Beyond IP (industrial policy, that is)

Over at the Progressive Fix, Stephen Ezell has a great piece on The Economist’s Strange Attack on Industrial Policy — his riff on a major article in the Economist. One of the more interesting points he makes is the double standard we apply to government sponsored innovation and private sector efforts:

The Economist frets that governments aren’t very good at identifying and investing in strategic emerging technologies. In impugning governments’ ability to pick winning technologies, the article cites failures such as France’s Minitel (a case of a country picking a national champion company) and argues that “Even supposed masters of industrial policy {like Japan’s MITI, or Ministry of International Trade and Industry} have made embarrassing mistakes.” But this would be tantamount to pointing to the spectacular failure of Apple’s Newton and arguing that Apple’s no good at innovation. The Economist seems to suggest that if governments failed 80-90% of the time in picking technology winners (and ITIF actually thinks their success rates are much higher), then they must be pretty incompetent at the effort and should stop trying altogether.
But if private corporations followed that advice, then we would have no innovation whatsoever. Indeed, research by Larry Keeley of Doblin, Inc. finds that, in the corporate world, only 4 percent of innovation initiatives meet their internally defined success criteria. More than ninety percent of products fail in the first two years. Other research has found that only 8 percent of innovation projects exceed their expected return on investment, and only 12 percent their cost of capital. Yet companies have to continue to try to innovate, even in the face of these long odds, because research finds that firms that don’t replace at least 10 percent of their revenue stream annually are likely to be out of business within five years. The point is that just because innovation is difficult and success rates are low, this does not mean that corporations, or governments, should quit trying–or that their successes, like the Internet, can’t be spectacularly successful and have a profound impact on driving economic growth.

In fact, government sponsored investments in R&D have a pretty good return on investment — as I’ve written about before.
In fairness to the Economist, they do recognize that government programs can work:

The lessons of the past are clear. First, the more it is in step with a national or local economy’s comparative advantage, the more likely industrial policy is to succeed. Drives to spur high-tech entrepreneurship in areas of heavy manufacturing, for instance, face a struggle. According to Mr Lin of the World Bank, following comparative advantage has produced clear successes for some developing countries. Chile, for instance, moved from basic industries such as mining, forestry, fishing and agriculture to aluminium smelting, salmon farming and winemaking thanks to a number of government initiatives.
Second, policy is least prone to failure when it follows rather than tries to lead the market. Curiously, Sheffield Forgemasters might have been an example of the former: Westinghouse, an American company, had suggested to the Yorkshire firm that it should try to break Japan’s monopoly on ultra-large nuclear steel forgings.
Third, industrial policy works best when a government is dealing with areas where it has natural interest and competence, such as military technology or energy supply. The worst problems unfold when politicians intervene in purely private domains with short-term goals, bailing out old firms to save jobs or spending lavishly on white elephants. The present round of industrial policy will no doubt produce some modest successes–and a crop of whopping failures.

Echoing Ezell’s critique, if some successes balanced with some failures was the outcome, then the effort might be worthwhile. The trick here, as I’ve mentioned earlier, is to fail quickly and cheaply. The private sector has generally learned that lesson. We need to be able to let the public sector do likewise.

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