The writer, professor at UCL, will deliver the Penrose Conferences in Soas this week
Industrial strategy is experiencing a renaissance. Triggered by multiple crises – financial, climate and health – countries around the world are investing heavily in promoting economic growth and resilience. The war in Ukraine, with its impact on supply chains, made this even more important. The EU, for example, is investing over €2 billion in economic recovery and transformation, while President Joe Biden is investing over $2 billion in a “Modern American Industrial Strategy”. Similar investments are being made from Japan to Latin America.
Last month, Biden’s chief economic adviser compared the scale of investment and ambition behind the new US industrial strategy to the Apollo space program. But this ambition will only be realized if the strategy is designed to foster a new type of economic growth. In this respect, the conditions that companies must fulfill in order to receive public funds are crucial.
If they are to “build back better” – rather than return to the crisis-ridden status quo – growth must be inclusive and sustainable. To achieve this, governments must strike a new deal with the private sector, raising the bar on what to expect in return for public funding. This requires approaching these partnerships as an opportunity to maximize public value – to share the benefits as well as the risks of investing in innovation and growth.
There are four types of conditions that governments should consider attaching to purchases, grants, loans and tax incentives.
Where affordable and equitable access is a policy priority, publicly funded products and services should be priced accordingly. For example, the AstraZeneca Covid-19 vaccine, developed with the help of government investment in R&D, manufacturing and advance sales, included provisions to keep prices low, limit profits during Covid and ensure knowledge sharing for public health. This contrasts with the trend of monopolistic pricing in the pharmaceutical industry and strategic patents to block competitors.
Conditions can also shape the goals – or “missions” – behind the investment and impose standards on companies. Decarbonizing existing industries and scaling up green innovation and growth is a priority. To address the climate crisis, we need enterprising states to shape and create markets. In the United States, clean energy is at the center of recent investments, while EU stimulus funds are geared towards climate and digital inclusion goals.
To achieve these goals, it is not enough to invest in specific green technologies or industries. The conditions associated with a just green transition should apply to all industrial strategy investments: for example, requiring new manufacturing capacities to minimize carbon emissions and create jobs in line with labor standards.
In addition, receipt of public funds should be conditional on sharing a portion of royalties, equity or intellectual property with the government. This would allow the state to take a portfolio approach to investments, knowing that some will succeed and others will fail. Had the US government acquired shares of Tesla in exchange for its initial $465 million in funding, those revenues could have been reinvested in other businesses aligned with green transition goals.
Finally, governments can incentivize companies to channel their own investments into productive activities. Biden’s Chips and Science Act, which aims to spur U.S. semiconductor innovation and manufacturing, includes “safeguard” provisions that prohibit the funds from being used for stock buybacks. However, it does not yet prohibit companies that receive chip law funding from engaging in such takeovers – a loophole that has led to calls for tougher rules.
The companies that lobbied for the law have already spent billions on stock buybacks — Apple, Microsoft, Cisco and Google collectively spent $633 billion on it between 2011 and 2020, for example. Strict conditions could require that future profits be reinvested in research and development and the training of the workforce.
The industrial strategy of many countries is still being developed. The flea law, in particular, offers an immediate possibility to impose conditions. Its existing “guardrail” requirements are a good place to start. But whether this law is a catalyst for green and inclusive growth – and not “corporate welfare” – will depend on the conditions set out in the notices and financing contracts.
Without conditions, public money invested in industrial strategies will dissipate into corporate and shareholder profits with only marginal public gain. Getting these investments right should be a priority for governments around the world.
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