Discuss the theoretical rationale for industrial policy in the EU. To what extent is there a need for policies at both the EU level and member state levels?

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Name: Upesh Patel

Reg. No: 0045496

Course: ES3931

Competition, Industrial and Technology Policy in the EU

Discuss the theoretical rationale for industrial policy in the EU. To what extent is there a need for policies at both the EU level and member state levels?

        Industrial policy has an important part to play in the economics of the European Union. Before discussing the EU’s approach to this issue, it is important to define what we mean by industrial policy. One of the broader definitions of industrial policy states that it “embraces all acts and policies of the state in relation to industry.” (Bayliss and El-Agraa, 1990) However, industrial policy is not merely concerned with only manufacturing sectors, for example, a policy to support a service activity, like a bank or a airline, qualifies as an industrial policy. Therefore, a broad economic definition of industrial policy might be “all acts and policies of the state to alter the allocation of resources between sectors.” (V. Curzon Price, 2001) Clearly, there is a contrast between industrial policy and competition policy. Whereas competition policy is concerned with preventing firms engaging in uncompetitive practices (such as abusing market power by charging high prices), industrial policy encourages firms to do what they otherwise would not do. For example, if firms were left to their own wishes, many of them would not invest in research and development because of the extra costs they would incur. However, industrial or technology policy would provide incentives, such as subsidies on research expenditure, to ensure that research and development does actually occur. It is clear that industrial and technology policy is primarily concerned with making firms behave so they contribute to the objectives of society. Whereas competition policy is static and is interested in private gain, industrial policy is more dynamic and concerned with social gain.

        Why do we need industrial policy? There are many theoretical reasons given for its existence. Firstly, industrial policy is used to increase competitiveness. By this, we mean increasing the competitiveness of the EU internationally, particularly against North America and South East Asia (i.e. with respect to “triadic” competition), as well as increasing competition at a lower level, between member states. Competition is considered to be a vital feature of economic systems by many economists, including Devine, who states, “international competitiveness has become a necessary condition for any modern, dynamic economy.” (P. Devine, 1996) It is therefore important to use industrial policy as a means of increasing competitiveness inside the EU, and of the EU as a whole. Communities with competitive economies are said to benefit from a virtuous circle of cumulative causation, whereas those with uncompetitive economies suffer from a vicious circle. (P. Devine, 1996)

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        There is a neoclassical rationale for the existence of industrial policy, aswell as for competition policy, however, with industrial policy, the emphasis is built around market failure. Therefore, industrial policy is used to correct certain types of market failure. One of the main types of market failure that can be corrected is the existence of externalities. If firms were left to their own devices, they would not undertake enough research and development. As a result, the level of research and development in an economy would be less than the socially desirable level. The reason for this underinvestment in research and ...

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