Broadening the ambit of industrial strategy to include latent demand and corporate governance

Driver, Ciaran

Abstract

•Markets are more suited to reacting to incremental demand change than to implementing entirely new sets of opportunities. This is not only because markets are often short-termist or rent-seeking, but also because major innovative change implies external gains and losses beyond the individual innovating firm.
•Industrial strategy complements or circumscribes market competition. It deals with the co-ordination of structural change, recognition of inter-dependencies across sectors and places, and the building of capabilities and future options. Industrial strategy concerns more than subsidies and picking winners. It is about enabling change.
•Demand is there potentially, but it is latent, not effective and needs to be fostered by public-led coordination. Industrial strategy should then be conceived as including research on public projects which would make effective the latent demand for new market and non-market provision. New institutions linking private and public finance and research may be necessary for the unlocking of this potential. Private venture capital finance does not currently have the mission or interest in pursuing large co-ordinated schemes.
•The focus of this chapter is on the supply and coordination of investment i.e. forward commitments, whether they comprise physical capital, organisation, infrastructure, skills, or innovation.
•The investment decision-making of individual firms are autonomous in a mixed economy. It is hard to persuade firms to sign up to coordinated plans when they are competing to capture rents and when they have more private information than any regulator or official.
•The proclivity of corporations to invest capital depends on the corporate culture of the economy. It is influenced by institutional features – regulation, takeover codes, company law and codes of conduct that concern the duty of directors and the rights of different types of investor. This complex of institutions makes up the “corporate governance” environment that reflects the balance of power between the various parties or “stakeholders” involved with a company’s activities such as investors, managers and workers. When a firm’s corporate governance is attuned mainly to the interests of investors it tends to invest less capital and distributes more. In this framework the market then allocates capital - in an uncoordinated manner.
•The reform of corporate governance is a pre-requisite for a successful industrial strategy that identifies and responds to latent demand.

Citation

Driver, C. (2021). Broadening the ambit of industrial strategy to include latent demand and corporate governance. In C. Berry, J. Froud, & T. Barker (Eds.), The Political Economy of Industrial Strategy in the UK (149-160). Agenda Publishing. https://doi.org/10.2307/j.ctv1mvw8s5.18

• Publication Date: Mar 1, 2021
• Deposit Date: May 10, 2021
• Publicly Available Date: Mar 2, 2121
• Pages: 149-160
• Series Title: Building Progressive Alternatives
• Book Title: The Political Economy of Industrial Strategy in the UK
• ISBN: 9781788213394
• DOI: https://doi.org/10.2307/j.ctv1mvw8s5.18