January 31, 2008
National champions: rewarding mediocrity
I have a piece up at Forbes.com trying to unravel why governments so unerringly back losers:
There’s a more sinister logic behind the pattern of government favoritism. Namely, firms in emerging, competitive industries have virtually no incentive to lobby for government hand-outs, while firms in aging, shrinking industries have the most to gain.
Here’s why: Firms in an open, competitive, growing young industry have little to gain from government support. More government funding for, say, biotechnology, is going to mean more biotechnology companies, more competition and (perhaps) more innovation. That might be good for America, but probably not much good for any single biotech company. Sure, they’ll all enjoy the government help, but each must weigh that assistance against the swarm of new competitors attracted by the handouts. No one firm would choose to hire top lobbyists and send them to D.C. to bring back the pork.
By contrast, firms in aging, shrinking, capital-intensive industries have everything to gain from government support. Because the industry is shrinking and it’s expensive to enter–think steel mills–the government subsidies and tax breaks are probably not going to attract new competitors. If there are no new competitors, the old guard gets to pocket all the money.
“European governments, in charge of relatively small economies”
Relative to what? Half the G8 is European, 5 out of the Top 10 countries by GDP and 10 out of the Top 20.
Surely most of these ailing/ageing industries were state owned in the recent past and government support is linked to this legacy, as well as limiting localised unemployment during transition.
Meanwhile, Europe has built a significant lead in mobile communications, largely through national champions that are gradually becoming European ones.
Agriculture is another story: I agree with your critique of its government support, but much of this is also to do with cultural factors, rural lifestyles, etc.
Posted by: Dave | January 31st, 2008 at 3:35 pm | Report this commentFurthermore, biotechnology is a sector with many big players from agribusiness and pharmaceuticals - these companies do indeed send armies of lobbyists to Washington and Brussels.
If it is the capacity to lobby to weaken competition that is regarded as sinister - and to be compared unfavourably with smaller, innovative firms - then surely the criticism applies to large corporatons in general, and not just to those identified by governments as strategic to their national interest?
Posted by: Dave | February 1st, 2008 at 3:09 pm | Report this comment