Transcript No Slide Title

Mr. Massimo M Beber
Fellow in Economics
Sidney Sussex College
Cambridge CB2 3HU
[email protected]
http://people.pwf.cam.ac.uk/mb65/mpes
European Economics
Lecture 4
INVESTMENT, INNOVATION
AND CORPORATE CONTROL
(Provisional Version: last updated 28th October 2007)
M.Phil. in Contemporary European Studies 2007/8
©Massimo M Beber 2007
Lecture Outline
• A “European Economy” implies integrated production:
the combination of labour and capital inputs on a EU,
rather than national, scale through FDI
• The efficiency capital in European production depends
on several crucial dimensions, to be examined in turn:
– Investment and capital accumulation
– Technical change, innovation, diffusion
– Competition policy
I: Accumulation and Innovation
• Without technical change, investment is subject to
diminishing returns; capital therefore should flow to
where it is scarce (from rich to poor countries/regions)
and lead to convergence.
• Technical change can delay/prevent diminishing
returns: a virtuous circle (high investment, successful
innovation, higher savings, higher investment) can lead
to divergence, or at least to convergence clubs.
• Integrated production is therefore crucial not only to
the aggregate performance of the European Economy,
but also to its cohesion.
Basic Definitions
• MNE (multi-national enterprise): business including
permanent establishments producing value added in
more than one jurisdiction
• FDI (foreign direct investment): expenditure resulting
in substantial control of such a permanent
establishment abroad through one of the following:
– Greenfield investment
– Brownfield investment
– M&A (mergers and acquisitions)
Basic Explanations – the OLI Model
• Cross-border expansion: FDI vs exports, licensing,
franchising
• FDI the preferred strategy in the presence of
advantages such as
– Owner-specificity: reputation, tacit knowledge…
– Localization: different factor endowments, infrastructure,
business/tax culture, political stability…
– Internalisation: predictability through vertical integration,
avoidance of incentive problems (adverse selection, moral
hazard), tax planning…
Basic Statistics
EU15
% World FDI, 1998 Inward Stock, %
GDP
Inflows Outflows 1980
1997
36
60
6
15
USA
50
21
3
8
Japan
1
4
.3
.6
Source: Hansen (2001).
Memorandum: MNE’s intra-company trade accounts for 40% of world trade
The Historical Background
• Capital mobility one of the “four freedoms”
• But little progress in the 1950’s and 1960’s
– General commitment to the “mixed economy”
(direct production of services; nationalised
industries);
– “commanding heights” (timing of investment;
control over the destination of industrial subsidies);
– Residual protection provided a painless way to
subsidize “national champions”
“Old” Industrial Policy
• Discriminates between different economic activities
• Impacts upon the economy’s allocation of resources
• Uses a variety of instruments
–
–
–
–
–
Subsidies to investment
Privileged access to credit
Protection and government procurement
Acceptance or promotion of restrictive practices
Nationalisation
• Sees tension between competition and competitiveness
The Rise of Integrated Production
• National protection undermined by the shocks of the
1970’s
• Business demands for integration build up from
Davignon’s “Round Table” to the 1985 White Paper
• Trade integration in principle an alternative to
production integration (Kindleberger’s “investment
creation/diversion” classification)
• In practice, both have been stimulated by “1992”
“New” Industrial Policy
• Also known as “Industrial and Competitiveness
Policy”
• Broadly defined to include “acts and policies of the
state designed to improve a country’s economic
performance”
• “Horizontal” or non-discriminatory amongst sectors
• Reflecting the neo-liberal twist in the philosophy and
ambitions of economic policy since the 1970’s
The Single Market and FDI
• “Investment creation” explains the increase in inward FDI from
the rest of the world;
• “Investment diversion”, however, is inconsistent with the
observed rise in intra-EU FDI
• Economies of scale inside the Single Market less important than
–
–
–
–
–
–
Vertical segmentation
Preservation of market power
Retrenching to core functions
Reduction in sales uncertainty by closer presence in export markets
Transport costs
Strategic motivations (e.g. perceived first-mover advantages
Country Distribution of FDI
• Significant variations over time, both across sectors
and countries
• Overall, strengthened position of the smaller member
states as host countries to inward FDI (Finland,
Sweden, Denmark, Ireland; the CEEC), especially
when FDI measured as a share of total domestic
investment
• When measured as share of total FDI, core countries
still play a major role (Germany, France, UK, Italy)
Sectoral Distribution of FDI
• Negligible role of agriculture (until Eastern
enlargement, net disinvestment);
• Services accounting for over 2/3 of total FDI, and
likely to increase further as public services reform
“marketises” further services in health, education,
utilities…
• Anomalous pattern in manufacturing, with the bulk of
FDI involving relatively low-tech sectors
Cross-country patterns
• Analysis of EU-15 cross-country FDI flows in the
1990’s did not support the basic neoclassical
prediction, whereby capital (net FDI outflows) move to
where it is scarce;
• Rather, there is some evidence that countries of similar
income levels have intense two-way (gross) FDI
flows;
• Also, gross FDI is higher where bilateral trade is more
intense
II: Science and Technology Policy (STP)
• Why having a STP at all?
– Uncertainty
– Indivisibility
– Inappropriability
• Why fearing policy failure?
– Public choice
– Legitimacy and evaluation difficulties
– Conflict with competition criterion, both internally and
globally
Historical Background
• EEC Treaty: elements, but no framework: Euratom the
main exception.
• The poor precedent of the JNRC (Joint Nuclear
Research Centre)
• More independent collaborations since the 1960’s
– Concorde
– Airbus
– ESA (the European Space Agency, launched in 1973)
• January 1974: Council decision on launching a
European STP overtaken by stagflation/Eurosclerosis
One Market, One STP?
• By the early 1980’s, business pressures for a single
market also imply a co-ordinated approach to science
and technology
• In 1979, Davignon initiative for an industrialists’
“Ronnd Table”
• ESPRIT (European Strategic Program of Research in
Information Technologies) runs successfully in 1982-7
• In 1987, the SEA’s Title VI establishes the aims and
structure of a EU STP: central role of the 5-year
“Framework Programme”
Legitimacy and Effectiveness
• Evaluating STP raises a number of issues:
–
–
–
–
Ambit
Horizon
Additionality
Counterfactuality
• Yet for STP to be sustainable at the EU level, its legitimacy
must be based on demonstrable effectiveness – to an even
greater extent than in the case of national STP’s;
• In practice, EU STP – including both Framework Programme
and ESA allocations – still accounts for less than 15% of total
EU STP spending
Unresolved Tension in EU STP
• Pre-competitive research/applied research
• Euro-networks/clusters vs. global IICAs (InterInstitutional Collaborative Agreements)
• STP as a redistribution policy (resentment in rich,
stagnant economies if STP disseminates their
technological advantage to faster-growing new
members)
• The primacy of NSI’s (National Systems of
Innovation)
III: Competition Policy
• Setting standards of conduct rather than achieving specific
goals
• Anchored in the principles of market capitalism
• Direct Function: to guarantee the economic efficiency of
integrated production within the European Economy
• A “meta-policy” expanding (industrial and R&D) and
informing (media, telecoms) EU competencies
• Indirect Function: by preventing abuse of market power by
business, to maintain and enhance public support for the
integration process
Historical Background
• A core requirement from the start: the Spaak Report
warned against
– Market segmentation
– Collusion to restrict output/technological change
– Abuse of Dominant Position
• A legalistic approach
– Business Conduct: Art 81 (1) and (3), 82;
– Market Structure: the 1989 Merger Control Regulation
– Public Relationship with Industry: Art 86-88
A Competitiveness Renaissance
• As late as the early 1990’s, “an afterthought”
• a raft of big ticket cases raised the profile of EU
competition policy
– Nestle/Perrier (1993), Boeing/McDonnell Douglas
(1997), GE/Honeywell (2001)
– Microsoft, the Hoffman-La Roche vitamin cartel
– EdF
Current Issues in EU Competition Policy
• Progressive move from legalistic to economic
philosophy in assessing effective competition,
reflecting both greater technical competence and a shift
to “market optimism”
• Modernisation and streamlining of decision-making, to
keep pace with greater dynamism in market structures
(M&A, Schumpeterian monopolies in new products)
• Enforcement, especially of the 1999 Regulation on
State Aid, in the face of persistent member state
support of strategic/politically sensitive national firms
and industries.
Conclusions
• Regionally integrated production is a relatively recent
stage in European economic integration (post-SEA)
• FDI decisions are complex, and the observed patterns
generally do not fit a simple convergence scenario
• EU-wide public governance - science and technology
policy, and competition policy - have significantly
expanded and changed in philosophy and practice as a
result