Cambridge Journal of Economics 2011, 35, 831–852
doi:10.1093/cje/ber003
Advance Access publication 30 March 2011
Post the ‘Washington Consensus’:
economic governance and industrial
strategies for the twenty-first century
Keith Cowling and Philip R. Tomlinson*
Recent events in the global economy have led to a growing dissatisfaction with the
neo-liberal economic paradigm that has dominated economic policy over the last
30 years, and the increasing concentration of (and abuse of) economic power within
the corporate sector that has ensued. However, amidst calls for a new approach to
economic management, there is a danger that a new policy framework may overlook
underlying economic governance structures that exist (and may evolve) within the
economy. Such oversight has implications for development. This paper seeks to
demonstrate that the long run efficacy of industrial strategy depends upon designing
appropriate economic governance structures that serve the wider public interest. It
does so by exploring past experiences of industrial strategy, drawing lessons from the
USA, the UK, Japan, the third Italy and the emerging and transition economies. We
also offer some suggestions for ways forward.
Keywords: Economic governance, Strategic decision-making, Strategic failure,
Industrial strategies, Industrial development
JEL classifications: L5, O25
1. Introduction
The current global economic crisis has, among others things, highlighted the growing
dissatisfaction with the neo-liberal economic paradigm that has dominated economic
policy over the last three decades. This paradigm is manifested in the so-called
‘Washington Consensus’ which emerged during the early 1980s, which is defined as a type
of free market capitalism based upon extensive market de-regulation, privatisation and
liberalisation and was widely advocated by the West and the major policy making
Washington institutions such as the International Monetary Fund and the World Bank
(Williamson, 1990). While the paradigm itself evolved and indeed from the late 1990s, in
a more nuanced approach under the guise of a ‘post-Washington Consensus’, began to
Manuscript received 11 June 2009; Revised version received 6 September 2010.
Address for correspondence: Philip R. Tomlinson, School of Management, University of Bath, Bath BA2 7AY,
UK; email: [email protected]
* Department of Economics, University of Warwick and School of Management, University of Bath, UK.
We are grateful for comments and suggestions from David Bailey, Rob Branston, Dan Coffey, Ian Jackson,
Roger Sugden and Jamie Wilson and two anonymous referees. We are also grateful for comments from
participants at the plenary session of the 12th European Union Network for Industrial Policy (EUNIP)
conference, held at the University of Reus, Spain, 9–11 June 2010. The usual disclaimer applies.
Ó The Author 2011. Published by Oxford University Press on behalf of the Cambridge Political Economy Society.
All rights reserved.
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K. Cowling and P. R. Tomlinson
recognise a role for the state in providing appropriate (often light touch) regulatory regimes
and in correcting for market (largely informational) failures, neo-liberalism largely
entrenched and exacerbated (rather than challenged) positions of corporate and economic
power (Fine et al., 2003; Onis and Senses, 2005). Indeed, the enduring dominance of the
corporate sector and the economic crises that have subsequently followed now lead many
to question the continued relevance of the Consensus and instead seek a moral compass in
the twenty-first century. For instance, during the G20 summit in London in April 2009,
Gordon Brown, the then British Prime Minister, declared that the Consensus was over and
called for a new (global) alternative approach to economic management (The Guardian,
2009), while the election of the Obama administration in the USA has also signalled that
a new economic direction is required.
Questions arise, of course, as to what shape alternative policy frameworks might take,
although there is now widespread recognition, in some quarters at least, that the state
should engage in a more active role in industrial development. This is particularly the case
in the UK and the USA, where a rebalancing of economies is required away from heavy
consumerism and an unhealthy reliance upon the financial sector, towards more sustainable productive activities (Cimoli et al., 2009; Wade, 2009). It appears that industrial
policy, after a long hiatus and being much maligned in the era of market fundamentalism, is
back in vogue although now generally referred to as ‘industrial strategy’.1 In reality, the
state was never entirely absent during the neo-liberal era, although its role was largely
redefined in terms of facilitating market deregulation with industrial policy subtly targeted,
mainly towards defence led industries (Kitson, 2005). Nevertheless, the recent changing
attitudes towards industrial strategy and economic rebalancing are welcome; their origins
lie in the rich tradition of political economy and a new approach offers the potential for
a positive impact upon development. Yet at this juncture, it would be wise for any new
approach to seek to learn from past experiences of industrial policy, of which there are
many from different corners of the globe. This would hopefully guide and inform future
sustainable industrial strategy making.
More poignantly, however, a reappraisal of previous experiences seems particularly
pertinent given the lurking suspicion that amidst the new enthusiasm for ‘industrial
strategy’, any new policy framework will overlook the underlying economic governance
structures that exist (and may evolve) within industries and the wider economy. Such
oversight has occurred within the context of recent regional policy initiatives, with longterm implications for the development of localities (Christopherson and Clark, 2007).
Economic governance is an important consideration for development since it focuses upon
the ability of actors to participate in strategic decision-making processes on key economic
variables (such as employment, investment and the environment) that affect their own
trajectory (Cowling and Sugden, 1999). The key issue is the distribution of economic
power among actors and, in particular, firms; what it entails, where it resides and how it
might be exercised. In most situations in the global economy there is an uneven
distribution of (economic) power, this generally being characterised by hierarchical
1
Industrial policy or industrial strategy can be wide-ranging. According to Cimoli et al. (2009, pp. 1–2) it
‘comprises policies affecting ‘‘infant industry’’ support of various kinds, but also trade policies, science and
technology policies, public procurement, policies affecting foreign direct investments, intellectual property
rights, and the allocation of financial resources. Industrial policies, in this broad sense, come together with
processes of ‘‘institutional engineering’’ shaping the very nature of the economic actors, the market
mechanisms and rules under which they operate, and the boundaries between what is governed by market
transactions, and what is not’. This paper is largely concerned with the principles and philosophy of industrial
strategy and so does not explore such policies in critical detail.
Economic governance and industrial strategies
833
governance structures and strategic decision-making processes concentrated among
exclusive, elite groups; typically the corporate hierarchies of transnational corporations
(Palermo, 2000; Cowling and Tomlinson, 2005). It is likely that this powerful group will
pursue their own interests, possibly to the detriment of others raising the spectre of
‘strategic failure’, a situation arising where the strategic decisions of the corporate elite(s)
conflict with the wider public interest(s) (Cowling and Sugden, 1999, pp. 363–5). Not only
is this scenario undemocratic but it can lead to uncertain and unstable development paths.
This paper welcomes the renewed interest in industrial strategy and seeks to contribute
to the discussion on how new strategies may evolve. In doing so, the paper specifically seeks
to demonstrate that the long term efficacy of industrial strategy—in delivering sustainable
and democratic industrial development—is contingent upon simultaneously ensuring
economic governance structures are relatively diffuse and allow for wider stakeholder
engagement in the development process. The approach taken in this paper is a comparative
review of some notable past experiences of industrial strategies across the globe. In this
regard, the use of comparative case studies is very much within the political economy
tradition although while this may draw some similarities with the ‘varieties of capitalism’
(VoC) literature (Hall and Soskice, 2001), we refrain from becoming immersed in what
Hay (2005, p.120) describes as a largely ‘apolitical approach’, which (rather crudely) posits
a simple duality existing between either ‘liberal market economies’ (LMEs) and ‘coordinated market economies’ (CMEs) with efficiency in each mode being attained through
the various complementarities existing between firms and non-firm institutions in different
spheres of the economy. While the cases we present highlight degrees of coherence between
the state, firms and institutions that assist industrial development, we follow Coates (2000,
2005) and Coffey and Thornley (2009) in seeking a broader perspective in any
comparative analysis. Moreover, like Crouch (2009, p. 79), we regard (economic)
governance—rather than institutions—as the central category for analysing economies.2
The remainder of the paper is set out as follows. We begin by reviewing the influence of
neo-liberalism and the Washington Consensus, in which transnational corporations have
gained significant prominence, and briefly consider its impact upon both the US and UK
economies (Section 2). Section 3 then considers some alternative experiences. First, we
focus upon Japan and then the more regionalist approach of the third Italy. Both of these
cases are highly significant in once being (widely) regarded as illustrative examples of
2
Following Halls and Soskice (2001), the Variety of Capitalism (VoC) approach has attracted significant
academic attention over the last decade, notably for its purported wide-ranging analysis and predictions (for
a critical set of selected commentaries, see Hancké, 2009, who also offers a defence). The basic VoC premise
is that efficiency can be improved through firms coordinating practices between different spheres of the
economy (such as industrial relations and bargaining, training and education), corporate governance
(relations between firms and investors), inter-firm relations and employee relations) irrespective of whether
the economy is ‘liberal’ (LMEs) where resources are primarily allocated via market forces or ‘coordinated’
(CMEs) where equilibrium outcomes are largely determined through non-market relations, collaboration
and credible commitments between firms (and other actors). The VoC approach favours neither mode
(hence, the characterisation ‘apolitical’), but suggests that firm behaviour and investment patterns will differ
(in both LMEs and CMEs) according to the mode of coordination that has institutional support so as to
facilitate a comparative institutional advantage. While the endeavour in exploring different modes of
capitalism is welcome and the approach offers some useful insights, we share some of the scepticism that has
been expressed about its general applicability, particularly (in its earlier manifestations) the neglected role of
the state in development. Our main concern however, is the implication (within the VoC approach) that firms
are of a similar hue and largely operate within the confines of their own national institutional structures. This
is problematic in that it largely ignores a fundamental aspect of economic governance in disallowing the more
dynamic (and very real) scenario where transnational corporations actively draw upon resources and leverage
policy concessions across nation states, thus being involved in framing political and institutional structures to
suit their own purposes (Coffey and Thornley, 2009; see Section 2).
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K. Cowling and P. R. Tomlinson
successful industrial strategies, which, at their roots, were based upon a more ‘institutionalist’ and ‘interventionist’ approach. We then consider the (relatively) recent experiences of
the so-called ‘transition’ and ‘emerging’ economies from the Communist era, where radical
(neoliberal) solutions were imposed; a brief comparison here is made with China, where
a more gradual approach has been adopted. All these cases highlight aspects of successful
and less successful industrial strategy, but throughout our main focus is that of economic
governance. In Section 4 we explore some recent approaches towards industrial strategy,
notably the alignment of regional and technology policy, which raises some caveats, before
deliberating upon some future possibilities for ways forward. Finally, Section 5 concludes.
2. Re-evaluating the Washington Consensus
2.1 Neo-liberalism in the USA and the UK
Over the last 30 years, both the US and the UK have been at the forefront in the
implementation and promotion of a neo-liberal economic paradigm that became more
widely known as the ‘Washington Consensus’. This paradigm represented a particular
mode of capitalism that was initiated by the Reagan and Thatcher governments and was
widely advocated by the Washington institutions—namely the International Monetary
Fund (IMF) and the World Bank (until fairly recently, the Washington Consensus and new
liberalism was widely promoted as the (new) model for economic development).3 The
Consensus itself primarily consisted of policies that favoured extensive market liberalisation, privatisation and a tight macroeconomic framework (such as fiscal discipline and tight
monetary policy) and was a neoliberal response to the economic crises, stagnation and
industrial strife that afflicted the global economy during the 1970s (Williamson, 1990).
Consequently, industrial policy was regarded as antediluvian and the state began to largely
withdraw from industrial intervention. During the late 1990s, and mainly due to the
influence of Joseph Stiglitz at the World Bank, the Washington institutions did begin to
recognise that the state could play a complimentary role in liberal economies, particularly
with regards to some (limited) regulation of financial markets and in addressing some
market failures (primarily in health and education provision). Yet, even within what some
have labelled a more progressive ‘post Washington Consensus’ phase, the state was largely
subservient to the market and critically—as we argue below—economic power became
more concentrated. Indeed the issue was left largely unaddressed (see also Fine et al., 2003;
Onis and Senses, 2005).
In evaluating the Washington Consensus, some authors have argued that where policies
have been ‘properly applied’ the results have been largely positive (Williamson, 2003).
Much of this appraisal has come from commentaries that have routinely lauded a ‘New
Golden Age’ of prosperity emerging in the USA and the UK during the 1990s (and which
endured for the best part of the last decade), and regarded as a testament to the virtues of
the neo-liberal agenda. Indeed, the apparent macro-economic success of the US (and to
a lesser extent the UK) economy in this period as measured in terms of GDP growth,
employment, lower inflation and productivity vis-à-vis continental Europe (which had
generally maintained a more interventionist approach) has been a source of angst and
concern for the latter (Blanchard, 2004; Pozen, 2005). The Lisbon Agenda (2000) and the
Sapir Report (2004), which were given the remit of improving European competitiveness,
were largely a response to the challenges posed by the USA, and it is interesting to note
3
Indeed, in the so-called ‘developing world’, international aid and assistance packages were often
contingent upon recipient countries adhering to compliance to the Washington policy framework.
Economic governance and industrial strategies
835
their subsequent inclination was to move towards the neo-liberal model (Sapir Report,
2004, 2005; see also Kok, 2004).
In retrospect, the apparent hegemony of the neo-liberal model and the US economy was
relatively brief, curtailed with the onset of the deepest global recession since the 1930s.
Moreover, any comparative analysis of economic performance requires a longer window,
particularly when drawing inferences about the efficacy of industrial strategy. Kitson
(2005), for instance, reminds us that between 1945 and the mid-1990s, it was Europe
(with its state activism) that consistently recorded higher growth rates, with US industry
often being conceived as weak and looking towards Europe for leadership (see, for
instance, Thurow, 1992). A closer inspection of the US economy since the mid-1990s also
provides some interesting observations in relation to the role of the state. First, and with
particular regard to European concerns over innovative performance, Kitson (2005) notes
that behind the veil of US neo-liberalism, the US state has continued play to a significant
role in science and innovation, albeit largely through excessive defence expenditure. While
such expenditure might not be considered optimal in terms of the use of public funds or in
the commercialisation of science, it has nevertheless led to US investments in long-term
risky projects (and subsequent innovations for non-military use) that would not have been
undertaken if left solely to the market (Kitson, 2005, p.994). Kitson also points out that the
USA has been relatively more successful than Europe in cultivating long term close links
between universities and business, which is known to aid innovation and getting new ideas
to market (see also Section 4). Such observations, of course, are consistent with a more
positive view of the state (and institutions) in industrial development, and suggest the
wider indifference (and disregard) shown by policymakers (and commentators) towards
industrial strategy might be somewhat misplaced.
Secondly, the key difference in productivity performance between the USA and Europe
was in the service sector (retail, financial services) where the USA appears to have been
more adept in deploying ICT (O’Mahoney and Van Ark, 2003). Such an advantage may only
be temporary. Moreover, these US sectors have particularly benefitted from the unsustainable domestic consumer boom, which, although generating a form of dynamism within these
sectors, has created large and dangerous structural imbalances in the US macro-economy
(Bailey and Cowling, 2006). Indeed, personal savings as a proportion of disposable income
in the USA fell from an average of 10% between 1974–1984 to around 5% in 1994, and 0.6%
in 2007 (OECD, 2008), while levels of indebtedness in US households also rose, with
Mishal and Eisenbrey (2005) estimating that the real level of debt rose by 35% over the
period 2001–2005. However, the USA (like the UK) satisfies increased consumption
through rising imports, with the US current account deficit tripling between 1997 and 2007
to reach 5.3% of GDP (higher than any other G7 nation).4 This was largely financed by
rising international borrowing, particularly from the so-called developing world. Kitson
(2005), for instance, points out that the Chinese central bank holds approximately $1 trillion
in US government bonds. These macro imbalances are structural in nature and underpin
much of the economic crisis afflicting the US (and UK) economy. They may now need to be
rectified by an appropriate industrial strategy (see Cowling et al., 2011).
Social and economic outcomes have also been far from equitable. Evidence for both the
USA and the UK, suggests a significant proportion of these economy’s inhabitants did not
4
The UK has followed a similar path (both in terms of policy and performance), with personal savings
falling dramatically from around 10% in 1997 to minus 0.2% in 2007. The UK current account deficit
reached 3.75% of GDP in 2007, the second worst performer (to the USA) of the G7 nations (OECD, 2008).
836
K. Cowling and P. R. Tomlinson
share in the benefits of the decade long boom. Both countries, for instance, experienced
growing disparities in incomes and wealth, with the rise in inequality largely a result of
a shift of income from wages to capital (Faux and Mishal, 2000, p. 102). Lower inflation
itself was delivered through a combination of cheaper imports sourced from countries with
lower labour costs (and relatively poorer employment conditions) and lower domestic wage
inflation due to labour market deregulation and the curtailment of the trade union power.
Blue collar real wages in the USA barely rose in 25 years to the new millennia, while in the
UK (which followed a similar path) the lowest paid workers ‘hardly benefitted at all’ from
any real wage growth over the same period (Griffith and Wall, 2001, p. 346; Thornley,
2003). Social mobility was also lower in both the USA and UK than in eight other major
industrial nations, with opportunities for social advancement being poor (Blanden et al.,
2005). Moreover, growing regional disparities were also evident, as older industrial cities
and regions became particularly impoverished and often neglected as the neo-liberal
economies focused upon creating wealth in new centres of financial services (such as
London and New York). In the UK, for instance, the larger industrial conurbations of the
West Midlands, Merseyside and Glasgow have long suffered higher unemployment and
lower life expectancy than richer regions such as the South East (Webster, 1999; Office of
National Statistics, 2004).
2.2 Economic governance and the Washington Consensus
In terms of economic governance, neo-liberalism has facilitated unabated growth in the
economic power of the corporate sector, as sectors of the economy (such as manufacturing,
ICT, finance, media, transport and energy) have become more concentrated; this pattern
being particularly acute in both the USA and the UK (for recent evidence, see Cowling and
Tomlinson, 2005). A notable feature here has been the rising dominance of transnational
corporations, who have become the central actors in the global economy, with their
tentacles of control and dominance often extending across international boundaries
(Hymer, 1972; UNCTAD, 1993). This has added to concerns that neo-liberalism has
largely been an exclusive process in which the strategic interests of corporate hierarchies
took precedence over those of the wider public, who were often not engaged in the
development process (Sugden and Wilson, 2002).5
Indeed, the globalisation process in the neo-liberal era has had significant implications
for development, governance and the public interest. An asymmetry of power exists
between transnationals and nations (and regions), deriving from the former’s transnationality; in this respect, the strategic decisions made in the interests of transnationals are
often unlikely to be compatible with the long term requirements of communities (see
Christopherson and Clark, 2007). A significant element here is the transnational base of
the corporation, which provides it with considerable leverage in bargaining with both
policymakers and labour through the use of a ‘divide and rule’ strategy. First, such leverage
can be applied against the state in bargaining over measures such as investment subsidies,
infrastructural support, employment legislation and tax regimes that will affect the
transnational’s profitability. The credible threat of re-location will usually lead to the state
5
More widely, the Washington Consensus and in particular the structural adjustment programmes of the
IMF and World Bank have attracted widespread criticism (see Cavanagh et al., 1994; Stiglitz, 2002, 2006).
For instance, in Africa, Stiglitz (2006) has commented on the market liberalisation process, which has led to
overseas investors being more interested in exploiting Africa’s natural resources rather than assisting in a long
term development plan, while IMF requirements have brought fiscal austerity and placed constraints on
human capital projects such as education and health.
Economic governance and industrial strategies
837
acquiescing to corporate demands since there are (short term) political rewards associated
with attracting and retaining transnational investment (Dicken, 2003). Such competitive
pressures undoubtedly place a strain upon the state’s fiscal resources, which may not
necessarily be replenished through higher corporation tax revenues since the transnational
base of the corporation facilitates the use of transfer pricing so as to minimise global tax
liabilities. Secondly, ‘divide and rule’ is an effective strategy by which transnationals can
reduce their labour costs as the credible threat of relocation nullifies any potential labour
militancy, since workers place a positive utility on attaining/retaining employment. There is
now substantive empirical evidence of transnationals using their bargaining powers vis-àvis state and labour in such a way (for further details see Peoples and Sugden, 2001;
Dicken, 2003, pp. 304–12; Christopherson and Clark, 2007).
Such processes reflect economic governance structures in which transnationals have
significant influence over national and international policy, with the credible threat of
disinvestment (unless concessions are made) often undermining any long-term industrial
strategy. Indeed, the widening scope of transnational corporations and their footloose
activities have contributed significantly to de-industrialisation in the USA and the UK
(Cowling and Sugden, 1994) and more recently in Japan (see below). In both the USA and
the UK, this has undoubtedly contributed to the rising trade deficits and social and
economic inequalities outlined above.6 In addition, neo-liberalism has been concomitant
with centripetalism, a tendency for higher level economic and political strategic decisionmaking to gravitate towards economic centres. This scenario was initially envisaged by
Hymer (1972), and has evolved as the major transnational corporations have tended to
locate their corporate headquarters in the world’s major cities (for example, New York,
Tokyo, London, Bonn, Paris and more recently an emerging Shanghai). Given the global
hegemony of transnational corporations, such centralisation of economic power undermines the degree of local, regional and national autonomy. More widely, the global
interests of the corporate sector have also been vigorously pursued through (global)
corporate pressure groups such as the Trilateral Commission, which has often sought and
obtained favourable policy concessions (particularly in relation to international trade and
capital flows) from supra-national authorities (Marchak, 1993; Monbiot, 2000).
3. Experiences of alternative industrial strategies since 1945
3.1 The Japanese model
Dissatisfaction with the Washington Consensus in terms of both its wider outcomes and
more centralised (economic) governance structures, leads to explorations for alternative
frameworks, possibly ones in which certain forms of the state play a more active role. In
terms of exploring the efficacy of industrial strategy, it is perhaps first appropriate to draw
lessons from Japan. This nationally directed model of industrial development was widely
lauded in its contribution to Japan’s extraordinary post-war economic success, in which
the country (and its industries) outperformed all the other major economies on almost any
economic measure (Johnson, 1982; Graham and Seddon, 1990). In analysing the Japanese
model, there are two (related) salient features: (i) an interventionist industrial policy and (ii)
a unique institutional (production) system based around the Japanese Firm [Aoki’s (1990)
so-called ‘J-mode’] and small firm production networks known as the ‘keiretsu’.
6
For various other country case studies (e.g. Sweden, Canada) of problems caused by the short term
strategies of transnationals see Dunning (1997).
838
K. Cowling and P. R. Tomlinson
Industrial policy came under the remit of the Ministry of International Trade and
Industry (MITI), whose strategy was to promote selected industries through a range of
policy measures, including regulating foreign trade (to protect domestic ‘infant industries’), providing export subsidies, tax breaks and investment subsidies (Johnson,
1982). MITI also encouraged the importation of foreign technology which was orientated
towards domestic innovation (see Ozawa, 1973), and was closely regulated along with both
inward and outward foreign direct investment (FDI). The strict FDI regulations reflected
MITI’s governance concerns—at the time—of dominant corporate interests particularly
where (i) US transnationals would enter and control Japan’s domestic markets and (ii)
Japanese outward FDI would encourage ‘reverse exports’ and harm Japanese domestic
industry. During this era, MITI felt that corporate interests could be controlled or at least
curtailed to comply with the wider public interest (see Bailey et al., 1994).
Japan’s industrial structure was based around so-called ‘keiretsu’ networks of small and
medium-sized enterprises (SMEs) supplying intermediate goods to large corporate client
firms: this was known as the ‘dual structure’. Relationships between client firms and subcontractors were often described as being close, cooperative and built upon mutual trust
and cross-shareholding arrangements (see Smitka, 1991, for an overview). Firms would
often work in close proximity in areas that became known as ‘company castle towns’ (often
named in recognition of the large client firm, e.g. Toyota City). A banking keiretsu
facilitated collective borrowing, channelling low cost funds to industry. Japanese industry
and inter-firm ties were also supported through publicly funded institutions and initiatives
aiding innovative activity, such as industrial Public Testing and Research Centres (PTR)
and industry supplier associations (Ruigrok and Tate, 1996, Sako, 1996).
By the late 1970s, Japan’s large corporations were competing very successfully with their
Western rivals in world markets. This attracted the interest of a significant number
of influential management scholars who sought to explain the comparative success of
Japanese firms (and also the Japanese economy) vis-à-vis Western firms on the basis of
superior methods of organisation, innovation and flexibility in production. Indeed in
a series of articles, Mashimoto Aoki (1984, 1988, 1989, 1990, 1994) set out his economic
theory of the Japanese Firm (labelled the J-mode), distinguishing it from typical Western
firms (H mode; hierarchical), in terms of its outlook, organisation, employer-labour
relations, finance and equity arrangements. Intriguingly, Aoki concluded that J-mode firms
represented a wider set of interests than H-mode firms through their more diffuse
governance structures (see also Miwa, 1996). The popular view of the Japanese economy
was of representing a form of ‘alliance’ capitalism and progressive in uniting the various
stakeholders in delivering growth (Gerlach, 1992). From a VoC perspective, one might
also (reasonably) infer a degree of complementarity between the various spheres of
Japanese political economy: a largely networked (and trust based) economy, with cohesion
between the state, institutions, business and employer-labour relations contributing to
Japan’s superior economic performance (Hall and Soskice, 2001).
For a long period, there appeared a degree of congruence in the development of the
Japanese economy and the growth (and global success) of Japanese corporations. However,
Japan’s experience over the last 20 years, particularly the ‘hollowing out’ of its industrial
sectors—for so long the source of its strength—has led scholars to question the Japanese
model. Behind the veneer painted by Aoki (and others) lay a fundamental flaw as economic
governance structures in the Japanese economy were remarkably similar to those in the
West, with economic power primarily concentrated among the corporate hierarchies
of large (Japanese) corporations. This was particularly evident in Japanese industrial
Economic governance and industrial strategies
839
organisations, where vertical ties between keiretsu partners were typically controlled at the
apex by main contractors through various control levers, including the holding of
significant equity stakes in smaller partners and the subjugation of keiretsu partners by
the main contractor(s) dictating contract conditions and imposing technologies and
processes upon them (Coffey and Tomlinson, 2003).7 The concentration of economic
power also appeared to be (if inadvertently) supported by MITI’s industrial strategy. In this
regard, the approval of cartelisation proposals through the 1960s–1980s (Schaede, 2000),
PTRs being used as a mechanism to exert (further) control over keiretsu suppliers
(Ruigrok and Tate, 1996) and the close links fostered between MITI and the corporate
sector, which allowed the latter to influence and successfully lobby the higher echelons
within the ministry in order to pursue its own strategic interests (Johnson, 1982) being just
some examples. Within the Japanese firm, it was also clear from Aoki’s (1990, pp. 13–16)
own writings that Japanese employees had only discretionary decision-making in their daily
operations, and were ultimately subordinate to management authority (as is the case in
Western firms). Moreover, evidence has also emerged of extensive labour exploitation in
Japanese industry, particularly in the sub-contracting sector, which had been the domain of
long hours, low wages and intensive work routines (Burkett and Hart-Landsberg, 1996;
Coates, 2000). Such commentaries and insights clearly questioned the view of Japan as
being a ‘progressive’ form of capitalism (Coates, 2007).8
By the mid-1990s, the flaws began to emerge in Japan’s economic structure. Relaxation
of the FDI restrictions in the early 1970s (following lobbying by the corporate sector—see
Mason, 1994), led to Japan’s larger corporations increasingly shifting their operations
offshore to take advantage of lower labour costs and expand their corporate interests,
raising overseas production ratios six-fold between 1985 and 2002, an increase higher than
in any other major industrialised country (Ministry of Economy, Trade and Industry,
2003). Investment was diverted away from Japan’s industrial regions in favour of low cost
alternative overseas sites, while small domestic keiretsu firms were left isolated (and placed
in a weaker bargaining position) as their main contractors employed ‘divide and rule’
strategies and resorted to global outsourcing of intermediate goods and services. This
exacerbated a ‘hollowing out’ of Japanese industry, with Japan’s large industrial belts of
Kanagawa, Tokyo, Osaka and Saitama being particularly adversely affected, experiencing
dramatic declines in industrial capacity and significantly higher levels of unemployment
throughout the 1990s and into the new millennia (Cowling and Tomlinson, 2003). In
hindsight, the strategic interests of Corporate Japan were often pursued at the expense of
other stakeholders within the Japanese economy and society (Cowling and Tomlinson,
2000, 2002).9 And herein lies a critical lesson for industrial strategy. It can be an efficacious
tool, but where it is closely aligned with the interests of the corporate sector, in the long run
the likely outcome is one of ‘strategic failure’.
7
For instance, in the widely celebrated Japanese automobile industry, Ruigrok and Van Tulder (1995, p.
53) have described the situation as one where there is ‘a one-way dependency of suppliers on the end
producers’. Similar sentiments expressed by industry practitioners: Adio Kodani, a former Nissan-appointed
President of the Nissan-affiliated supplier Ikeda Bussan, notes that ‘the keiretsu served to create a comfortable
vertical supply structure for Nissan, rather than as a structure to make affiliates stronger’ (Nikkei Weekly,
2000). A similar perspective is offered by Kono (1984, p. 127) who remarks that the keiretsu supplier
‘perceives that Toyota’s policy is ‘‘not to kill, neither to keep alive easily’’’.
8
Coates (2007) provides an interesting review of how some (radical) scholars have, in the light of Japan’s
decline during the 1990s, (recently) altered their perceptions of the Japanese model as being a model of
‘progressive capitalism’ and an alternative to the ‘harsher conditions’ associated with Western neo-liberalism.
9
Burkett and Hart-Landsberg (2000, pp. 120–1) express a similar view describing the Japanese model as
being an ‘exploitative, hierarchical, undemocratic and expansionist form of capitalism’.
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K. Cowling and P. R. Tomlinson
3.2. The third Italy
During the mid-1980s, there was a renewed interest in economic geography and, in
particular, models of ‘industrial districts’ and clusters. This followed Piore and Sabel’s
(1984) pioneering study, which highlighted how small firms in the traditional Italian
‘industrial districts’—in particular in the machinery industries of Emilia-Romagna and the
Prato textile industry in Tuscany—were out-performing their much larger rivals in world
markets, despite the initial technological superiority of the latter and their access to lower
relative labour costs around the globe. The success of small Italian firms operating in these
‘districts’ came as a surprise to many economists who had long accepted the supremacy of
large transnational corporations as the industrial norm. By benefiting from the external
economies of scale that arose from within the ‘district’ and given the nature of small scale
production, Piore and Sabel argued that these small firms were more flexible in dealing
with changing market conditions than their larger, more bureaucratic rivals. This flexibility
enabled the ‘district’ firms to be more diverse and innovative in their production activities,
providing them with a competitive edge in markets. Over time, in the Italian districts,
relative real wages increased and relative unemployment fell. The success of these district
firms and the economic prosperity and stability that they brought to their respective regions
led Piore and Sabel to suggest that local economic development policy might be based
upon the Emilian model.
The core characteristics of the Italian ‘industrial districts’ model are essentially
Marshallian (Marshall, 1919) with small firms operating in the same industry, embedded
within the same locality. However, in the Italiannette model, there is a greater emphasis
upon interdependent links, joint actions and reciprocity between firms, particularly in
productive activities and in the co-sharing of information and technology. Additionally,
both private and publicly funded business associations and industry specific research
institutes actively support district firms, while small business services such as marketing,
purchasing and credit negotiations are also run on a collective basis and firms within the
district are often allowed to take advantage of these services at low cost or no charge.
Collectively, these activities and services have provided district firms with significant
(external) scale economies, thus enhancing their own and the region’s long term
competitiveness (Brusco, 1982).
In terms of economic governance, the traditional picture of the Italian ‘district’ is thus
one of a propagation of small firms with no one firm being dominant, and numerous crisscrossing relationships existing between firms and local actors. The structure is generally
regarded as being ‘heterarchical’, diffuse and largely inclusive. Becattini (1990), for
instance, described the ‘Italian districts’ as a ‘socio-economic entity which is characterised
by the active presence of both a community of people and a population of firms in one
naturally and historically bounded area. In the district—and unlike in other environments,
such as the manufacturing town—the community and firms tend, as it were, ‘to merge’. In
other words, the economic and social development of the ‘district’ are seen as moving
together in an integrated process with public policy seen to take account of both economic
and social development, not one or the other (Bellandi, 2003).
More recently however, the Italian districts—as with other industrial clusters—have
been faced with the rising challenges of globalisation and in particular, low cost competition from the Far East. In order to compete, larger lead firms have started to emerge
and there has been greater consolidation of production within (and outside) the districts.
Although the growth of these larger lead firms has provided smaller district sub-contractors
Economic governance and industrial strategies
841
with a potential market outlet in difficult market conditions and they have sometimes
benefitted from the umbrella of their lead partners’ brand identities, recent concerns have
arisen that the districts’ wider social values are being compromised in the pursuit of
a popular but debated concept of ‘competitiveness’ (Bristow, 2005). These concerns have
in part arisen from an increased emphasis by lead firms upon lowering labour costs within
the districts through the wider of use of (global) outsourcing outside the districts (thus
putting downward pressure upon district labour conditions) and/or through awarding
contracts to district firms, where labour standards are noticeably lower. In the Prato textile
district, for example, controversy has arisen over the increased presence (and employment)
of a Chinese community of entrepreneurs, predominantly based upon cheap labour, with
working conditions that sometimes cross the borderlines of legality (Ceccagno, 2003). The
exploitation of such ‘sweatshop conditions’ not only undermines the districts’ social values,
but the emphasis upon low-value added, cost reducing strategies also does little to enrich
the districts’ ability to re-launch activities into new diversified and higher value added
product lines. Moreover, with regards to governance, it may now be that—because of
globalisation—the ‘tradition of familialism’ long associated with the (Italian) industrial
districts is being replaced by more structured and hierarchical forms of economic
governance, which will have consequences for their future development paths (Sacchetti
and Tomlinson, 2009).
3.3 The emerging and transition economies
For much of the twentieth century, the main alternative to Anglo/US capitalism was the
communist model, which was initially implemented in the Soviet Union following the
Bolshevik revolution in 1917 and was later adopted (in various guises) across the world,
notably in Central and Eastern Europe, China, North Korea and also in Africa. The basis
of the communist model was community control over the means of production and
exchange: in essence, one might postulate that it sought to prevent the abuse of economic
power endemic within modern market economies and ensure development paths are fair
and socially efficient. The reality of communism, however, as epitomised by the Soviet
model, was a lack of democratic engagement with community stakeholders. Instead,
political elites emerged to replace the power of corporate elites. In the Soviet Union,
bureaucratic and political appointees were given responsibilities to run state enterprises
(ironically based upon US models of management (Ellman, 1989). The result was an
administered command economy managed from the political centre, which remained in
force until the early 1990s. Consequently the Soviet model led to institutional and
structural rigidity, and inertia, while innovation within the system was blocked and
flexibility and efficiency denied (Ericson, 1991). Social efficiency without democracratic
engagement is a chimera—one cannot be pursued and achieved without the other. The
outcome was thus one of ‘strategic failure’.
From the late 1980s, the response of the Soviet Union and the Eastern Bloc was to move
towards a period of ‘economic transition’. In reality, this meant that state-owned
enterprises were transferred to the private sector, following the earlier UK privatisation
experiment. Consequently, just a few years after the break down of the Soviet regime, and
by the mid-1990s, the private sector in the Czech Republic accounted for approximately
80% of GDP, in Hungary it was 55%, Poland 55%, Russia 50% and Ukraine 30%. This
represented a seismic shift in the balance of control from the state to the private sector and
such was the pace of change, that serious concerns were soon raised about the so-called
842
K. Cowling and P. R. Tomlinson
‘gangster economy’ that subsequently emerged. This was particularly the case in Russia,
where large organised crime groups secured a massive transfer of state property due to the
speed and spontaneity with which privatisation occurred, without legal safeguards and
without transparency (Stiglitz, 2006).
One of the arguments put forward—by, among others, the Washington institutions—was
that privatisation was necessary for economic efficiency and dynamism. There was
obviously a need for a new approach to dismantle the stranglehold of bureaucracy within
the Soviet system, and to resolve problems of inertia within the economy. However, the
lesson here is that it should have proceeded gradually, within an overall developmental
strategy, with safeguards in place to avoid the problems of ‘gangsterism’. The privatisation
process was ‘spontaneous’, was not inclusive and led to the emergence of a new corporate
elite—the so-called oligarchs. In Russia, by the end of 1995, management buyouts of
formerly state-owned enterprises were responsible for 83% of privatisations. The reality of
the transition was a transfer of economic power and control from state bureaucrats to a new
corporate elite in Eastern Europe, while trade liberalisation opened the economies up to
the major transnational corporations at a time when these economies were ill-prepared for
such competition (Stiglitz, 2006).10
Interestingly, a more gradualist approach to industrial development in the former Soviet
Union and the other Eastern Bloc economies might have drawn upon the experience of the
most populous communist nation, China. In China, communism was initially implemented along the lines of the Soviet model, following the Maoist victory in the Chinese
civil war in 1949. However, what is particularly interesting is that during the 1950s,
beneath the Maoist centralised structures that limited freedom and democracy at the
national level, Chinese economic planning evolved towards a regionally-based system, with
a greater emphasis upon local economic planning and the delivery of goods and services
(Goodhart and Xu, 1996). In particular, the state encouraged the development of (small)
township and village enterprises (TVEs), which are market orientated public enterprises
under the purview of local government: in essence a form of ‘municipal socialism’ began to
emerge, with collective governance structures that, to some extent, took account of local
community interests (Naughton, 1994, 2007).
China’s ‘transition’ to a more mixed economy can be traced to Deng Xiaoping’s
gradualist market reforms of the late 1970s, and subsequently during the 1980s and 1990s,
TVEs became one of the most distinctive features of the country’s ‘transition’—indeed,
they were described as ‘the main engine of Chinese economic growth’ (for further details,
see Goodhart and Xu, 1996).11 Public ownership in China also played a dynamic role. It
facilitated cooperation and trust (through implicit contracts) among community members,
who were locked into ongoing relationships and commitments (Naughton, 1994; Saich,
2001). TVEs often faced fairly hard budget constraints, but nevertheless they were
relatively successful, particularly in dealing with the transition to a more open market
environment. Since the mid-1990s, China’s TVEs have faced a more challenging external
environment, which has led to restructuring and (in most cases) privatisation. However,
10
Stiglitz (2006, pp. 37–9) highlights some of the social consequences of the economic transition in
Russia, with education (once highly regarded in the USSR) and health budgets being slashed due to falling
state revenues and poverty increasing ten-fold between between 1987 and 2001.
11
Naughton (2007, p. 274) illustrates the extent of this dynamism, reporting that TVE employment grew
from 28 million to 135 million between 1978 and 1996, with the sector’s contribution to China’s (rapidly
expanding) GDP rising from under 6% to 26% over the same period. In admiring their flexible organisational
structure and contribution to China’s economic development, Martin Wolf (The Financial Times, 1995)
lauded TVEs as an ‘economic wonder of the world’.
Economic governance and industrial strategies
843
here, privatisation has often been conducted at the local level, with incumbent managers
and workers acquiring shares and, in many cases, local government retaining a significant
equity stake. In short, TVEs have remained largely embedded within their local
communities (Naughton, 2007). Moreover, the experiences of mass privatisation elsewhere (in the former Soviet Union and Eastern Europe) reveal major costs of transition
which have so far appeared absent in China.
There are of course, genuine concerns regarding some recent policy initiatives in China,
particularly in relation to foreign transnational corporations, where policies have largely
been favourable and encouraged substantive inward investment over the last decade
(Naughton, 2007, pp. 377–423). Such moves can compromise economic governance,
particularly if China’s economic trajectory becomes entwined with the strategic interests of
the large transnationals. However, the salient lesson from China’s experience with TVEs is
that a careful use of public ownership, combined with governance structures that promote
local autonomy and self-reliance can facilitate creativity and dynamism. Such a lesson
confounds advocates of neo-liberal economics.
3.4 Overview of case studies
The Japanese, third Italy and Chinese cases suggest ways in which an active industrial
strategy can have a positive impact upon development through facilitating dynamism and
growth. Even in the USA, where industrial strategy has been far more subtle, specific
sectors have benefitted through state intervention (Kitson, 2005). Policy is also likely to be
particularly fruitful where there is a degree of coordination between the various actors; the
state, firms and institutions (Hall and Soskice, 2001; Cimoli et al., 2009). Industrial
strategy can thus be an efficacious tool in shaping an economy’s trajectory.
However, for us, a salient feature of these cases—but one largely ignored in the
literature—is that policy is more likely to succeed in delivering both (wider) social and
economic benefits when it is aligned with governance structures that allow wider stakeholders to participate in the development agenda. In this regard, and while no model should
be regarded as a panacea, the Italian case and to a lesser extent, the Chinese experience
with TVEs share characteristics allowing for a more inclusive process in shaping (local)
development (Bellandi, 2003; Naughton, 2007). The Japanese case also demonstrates
that, with a degree of protectionism, industrial strategy and state investment can deliver
dynamic growth for a (significant) period. However, in the long term, Japan (and Russia)
also highlights that where a corporatist policy is pursued and hierarchical governance
structures emerge, then long term development paths are likely to be determined by the
few with the public interest being compromised. This is a crucial lesson for the design of
future industrial strategy.
4. New industrial strategies: caveats and future possibilities
In searching for future directions, the governance lesson leads us to consider regions and
localities as possibly a focal point for industrial strategy and for facilitating relatively diffuse
governance structures. As in the third Italy (and with China’s TVEs), the local dimension
may perhaps allow for some wider participation in decision-making over development and
similarly policy here may also favour small and medium sized firms so as to reduce the
reliance upon (and dominance) of transnational corporations. A central feature of policy
844
K. Cowling and P. R. Tomlinson
is likely to focus upon technological upgrading and innovation, which may enhance
competitiveness. This is particularly important in regions that have largely lost their
industrial bases. Indeed, as the recent edited volume by Cimoli et al. (2009) documents,
there is a long history of state intervention in promoting innovation, primarily to negate
market failure where a lack of appropriate incentives for generating and diffusing new
knowledge generally leads markets to under-invest in research and development (see
Stoneman and Vickers, 1988).12
New industrial strategies have, of course, largely focused upon aligning regional and
technology policy. The literature here is vast, and while it is beyond the scope of this paper
to offer a comprehensive review, we now deliberate upon some of these approaches and,
also drawing upon the above cases, we raise some caveats before offering some tentative
and positive suggestions for the future course of industrial strategy. In this vein, it is
perhaps useful to first recall the work of Jane Jacobs (1961, 1969, 1984), who saw cities in
particular (though her arguments may be extended to regions), as being hubs of innovation
and experiment. For Jacobs, the intensity of the interactions between actors in close
physical proximity provides greater impetus for knowledge spillovers to flow and creative
talents to surface. More recently, and following the work of Lundvall (1995) and Cooke
and Morgan (1994, 1998), a wide literature on ‘regional innovation systems’ and, within
a largely Italian context, ‘innovative milieu’ (Camagni, 1991; Maillat, 1995) has emerged.
This literature has tended to emphasise the importance of promoting regional inter-firm
networks and cooperative ties among firms, aligned with regional infrastructures and close
support from (local) institutions such as universities and industry-specific research
institutes to meet the collective needs of participating firms (Helmsing, 2001; Nelson
and Nelson, 2002). In this regard, and as originally evident in the third Italy, cooperative
ties and repeated interaction between firms builds social capital, a conduit for ‘collective
learning’ and the nurturing of stimulating environments to facilitate innovation (Boekema
et al., 2000; Lorenzen, 2001). Similarly, universities (particularly science and engineering
departments) may act as the interface between science and industry, and possibly as
a catalyst for nurturing innovation networks (Balthasar et al., 2000). In short, the emphasis
is upon encouraging firms (and regions) to take the ‘high road to development’ so as to
compete in world markets, with the inference that this enhances employment and growth
(Pyke and Sengenberger, 1992; Kaplinsky and Readman, 2001). Innovative regions are
also considered more likely to nurture, retain and attract highly productive firms and
workers. In Markusen’s (1996) parlance they are more likely to become a ‘sticky place’.
Not surprisingly, this approach has been quite influential in regional policy quarters,
being seen (in particular) as a means to help revitalise lagging industrial regions. And, in
contrast to neo-liberalism, there is much to commend in an approach combining state
intervention with inter-firm collaboration to promote innovation at a regional level.13
However, there is a caveat in that within this ‘regional innovation systems’ approach, the
governance issue and the role of transnational corporations has largely been ignored. This
12
It is worth noting the recent Sapir Report (2005) in recognising that Europe’s relatively disappointing
innovation performance has called for a greater proportion of European GDP to be spent on R&D1.
13
It is worth noting that there are a number of recent empirical studies, demonstrating the importance of
regional cooperative ties and social capital for improving firms’ innovative performance. For instance, De
Propris (2002) provides evidence in this respect for vertical cooperative ties between West Midlands
manufacturing firms, while Freel and Harrison (2006) similarly do so for small manufacturing firms in
Northern England and Scotland. Molina-Morales and Martinez-Fernandez (2006, 2010) also find that social
capital variables are significant factors in the innovation process across five Valencian industrial districts in
Spain.
Economic governance and industrial strategies
845
criticism is levelled by Christopherson and Clark (2007), who argue that the strategic
interests of the region and transnationals are often misaligned and conflicting; a critical
point rarely recognised in policy formulation. They then suggest that regional policy and
investments in infrastructure (designed to improve regional competitiveness) often
amounts to subsidising ‘regionally dominant transnational firms’, whose global span
allows them to draw upon multiple regional networks (and bargain over resources), with
the costs and risks (of such investments) being disproportionately borne by the locality.14
Christopherson and Clark (2007) also raise concerns that universities are increasingly
pressurised (for financial and political reasons) into commercial ties with large (transnational) firms to promote regional innovation, yet the latter regard universities as
a ‘flexible way to conduct research’ and subsequently appropriate the main benefits ‘often
outside the region’. While such ties are not inconsonant with the wider university ethos,
the authors fear this undermines the universities’ core mission of ‘developing human
knowledge and expression’ and knowledge creation for the wider public domain
(Christopherson and Clark, 2007, pp. 129–31).15 Moreover, smaller (local) firms are
often treated as poorer cousins or even excluded from such activities. Huggins et al. (2008),
for instance, argue that universities are less inclined to engage in knowledge transfer
activities with the small firm community unless they receive a market return (or state
subsidy); they note that small firms are often regarded as ‘inferior and less lucrative
collaborators and partners in comparison to larger and more internationally focused firms’
(p. 333). Finally, Christopherson and Clark (2007) are also sceptical about the links
between transnationals and (local) small firms within ‘regional innovation networks’ with
the literature tending to ignore the asymmetrical power relations that exist in such
networks, which have become more one-sided (in favour of transnationals) since the
1990s. Yet such power imbalances are important and can actually hinder innovation, since
large firms will often find it in their strategic interests to limit knowledge transfer so as to
maintain their monopoly positions, while seeking to shape ‘regional innovation systems’ to
suit their own global goals (Christopherson and Clark, 2007, pp. 109–18; see also
Sacchetti and Sugden, 2009). The recent trend towards large leader firms in the Italian
districts has, for instance, led to a marked deterioration in the innovative capacity of interfirm networks in the region (Boschma and Lambooy, 2002).16
We share such concerns in relation to recent regional policy initiatives. The experiences
in both Japan and Russia particularly highlight the dangers of ignoring the governance
issue and the impact of transnational corporations. Returning to Jacobs, it is worth
recalling that she envisaged a largely diffuse system of production, with cities (and regions)
evolving without any central direction from either the government or the corporate sector:
the inhabitant’s diversity and their own (spontaneous) ideas were seen as essential for
a city’s (and region’s) future growth and prosperity since they lessened the dangers of
14
This argument is analogous to the point about ‘divide and rule’ (see Section 2).
Huggins et al. (2008) also express concerns that universities are increasingly over-burdened with market
based pressures to engage in commercialised research programmes, and that policy has begun to overlook the
other wider functions of universities. There is, of course, a wide debate on the role of universities in industrial
(and particularly regional) development. For a comprehensive review of some of the recent salient issues, see
the papers by Huggins et al. (2008), Rutherford and Holmes (2008) and Power and Malmberg (2008) in the
Cambridge Journal of Regions, Economy and Society (2008, no. 1).
16
More generally, we might also note there is long standing evidence in the industrial economics literature
of how large dominant firms maintain monopoly positions (at a national and local level) and suppress
technical progress through the defensive use of R&D and sleeping patents (Scherer, 1980), while highly
concentrated sectors stifle new entry, thus dampening initiative and new innovative activity (Scherer and
Ross, 1990).
15
846
K. Cowling and P. R. Tomlinson
becoming locked into particular specialisms (Glaeser et al., 1992). Such diversification in
creativity and technology within regions is important, and when decline occurs it can help
to foster renewal through the cross-fertilisation of ideas; particularly so if synergies exist
between old and new technologies (Swann and Prevezer, 1996). In contrast, the overreliance of regions upon transnational corporations for investment expenditures in recent
years has led to an unwelcome degree of uniformity in technology and production (in these
regions) and as these technologies have declined this over-reliance has been exposed: the
cases of Detroit in the USA and Birmingham in the UK, both heavily reliant upon the autosector being classic examples (Bailey, 2003).
With these lessons in mind, a new regional industrial strategy might therefore reconsider
the original path of the Italian districts (and possibly China’s TVEs) and seek to promote
independent networks of small and medium sized firms. From a governance perspective,
such an approach may lead to a less concentrated and more diffuse industrial structure.
Moreover, there is strong evidence to suggest that SMEs are the main source of growth in
new employment (Bianchi et al., 2006), while they also have a relatively better innovative
record than larger corporations (Pavitt et al., 1987; De Propris, 2002). Invariably and in
reality, of course, small firms will develop their own links with transnationals; however,
policy might try to steer such links away from being overly-dependent and one-sided.
Rather, a developmental approach to small firms might, for instance, assist them in
accessing global markets on their own (or through collaborative SME networks) rather
than under the auspices of ‘lead transnational firms’ (Christopherson and Clark, 2007).
Technology policy will obviously play a key role in this regard, although it should avoid the
blanket subsidies/grants and tax incentives approach such as the UK’s universal R&D tax
credit system, which generally favours larger firms and has had a disappointing impact
upon the rate of innovation (Kitson and Primost, 2005). Lessons here might be garnered
from the relatively more successful US Small Business Innovation Research programme,
which provides seed funding from Federal funds for innovative activities in small
businesses and which is more specifically targeted (Wessner, 2004). A significant adjunct
to policy is the design of appropriate institutions that not only support (regional)
innovation, but are (more) inclusive with facilities being available to participating firms
across the network. Again, however, policy here might need to ensure that transnationals
do not ‘crowd out’ and dominate such facilities.17 Universities will also figure prominently
but they should not be shackled by the (recent) pressures to engage in commercial research
for large players. Rather their main role in knowledge creation, dissemination and
nurturing highly quality graduates should be more widely appreciated (Huggins et al.,
2008).
Finally, it would be unwise to solely advocate an intra-regional (or national) approach to
industrial strategy. This would be too inward looking and may ignore the possibilities of
positive external influences. Indeed, recent insights from regional science suggest there is
much to be gained from firms combining external sources of knowledge through so called
‘global pipelines’ with the ‘local buzz’ (and vibrancy) that exists within their geographically
17
The Japanese Public Testing and Research Centres for small firms in the automotive industry are an
example of how such facilities can easily be captured by transnationals. According to Ruigrok and Tate (1996)
these centres ultimately became the preserve of Japan’s giant assemblers and a mechanism by which to exert
control over their suppliers, rather than an enhancing small firm innovative activity. In contrast, the regional
innovation institutes set up in the Italian industrial districts during the 1970s were more diffuse and served
the whole network (Piore and Sabel, 1984; Beccattini, 1990). Similarly, the technical training centres in West
Jutland, Denmark, stimulated the dramatic development of a highly diffused engineering sector (Kristenson,
1990).
Economic governance and industrial strategies
847
confined (close) networks (Storper and Venables, 2004; Wolfe and Gertlet, 2004). There
may be a role for inward foreign direct investment in this regard, but this needs to be
carefully positioned within the broader strategy to promote industrial development.
Japan’s earlier policy towards inward investment, where technology-induced investments
were strategically linked into domestic technology complexes is a poignant example of how
policy may be used to successfully develop connections between inward investment and the
domestic economy (see above; also Ozawa, 1973; Bailey et al., 1994). A more radical
possibility is the nurturing and development of multinational webs of small firms through
which international (small firm) cooperative networks of innovation and production might
emerge. Unlike the current global transnational production networks where control of such
‘global pipelines’ lies among a few leading players, these webs would be organised along
non-hierarchical lines, with wide opportunities for small firm participation in international
cooperative activities and technological development (again with supporting institutional
arrangements; for further details see Cowling and Sugden, 1999). Given that many small
firms (and regions) across the globe face similar challenges, such a process may facilitate
a wider cross-fertilisation of ideas (and creativity) and generate joint solutions to the
problems they face.
5. Concluding comments
Recent events have led to calls across the globe for a new approach to economic
management. In particular, there is now recognition that the state should play a more
active role in guiding development, possibly through a new industrial strategy to facilitate
a rebalancing of (Western) economies that rely heavily upon imports to satisfy often
unbridled levels of domestic consumption. Underlying such calls are concerns about the
increasing concentration of economic power within the corporate sector and the abuse of
such power, which became entrenched within the dominant paradigm of the Washington
Consensus. Indeed, the enhanced power of transnational corporations and the growth
in centripetalism, has important implications for social and economic development across
the globe, particularly since long term corporate and public interests are unlikely to be
compatible. With ‘strategic failure’ endemic within the global economy, economic
governance is thus a major issue.
Through the cases in this paper, we have highlighted that industrial strategy can be
a positive and efficacious tool in industrial rebalancing and development. However, there is
a danger that any emerging policy framework may fail to fully incorporate the governance
issue. Given past experiences of industrial strategy, particularly in Japan (and Russia), such
an oversight is likely to have adverse long term consequences. The long run efficacy of
industrial strategy depends upon designing appropriate economic governance structures
that facilitate wider stakeholder engagement and better serve the public interest. This
paper has sought to demonstrate the salience of this point. Our view, as illustrated in the
highlighted cases, is that wider public interests are likely to be better served through an
inclusive approach where governance structures are relatively diffuse and allow opportunities for all stakeholders to participate in the development process. At a practical micro
level, and in this respect, both regional and technology policy are obvious candidates for
consideration, although here the recent literature has tended to ignore the governance issue
(Christopherson and Clark, 2007). We have offered some tentative possibilities for
development based upon non-hierarchical modes of production, which might be seen as
positive ways forward. Of course, at a supra-national level, policies, particularly in relation
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K. Cowling and P. R. Tomlinson
to trade and investment, will also need to be re-examined in the light of the continuing
dominance of the transnational corporations: in short their power needs to be curtailed.
Implementing such an approach is unlikely to be easy and is likely to be resisted by the
corporate sector. However, it is necessary to ensure long term democratic and sustainable
development; given current popular opinion, the time is ripe.
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