our paper should meet the following requirements:• Be approximately 2-3 pages in length, not including the required cover page and reference page.• Follow APA6 guidelines. Your paper should include an introduction, a body with fully developed content, and a conclusion.• Support your answers with the readings from the course and at least two scholarly journal articles to support your positions, claims, and observations, in addition to your textbook. The UC Library is a great place to find resources.• Be clearly and well-written, concise, and logical, using excellent grammar and style techniques. You are being graded in part on the quality of your writing.10 Building an economy:
Government planning vs.
entrepreneurial innovation
Copyright 2012. Cambridge University Press.
All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
“Reconquer the domestic market!” is a rallying cry invented by the
government in its effort to reduce France’s foreign trade deficit and
stimulate citizens to buy nationally-made products in preference to
imports.1
While globalization has opened up markets everywhere, it has also
thrown the inherent tension between government economic activism
and entrepreneurial freedom into sharp relief. We now take up crucial
questions about the proper role of government on the one hand, and
the place, indeed the very future, of entrepreneurship on the other.
In our global economy entrepreneurs are frequently competing
with companies supported and directed, and often controlled, by the
governments of the countries where they do business. It is hardly an
even match: such policies inevitably engender hidden or overt preferences for buying local products.
Clearly, state-controlled economies pose a serious challenge
to the basic concept of entrepreneurship and the ability of foreign
corporations to operate freely within those economies. By raising
barriers to international sales opportunities, they clearly increase
the inherent risks of launching new entrepreneurial businesses.
Under such conditions, it is fair to ask whether the individualistic
and “random” entrepreneurial process, gated by so many unpredictable circumstances, can be counted upon in the future as a significant economic driver. Must governments everywhere become much
more involved in supporting ambitious entrepreneurs focused on
creating new markets? This is a pressing issue for countries like the
1
J. Gee, “Five year target for France,” Data Processing, vol. 25, no. 9, November
1983, pp. 37–39.
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228 Building an economy
US, which have a tradition of free markets and limited government
support of their industries.
We opened this book on the entrepreneur in the global economy by outlining how governments involve themselves in building
local economies. In Chapter 2 we looked at the importance of entrepreneurs in creating new companies and industries. The succeeding
chapters tracked the fortunes of twelve entrepreneurs, from David
Sarnoff of RCA in the first half of the twentieth century to Lynn Liu
of Aicent at the opening of the twenty-first, as they strove to build
competitive companies in an increasingly globalized economy.
In this chapter we will ask whether and how governments and
entrepreneurs can coexist and cooperate, and explore the ramifications of that question. This covers such topics as, to what extent
will governments take on the roles of venture capitalist and entrepreneur, choosing the technologies and building the industries of
the future? In what areas is government participation most likely to
be healthy and productive? How can entrepreneurs and corporations
responding to market conditions make better decisions?
The hazards of targeting industries
To set the stage, we will review two diametrically opposed views of
economic development, as described initially in our opening chapters. They represent the most extreme positions in the argument
over industrial policy in the developed world: pure free markets versus heavy state involvement.
There is plenty of public support for an untrammeled entrepreneurial approach. Free-market advocates insist that the US government (and by extension governments in other free-market countries)
should stay out of the markets and let entrepreneurs chart their
own course. According to these proponents, “The country needs to
unleash entrepreneurs, who will only be held back by tax-funded
make-work projects.”2
2
E. Glaeser, “Detroit’s decline and the folly of light rail,” The Wall Street Journal,
March 25, 2011, p. A17.
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The hazards of targeting industries 229
Others question the efficacy of this approach. They believe that
the idea that “entrepreneurs are the foundation of the [US] economy”
is a myth, 3 and that the US and other free-market countries might
be better off with a targeted industrial policy to ensure the growth
(and protection) of domestic industries, particularly new ones based
on domestic innovations.
A better way to frame the argument is to ask the following
question. Is it realistic to believe that government planning, supported by taxpayer money, can force-feed industrial innovations into
the commercial marketplace? Can it totally replace the more chaotic
but much more flexible and dynamic entrepreneurial process?
As an approach to answering this question, it is worth keeping in mind the observations of Nassim Taleb in his book The
Black Swan,4 in which he summarizes the views of Nobel Laureate
economist Friedrich August Hayek, a famous proponent of the free
market.
For Hayek, a true forecast is done organically by a system, not
by fiat. One single institution, say, the central planner, cannot
aggregate knowledge; many important pieces of information will
be missing. But society as a whole will be able to integrate into
its functioning these multiple pieces of information. Society
as a whole thinks outside the box. Hayek attacked socialism
and managed economies. Owing to the growth of scientific
knowledge, we overestimate our ability to understand subtle
changes that constitute the world, and what weight needs to be
imparted to each such change.5
On a theoretical level, then, there are limits to what can be
done with “top-down” economic planning. Hayek suggests that any
attempt to dictate a national approach to a dynamic market will be
3
4
5
R. Foroohar, “Don’t hold your breath,” Time, June 20, 2011, pp. 22–26.
N. S. Taleb, The Black Swan (New York: Random House, 2010), p. 180.
See F. A. Hayek, The road to serfdom (Chicago, IL: The University of Chicago
Press, 1994), for a statement of his positions.
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230 Building an economy
unsuccessful in the long run. Instead, the most productive strategy
for fostering economic growth is likely to be the creation of national
policies that focus government on what it does best, leaving private
capital and entrepreneurs to areas where they function more efficiently. We will clarify the dividing line between these two spheres
by looking at some examples of government actions and their
outcomes.
Government as entrepreneur
On the face of it, it seems like a good idea to have the national government fund the creation of industries around promising technologies in the hope of expanding the economy and building exportable
products. Proponents of this approach envision using subsidies and
other incentives to accelerate the growth of the chosen industries.
This would be done in partnership with private industry if possible –
and without it if private funding is not available.
This may sound familiar because it is an old idea. We encountered it in our discussion of Colbert, who targeted growth industries
for seventeenth-century France. China runs a modern version of the
strategy.
Although this approach can achieve quick success, it usually
runs into trouble later on. The availability of “easy” state money
spawns enterprises with uncompetitive cost structures. They become
too far removed from the discipline of the competitive marketplace
to achieve profitability. Bereft of entrepreneurial management, companies built on this model risk becoming permanent wards of the
state. This actually happened in Colbert’s France.
There is a bigger problem with this approach: it too often fails,
especially when newer technology is introduced. We can understand
why when we contrast industrial development with infrastructure
and defense, two functions crucial to economic growth and stability
that governments can carry out quite effectively.
Infrastructure (roads, airports, and water and power utilities) is
convenient for the citizenry – and absolutely necessary for industrial
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The hazards of targeting industries 231
development. Likewise, defense programs uphold national security – and also spur the growth of industry by underwriting R&D
programs. Even the most radical proponents of limiting the power of
government would agree that both of these activities are the rightful
province of the state. Governments are the only entities with the
resources to plan and finance such sweeping programs. They are also
dealing with known quantities: it is relatively easy to project infrastructure requirements and forecast future defense needs.
Deciding which new innovative industries to subsidize, on the
other hand, is a far less certain undertaking than determining when
and where people will need roads and sewers. It is nearly impossible
to predict future market trends and competitive threats with any
great degree of accuracy. As a result governments are notoriously
poor at picking winning new commercial industries for long-range
development. Such attempts have often generated disappointing
results.
Long-term planning, longer odds
There is another reason why governments have such a poor track
record in planning technology industries: the nature of their
decision-making process. They are not the only entities affected by
this shortcoming. It is common in large corporations as well.
As can well be imagined, thousands of planning meetings
take place every day in large organizations around the world, with
committees deciding economic and technological matters large and
small. Whether these meetings occur in the government bureaucracies of planned economies or in the boardrooms of large corporations, one thing is certain. Lone visionaries, even if present, have
little chance to influence the ultimate decision. In addition, most of
the people in the room will be far removed from the actual technologies under discussion.
Yet funding decisions must be made, often long in advance.
And unfortunately what appears to bureaucrats or board members to
be the low-risk approach has a good chance of being the wrong path
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232 Building an economy
to take. That is why so many radical innovations come from individuals or small independent teams. They have the freedom to assume
risks of their own choosing and the financial freedom to fund programs that balance high risk against high rewards. They also have
the flexibility to modify their decisions quickly, without waiting for
the next budget cycle.
Planning industrial development is no task for the faint of
heart. But countries have to place their bets and take their chances
in the competitive global market. The question is how do governments in open economic systems like the US establish policies and
fund programs that lead to innovative businesses, without trapping
themselves in dead ends.
One would think that a country like China, which has had
great success with a planned economy, would have an answer. But
even China understands the difficulty of long-term industrial planning. For example, its first five-year plan of 1951 called, among other
things, for 6 million tons of cement, 5 million tons of pig iron, and
4.2 million tons of steel. These objectives were achieved because the
state paid for the construction of the plants required to produce these
products, and the technology was acquired from foreign sources.
But things have changed since then. In what is now the second
largest economy in the world, the multitude of industries and priorities are too complex to be sorted out by state planners. Now China’s
five-year plans target only industries deemed to be of major strategic importance. Hence, the twelfth plan (2011 to 2015) puts great
emphasis on broader issues such as employment, energy efficiency,
increased funding of research and development, the expansion of
top-quality universities, and environmental improvements.6
In spite of the pitfalls of planning by committee, critics of
the free-market model worry that the transition from innovation to
commercialization, when paced by the capitalist profit motive, is
too slow in countries such as the US. They call for a more focused
6
“A new epic: China’s new five-year plan is at odds with itself,” The Economist,
October 23, 2010, p. 88.
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The hazards of targeting industries 233
national industrial policy helped along by government funding,
which they feel is essential to accelerate the pace.
People who advocate this approach are basing their recommendations on the rapid growth of China and its perceived ability to
quickly build industries practically from scratch. In their enthusiasm they tend to gloss over the gap between China’s more predictable path of importing existing technology as opposed to the chancy
nature of developing innovations.
In defense of government planners, however, they may not be
much worse at forecasting the future of transformational technology than the private sector. We will have occasion below to judge
the efforts of analysts and technology experts outside the government in predicting which innovations will have a serious impact on
the economy. Nor should one assume that government investments
in technology never deliver positive results. We will also highlight
cases where government involvement has produced truly transformational technology.
However, history is littered with the remains of failed statefunded industrial initiatives.7 One such case is especially interesting
in that it concerns France, a centuries-long bastion of state planning.
Targeting growth industries: A government goes it alone
In 1983, in an effort to develop new growth industries that could
compete with foreign firms (see the quote that opens this chapter),
the government of France launched a five-year, $20 billion program
to stimulate the development of domestic information technology
companies. Its program targeted computers, semiconductor components, and industrial software. At the time all of those fields were
dominated by the US.
The program also included funding for the expansion of
Minitel, a new videotext service pioneered in France. Minitel used a
7
Josh Lerner of the Harvard Business School discusses salient examples in
Boulevard of broken dreams (Princeton, NJ: Princeton University Press, 2009).
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234 Building an economy
combination of television and the telephone system to interactively
provide information to homes and businesses across the nation.
It was not surprising that France should target specific industries for investment. This approach was consistent with the country’s history of state industrial planning and financing, starting
with Colbert in the seventeenth century. What was surprising was
the program’s lack of success.
• French computer companies were never able to keep pace with the rapid
international progress in the computer industry. The national champion,
Groupe Bull (named, ironically, for its Norwegian founder Fredrik
Rosing Bull), was nationalized in 1982 and re-privatized in 1994. It has
undergone many takeovers, mergers, and name changes, including joint
ventures and ownership relations with overseas companies General
Electric, Honeywell, NEC, and Motorola. Now called simply Bull, it
remains a marginal competitor in need of state support.
• During the semiconductor industry’s greatest growth period,
between 1980 and 2000, France remained a minor player. Thomson
Semiconducteurs, the leading French chip company, merged with
Italy’s SGS Microelettronica to form SGS Thomson in 1987, but sold its
ownership share in 1994. Meanwhile Japan and Taiwan joined the US as
major global chip suppliers.
• France developed many niche players in industrial software, but the US
raced ahead, and Germany’s SAP proved to be a world-class enterprise
software innovator.
• Although Minitel was a truly innovative service and did achieve some
popularity in France, it was eventually overwhelmed by the success of
the Internet – a technology unknown in 1983. The obsolete service was
officially terminated in 2011.8
Among many explanations for these disappointing results, one
key factor, we believe, was insularity. France’s program focused on
funding domestic companies to execute the turnaround of the computer industry. Its intent was to boost French industry by relying as
much as possible on French resources.
8
M. Cochester, “France Telecom will bid adieu to Minitel,” The Wall Street
Journal, July 25, 2011, p.B4.
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The hazards of targeting industries 235
Another factor was the program’s reliance on established (one
might say ossified) providers. No new entrepreneurial ventures were
in the equation. It was a state initiative, rife with the bureaucratic
malaise that such programs commonly entail. The French authorities ignored the example of Colbert, the finance minister who had
vigorously recruited foreign entrepreneurs to bring in new technical
talent and start new companies in seventeenth-century France.
Contrast this failed effort with what some other countries were
doing during the same period, and with the results they achieved.
• Entrepreneurial activity in the US, substantially funded by venture
capital, led to an explosion of new businesses, many of which became
world leaders in their categories.
• During the same period Japanese companies imported foreign technology
under license to get started. They then used domestic product
development to fuel the growth of world-class businesses such as Fujitsu,
Toshiba, and NEC.
• Taiwan’s semiconductor industry began with foreign technology, with
RCA a major licensor, giving TSMC and other semiconductor companies
the foundation they needed for success.
Targeting growth industries: Government teams
with the private sector
When state initiatives to develop new industries fail, it is the taxpayer who foots the bill. Where the government has recruited private capital and entrepreneurs to join such initiatives, however, the
economic effects are amplified. Entrepreneurs and their investors
are left stranded along with the taxpayers, potentially affecting the
availability of funding for other, more promising innovations. Three
US government “clean energy” programs illustrate how this can
happen.
Clean energy is currently one of the most popular areas for investment, so it was easy to persuade private investors and companies to
participate. All the programs were targeted at reducing fossil fuel consumption and controlling greenhouse gas emissions, though in very
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236 Building an economy
different ways. Two programs addressed the electrical utility industry,
while the third subsidized sales of hybrid ele…
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