Industrial strategy demands a new deal with the private sector

The writer, a professor at UCL, will be delivering the Penrose Lectures at Soas this week

Industrial strategy is experiencing a renaissance. Provoked by multiple crises — financial, climate and health — countries around the world are investing heavily in promoting economic growth and resilience. The war in Ukraine, with its impact on supply chains, has made this even more important. The EU, for example, is investing more than €2tn in economic recovery and transformation while President Joe Biden is putting more than $2tn into a “modern American industrial strategy”. Similar investments are being made from Japan to Latin America.

Last month, Biden’s chief economic adviser compared the scale of investment and ambition behind the new US industrial strategy to the Apollo space programme. But this ambition will only be realised if the strategy is designed to foster a new kind of economic growth. Crucial to this are the conditions that companies must meet to receive public funds.

If they are to “build back better” — rather than returning to the crisis-ridden status quo — growth must be inclusive and sustainable. To achieve this, governments need to strike a new deal with the private sector, raising the bar on what to expect in return for public funding. This requires approaching these partnerships as an opportunity to maximise public value — to share the rewards as well as the risks of investing in innovation and growth.

There are four types of conditions that governments should consider attaching to procurement, grants, loans and tax incentives.

Where affordable and equitable access is a policy priority, products and services with public funding should be priced accordingly. For example, the AstraZeneca Covid-19 vaccine, developed with the help of government investments in R&D, manufacturing, and advance sales, included provisions to keep prices low, limit profits during Covid and ensure knowledge-sharing for public health. This contrasts with the trend of monopoly pricing in the pharmaceutical industry and strategic patenting to block competitors.

Conditions can also shape the goals — or “missions” — behind investment and impose standards on companies. Decarbonising existing industries and expanding green innovation and growth is a priority. To tackle the climate crisis we need entrepreneurial states to shape and create markets. In the US, clean energy is a major focus of recent investments while EU recovery funds are oriented towards climate and digital inclusion goals.

Achieving these goals requires more than just investing in specific green technologies or industries. Conditions associated with a just green transition should cut across all industrial strategy investments: for example, requiring new manufacturing capacity to minimise carbon emissions and create jobs that meet labour standards.

In addition, receipt of public funds should be conditional on sharing a proportion of royalties, equity or intellectual property with the government. This would enable the state to take a portfolio approach to investments, knowing some will succeed and some fail. If the US government had acquired shares in Tesla in exchange for its early-stage funding of $465mn, this revenue could have been reinvested in other companies aligned with green transition goals.

Last, governments can prompt companies to channel their own investments into productive activities. Biden’s Chips and Science Act, which seeks to boost US semiconductor innovation and manufacturing, includes “guardrail” provisions that prohibit funds from being used for share buybacks. It does not yet, however, prohibit companies that receive chips act funding from engaging in such buybacks — a loophole that has led to calls for tougher rules.

The companies that lobbied for the act have previously spent billions on share buybacks — Apple, Microsoft, Cisco, and Google collectively spent $633bn on them between 2011 and 2020, for instance. Stringent conditions could require future profits be reinvested into research and development and workforce training.

Industrial strategy in many countries is still being shaped. The chips act, in particular, offers an immediate opportunity to impose conditions. Its existing “guardrail” requirements are a good starting point. But whether this act is a catalyst for green and inclusive growth — and not “corporate welfare” — will depend on the terms set in funding notices and contracts.

Without conditions, the public money flowing into industrial strategies will dissipate into company and shareholder profits with only marginal public gain. Getting these investments right should be a priority for governments everywhere.