It Is Important to Offer a Total Package of Innovation-Friendly Policies
Questions & AnswersEuropean Industrial Policy – What Should Europe Tackle Next?
To judge by recent discussions about European industrial policy, Europe has been slow to adopt new digital technologies and is facing terrifying competition from China.
Christian Rammer, the deputy head of the “Economics of Innovation and Industrial Dynamics” Research Department at ZEW, tells us whether Europe’s industrial sector is in as bad shape as conventional wisdom suggests and what the EU can do better in the future.
The EU increasingly sees China as a rival in areas that underpin the growth of many industrialised countries, such as information technology, artificial intelligence and energy-efficient vehicles. Should Europe’s economy be afraid of the Middle Kingdom?
China has become an incredibly important market for European industry. Demand from China has been and continues to be a major economic pillar for the EU economy, while European consumers benefit from cheap Chinese products. At the same time, China has invested heavily or acquired controlling interests in many European companies. Moreover, China’s investment in cutting-edge technology and its focus on crucial, future-shaping issues offer new opportunities for cooperation. Modern industrial production requires specialisation and a narrow division of labour. As Chinese companies produce more high-tech goods, they need more high-tech inputs, and producers in Europe can benefit from cheap and high-quality intermediary products made in China. In the medium term, this intra-industrial trade will lead to productivity gains – and rising prosperity – for everyone involved.
What should the EU do about China and global competition to strengthen its industrial competitiveness?
The strength of Europe’s industry ultimately comes down to innovation. This involves not only developing new technologies and new products, but also improving services, creating more efficient and better organised processes and exhausting the possibilities of digitalisation. Nation- and EU-based programmes to promote innovation often focus on new technologies. But it is also important to offer a total package of innovation-friendly policies that keep in mind user needs and societal conditions with regard to education, infrastructure, bureaucratic regulations and open markets.
China’s state-owned companies have ballooned into seemingly all-powerful economic giants in various industries including energy, transport and chemicals. Is this the model Europe needs to be competitive in the global and digitised world of tomorrow?
Industrial consolidation in China has to be seen against the backdrop of the country’s enormous size. The dominance of large companies in many sectors is not nearly as strong as it is in Europe or the USA. In automobiles, chemicals, pharmaceuticals, food and many other industries, Europe already has very large corporations, with some of the world’s leading companies among them. More mergers in these industries may be detrimental to competition in Europe. At the same time, it is by no means certain that so-called European champions will be better suited to compete with Chinese companies. With size also comes inertia; large companies are often slow to respond to new developments. Rather than relying on European champions, therefore, the EU would be better off improving growth opportunities and market access for small and medium-sized companies.
It is widely believed that Europe’s digital business models are lagging behind their US competitors. Why has the US managed to bring innovations to the market faster and more successfully than Europe? What adjustments must Europe make to keep up?
US companies enjoy the huge advantage of a home market that is large and linguistically and culturally homogeneous. This encourages the use of network effects and the rapid upscaling of digital business models and allows other markets to be handled more easily. By contrast, Europe cannot serve as a single market for many digital applications in the B2C sector due to its linguistic diversity and varying demand patterns. This makes life more difficult for digital startups in Europe relative to those in the US. In Europe, it makes more sense to focus on B2B and industrial applications in the digital domain. When it comes to Industry 4.0, however, Europe is by no means worse off than the US and Asia.
