Industrial policy?

I was struck while reading Ira Magaziner and Mark Patinkin’s book Silent War by how timeless the issue of American competitiveness has been. The book itself (now out-of-print) was better than I expected (probably due to Patinkin) with almost 100 pages of footnotes (probably Magaziner’s). In the book they outline what are considered ‘successes’ in challenging the rise of low cost imports.

The overall takeaway is that developed countries cannot challenge the low wage countries on cost. The alternative is to develop and to continuously develop a better and more reliable product using advanced technologies. This would require a lot of investment in capital - equipment and human but would be best in the long run as productivity will increase and workers can become more empowered in the production process. For developing countries (at the time - he highlights Korea and Singapore) the lesson is the same. Investment in physical and human capital will allow the country to move up the value added chain. Underlying all this is of course the role that government can and needs to play either as a coordinator or directly intervening in industries.

The chapters are divided into the stories:

1. Korea’s Samsung came from almost nowhere to become the main supplier of GE microwaves through not only hard work, but investment in physical and human capital. The first prototype of a microwave that they produced caught fire. The emphasis on human capital was engineers and what they can do - design not just products but factories and machines.
2. In Singapore the emphasis on human capital was similar but added other ingredients - tax breaks and streamlined processes for foreign firms starting up in the country along with government sponsored worker training. This program allowed firms to send their workers for government subsidized training to use complex machinery and tools. The workers studied at night and on weekends and were able to increase their productivity via suggestions to managers. Because of their higher productivity, these workers were not laid off even though their suggestions were aimed at reducing labor inputs. The story is told through Apple’s first plant established there.  
3. General Electric refurbished their plant in Columbia, Tennessee to produce a new type of energy efficient refrigerator. They not only had to upgrade the machines and redesign the factory floor for new processes, the workers also had to be retrained.
4. In Germany, the machine tool  industry faced challenges from Japan. They show through the stories of two companies - Traub and Scharmann now part of a larger group, that investment in R&D even through recessions would pay off in the long run. Moreover the companies decided that since they could not beat the Japanese on cost they would move into complex CNC machine tools that were specially tailored for clients.
5. Magaziner advised Sweden and Volvo on its turnaround strategies. For Volvo this meant building what would become the highly successful V70 model. In tandem it also advised Sweden on how to restructure its economy and what Volvo could do to help Sweden. In particular there was no way that Sweden would be able to continue to be competitive in industries such as shipbuilding. The government deficits were growing as it continued to support some of these dying industries. Firms such as Volvo could help by building its factories close to (or use existing facilities of) these dying industries, especially since the workforce of these industries are relatively high skilled.
6. AT Cross, the maker of pens embraced an expansionist policy of exporting - and cultivating a luxury image by gaining control over its distribution process. The underlying message here is that few firms would have thought of exports as a savior since the overseas market is a highly uncertain market and that the government can do more to make exporting easier.
   The United States would eventually lose to Japan in photovoltaics as a result of its hot-and-cold policy of subsidizing research. This was perhaps the only chapter where there was an appeal for continued and direct government intervention.
7. Airbus was doomed to failure even though it was a heavily subsidized company. Yet how did it manage to succeed and thrive in a continent where the interest of Europe was secondary to those of the home countries? There seemed to be an appeal to a great man here - Roger Beteille - but the main thrust of their argument was that Airbus offered a better and more technologically advanced product - the A300 - two engines and lighter materials to conserve fuel and a recognition that short to medium routes might be the wave of the future.
8. In Corning , the authors highlighted the role of long run R&D even through recessions that finally made optical waveguides a successful product in the telecom industry.

How well have these ‘success’ stories fared? I googled a few of these.

1. The Columbia, Tennessee plant closed in 1993.
2. The winner of the photovoltaics war seems to neither be the US nor Japan.
3. And we all know what happened to Volvo after it was bought by Ford. This may still turn out to be a success story.

How does an industrial policy story hold together? As for direct intervention, the photovoltaics story and the current state of the Japanese economy (though not all Japanese companies) seem to be another nail in that coffin. The counter to this nail is Airbus.

What about a more general role for the government where there is some coordination in terms of human capital policy, R&D subsidies, and export promotion via streamlined paperwork and direct help in getting to market? The GE story seems to be a strike against firms that upgrade and then fail but perhaps there is still a lesson from this - for instance, were the workers more easily able to find jobs since they were retrained for the new plant? Could another factory producing something else have been relocated there to absorb these workers?

What about the role the stock market and its obsession with quarterly earnings that makes R&D its first casualty when earnings dip? The German companies were able to continue investing through the downturns since they did not have to worry about the stock market. Nevertheless, so was Corning even though stock price wise it hasn’t done too well.