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Competition and Industrial Policy: an (in)possible co-existence?

Two policies from the interventionist tool kit:

More than 5 years have passed since the word ‘crisis’ has made its way into our day-to-day vocabulary. But more than just simply contributing to the depiction of reality, the persistence of this word in daily news has contributed towards the creation of expectations in voters and policymakers that has propelled a swing in the pendulum of interventionism. Today, governments feel an increased legitimacy in intervening in the markets, doing the once unthinkable move of justifying intervention on the grounds of strategical, political, moral, (etc.) motivations, instead of using as a justification the sound grounds of economic theory, namely the argument of market failure correction[1].

Being intervention the word of the day, two types of policies stand out from the policymaker’s interventionist tool kit, namely industrial policy and competition policy. Industrial policy refers to public policy aimed at the creation of competitive advantages[2], via the alignment of the ‘new’ endowments of the knowledge economy towards the enhancement of innovation capabilities and competitiveness. Accordingly, more than just policies directed at industry, industrial policy consists in ‘…restructuring policies in favour of more dynamic activities generally, regardless of whether they are located within industry or manufacturing per se.’ (Rodrik, 2007:100).

Competition policy concerns policies whose purpose is to promote competition. Accordingly, it can be defined as those policies that are ‘…concerned with the creation and maintenance of market power…’ and whose intent ‘…is to prevent firms from creating, enhancing, or maintaining market power.’ (Church and Ware, 2000:12). Within the EU, four practice areas of competition policy standout: Anti-Trust (abuse of dominant position), Anti-Competitive conduct (Collusive behaviour), Merger Control and State Aid. The last of these being of particular importance in what concerns possible government intervention, as it aims at ensuring that state intervention does not translate into ‘…an advantage in any form whatsoever conferred on a selective basis to undertakings by international public authorities’ (DG Competition, 2013).

The origin of an uneasy relation:

Despite stemming from the same ideological spectrum – i.e. from the same policy tool kit – industrial and competition policy definitions strongly differ, hence hinting a problematic co-existence. Such uneasy relation derives from the different objectives to which each of these policy types aim. Indeed, industrial policy’s aim at creating a competitive advantage through state intervention can be perceived as incompatible with the competition policy’s aim at levelling the competition field and ensuring that government action does not alter, in any significant manner, the competition conditions under which firms operate.

By acknowledging that the conflictive nature between these two policy types derives from each concept’s genesis, can we conclude that during these interventionist times the policymaker is doomed to choose between either one policy type or the other? Is there no possible way by which the policymaker can attain the simultaneous benefits of both industrial and competition policy?

Why can’t they be friends?

But they can! The extrication of the interventionist policymaker from the uneasy position of choosing between industrial or competition policy is actually possible. Indeed, as in many things in life, the solution can be found on one hand in the balance between the two policy types and on the other hand in the perspective.

In what concerns the balance between industrial policy and competition policy, emphasis must me made on the consideration of the context and characteristics of the county. As an example, lets assume that the relevant characteristic of the country is its development stage. Here, depending on the development level, the balance between industrial and competition policy can vary. For instance in a developing country, where markets are characterized by lack of supply capacity and relative few operating firms, it can be argued that the application of competition policy, despite clearly evidencing government intervention, would probably translate into little social benefit, as the problem the country faces is not likely to be that of competition but of capacity. Accordingly, the policymaker’s concern should be first with the deployment of industrial policy by means of creating critical capacity and competitive advantage, and only subsequently concern on the level of competition within the market. In other words, the policymaker ought first to focus on the creation of the market and only after worry on how the market is functioning. To illustrate this point note that, as highlighted by Chang (2003), the 1890 Sherman Antitrust Act was only introduced when the USA was already among the frontrunners of the development race.

In what concerns the issue of perspective, it is appropriate to highlight that, from a competition policy point of view, the practice often preached within national borders differs substantially from the one implemented in the international arena. Prohibited practices from the standpoint of competition law, such as dumping, abuse of dominant position, etc., tend not to raise alarm to competition authorities when practiced by national champions in the international markets – the natural exception being international practices within special economic zones such as the EU or those practices that go against WTO rules. Accordingly, to a large extent from a national perspective, the implementation of industrial policy towards enhanced competitiveness of national champions in the international arena can be in line with the simultaneous application of competition policy within the country, thus implying that both policy types can coexist. All in all, coexistence between industrial and competition policy is possible by means of adopting both the right balance between policies and the right perspective.

Tancredo Duval

References:

Chang, H., (2003) Kicking Away the Ladder. London: Anthem Press.

Church, J. and Ware, R. (2000) Industrial Organization: A Strategic Approach. McGraw-Hill.

Cimoli, M., Dosi, G., and Stiglitz, J. E., (2009) Industrial Policy and Development. Oxford: University Press.

DG Competition (2013) State Aid Control – Overview, webpage accessible at:

http://ec.europa.eu/competition/state_aid/overview/index_en.html

Porter, M., (1990) The Competitive Advantage of Nations, Hampshire: Palgrave Macmillan.

Rodrik, D., (2007) One Economics Many Recipies. Oxford: Princeton University Press.


[1] Note however that the justification for government intervention solely on the grounds of ‘market failure’ is highly contested, as highlighted in Cimoli et al (2009). Indeed, ‘In a profound sense, when judged with standard canons, the whole world can be seen as a huge market failure!’ (2009:20).

[2] For a definition on competitive advantage see Porter (1990).

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Author: studentnovasbe

Master student in Nova Sbe

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