What industrial policies should Europe implement in relation to big tech and in the context of information asymmetry, asked Professor Jean Tirole at the BNP Paribas Asset Management 2019 Investment Forum.
- Some guidance on an appropriate industrial policy response in Europe
- How can innovation be promoted?
- Should Europe pursue a targeted or a non-targeted policy on regulation?
- Handbook notes for an efficient industrial policy
This is part 2 on the salient points of his talk; part 1 covered his analysis of market imperfections. We also refer readers to the three articles we recently published on Investors’ Corner, presenting key elements of his body of work . Those readers who would like to delve deeper can gain more insight (and enjoyment) from his book Economics for the Common Good (Princeton University Press).
Even if it is well set up, an antitrust policy would not solve the problem of big tech quasi-monopoly market power in Europe as all the giants in the technology sector are either US companies (11 of the 20 largest companies by market capitalisation in the world) or Chinese (the other nine).
The same must be said for the pharmaceutical sector, where there are still European champions, but their position looks highly likely to weaken due to the industry’s new orientation towards biotechnology, the use of big data and genetic research.
So, as antitrust regulation will not resolve these issues, perhaps the European authorities should contemplate other ways to address market failure.
Europe: What kind of industrial policy response is needed?
It seems natural that European authorities would want to create big tech companies that are 100% European, and to use a specific policy to do so. There is a need to distinguish between non-targeted policies, which would not seek to identify a priori winners or losers, and industrial policies that would target specific sectors, technologies, or even companies.
In the first case, governments would be subsidising research and development (R&D) spending in one way or another. Economic studies generally show that spending more on R&D is positive. However, this should be done in an orderly way; otherwise, it would not improve the social benefit.
As regards a targeted policy, it appears that, despite real advantages (infrastructure and information sharing between companies, creation of local labour markets facilitating mobility) and undeniable successes (e.g. Airbus), it is not a panacea.
As is often the case in the industrial economy, information is key. This is not always fully available to the public authorities. Decisions to support one industry or company to the detriment of others may not be optimal. On the other hand, the state may find itself so involved in an industry that it will no longer be able to play its role as an independent referee.
Notes for an effective industrial policy response
To avoid these drawbacks, policymakers would be well advised to adhere to some principles when implementing industrial policy, such as:
- Identifying why the market failed so as to be able to come up with the appropriate policy response
- Using independent, high-level experts to select projects
- Paying attention to the supply side (human capital, gathering of scientific skills) not just to the demand for the creation of specialist sites
- Avoiding the distortion of competition between companies
- Remaining objective: monitoring and evaluating how well projects do and, if necessary, closing them down
- Involving the private sector in risk-taking where possible
- Strengthening schools and universities that are the source of future innovation.
These guidelines may seem common sense, but they are unfortunately often ignored, and not only for electoral reasons.
Beyond regulation and industrial policy, are other paths possible in the face of the growing imbalances that stem from big tech’s market power? What about fighting out-and-out tax optimisation or specifically taxing the profits these multinationals make?
Watch out for a future article that deals with this thorny subject!
 Also read:
To discover our funds and select the ones that meet your requirements, click here >
For more articles by Nathalie Benatia, click here >
For more thought leadership and Investment Forum articles, click here >
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.