considering the fact that European countries, leaving aside their heterogeneity, are not losing ground in electronics only. Indeed, Europe has invented few sunrise products. Second, there must be actual competence for mastering continuously changing technologies. Such competence is determined by the efficiency in the relations between education, training and firm strategies. Other growth models insist on the importance of infrastructures in growth (Arrow and Kurz, 1971; Barro, 1990; Barro and Sala-i-Martin, 1992). The preoccupations regarding the choice of key sectors for industrialisation are left in the background. What matters is that European countries can develop an important network of public infrastructures coherent with the diffusion of the new productive regime. One may suppose that the infrastructures concerned are different from those upon which Fordist growth relied (motorways, etc). The new types of infrastructures would involve to a large extent products related to ICT products (telecommunications, etc.), which brings us back to our previous point.

6. Conclusion Whatever the theoretical model or the statistical evidence, the present evolution of European competitiveness is quite worrying. In spite of large R&D expenditures in the electronics sector, Europe has been unable to build any strong position in this sunrise industry. Nor have most countries been quite successfulin using ICT, and thus extending their oligopolistic rents along their past international specialisation. Of course, the single market represents a larger pool of purchasing power, but the European firms are not always able to reach the requirements of sophisticated consumersregarding product differentiation and quality. The work force is well educated but the continuous upgrading of skills is generally not the core objective of most European firms: the German training system, so often praised, is quite uneasy to copy and adapt becauseof its congruency to an industrial structure that is uniquely German. These features would not have been detrimental within the previous growth regime based upon mass production directed mainly for the domestic market: external competition was kept under control by national Authorities, the World economy experienced a fast growth under the aegisof a quite stable monetary and trade regime. But since the 1980s economic performance is more directly related to the ability to gain market sharesvia quality improvements, product differentiation and permanent innovation at a quicker rate than competitors. On average, Europe has been rather clumsy in playing this new game: difficulties in high tech sectors, slower growth, rising unemployment are evidence of such a poor economic performance.

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Hence a striking paradox. Many European problems are related to the unavailability of European firms, unions and governments to implement the relevant sources of competitiveness. But conversely the poor macroeconomic performance (high and long term unemployment, long and severe recession, financial losses for leading European firms, etc.) makes the structural changes, so desperately needed, more difficult than ever. For instance, short termism may lead to cut R&D expenditures whereas innovation is the source of tomorrow’s competitiveness. Given the large surplus of workers, including skilled ones, firms may screen the applicants and cut training expenditures, instead of fully reorganising their management in order to exploit the extended competencies delivered by the education system. Similarly, governments are tempted to cut down public deficits by downsizing their investment in infrastructure or education, i.e. the very ingredients for the long run competitiveness of national territories. European authorities, conscious of this vicious spiral, have promoted such programs, but unfortunately the general disappointment with respect to the European Union. reinforced by the sceptical assessment by financial markets, have deprived these programs of their counter-cyclical impact. For one decade, some plans on technological innovation (Eureka, Esprit, . _ .) have stimulated networking and cooperation, but it takes time to convert these breakthroughs into competitive products. Thus Europe is probably living a dangerous period. If correct, the present analysis points towards two directions. First, the entering into a new epoch should be more clearly recognised. If the European miracle of the 1960s turned into the 1980s’ Eurosclerosis, it is largely due to an excessive inertia in the general understanding of the new sources of growth and competitiveness. The difficulties in reforming management methods, industrial relations and economic policies are somehow related to this cognitive gap, and not only the conjunction of vested interests. Also, the diversity of national trajectories should not prevent us from proposing some European initiative in order to build the long run competitiveness of the old continent. References Abramovitz, M., 1986, Catching up, forging ahead, and falling behind, Journal of Economic History YLVI(2), 385-406. Adler, P., 1991, Capitalising ‘Jn new product and process technologies: current problems and emergent trends in US industry, Paper prepared for the international OECD Conference Technological Change BS a Social Process: Society,, Enterprise and the individual, Helsinki, 11-13 December. Aplietta, M., 1982, Regulation and Crisis of Capitalism (Montly Review Press, New York). Arnable, B., 1993, Catch-up and Convergence: a model of cumulative growth, International Review of 4pplied Economics, 7(l), l-25. Arnable, B., J. Henry, F. Lordon and R. Topol, 1992, Hysteresis: what it is and what it is not, Working Paper CEPREMAP no 92 16. Aoki, M., 1990, Towards an economic model of the Japanese firm, Journal of Economic Literature 28 (1) I-27. Aoki, M., 1992, The Japanesl: Firm as a System of Attributes: A Survey and Research Agenda, CEPR Publication no 288, Stanfo1.d University. Aoki, M., 1993, The contingent governance of team production: an analysis of systematic effects, mimeo Stanford University.

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