Perspectives on European community industrial policy

Michael Llewellyn W. A. Adam

Perspectives on European Community Industrial Policy The European Commission’s Venture Capital Pilot Scheme ended in September 1983. Intended to promote New TechnologyBased Firms (NTBFs) on to a European-wide market, the US$ 1 million scheme involved the participation of leading Europeanassisted NTBFs with activities spanning computer software, biotechnology, metrology and waste treatment. The Venture Capital Liaison Office co-ordinated the various activities of the partners in the scheme, the European Communities Commission, the Venture Capital companies and the NTBFs, while continuously evaluating the scheme’s operation. Throughout its three-year existence, and based on this continuous evaluation, the pilot scheme contributed to significant developments in the Commission’s drive to improve the competitiveness of Community industry, as outlined in the following documents: l Plan for the Transnational Development of the Supporting Infrastructure for Innovation and Technology Transfer (1983(1985) COM (83) 251 Final. l Towards Community Financing of Innovation in Small and Medium-Sized Enterprises: COM (83) 241 Final.

A direct result of the Pilot Scheme is the European Venture Capital Association, headquartered in Brussels, which began activities in October 1983, and will be a welcome instrument in maintaining a venture capital industry as a means to innovation financing. Although the final report of the Pilot Scheme will not be available until January 1984, in this paper the author places the project in the context of the European Commission’s overall strategy of improving competitiveness in industry, and reports some preliminary conclusions. The theme of the paper ti that while there exist gaps in thti strategy (such as the lack of manpower policies, no tangible results on labour flexibility and the sterility of Forecasting and Assessment of Science and Technology - FAST l), the greatest task facing the Commtision in trying to promote an industrial ‘renaissance ’ lies in opening-up to public scrutiny the dialogue between it and the Council of Ministers, reviving the concept of accountability and the end of unanimous decision-making. Given the increasing role and importance of the small and medium-sized firm in improving European industry, it also faces a considerable task in promoting and maintaing better communication and sponsorship of technology SMEs in particular.

and

Consultant, Brussels AI Management, Brussels.

W. A. Adam’s company, AI. Management provided the Liaison Office facilities for the . European Commission’s Venture Capital Pilot Scheme. His activities are now largely devoted to promoting the interests of the European Venture Capital Association which grew out of the Pilot Scheme, and to the expansion of his technology-based trading firm Sinkin. Michael &wellyn is an independent consultant based in Brussels and a regular contributor to business publications both in Europe and the United States. His research and writing is increasingly taken up with industrial policy, technology assessment, and corporate adjustment policies.

European Industry

Community is not Competitive

The problem

identified

In 1965, the European Community (EC) exported 40 per cent more in eIectronic-based manufactures than it imported: by 1976 the situation was just about break-even. In the same year, Japan exported almost nine times as many electronic-based products as it imported. In 1965, EC industry exported 3.7 times as much machinery and transport equipment as it imported: by 1978 this margin was down to 2.4 times. Japan’s performance in the same sectors was to export ten times more than they imported. In advanced technologies such as data processing and microelectronics the EC has virtually surrendered its internal market to the Japanese and the Americans and is finding exports squeezed ever more hard on foreign markets as a result. True, programmes such as Esprit (European Strategic Programme for Research. and Development in Information Technology) agree on the intention to redress this imbalance, but it is difficult to see Esprit’s many laudable objectives being achieved. If achieved, it is difficult to see

21

it reducing the competitive lag between the Community and its two main adversaries in trade. A recent report on the competitiveness of EC industry compiled by the Commission’s Services noted among its conclusions that ‘not only are Community exports relatively unspecialized, the degree of specialization in high technology, high-skill products seems to be declining and certain member states’ exports are even specializing in product areas where they are or will be, competing mainly with newly industrialized countries, rather than with developed countries.’ The evidence

from

trade

The volume of world trade increased between 1963 and 1973 by an average of 8.7 per cent per year, whereas between 1973 and 1981 it increased by only 3.6 per cent per year, During these periods the annual average growth rate in world output fell from 5.7 per cent to 3.1 per cent. The world recession which began in 1973 clearly resulted in the disproportionate contraction of world trade. In 1980, the industrialized countries’ share of world exports was 64 per cent in comparison with 74 per cent in 1973, but their share of world imports was 67 per cent. The gap between their relative

When it comes to international market shares the EC’s position seems at first to be encouraging. With regard to OECD

shares

trade

of exports

and imports

serves to

highlight the seriousness of the imbalances faced by the industrialized nations since 1973, The EC accounts for one-third of total world trade (1980) with rather less than 50 per cent of this being extra-EC trade, that is trade with the rest of the world. While this is spread across many world markets and includes a wide range of products, most of these exports fall into only

a few

industry

categories.

Of total

EC exports to the rest of the world, 68 per cent is attributed to only.six sectors motor vehicles, mechanical and electrical engineering, metals, chemicals and agroindustries. Clearly, a weak performance is of greater significance for both income and employment in the EC the greater the amount of exports which are thus exposed. At the same time, the implicit requirement for structural adjustment will be greater.

22

It will be demonstrated that, to a certain extent, the Community is competitive internationally in the products it exports most of, although this is certainly not the case for each member state or all important manufactures. It is also true that intra-EC trade, that is trade between the member states, continues to be more important for manufactured products than export trade with the rest of the world. It is also important to remember that trade between member states is of much greater importance for the founding members of the Community, those whose industries have had more time to adapt to the unified domestic market as well as for the smaller ones, for example Belgium and the Netherlands. What is disturbing about the pattern of intraCommunity trade is that it includes goods such as office and data processing equipment and some other products for which the Community could be losing its international comparative advantage and for which the common market provides a measure of protection. World

market-shares

in manufactures,

the Community’s

share at 38.6 per cent (1980) far outranks that of both the United States (22.3 per cent) and Japan at 19 per cent; however, an examination of the gains and losses in share puts quite a different complexion on the issue. For example, while the Japanese share has increased by 2.6 points since 1973 and that of the United States by 0.8 points, the EC share declined over the same period by 0.4 points. As regards machinery exports, including those of electrical machinery, the EC is far ahead of the American and Japanese competition, with a share in excess of 40 per cent. The low share of the United States in capital goods contributes to its remaining firmly in second place, far behind the Community. Japan is in third place with shares ranging between 10 and 22 per cent. But the important characteristic concerning the Japanese share is

that it is increasing age points between electrical machinery shows the trends of products in Japan’s duction. In

the

vitally

up by 7.7 percent1973 and 1980 in alone. Diagram 1 production of new machinery pro-

sectors

important

I I I

2 g

I I

of

office and telecommunications equipment the EC is well behind both the United States, which has a 27.2 per cent share, and Japan which leads with almost .35 per cent. The Community’s 25 per cent share in this market is declining. In engineering the situation is precision more serious in that, from a position of

I I I

New products commercialized 1976 through

from 1980

New products commercialized 1971 through

from 1975

New products commercialized 1966 through

from 1970

8.0

2 z E

6.0

i

4.0

E 6

2.0

r .g Iv) 10.0 0.0 :

61-65

@Explanatory

66-70

71-75

76-80

76

commercialized

from

1976 through

79

80

1980

@ New products

commercialized

from

1971 through

1975

@New

commercialized

from

1966 through

1970

products

@Total

of the above

@Those

other

Diagram

78

notes:

@ New products

Source:

77

than new products

1 Trends of production

of new products

1982 White Paper on International

(machinery).

Trade.

25

parity, the Community’s share between 1973 and 1980 declined by almost 4 percentage points in contrast to Japan’s increased performance of almost 8 percentage points. The outstanding Japanese performance, however, has been in motor vehicles: this has caused the greatest upheaval since 1973. Japan has now overtaken the Community as the world’s largest motor car exporter, almost doubling its share of OECD exports in seven years, increasing it up to almost 33 per cent in I980 largely at the expense of the EC, which lost 4.7 percentage points over the same period. The Community did particularly badly, apart from the areas already mentioned, in consumer electronics and machine tools, especially machining centres, numerically controlled and computercontrolled machines. Taking the analysis one stage further, the OECD countries accounted foraround 62 per cent of world imports in 1980, and taken as a whole they form a highly competitive market. Trends in the shares taken by the major sources of supply (that is the exporters) of OECD imports from the world therefore provide a reasonable indicator of Community performance against not just the developed but also the ,developing countries. These trends have been analysed for a representative cross-section of 18 product groups over the period 1968-80, and the main point emerging from this data is that the Community had a growing market share in only 3 of the 18 product groups and a declining share in 10: these are passenger cars (27 per cent); lorries and trucks (17 per cent); organic chemicals (34 per cent); plastic materials, regenerated cellulose and resins (40 per cent) ; manufactured fertilizers (11 per cent); iron and steel (27 per cent); clothing and accessories (13 per cent); made-up textile articles (11 per cent) ; ships and boats (21 per cent) and last, machine tools (29 per cent). The fact that the Community had the largest share in 6 of the 18 product groups was largely offset by the fact that in 4 of these its share was declining. It has to be concluded from this evi-

24

dence that the wide range of goods in all sectors which the Community exports provides no safeguard against competition although it does provide something of a stable foundation on which to develop future international markets. Japan, on the other hand, which has made exceptional gains in terms of increasing market shares has tended in the past to pin performance. to a limited number of sectors (the so-called laser beam approach) such as steel, precision engineering, motor cars, and consumer electronics. The intrinsic risks of this policy have evidently been more than offset by the resources in financial and managerial terms, devoted to success in these selected areas. Industrial

specialization

An alternative approach to assessing changes in the competitiveness of EC industry is to compare the degree of specialization in trade in each product group for the EC against those of its competitors. Tables 1 and 2 offer an index of industrial specialization and an index of comparative advantage respectively. They suggest that the pattern of industrial specialization in the Community has moved, but only partia.lly, in the direction of adjustment to changes in world supply and demand. In certain sectors, the specialization index for Japan has reached levels far in excess of those in either the EC or the United States. In 1963, the United States had a good specialization profile for an advanced industrialized country, and largely retained this profile up to 1979 having high specialization indices in important technology-intensive sectors. The main weakness in this performance is that the index of dependence has risen sharply in some technology-intensive sectors and declined equally sharply in some low technology ones. The comparison of exports in a selected group of high-technology products in Table 1 also tends to confirm not only Japan’s rapid improvement in high-technology trade (against a moderate decline in the American position), but a distinct deterioration in the Community’s performance.

Table 1 Index of industrial

specialization.

Index of Specialization

Community 1973 1973

* 1980

Iron and Steel Metal products Basic chemicals Chemical products

0.99 1.08 0.99 1.21

1.01 0.99 1.12 1.25

Agricultural machinery Electr. machinery Power generating math. Other machinery

0.80 1.16 1.15 1.07

Office, Telecom. equipment Opt., clock, photo Road vehicles Other transport equipment

1963

U.S.A. 1973

1980

1963

1973

1980

0.96 1.11 1.08 1.23

0.42 0.84 1.05 1.14

0.35 0.74 1.13 1.07

0.33 0.70 1.22 1.14

1.72 1.06 0.60 0.38

1.85 0.89 1.57 0.26

1.75 0.80 0.44 0.25

1.03 1.06 1.03 1.32

1.10 1.06 1.15 1.27

1.83 1.03 1.20 1.24

1.74 1.24 1.43 1.16

_ 1.69 1.07 1.35 1.17

0.07 0.75 0.52 0.39

0.42 0.88 0.89 0.57

0.58 1.20 0.98 0.75

0.95 0.78 1.31 0.78

0.74 0.93 0.96 0.77

0.71 0.84 0.84 1.04

1.31 1.11 1.00 1.43

1.23 1.30 1.00 1.79

1.32 1.27 0.73 2.33

1.55 0.95 0.47 1.32

2.12 1.09 1.09 1.78

1.96 1.36 1.69 0.91

Textiles Clothing Shoes Paper Wood, furniture Plastic, rubber Other manuf. goods

0.94 0.99 1.05 0.51 0.65 0.98 0.86

0.95 0.79 1.16 0.55 0.62 1.01 1.08

0.87 0.83 1.06 0.56 0.84 1.03 1.22

0.43 0.27 0.38 0.80 0.45 1.11 1.82

0.44 0.25 0.27 0.79 0.54 0.82 1.68

0.58 0.37 0.35 0.76 0.45 0.79 1.39

2.47 2.05 1.22 0.35 1.64 0.90 1.07

1.22 0.45 0.36 0.25 0.30 0.81 1.06

0.98 0.13 0.21 0.24 0.14 0.67 0.81

Total manufactures

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

I

lapan

This table gives a measurement in the EC’s, USA’s and Japan’s degree of wade specialization group. The numbers give the relative weight of expbrts compared with the relative weight total OECD trade. Source: Commission Services on basis of OECD trade data. * Extra-EC trade.

Financing

Innovation

New securities markets flourish There is a growing conviction in the EC that one means of not only freeing industry from the bonds of the current recession, but of restoring it to healthy competitiveness, is the stimulation of industrial innovation. Innovation is seen as not only a means of generating new technologies, and thereby new industries, but also of revitalizing older and more established ones. Innovation and the task of promoting it is, however, a very risky business in politicaI, financial, and managerial terms. In this respect, the role of venture capital in controlling this risk is increasingly mentioned. The Commission is aware of the role which venture capital could play in restoring the competitive edge to Community industry. In 1980 it set up, in association with venture capital companies, a pilot scheme in order to promote new technology-

in each product of the product in

based firms (NTBFs) and venture capital companies on to a European market, in contrast to the more standard practice of limited national operation. It also supported the initiation of a European association of innovation-financing organizations, the European Venture Capital Association. Small and medium-sized enterprises In the course of its work on investment, the Commission has identified the specific financing problems encountered by small and medium-sized innovative firms and is studying possible choices with a view to proposing ways in which Community instruments could be more effectively used to cover the specific risks of innovative investment. In the next few months the Commission is expected to make specific proposals in view of its findings. The Commission recognizes that stock

25

Table 2 Changes in comparative advantage in exports of high technotogy products. Total 1963

Community* U.S.A. Japan Belgium-Luxembourg Denmark Germany

1980

0.94 1.27 0.87

0.88 1.20 1.41

0.67 0.58 1.21

0.77 0.60 1.06 1.06 0.03 0.67 0.83 0.92

0.79 0.66 0.99 0.93 0.63 1.03 0.69 0.94

France

1.00

0.84 0.43 1.05 1.05

U.K.

Exports

1.02 1.29 0.56

Italy

Ireland Netherlands

World Manufacturing 1970

This table compares the EC’s comparative advantage in exporting a select group of high-technology products with those of Japan and USA. The selected product list embraces chemical, pharmaceutical, radio-active and nuclear products, engineering, electrical and electronic, optical, photographic and measuring equipment. The indices are calculated by comparing the high-technology component of exports with total exports for the EC and the countries. Japan’s relative progress in high-technology exports is illustrated by the table. * Including inn-a-EC trade. Source: Commission Services, DC II.

markets provide an essential mechanism for sources of additional capital and market valuation. Stock exchanges in several member states have begun to, or intend to, create markets which are particularly adapted to smaller and medium-sized companies wishing to obtain a public market for their securities. On this point, the Commission intends to carry out a detailed study of these developments in conjunction with experts in the member states. On taxation, the Commission recently carried out a detailed survey of tax incentives in the member states and hopes to report its conclusions later this year. This report will deal, among other things, with the tax aspects of promoting investment in venture capital.

change and is an attempt to answer the criticism that the Stock Exchange did not funnel enough cash into industry. In the almost three years since its birth, the USM has raised well over 2200 million in new equity and around E60 million through rights issued by firms already quoted on the USM. By any standard the OTC market in the United States is thriving. Around 3.7 billion shares were traded in the first quarter of 1983, more than double the total for the corresponding quarter of the previous year, and in the same first quarter 154 firms joined the OTC market, and more than 600 companies already on it are eligible for a New York Stock Exchange listing, among them names like Apple Computer and. Genentech. The attractive

Unlisted securities markets Over-the-counter (OTC) markets, which exist to satisfy the financing needs of young companies in need of stop-gap financing between their own limited funds and a full stock market listing, have been flourishing since their inception. Trading in unlisted securities, these markets have become well established in Sweden, France, Japan and the United States among others. In the United Kingdom, the unlisted securities market (USM) is reguIated by the Stock Ex-

26

USM listing

advantage

offered

by a

is that firms are required to

offer only 10 per cent of their equity, 25 per cent being the norm for a full listing on the stock exchange proper. Investors in Sweden’s OTC market qualify automatically for tax concessions and shareholdings are assessed at only 30 per cent of the company’s worth. In Paris, a second attempt to launch an intermediary market was begun recently, modelled on London’s USM. The French Government hopes this will serve as a conduit of funds to smal1 firms in the private sector.

In Japan, the Japanese Securities Exchange and the Ministry of International Trade and Industry (MITI) are exploring ways of promoting the OTC market intc a source of high-risk funding for hightechnology ventures. Venture

Capital

- A European

Role?

While USMs undoubtedly have a role in funding fledgling technology-based firms, it is the prospect of a major role for venture capital which continues to attract most attention. It remains to be seen which of these two may prove to be the more viable. While venture capital is not new to Europe, it was not until around 1980 that the number of venture capital companies really began to increase, particularly in the United Kingdom, Netherlands, France and Belgium. Much of the excitement generated by the increasing roIe of venture capital in the EC is derived from the American experience. The venture capital process has been institutionalized in the United States since 1946. The major milestone in its development came in 1958 with the creation of the Small Business Investment Act: this provided for the creation of small business investment companies (SBICs) which provided tax advantages and potential government lending leverage. As it exists today in the United States, the profession is composed of three types of firms: private venture capital companies, SBICs, and the subsidiaries of major corporations. The total venture capital pool, that is the amount of funding committed to venture capital investment, grew from around U.S.$2.5 billion in 1977 to almost U.S.$8 billion by the end of 1982. The technical criteria involved in a venture capital decision are as follows: l

l

l

innovative or unique technological applications; product appeal that yields high profit margins to sustain growth (for example productivity-enhancing systems or products); unexploited spin-off opportunities;

competitive variables of technology and applications engineering (as opposed to economies of scale production affecting costs and hence prices). In assessing the technical applications, the venture capital investor will be looking for an application of technology, whether new or pot, that serves a unique purpose and therefore a unique and potentially fast-growing market. Any new product or process should improve performance, increase the level of service, equipment rereduce costs, eliminate quirements and so on. For these reasons, at least in the United States, productivityenhancing products, systems or services are prime candidates for venture investment. The market criteria involved are that the product or process should have an identifiable market niche and show high growth potential, and both of these should be relatively easy to measure. l

130,000

jobs in 72 companies

In August 1982, the General Accounting Office produced a report (Gouernment-Industry The Venture

Cooperation Can Enhance Capital Process) on the ven-

ture capital experience .in the United States which, among other items, studied the experiences of 1,332 companies that were started with venture capital in the 1970s. This showed that the benefits to the national economy and to productivity were disporportionately large in comparison to the amounts invested. For example, with US $209 invested in 72 of these firms, their combined annual sales in 1979 amounted to US $6 billion. Their growth averaged 33 per cent annually and in the process they created an estimated 130,000 new jobs, paid over US $100 million in corporate taxrevenues, US $350 million in employee taxes and earned US $900 million in exports. Moreover, most products were productivity such as computer-related enhancing, equipment, fibre optics, industrial control, lasers, robotics and so on. Understandably the main criteria for selection to the Commission’s Venture Capital Pilot Scheme differ from the tried and tested American equivalent,

27

mainly in that there should be a clear need for EC-wide development of the company by organic growth, joint venture or merger. The other two are that the required potential for return on the investment should be evident from the and that the product or beginning, process is innovative and technologybased. The principal objectives of the pilot scheme were to: investigate, analyse and quantify the problems facing the European venture capital profession and the NTBFs in which they invest; interpret the findings of the investigations for, and communicate them to, the Commission in terms of recommendations for measures to promote industrial innovation and employment. In working towards these objectives particular attention was paid to start-up problems and the early-stage development of NTBFs and the problems confronting them when they try to expand to a European basis. In several community countries schemes exist for governments to share NTBF financing risks with the Venture Capital company (VCC) concerned. However, if a firm obtains financing from two VCCs in different EC countries, this support is withdrawn leaving the VCCs to carry the full risk. This, as the experience of the Venture Capital Pilot Scheme bears out, suggests that the Commission’s aim to build EC companies with European capital is either not understood by, or not supported by member governments. The pilot scheme revealed a number of shortcomings amongst the NTBFs ,promoted to it: the more important of these are: l

l

l

l

28

-

poorly prepared or no business plan for European expansion; little or no study of market requirements; failure to relate R 8c D programmes to market requirements; under-estimation of management skills and capacity needed for success (often one key management skill would be lacking, in finance or

l

marketing for example) ; little or no production and development costing and budgetary control.

These and other conclusions tend to underline previous experience that European NTBFs tend to be nipped in the bud as much by the still fragmented ‘common market‘ and by nationalistic tendencies, as by external competition. The search for a new entrepreneurship

There can be little doubt that SMEs do play a major role in the early phase of new technologies. Technology-based SMEs or NTBFs can be a potent force for recovery at the national and perhaps, more importantly, at the regional level in industrial regeneration. Whether or not the small and medium-sized enterprise can create employment (which means reducing unemployment) on a scale sufficient to raise the hopes of the EC’s unemployed millions is, however, doubtful. The revived interest in NTBFs in particular often overlooks the fact that, where capital costs are high and where large economies of scale are necessary, small firms are unlikely to play any principal role. The semi-conductor industry is often quoted as one example of the potential of the NTBF, characterized by a high degree of innovation and entrepreneurial flair. But frequently overlooked is the fact that most of the major innovations in this industry occurred not in small but in large technology-dedicated firms. It is certainly true that many of the industry’s end products find novel applications but these are not necessarily innovatory. The pilot scheme has clearly demonstrated that small firms do enjoy and can expioit some advantages, but only in some aspects of the innovation process. Given their size they normally enjoy better internal communication, can respond rapidly to technical and other market movements, and probably offer better prospects for dynamic, entrepreneurial-style management. It has also exposed lack of management expertise, the inability to establish efficient external technical and commercial communication,

and the Iack

of finance

to

fund high-risk endeavours. What is clearly required is a style of entrepreneurial management of a different sort from that which Europe has traditionally been thought to produce. While the Commission is making every attempt to rectify some of these negative much requires to be characteristics, done, especially in areas which to date have received little attention; namely, improving the climate for a better communication and total dialogue between large and small firms, and the monumental task of training and breeding a new and different style of entrepreneurial manager and management, because without these skills the optimism currently expressed about small firms will surely evaporate. Money

and advice

Technological entrepreneurship is an idosyncratic act having its roots in many factors. While there is much doubt as to whether or not governments can create as such, bearing in mind ‘entrepreneurs’ the deficiences in managerial and entrepreneurial talent which the Venture Capital Pilot Scheme has exposed, it can create an environment, favourable or otherwise, to the entrepreneurial function. It is worth noting here that small business courses in the United States are a great success, and many colleges and universities have courses on entrepreneurship. The general consensus of most of the independent research on this matter tends to agree that the most significant of these environmental factors are the availability of risk capital, easily accessible sources of technological advice, and a receptive local market for the innovative products of new technology-based firms. SMEs in general are thought to have an important role to play in industrial rejuvenation, and in this respect it would appear that the Commission is correct in trying to foster the entrepreneurial NTBB. Although the Venture Capital Pilot Scheme ended in September 1983, the EuropeanVenture Capital Association should be able to continue in a similar way. The purpose of this association will

be to provide for the examination and discussion of management and investment in venture capital in the EC, with a view to developing and maintaining a venture capital industry as a means of financing innovation with equity and establishing high standards of business conduct and professional competence. Having previously referred to the record of large firms in innovation, it remains to be said that the ability of the large national and multinational firms to be more radically innovative and to exploit the benefits of ascendant technologies, both products and processes, is the surest route out of these recessionary times, since, as the venture capital pilot scheme has demonstrated, Europe is without a truly strong tradition of independent technological entrepreneurship. As noted earlier the Commission should be striving to improve rapport between the likes of the Philips’ and GEC’s of this world and fledgling NTBFs in order to marry the benefits of the small entrepreneurial type of firm with the resources of large corporations. This practice has been recognized in the United States. For some time a few of the largest firms have been experimenting with and adapting their internal structures to accommodate and stimulate entrepreneurship from within. Others have resorted to the spin-off small firm, the so-called ‘inside-outside’ venture. There is little sign at present that the Commission is aware of this route to enhancing competitiveness.

Forward Industrial European ing-up

Planning of Restructuring Community:

Always

catch-

Almost every country has an industrial policy, an industrial strategy which may be more or less explicit. Planning, for example, may range from the highly dir&&e of which the French example is the most widely quoted, to the denial of any highly developed policy as in the United States. Japan’s industrial policy is quite explicit, economically rational and internally consistent. And although it is

29

certainly neither remarkable nor exceptional it continues to arouse considerable interest, if not controversy. It is probably true to say that this interest is derived from Japan’s success as an exporting nation and major manufacturing power, generally on the basis that emulation will bring success. However, most of the discussion of Japan’s industrial policy tends to dwell on the operation of the policy rather than the policy itself. Un-, fortunately, those who hope to come to a solution by this method find in the case of Japan no clear or immediately recognizable answer to the question of the importance of industrial policy to Japan’s success. What is, however, immediately obvious is the role of industrial adjustment and forward planning in Japan’s industrial policy and the Iack of it in the %atchingup’ policies of the Commission. Since the early 197Os, there has been a decided shift in Japan’s forward planning from the pursuit of high economic growth rates and export promotion to that of more moderate growth. True, long-range strategic planning in Western Europe tends to be either treated with scorn or to become something of a fetish, as practiced by many US firms and consulting groups. The forward planning of industrial restructuring and its implementation are introduced long before any impact is felt, and should not be confused with industrial assistance policies which are intended to help with industrial adjustment to ease the process and minimize the economic and social consequences to the industries involved, the workers displaced and their communities. With its emphasis on what is politically and socially acceptable, the Commission’s industrial strategy contains more of the elements of industrial assistance than industrial restructuring as a result of forward planning. Forward planning of industrial restructuring has been the most important component of Japan’s industrial policy during the entire post-war period, and does come in for some strong criticism especially of the extent of the close government-company co-operation which such a policy requires, and the

SO

assistance measures given to selected firms and industries. Unfortunately, there is no mechanism in the EC’s industrial strategy for the forward planning of industrial restructuring and, given the higher value added of high technology products, no real formula for assessing the adoption of new and ascendant technologies in products or processes throughout EC industry. There is no practicalforward-looking scheme to monitor and assess technological developments or to keep industry informed of these, although the need has been acknowledged. Technology forecasting Assessing the trend and development of new technologies and the new products or processes likely to be developed is a tried and tested component of industrial restructuring in Japan. One of the methods by which the development of technology can be plotted is exemplified by a survey carried out in 1978 by the Japan Techno-Economic Society on the relative technical level of advanced countries and newly industrialized countries (NICs). Some 380 heads of technology departments in 21 industries covering 55 product categories were surveyed. The basic results are summarized below. These categories were found to be classifiable into three groups, as follows: Products requiring a high level of technology and in which the rate of technological progress is intense, e.g. computers, aircraft, medical electronics and nuclear power equipment; Products in which both the advanced countries and the NICs were found to excel: watches, cameras, measuring instruments, office equipment, telecommunications equipment, semiconductors and integrated circuits, computer peripherals and terminals, electric appliances, pumps and compressors; Products in which Europe and the United States have reached the top level of technology but in which technical progress is stagnant and in

Table 3 Product

categories

surveyed.

No.

Products

No.

Products

01 02 03

Automobiles Trucks Ordinary commercial ships (freighters, tankers, etc.) Special vessels (hovercraft, hydrofoils etc.) Railroad cars and systems Aircraft Cameras Watches Measuring instruments Office equipment (copiers, facsimiles, etc.) Nuclear power equipment Equipment for electric power generation Industrial electrical equipment General-purpose electrical devices Telecommunications equipment Semiconductors and integrated circuits Large computers Medium and small computers Peripherals and terminals Sound and image projection equipment Electrical appliances (refrigerators, washing machines etc.) Medical equipment Prime movers and boilers Machine tools Environmental equipment Construction machinery Pumps and compressors Plants (steel mills, chemical plants, oil refineries, etc.)

29

Machine parts (seals, valves, bearings, pistons, etc.) Synthetic textiles Plastics Fertilizers Industrial chemicals (organic iptermediate, etc.) Synthetic rubber Dyes and pigments Surface-active agents Parmaceu tic& Agricultural chemicals Film Girders, structural steel, tanks (steel structure) Aluminum products Aluminum refining Electrical wire Ordinary steel Special steel Glass Cement Ceramics Tires Oil refining Natural fibres Foodstuffs Construction Civil engineering Production of crude oil and natural gas

04 05 06 07 08 09 IO 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

which the NICs are rapidly catching up: synthetic textiles, plastics, industrial chemical& synthetic rubber, general purpose - electrical devices and so on. At this time, it was felt that Japan had a high technological claim on massproduced products embodying electronics technology: many of these were to be found in classification two. But in classification one, the so-called advanced fields, it was felt that Japan lagged behind both the United States and Europe. For this reason, an intense R&D effort was made in these areas from which the much discussed ‘fifth-generation computer project’ is but one example. For a country dependent on imported technology and deficient in creative science, it is understandable that Japan ‘should be making such an effort to maintain pace with competitors, but it also shows the benefit of keeping in touch

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with the users and the manufacturers if not the originators of new technologies. Now, MITI’s project Research and Development of Basic Technologies for Basic Industries, which begins from the point where theoretical or experimental innovative industrial technologies appear to be commercially feasible, takes them to the verge of commercial development then allows market forces to do the rest. Started at the end of 1981 the project will run for 10 years. There are 12 main research themes falling under three principal headings : l

l

New materials: high performance ceramics; synthetic membranes for new separation technologies; synthetic metals; high performance plastics; advanced alloys and advanced composite materials; Biotechnology: bioreactors; largescale cell cultivation; recombinant DNA;

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l

New electronic devices: super lattice intedevices ; three-dimensional hardened ICs for grated circuits; adverse conditions.

The Japan Research and Development Corporation (JRDC) also has a project under way entitled Exploratory Research for Advanced Technology (ERATO) which represents a deliberate attempt to break with Japan’s tr$itional methods of consensus by giving way to individual initiative. The research topics have been chosen because they offer the likelihood of leading to new technologies. One notable feature of the ERATO project is the inclusion of foreigners on the research teams. The provision of carefully collected information on technological change is only one of a number of ways by which the course of that change may be put to good use. Knowing which technology to pursue and the best moment to do so, how to manage the transition from one to the other, and how to prepare the firm for technological change are vital components of any industrial policy and, certainly for the time being, missing from the Commission’s idea of industrial policy.

Manpower

Policy

European Community the initiative

firms

fail to take

The experience with venture capital has demonstrated that what works in the context of industrial regeneration in one country will not necessarily work in another: venture capital practice cannot simply be transplanted from the United States to the European Community without adjustment. Similarly, the Japanese experience with industrial strategy should not be adopted lock, stock and barrel The problem for the Commission of the EC in trying to arrive at a workable industrial policy is that the advice handed out can so often be annoying and useless since it rarely helps the practical manager see more clearly. Part of the problem lies is the fact that the Commission has negligible powers of coercion and that any power it does have is increasingly being

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taken over by the Council of Ministers. The development of the EC through technological progress requires changes in the use of factors of production, including labour. The Commission’s reactions to this, and indeed, those of most member state governments, tend to be polarized between those who regard unemployment as the inevitable consequence

of technological

progress

or

its Iack, and those who believe that maximum employment must be maintained as long as possible. There is, however, a real dilemma; the Japanese have shown that technological development and comparatively full employment are not incompatible, but the workforce whose co-operation is a necessary precondition of technological change will only co-operate fully with the assurance that they will not be rewarded with years of unemployment. This is yet another reason for not neglecting larger firms. EC industry is not dominated by a few conglomerates on the scale of those in Japan, whose internal labour markets contain so many workers in different sectors that the firms themselves can offer re-training and new jobs to otherwise redundant workers. Nevertheless, large firms in the EC could do more. The training and placement of workers, which in Japan is handled though the internal labour markets of the big firms, account for much of the manpower policies of the governments of EC member states. To a lesser extent they are the concern of the companies involved. Because manpower training and employment are functions of Governments and companies, and trade unions also play an influential role, it is virtually impossible to make assurances about future empIoyment. WhiIe it is true that European firms cannot offer security of employment on the scaIe of Japanese firms, they could certainly offer more than they do at present. The ‘adaptability’ of the Japanese worker has been more important to the success of Japan’s industrial achievements than permanent employment, w
Commission’s Diagnosis Largely Correct But the patient fails to respond Upon analysis, much of the EC Commission’s diagnosis of the poor state of the Community’s industrial performance is correct, as indeed are some of the prescribed medicines. But the patient shows little or no sign of recovery and the reason lies simply in refusing to take the medicine. Although there remains new ground to be broken, especially in areas such as manpower planning, forward planning of industrial restructuring, technology forecasting, and breathing life into the statutes for the ‘European’ company which have been gathering dust for two decades now, the fundamental components of a sound industrial strategy are already in existence. There is also broad consensus concerning the objectives of such an industrial policy - creating jobs, overcoming energy constraints, and enhancing technological competitiveness - but it is seldom seen as a priority for the Commission and the Parliament to take the argument to

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where it really matters - public opinion. It is being increasingly argued that the greatest obstacle lies in the Council of Ministers. The immediate outstanding priority for the Commission is to improve its communication with the Council and to present to it the necessity of achieving many of the aims in its industrial strategy, which are broadly agreed as laudable but which for one reason or another tend to break down at ministerial level. Until the Commission is prepared to tackle governments head-on, and whenever possible to make them accountable for the negative effects of their approach, it is itself seen to be failing to meet self-imposed objectives. In many matters of industrial policy this means an end to unanimous decision-making, but that would be no bad thing. Reluctant governments should be left to their own devices. When convinced that its recommendations are correct there should be no going back for second thoughts. When it comes to competitiveness, and to adapting to and creating advanced technology, there is no such position as better late than never; those who fall behind tend to stay behind.

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